Taxation of Individual Income Outline

Spring 2015: Income Taxation Outline
Professor Friel
Gross Income
 
§ 61. Gross income means all income from whatever source derived, including listed items (but not limited to)
listed items: compensation for services (including fees, fringe benefits), gross income derived from business, gains derives from dealings in property, interest, rents, royalties, dividends, alimony and separate maintenance payments, annuities, income from life insurance and endowment contracts, pensions, income from discharge of indebtedness, distributive share of partnership gross income, income in respect of a decedent, and income from an interest in an estate or trust.
Glenshaw Glass
Question: whether punitive damages are income under the IRC?
Holding: Yes. The wealth has clearly been realized (received the money). The Punitive damages was an accession to wealth.
Rule: accession to wealth is taxable income.
Roco v. Commissioner
Petitioner was a whistleblower in a qui tam action against NYU medical center
The dispute was resolves with the medical center paying $15.5 million back to the government and the government gave Roco $1.5 million.
Question: is the money Roco received in the qui tam action income? There is no reference to qui tam actions in § 61 of the code.
SCOTUS: all accessions to wealth is included in income, the $1.5 million is taxable income. (Glenshaw Glass) This case showed the breadth of § 61.
Old Colony Trust
Taxpayer’s company agreed to pay the income taxes on his salary in a corporate resolution.
Question: was the amount that the taxpayer did not have to spend on his taxes income?
SCOTUS: yes, if a third party pays a taxpayer’s income taxes in consideration of the services the taxpayer provided, it is compensation and therefore taxable income.
It does not matter that the taxpayer had not bargained for the third party to pay its taxes, it is not a gift but rather a payment for services
It does not matter that the company was not obligated to pay the taxes, they still did.
Pellar v. Comm.
Payment of $55,000 for a house worth $70,000 was not compensatory; the difference between the purchase price and the value was not income.
Bargain purchase doctrine: the general rule is that if a taxpayer purchases something at lower price, the difference is not automatically income without proof that it is compensation.
Bargain purchase in the employment context is more likely to be compensation for services, not an arms length deal
Cesarini v. U.S.
Reg. § 1.61-15. Treasure trove is gross income to the extent that they had possession in the taxable year.
McCann v. U.S.
Taxpayer and husband went on vegas trip that was a reward for meeting work goal and paid for by taxpayer’s company.
Issue: was the trip taxable income?
Court: yes, it was compensation for meeting a work goal, people who did not meet the goal did not get to go on the trip, it was compensation for her services.
The husband going on the trip was a form of further compensation to the taxpayer
The president of the company: income for him? There is an argument that he had to go and that he was acting in the role if his job rather than to relax and go on vacation
Convenience of employment doctrine: a trip for work is not taxable income if the purpose of it is working and providing benefit to taxpayer’s employer
Bartering
Revenue Ruling 79-24
Taxpayers, members of a barter club, exchanged legal services for house painting. The fair market value of the legal services and the house painting received by the taxpayers was taxable income for them respectively.
Imputative Income
The government does not tax you for the value of the goods and services you provide to yourself; it does not generate taxable income.
Performing services within the family unit
The government does not attempt to separate services performed within the family unit. If one spouse performs one activity an the other spouse performs another activity, they are not taxable income.
Realization Requirement
Taxpayer does not have gain or loss in tax sense until the taxpayer realizes that gain or loss
Realization of gain or loss occurs when the taxpayer sells or otherwise disposes of propertyin question.
 
Effect of an Obligation to Repay
 
Loans
Loans are not gross income because it does not represent an accession to wealth or increase the taxpayer’s networth, the taxpayer is obligated to repay the loan
Claim of Right
What is the proper tax treatment of money received subject to a contingent repayment obligation?
North American Oil v. Burnet
Claim of right doctrine: If a taxpayer receives the earning under a claim of right and without restriction to its disposition, the taxpayer has received income he must report in that tax year, even though it may still be claimed that he is not entitled to retain the money and even though he may still be adjudged liable to restore its equivalent
If the taxpayer gives the money back, in that year the taxpayer would be entitled to a deduction
Example: finding wallet containing $1,000 and unable to locate the owner, but local law provides that if the person who lost the wallet returns and claims the money within 2 years you must return the money to him.
Commissioner v. Alamitos Land Co.
Applied the claim of right to possible excess revenues collected by a utility company and then placed in a bank account so as to be available for rep