Federal Income Tax Outline
If you create a form of tax favored income, people will alter their affairs to get it
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Identification of Income Subject to Taxation
I. Gross Income: The Scope of § 61
a. § 61(a) Gross Income Defined on (Page 57)
i. All income from whatever source derived.
ii. Cesarini v. United States: Ts found $4.5K in a piano they purchased. Included it in income but later changed their minds and asked for refund. Court held that, since found money is not expressly excluded from gross income, the finder of treasure-trove is in receipt of taxable income for the taxable year in which it is reduced to undisputed possession.]
iii. Regulations
· 1.61-1a (pg 884)- income may be realized from any source.
· 1.61-2d (pg 885)- if compensation for services is paid for in either property or other services, FMV of the property or services is GI/compensation. (RR-79-24 = 2d(1).
· 1.61-14(a) (pg 890)- any damages, illegal gains, treasure trove, constitute GI.
b. §s 101 to 139 are exclusions to GI
c. Gross income includes the receipt of any financial benefit which is:
i. Not a mere return of capital
ii. Not accompanied by a contemporaneously acknowledged obligation to repay
iii. Not excluded by a specific statutory provision
d. The discharge by a third person of an obligation to him is equivalent to receipt by the person taxed
i. Old Colony Trust Co. v. Commissioner: T’s company paid all of his income taxes. SCOTUS held that this constituted additional income to the T because they were paid as valuable consideration for services rendered by the T.]
e. Glenshaw Glass definition of gross income
i. Instances of undeniable accessions to wealth, clearly realized, and over which the Ts have complete dominion
1. The mere appreciation of property is not realization
a. Only when you sell it do you realize the profit
· Commissioner v. Glenshaw Glass Co.: Company received a settlement for fraud and antitrust violations. The Service wanted to tax the portion representing punitive damages. SCOTUS held that Congress intended to tax all gains except those specifically exempted – exerting the full constitutional measure of its taxing power. RULE; GI includes undeniable accessions to wealth, clearly realized, and where T has complete dominion and control.
2. Loans are not gross income because they are based on concurrently acknowledged obligations to repay which, offsetting the receipt, negate any accession to wealth
a. Same with a security deposit
3. James v. U.S- Illegal gain is income despite a legal obligation to make restitution, taxed in year embezzled.
f. Imputed Income
i. The flow of satisfaction from durable goods owned and used by the T and goods and services produced by the T’s own efforts for the T’s own use and enjoyment.
ii. Helvering v. Independent Life Ins. Co.: IRS wanted T to include the rental value of a building he owned and occupied in gross income. SCOTUS held the rental value did not constitute income within the meaning of the 16th Amendment.]
g. Other GI Cases:
i. Pellar v. Commissioner- Bargained purchases are not included in GI. (reasoning is because will be taxed in realization by the lower cost basis).
ii. McCann v. U.S- an employer rewarded an employee with a trip to Las Vegas with minimal business and the
Wolder v. Commish(107)- attorney wanted to exclude a bequest made under state law even though it was compensation for past legal services. Not a bonafide gift.
c. Employee gifts
i. Any amount transferred by or for an employer to, or for the benefit of, an employee is included in gross income (§ 102(c)(1)).
ii. Burden of proof is on the T to prove it is 102(a) gift.
iii. Exceptions
1. Employee achievement awards (§ 74(c))
2. De minimis fringe (§ 132(e))
i. Any property or service the value of which is so small as to make accounting for it unreasonable or administratively impracticable
3. Extraordinary transfers to the natural objects of an employer’s bounty if the employee can show that the transfer was not made in recognition of the employee’s employment (Reg. 1.102-1(f)(2) (pg 922)
d. Limitation on gifts
i. § 274(b) (253)- no deduction under 162 or 212 if gift excluded in a non-employer relationship, service provider or transferor cannot deduct any amount of $25.
e. Transferred Basis of a Gift
i. 1015(a)- (pg 580) – take the transferor’s cost basis unless the FMV is less than the cost basis, in which case the FMV is the cost basis.
III. Employee Benefits
