Income Taxation
Kaplan
Fall 2014
What is Income?
I. § 61: Receipt of Economic Benefit
a. all income from whatever source
i. list 1-15 is not all inclusive
ii. income is a term different in the tax context
b. Cesarini v. United States (N.D. Ohio 1969)
i. Facts: 1957 t/p buys piano for $15. In 1964 t/p finds $4k worth of coins and claims as income. 1965 t/p amends tax return and doesn’t include $4k, requests refund. 1966- refund is denied.
ii. Question: Was the $4k found in the piano income under §61?
iii. Holding: §61 is broad and includes all money unless you find an exception. Treasure trove is not specifically included or excluded which means it counts. Windfalls count as income
c. Old Colony Trust v. Commissioner (SCOTUS 1929)
i. Facts: Corporation paid income taxes for employees.
ii. Question: Does tax payment count as taxable income?
iii. Holding: Can’t avoid the obligation by having a third party pay the taxes. Payment was certainly consideration for employment (“services rendered”). Does not matter that the actual payment went to the government. NOT a gift.
1. If someone pays your debts it is as if they paid you (income) and you paid the creditors.
2. Direct discharge of a debt (without the middleman) doesn’t change the characterization
d. Commissioner v. Glenshaw Glass (SCOTUS 1955) ***STILL GOOD LAW***
i. Facts:
1. Case 1: (Glenshaw) Damages received for violations of fraud and anti-trust. Payment was punitive, t/p didn’t report as income.
2. Case 2: (William Goldman Theatres) Damages received for fraud and anti-trust. $125K actual and $250K punitive. Only reported the $125k.
ii. Question: Must punitive damages be reported as income?
iii. Holding: Exemption requires clear congressional intent, courts cannot create an exemption that’s not there. Income is realized whenever “[1] undeniable accessions to wealth, [2] clearly realized, and [3] over which the taxpayers have complete dominion
e. Charley v. Commission (9th Cir. 1996)
i. Facts: T/p was president of corp., job required travel. T/p would book coach seat, use miles to upgrade. Client was billed for first class seat. Difference between coach and first class seat moved to t/p’s account.
ii. Question: Was the money transferred to the t/p’s account income?
iii. Holding: Yes this is income. This was property received from his employer, the exchange for miles argument is irrelevant. He disposed of his own property (which had zero value) for a gain. That gain is income.
f. Revenue Ruling 2002-18: Frequent flier miles are not income, but if you turn them into cash it becomes income
g. Commissioner v. Indianapolis Power & Light Co.(SCOTUS 1990)
i. the contractual arrangement between the customers and the power company cast the deposit as a loan to the company
ii. Loans are not taxable income à but if there is no intent to repay then it is taxable income
h. James v. United States (SCOTUS 1990)
i. Overruled Wilcox and found that illegal gain is income despite restitution obligation
Receipt of Economic Gain Problems (page 54)
(1) Would the results to t/p in Cesarini be different if instead of discovering $4.467 in the piano they discovered that the Steinway was worth $500,000?
(a) Yes- gain is not realized until the piano is sold. Finding cash is realization of the income. There would be no realization of the increased value of the piano until it is sold.
(2) Winner attends the opening of a new department store. All persons attending are given free raffled tickets for a watch worth $200. Disregarding any application of §74 must winner include anything within gross income?
(a) Yes- there is a question of valuation because it is not cash, but it is definitely income
(3) Employee has worked for employer’s incorporated business for several years, $80k per year. Another company is attempting to hire employee, but employer persuades employee to stay for at least two more years by giving employee 2% of the company’s stock, worth $100k and buying employee’s spouse a new car for $30k. How much income on these transactions?
(a) $80k salary + $100k stock + $30k car for wife = $210k in income (Indirect compensation still counts- Old Colony Trust)
(4) Insurance adjuster refers clients to an auto repair firm that gives adjuster a kickback of 10% of billings on all referrals.
(a) Does adjuster have gross income? Yes- kickback is payment for services rendered
(b) Even if the arrangement violates local law? Yes- James still taxes illegal income
(5) Owner agrees to rent tenant her lake house for the summer for $4k.
(a) How much income does owner realize if she agrees to charge only $1k and tenant makes $3k worth of improvements to the house? Still $4k, improvements were made in consideration for living in the home
(b) Is there a different result in (a) if tenant effects exactly the same improvements but does all the labor himself and incurrs a total cost of only $500. No as long as the value of the improvements is still $3k. Question is always the value received, not the cost to the provider.
(c) Are there any tax consequences for tenant in part (b) above? Tenant has a gross income of $2500. Obligation $3k, cost to satisfy only $500. $2500 gain.
(6) Flyer receives frequent flyer mileage credits in the following situations. Gross income?
(a) Mileage credits received as part of a purchase of tickets for a personal trip, credits are assignable. No income unless assigned to
ot include the value of property acquired by gift, bequest, device, or inheritance
b. Factors to Consider:
i. Nature of the gift: must be characterized as gift, bequest, device or inheritance
ii. Motive of the donor: critical to gift characterization
c. Commissioner v. Duberstein (SCOTUS 1960)
i. Facts: 2 cases
1. Duberstein: t/p was pres. Of Ohio Company. Did work with and often referred clients to B. B bought t/p a car. Said it was a gift. t/p did not include in gross income
2. Stanton: t/p works at Church and left after 10 years. t/p given $20k at resignation, allegedly because everyone liked him. An alternate story that t/p resigned and the payment followed also was out there. t/p did not declare the $20k.
ii. Q: Are these items of value gifts under §102 and non-taxable or are they considered income?
iii. Holding: If the item or cash is received as the result of a duty it is not a gift. A statutory gift must include “detached and disinterested generosity.” The donors characterization is not determinative. Must look at all the facts.
1. Duberstein: Cadillac was not a gift. B’s company deducted this as a business expense- evidence of quid pro quo. Expecting something in return.
2. Stanton: remanded to district court, need more facts
iv. Gift Intent: Detached, disinterested generosity, out of affection, respect, admiration, charity or like impulses.
Gift Problems (pg. 69)
(1) T/p makes initial distinction and commissioner can challenge. Why is the trial court decision so important and what role may an appellate court play
(a) Limited to the findings in the trial court record if either party appeals
(2) t/p gave the maître d’ a $50 tip to assure a good table and the croupier a $50 “toke” after a good night with the cubes. Do either have gross income?
(a) Yes, both received in consideration for something else
d. Employee Gifts- §102(c)(1)
1. General Rule: employee shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of an employee
2. Congressional intent appears to be broad denial of gift classification to all transfers from employer to employee
3. § 102(e) allows for traditional retirement gifts
