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Tax
University of Dayton School of Law
Searcy, E. Dale

Table of Contents

Gross Income

v Basics of Gross Income
o Defined
o IRC § 61
o Net Worth and GI
o Receipts
§ Defined
§ Loans as GI à (Loans are not part of GI)
§ Assets and Liabilities
§ Receipts in Kind à FMV of receipt included in GI
· Cash Equivalent Doctrine
· Imputed Income à (excluded from tax unless GI from self-employment)
o Adjusted Gross Income
§ IRC § 62(a) [Adjusted GI Defined] § Computing Personal Income Tax
o Assignment of Income à from lesson #21

v Inclusions in GI Generally
o Differing Forms of Compensation for Services Rendered
§ Payment of an Employee’s Income Taxes à (Included in GI)
§ Reimbursements of Expenses Paid by and Employer à (Excluded, but look at employer’s motive)
§ Fringe Benefitsà (Included in GI, but see exceptions)
· Exceptions under IRC § 132 (1) through (8)
· Notes on Fringe Benefits
§ Treasury Code § 1.61-2(d)(1) (Additional forms of Compensation)
· Services Paid for in Property à (Included in GI)
· Services for Services à (Included in GI)
· Options received as Compensation à (maybe Included)
· Contributions made to an Employee’s Trustà (maybe Included)
o Criminal Gains as Receipts to GI à (Included as GI)
o Child Support/Alimony Payments and Divorceà (Spouse supp. = Included as GI to payee/Deductible by payor; Child supp. = Not GI to payee/Not deductible by payor)

v Exclusions from GI Generally
o Gifts and Inheritances à (Excluded from GI)
o Awards and Scholarships à (Awards = Included in GI, Scholarships = Excluded from GI usually)
o Contributions to Capital à (Excluded from GI)
o Life Insurance Benefits à (Excluded from GI)
o Annuities à (return of capital = Excluded from GI; interest = Included in GI)
o Interest on Local/State Bonds à (usually Excluded from GI)
o Government Benefits à (usually Excluded from GI)
o Medical Insurance/Disability Payments à (Excluded from GI)
o Damage Payments à (usually Excluded)

Exclusions, Exemptions, and Deductions

v Introduction to Exclusions and Deductions

v Personal Deductions Generally
o Introduction to Personal Deductions
o Personal Deductions from either GI or AGI
o Standardized or Itemized Deductions
§ Standardized
§ Itemized

v Gifts as Exemptions from Incomeà (Excluded from GI)
o General Rules about Gifts
o Determining Gift Status
o IRC § 102
o Examples of Gifts and Non-gifts
o Gift Basis and Holding Period
§ Gift Basis Generally
§ Holding Period

v Inheritance and Incomeà (Excluded from GI, usually)
o Introduction
o Gift or Compensation
§ Inheritance to Employeesà (Included in GI)
§ Income Derived from Giftsà (gift Excluded from GI, income resulting therefrom is Included in GI)
o Property Acquired from a Decedent (Lesson #15)
§ Inheritance Basis
§ Holding Period

v Business Expensesà (generally deductible)
o Introduction à The
o Basic Business Deduction Provisions
§ IRC § 162 (Trade or Business)
§ IRC § 212 (Expenses for Production of Income)
o Ordinary and Necessary Refined
§ Defining Ordinary and Necessary (expense must be both to get business deduction under §§ 162 or 212)
§ Necessary (meaning Appropriate or helpful)
§ Ordinary (meaning Foreseeable in light of type of business)
o Capital Expenditures in Business à (not Deductible)
§ Introduction to Capital Expenditures
§ Difference b/t Expense and Capital Expenditure
§ Determining if an item is Expensed or Capitalized

v Non-Business (Personal) Expenses

Cost Basis, Gain, Loss, and Accounting Fundamentals

v Cost Basis
o Introduction to Cost Basis
o Amount Realized

v Accounting and Tax
o Introduction to Accounting
§ Timing of Inclusion/Deduction
§ Main Methods of Taxation
§ Accounting Method is Choice of TP
o Cash Method of Accounting à Income when “received”, deduction when “spent”
§ Introduction to Cash Method of Accounting
§ Cash Equivalent Doctrine under the Cash Basis Method
§ Doctrine of Constructive Receipt
· Deferred Compensation and Constructive Receipt
· Prepaid Income
o Accrual Method of Accounting à Income when “earned”, deduction when “incurred”
§ Introduction to Accrual Accounting Method
§ Some Taxpayers are Required to use Accrual Method
§ Deferred Income and Accrual Accounting
§ Prepaid Income and Accrual Accounting
§ Dividends and the Accrual Method
§ Deductions and the Accrual Method

v Gains and Losses
o Gains in Gross Income à Included in GI [IRC § 61(a)(3)] § Introduction to Gains
§ Doctrine of Constructive Receipt
§ Realization Principal
§ Non/Recognition Principle à From Lesson #22
§ Gains and Property
§ Personal Casualty Gains
o

excluded)
· Prevailing View Today
o Any increment in net worth is presumed to be income unless specifically excluded
o But, a realization must have occurred b/f an increase in net worth becomes taxable (i.e. some event must occur so that it is appropriate to tax the increase in wealth at this point.)
§ For example, increases in the values of stocks are not taxable until the TP sells them and “realizes” the gain (dividends are not realizations!)
· GI = TI + Deductions
o Gross Income is the aggregate of all total income items taken into consideration in computing amount of income tax liability for the year
o Once deductions are subtracted from the GI, you get the TI
§ Oversimplified, this equals a TP’s tax liability
§ Requirements to be Income
· (1) Must be an accession to wealth for the taxpayer
· (2) Taxpayer must have dominion and control over it
· (3) The amount must be capable of valuation
· Determining if an item is “income”
o Factors to consider
§ Dominion and control (if employee has dominion and control à income)
§ Necessity (if necessary part of employment à excluded)
§ Requirements of employer (if “item” required by employer à excluded)
§ Basic Benefit (if basic benefit à excluded)
§ Accession to wealth (the more clearly item is accession to wealth à income)
§ Valuation (easier to value à income)
· Receive something that has a FMV (can be valued) but which we want to exclude from gross income because it’s value is very subjective to the person who receives it
· Relationship b/w recipient and the asset is such that it makes it hard to value in recipient’s eyes
o Excluded from income ß (factors) à Include in Income
§ Forms of Income
· Income does not have to be received in cash à the receipt of property/services/like-kind-exchanges are all treated as income
o Example: A is an employee of B-Corp, and receives a company car and housing as a fringe benefit of his employment. These additional (non-cash) benefits are taxable even though not received by A in cash form