Individual Taxation – Moore – Fall 2015
Overview
Four Filing Classifications:
1) Single
2) Married, Head of Household
3) Married Filing Jointly
4) Married Filing Separately
The two goals of tax policy are efficiency (make it easy and where it does not affect decisions) and equity (both horizontal- equal income=equal tax, and vertical- greater income=higher tax).
– Argument for progressivity
– 1) Ensures that individual’s tax liability is based on his or her ability to pay (equity)
– 2) Wealthier people should bear higher taxes because they receive more benefits (equity)
– 3) Accomplishes a measure of wealth redistribution (equity)
– 4) Theory of Marginal Utility (efficiency)
Argument against progressivity:
– 1) Makes it more complex (efficiency)
– 2) Often distorts taxpayer’s decisions (efficiency)
– 3) Causes inequity between similarly-situated taxpayers (equity)
Remember- The Statute of Limitations on an IRS Tax assessment is three years, except in the case of fraud (then unlimited).
I. Gross Income (61)
What is gross income?
– Glenshaw Glass Test (this is the one we use)- Gross income requires three things:
o 1) A clear/undeniable ascension to wealth
o 2) Complete dominion + Realization
o 3) NO Exclusion
Things that are income:
– 1. Cash/ Cash dividends
– 2. Punitive damages
– 3. Compensation
o Includes gifts from employers under 102(c).
– 4. Property received for services (83) – (Excess of FMV over amount paid)
– 5. Treasure Trove (Reg. 1.61-14(a))
o Cesarini- Taxable in the year that it is found
– 6. Barter Exchange (Rev Rule 79-24)
o The FMV of the property or services received in the exchange is included in GI (Rev Ruling 79-24)
· FMV= The price at which an item would trade between a willing buyer and seller not under compulsion who knew all material facts (Treas. Reg. 20.2031-1(b))
– 7. Illegal income (James)
o If crook has to return it, then that counts as a deduction.
– 8. Gains from dealing in Property (see basis)
– 9. Prizes/ Awards (74(a)), unless any of the following exceptions apply:
o 74(b) – Value of any prize or award given in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, if the following requirements are met:
· The taxpayer was chosen without any action on their part to enter the contest
· The taxpayer is not required to render substantial future services as a condition to receiving the rewards, and
· The prize is transferred to a governmental or charitable organization
o Another exception: Employee Achievement Awards – 74(c) – to the extent the employer’s cost in providing the award does not exceed the amount the employer may deduct for furnishing the award
· An employee achievement award is an item of tangible personal property awarded for length of service or safety achievement and not disguised as compensation.
· Employee must have worked at the place for at least five years
– 10. Third party satisfaction of taxpayer’s liability (Old Colony Trust), unless an exception applies (see fringe benefits, etc.)
– 11. Discharge of Indebtedness (61(a)(12); Kirby Lumber Co.), is GI unless an exception applies. Exceptions (excluded from GI):
o Title 11 bankruptcy discharge (108(a)(1)(A))
· Note that the amount excluded must be applied to reduce the taxpayer’s tax attributes (108(a)(3))
o Insolvency 108(a)(1)(B)
· No income if taxpayer’s liabilities exceed the FMV of the taxpayer’s assets after income discharged, BUT income recognized to the extent FMV of assets exceeds reduced liabilities (no longer insolvent) (108(a)(3))
· Merkel – Contingent Liabilities – guaranteeing another person’s loan counts towards insolvency liability ONLY IF it’s more probable than not that TP will be required to pay it
· Any amount excluded reduces the taxpayer’s tax attributes (108(b)(1))
o Qualified Real Property Business Indebtedness – 108(a)(1)(D) Qualifies if any debt is incurred or assumed by the taxpayer in connection with the acquisition or improvement of real property used in the taxpayer’s business and which is secur
83(b) Election- provides option to elect to pay the tax up front and not when it vests.
– 10. Gifts, Bequests, Inheritance – 102(a) – property acquired by gift, bequest, or inheritance is excluded from GI
o We look to see if there was “detached and disinterested generosity” (Duberstein)
o Any subsequent income generated from the property OR a gift/bequest/inheritance that is itself income from property isnot excluded under 102a – 102(b)
o Gifts from employers are still income UNLESS it qualifies as employee achievement award 74c or fringe benefit 132(e) – 102(c)
– 11. Fringe Benefits
o Meals furnished by employer: (119(a)-(b)(4)
· Furnished by employer to employee, spouse, dependents
· “For convenience of employer”
· 119(b):
o Provisions of employment K aren’t determinative
o The fact that employee can choose btwn meals and other compensation doesn’t affect analysis
o If over 50% of employees get meals that count as “for convenience of employer”, all other employees are assumed to get meals “for convenience of employer”
· “On business premises of employer”
· Must be “in kind”- can’t give someone money to go buy food
o Lodging furnished by employer if (119(a)-(b)(4), (d))
· Furnished by employer to employee, spouse, dependents
· “For convenience of employer “
· 119(b):
o Provisions of employment K aren’t determinative
· “On business premises of employer”
· This has been interpreted broadly to mean any general location that the employer is doing business.
· Employee “required to accept as a condition of employment”
· Adams – Must be required to live there
· 119(d) – Campus Lodging:
