Tax Outline

Tax
Gross income
– Above the line deductions
Adjusted Gross Income
– (Itemized, below the line deductions or Standard deduction)
– Personal exemptions
Taxable Income
* Tax rate (special calculation for capital gains)
Preliminary tax due
– Credits
Tax due / Refund

I. POLICY

1) Will there be administrative problems?
a. Too large tax base? Too many transactions?
b. Create money shifting incentives from people in different tax brackets
c. Do we want tax payer to look for every whole in the code
d. We want congress to create clear meanings in the code
2) Neutrality
a. We don’t want people to base their behavior on tax law.
3) Fairness
a. Want people to be treated the same
4) Why do we have 132(a)(1 & 2)? (No Compulsion)
a. Pros:
i. Administrative convenience, valuation, and record keeping problems are reduced. Airline standbys benefit both employers and employees
b. Cons
i. These exclusions are not treated neutrally.
5) § 119 has an element of compulsion. Is there really a benefit, and how much?

II. Chapter 2 – Gross Income
a. § 61 Gross Income Defined
i. Break cashless transactions into multiple step hypothetical cash transactions
ii. Treasury regulation 1.61-1(a). The form of payment which one receives generally makes not difference in determining what constitutes gross income. (see Old Colony Trust).
iii. 1.61-2(d)(1). Services exchanged for other services, value is determined by Fair Market Value (FMV).
1. Assume arms lengths transactions and that services are relatively equal.
iv. No taxation of imputed income (e.g. use of your own home as rent income of preparing your own will) b/c of administrative problems
v. Cash equivalents – See Timing/When section
b. Included in Gross Income § 61
i. Compensation for services § 61(a)(1)
1. Wages 1.61-2(a)
2. Tips 1.61-2(a)
3. Commissions 1.61-2(a)
4. Bonuses 1.61-2(a)
a. § 74(c) exceptions for certain employee achievement awards
5. Income from services 1.61-2(d) Fair Market Value
6. See § 102 gift, devise, bequest, and inheritance exceptions includable in gross income.
c. Commissioner v. Glenshaw Glass (punitive damage award that co. said they didn’t have to pay taxes on)
i. Gross income =
1. Undeniable accessions to wealth
2. Clearly realized, and
3. Over which the taxpayers have complete dominion.
ii. Congress intended to exert the full measure of its taxing power for purposes of determining gross-income – courts should give a liberal construction.
d. Old Colony Trust (co. paid taxes for its employees, IRS said that was income).
i. Not a gift b/c it was compensation for services
ii. Stands for:
1. Form of payment doesn’t matter
a. If someone else pays your debt it is considered Gross income and taxable. (it would be like the money going to the tax payer first and then paying the debt).
2. Voluntary payments can be compensation.
e. McCann v. US (seminar in Las Vegas was compensation as opposed to a business meeting and therefore gross income).
i. Where an employer pays an employee’s expenses on a trip that is a reward for services rendered by the employee, the value of the reward must be regarded as income to the employee at the FMV.
f. Bargain purchase rule: two arms length parties, the tax law will not look beyond the actual transaction to determine the value of the property for tax purposes. Bargain must be prior to the purchase.
g. Included in gross income
i. Compensation for services 61(a)(1)
1. Wages 1.61-2(a)
2. Tips 1.61-2(a)
3. Commissions 1.61-2(a)
4. Bonuses 1.61-2(a)
a. § 74(c) exceptions for certain employee achievement awards
5. Income from Services – 1.61-2(d) – FMV
6. See V.a. § 102 gift, devise, bequest, and inheritance exceptions includable in gross income.
7. 102(c) Employee gifts to or for the benefit of – generally are included in gross income
a. § 74(c) some employee achievement awards excluded
b. § 132(e) some de minimus employee benefits excluded
c. Employer paid vacations
i. McCann v. US (seminar in Las Vegas was compensation as opposed to a business meeting and therefore gross income.) p. 38
1. Where an employer pays an employee’s expenses on a trip that is a reward for services rendered by the employee, the value of the reward must be regarded as income to the employee at the FMV.
d. Payment of liabilities by non-arms-length third employer-like parties
i. Old Colony Trust Co. v. Commissioner (employer paid employees tax – tax paid was held to be taxable as compensation) p. 35
1. Form of the payment is immaterial
2. If a third party pays your tax liability. It is treated as if the third party first pays you and then you pay the liability.
3. Not a gift b/c employer and employee relationship – held compensation for services
8. Bartered transactions/Services for services – 1.61-2(d) and Rev. Rule 79.24 p. 37
a. No reduction for time spent
9. Gift of services AFTER the fee is earned
a. Cannot gift services after the fee is already earned. If you waive the fee prior to earning it then you are gifting services.
h. 61(a)(3) Gross income derived from business = total sales – cost of goods sold + investment income + incidental income 1.61-3
i. Treasure Trove 1.61-14(a)
i. Cesarini v. U.S. (found cash inside piano)
1. Income from all sources is taxable unless there is an express exception.
2. Treasure is taxable when actually found and title passes.
j. Gross income is to be defined broadly and you don’t need to specifically list anything as gross income.
k. Property realization event