Borison_Tax_Fall_2010.docx
Definitions:
1. Gross Income—
*Not net income
–Any accession to wealth, clearly realized, with control
–Income realized in any form, whether in money, property, or services §1.161-1(a)
–All income from whatever source derived including (but not limited to) 15 items listed in § 61
–Compensation for services (fees, commissions, fringe benefits)
–Gross income derived from business
–Gains derived from dealings in property
–Interest Income
–Rents
–Royalties
–Dividends
–Alimony and Separate maintenance payments (§71)
–Annuities
–Income from life insurance and endowment contracts
–Pensions
–Income from discharge of indebtedness
–Income from an interest in an estate or trust
–Prizes and Awards (§74)
2. Exclusions—Items that are an accession to wealth but which are not taxed and do not have to be reported on tax returns
–§71 etc. items specifically included in gross income
–§101 etc. items specifically excluded from gross income
–Proceeds of life insurance Ks payable by reason of death
–Gifts
–Inheritances
–Interest on state and local bonds
–Etc.
3. Adjusted Gross Income–(Gross income minus deductions) (can deduct business expenses)
–§62 is a directional provision, not a deduction granting provision
–Deductions § 161
*Above the line deductions—deduction that TP may subtract from GI when determining AGI
–§62
–Trade and business expense
–Certain trade and business deductions of employees
–Losses from sale or exchange of property (§161 etc)
–Rents and Royalties (§212, § 611)
–Retirement savings (§219)
–Alimony (§215)
–Moving expenses (§217)
–Interest on education loans (§221)
–Higher education expenses (§222)
–Health savings accounts (§223)
–Pension, profit-sharing, and annuity plans for self-employed individuals (§404)
*Above the line are always preferred because they can be taken by ALL TPs regardless of whether they take standard or itemized deduction
*Desirable because they reduce AGI, which determines floors
*Below-the-Line Deductions—allowable deductions that a TP may take into account only after AGI has been determined
–§161 etc.
–Expenses paid or incurred during taxable year for production or collection of income as an investment or activity expense (§212)
–BUT §163(h)—personal interest not deductible
–Costs incurred in producing income
–Real property taxes on the family home
–State income tax
–Charitable contributions
*Not Deductible:
–Personal expenses, §262
–Expenses commuting to and from work
–Mortgage payments on one’s personal residence
5. Standard Deduction– a deduction amount specified by Congress instead of a more personalized amount based on their actual expenses personally incurred. Amount adjusted for inflation
6. Itemized Deductions– if the taxpayer’s deduction exceeds the amount of the standard deduction, they will want to take the itemized deduction in which they itemize each expense to take advantage of a greater deduction based on individual expenditures (consists of below-the-line deductions)
–Means the amount deductible other than:
–Deduction allowable in arriving at AGI, i.e. above the line §62 deductions
–And deduction for personal exemptions provided in §151
–Must make an election to itemize §63(e)
–2% floor on miscellaneous itemized deductions §67
–Miscellaneous itemized deductions may be deducted only to the extent that in the aggregate they exceed 2% of AGI (i.e. only allows amount that is > than 2% of AGI to be deducted
–Miscellaneous itemized deductions mean the itemized deductions other than:
–For interest (§163)
–Home mortgage
–For taxes (§164)
–State income tax
–Real property tax
–Casualty or theft losses, §165(c)(2) or (3) OR for losses in §165(d)
–For charitable contributions and gift (§170, 642(c))
–Medical, dental, etc. expenses (§213)
–Estate tax in case of income in respect to decedent (§691(c))
–Any deduction allowable in connection with personal property used in a short sale
–Claim of right (§1341)
–Deduction allowable where annuity payments cease before investment recovered §72(b)(3)
–Deduction related to amortizable bond premium (§171)
–Deduction related to cooperative housing corporations (§216)
–Overall limitation on all itemized deduction, §68
–Itemized Deductions are reduced by lesser of 3% of the amount AGI exceeds an inflation-adjusted applicable amount or 80% of itemized deductions otherwise allowable
–$100,000 ($50,000 if a separate return by married TP)
–Adjusted for inflation
–EXCEPTION:
–Medical expenses
–Investment interest
–Casualty or theft losses
–Gambling losses
*Overall limitation applied after 2% floor limitation
7. Personal and Dependent Exemptions– Personal exemptions allowed the individual as in §151(a); dependent exemptions, $2000 exempted; dependent exemptions defined, may exempt certain amounts for having dependants
–One personal exemption amount of $2000 is applied for TP, spouse (if do not file jointly and spouse has no gross income and is not dependent of another TP), and each qualified dependant
–Joint return= 2000 for each TP, and each qualified dependant
–Amount may be reduced or limited for high-income TP
–150k for joint
–125k for head of household
–75k married, filing separately
8. Taxable Income– (adjusted gross income minus itemized and personal exemptions= taxable income)
9. Credits— §§21-53
–Credit reduces one’s tax on a dollar for dollar basis
10. Marginal Tax Rates—the tax rates in §1
U.S. v. Gotcher
1. Economic gain must be for the benefit of TP personally
a. The DOMINANT purpose of the trip determines
2. Factors:
a. Was the employee required by employer to go?
b. Legitimate business purpose even the employee enjoyed trip
c. Did employee have any choice to go in the reality of the business world?
d. Did employee have dominion and control over the money to use? Could he use the money as he wished to satisfy personal needs?
e. How much time spent for personal benefit v. legitimate business purpose?
b. §119—meals and lodging for TP, spouse, and dependants furnished by or on behalf of employer for convenience of employer excluded
i. But only if:
1. Meals are furnished on business premises
2. Lodging is required to accept lodging on the business premises of employer as a condition of employment
7. Discharge of Indebtedness= tax the income
a. Old Colony Trust v. Commissioner
i. Employer paying employee taxes is income
ii. Use a but-for test
1. Gift or compensation?
2. If he was not an employee would the company have paid his taxes? No, so not a gift
8. Assignment of Income Doctrine (concerned with anticipatory assignment)
a. Lucas v. Earl
i. Husband and wife have K where all income is husband’s
ii. Tax cannot be escaped by skillful documents to avoid taxation
b. Salvatore v. Commissioner
i. Gas station sale proceeds given to children in anticipatory assignment
ii. Primary sale was already completed (if timing was different, it may have worked because it wasn’t anticipatory)
9. Deductions of individual v. profit-seeker
a. Dual/Mixed Purpose
i. The primary purpose governs unless you can bifurcate it
ii. U.S. v. Gilmore
1. Litigation that arose due to personal reasons not deductible
2. If litigation where primarily business, then deduct
3. Test:
a. Is the expense personal or business?
b. What was the origin and character of the claim?
c. Look at claims made and see what caused the expenditure
b. Loss on sale of personal residence not deductible
i. Cowles v. Commissioner
1. Loss on sale of property is deductible 165(c)(2)
2. Mere offers to sell or rent are not sufficient for profit characterization
c. Primary Purpose at time of Taxable Event
