Federal Income Tax Outline

Federal Income Tax Outline

Prof. Logue

Fall 2012

I. Defining Gross Income

· In-Kind (Noncash) Compensation from Employers

§ Generally: If services are paid for in property, then the FMV of property taken in payment must be included in G.I. §61(a)(1) provides the G.I. includes “compensation for services,” including “fringe benefits.” Reg. §1.61-1(a) provides that “gross income includes income realized in any form, whether in money, property, or services.” Reg. §1.61-2(d)(1) adds “if services are paid for in property, the fair market value of the property taken in payment must be included in income as compensation.”

o Meals and Lodging

§ Generally: §119 intended to cover situations where employee is constrained in choice of food or eating places.

§ §119(a) excludes from income the value of meals if:

· Employer Furnishes: Employer furnishes the meals to an employee, his spouse or dependants (defined in §152) (would exclude independent contractor); and

o In Kowalski (1977) [p.61] Supreme Court says that meal allowance payments to a state highway patrol officer are not excludable under §119 due to failure to satisfy the “furnished” requirement.

o Employee of restaurant, meal is deductible before or after work.

· Convenience of Employer: Meals provided for convenience of the employer. Generally can establish by showing that the employee is required to be on call even when the employee is not working.

· Business Premise: May or may not be include homes near employers place of business (generally not); geographically close and owned or rented by business.

§ §119(a) excludes from income the value of lodging if:

· Furnished on Business Premises: by the employer to the employee, her spouse, or her dependants (defined in §152)

· Convenience of Employer: If you can take it or leave it then you must include in G.I., because it is not for the convenience of employer.

· Required to Accept: The employee is required to accept the lodging as a condition of employment.

o Other Fringe Benefits

§ Generally: §132. Benefits in the employment setting is mainly characterized by an all-or-nothing approach, with benefits either excludable (§119 & §132), or else included at FMV without regard to any argument that they were worth less to the taxpayer.

§ §132 excludes from income the following categories of benefits:

· No Additional Cost Services: §132(b)(1)-(2) (e.g., free seating for airline employees on flights that would not be sold out). Conditioned on compliance with a nondiscrimination provision.

· Qualified Employee Discount: §132(c) Conditioned on compliance with nondiscrimination provision.

o Goods: employee purchasing goods normally sold by business, a non highly compensated employee, up to the employers gross profit percentage

o Services: employee purchasing services may exclude a discount of up to 20%.

· Working Condition Fringe: §132(d) An item can be deducted as a business expense under §162 or §167 if paid directly by the employee (i.e., costs that are ordinary and necessary for one’s employment).

· De Minimis Fringe: §132(e)(1) any property or services not worth accounting

· Qualified Transportation Fringe: §132(f) deals with parking and transit pass

· Qualified Moving Expense Reimbursements: Amount received by an individual from an employer as payments for expenses that would be deductible by the employee as moving expenses under §217 if paid by the employee.

· On Premise Athletic Facility: §132(j) G.I. does not include the value of any on-premises athletic facility provided by an employer to employees.

§ §105 Employer Provided Health Care

· §105 excludes from G.I. without a threshold. The self employed get a deduction of 60% (and will be 100% in 2003). No relief for employees not covered by the employee plan. Also no discrim.

§ §106 Insurance Premiums

· §106 excludes from G.I. the value of health and accident insurance premiums paid by employer. Medical insurance premiums deductible (§213), but only to the extent that, with other medical outlays, they exceed 7.5% G.I. threshold. See also Reg. §1.61-2(d)(2)(ii)(a).

§ §79 Group Term Life Insurance

· §79 if the employer buys group term life insurance, the employees can exclude the value of the insurance from G.I. if benefits not greater than $50,000. Also no discrim.

§ §125 Cafeteria Plans

§ Travel Credits and Frequent Flyers: Charley (9th Cir. 1996) [p.66] frequent flyer benefits should be included in G.I., but the IRS has decided not to tax people.

· Imputed & Barter Income

o Imputed Income

§ Generally: Imputed income is increases in wealth realized through non-market transactions (e.g., doing yourself what you might otherwise pay for). Imputed income is not taxed because of valuation and liquidity problems.

§ General Rule: In addition to employee benefits, imputed income is also excluded from §61 gross income. Imputed income comes from property you won (that you don’t rent out but live in) and services that you provide for yourself.

o Barter

§ In theory, all barter is included in gross income. Calculate gain by AR (of the thing you acquired) – AB (in the thing you are giving up in the exchange)

· If services are paid for in other than cash, then the FMV of the property or services taken as payment must be included in income

· Does not apply to services within a family

· With imputed income, you consume it, but with barter, someone else does

· Does not include arrangements that provide solely for informal exchange of services on a non-commercial basis

· If you receive cash despite it being imputed income, it is taxed, Minzer (5th Cir. 1960) [handout].

· §1031 non-recognition provision: if you exchange two assets of a like kind either business or personal – you don’t have to count as a realization event – simply swapping basis.

· Windfalls and Gifts

o Windfalls: Basic Concepts

§ General Rule: Tax payer must include any windfall they receive, regardless of whether they “earned” it.

· Must do something to reject a windfall if you don’t want to be taxed (prove that you never had control or exercised dominion)

· Treasure Trove – cash found is taxed in the year in which it was found.

· Bargain – If you buy something and it is worth more than you thought, it is not taxed until the property is sold or exchanged.

· If donates found property to charity, and takes a deduction, then it is income (converting it to personal use)

o Gifts

§ General Rule: §102. Gifts are excluded from G.I. no matter what kind gift it is, even cash, and no matter what the size

· No deduction to the donor

· “disinterested generosity” requirement, Duberstein (1960) [p.95], the meaning of a gift turns on the donor’s state of mind

· Surrogate tax – tax at donor level – means that money probably gets taxed at higher tax bracket; also, afraid of exploitation (transfer for high to low)

· Gift is not a realization event, not taxed when receiving it – only when sell.

· Substituted basis – recipient takes basis of transferor (where FMV is greater than transferor’s basis)

· Basis only matters if there is a disposition

· If it were a compensatory transfer of property, then basis would be the FMV ATOT.

§ Employer to Employee

· §102(c) If the employer as employer then per se no gift (no matter what), but the employer can also be an individual. Also not the §132 de minimis exception

· §274(b) can exclude up to $25 of any business gift (business motivation for transferor, but gift to transferee).

§ Tips: Constitute compensation for services and must be included in G.I. Reg §1.62-2(a)(1).

§ Gifts of Appreciated Property: If at the time of transfer the FMV is equal or greater than donor’s basis, the donee takes the donor’s basis. On a subsequent disposition of property by the donee, he has gain to the extent his amount realized on the sale exceeds his basis.

§ Gifts of Depreciated Property: If property has declined in value in the hands of the donor so that the FMV of the property at the time of transfer is less than the donor’s basis in the property:

· Apply gain rule first – For purposes of determi