Select Page

Federal Income Tax
University of Missouri School of Law
English, David M.

I.                   Gross Income
A.                General Rule–gross income includes all accessions to wealth (IRC § 61–interpreted very broadly)
1.                  Income from all sources is taxed unless the taxpayer can point to an express exception (Cesarini–treasure trove is taxable in the tax year it is reduced to undisputed possession; Treas. Reg. § 1.61-14(a))
2.                  Liabilities decreased by another are taxable (Old Colony Trust–taxes paid by employer; discharged debt)
3.                  Money received from judgment is taxable income if the underlying reason for the judgment would be income (Glenshaw Glass–punies are income)
4.                  Illegal gain is taxable income (Treas. Reg. § 1.61-14(a))
5.                  When someone pays a legal liability on the behalf of the taxpayer, it is included in income, unless it is exempt for some other reason, as a gift (Old Colony Trust)
6.                  Alimony is taxable income (§ 61(8))
7.                  Property settlement in divorce is not income
8.                  Personal injury damages are not taxable income, unless the injury is not physical (e.g., slander, libel, emotional distress)
9.                  Loans are not taxable income
10.              Security deposit is not gross income because they do not have complete dominion over the money because they might have to pay it back (Indiana Power & Light)
11.              Rents received are included in income (§ 61(5))
12.              Increases in the value of property are not included in income until you realize the gain, e.g., by selling it
B.                 Important concepts
1.                  Realization–changing the nature of the taxpayer’s relationship with property, e.g., selling stock
a)                  Congress does not tax appreciation until the gain is realized
b)                  Rationale
(1)               Administratively impractical
(2)               In the case of depreciation Congress would have to refund for the loss
c)                  Exception–property received from employer or in payment for services
2.                  Recognition–including an item on the tax return, whether a gain or loss
a)                  Realized gains are recognized unless the taxpayer can point to a specific section of the Code that allows an exception
b)                  Realized losses are not recognized unless the taxpayer can point to a specific provision allowing it
3.                  Assignment of income–a taxpayer cannot assign income earned to another
a)                  Income can be in the form of cash or property
b)                  Income received by another is taxed to the employee (fiction that taxpayer receives the income and gives it to the other as a gift)
C.                 Income without the receipt of cash or property
1.                  Value of services received (Tres. Reg. 1.61-2(d); Rev. Rul. 79-24)
a)                  Taxpayer must include the value of services received (e.g., in a barter club) in the year received, not in the year the taxpayer renders services
b)                  So far the Service has not chosen to get involved in informal bartering
2.                  Imputed income
a)                  Taxpayers are not taxed on the imputed rental value of their homes (Independent Life) or self-help
(1)               Taxpayers are taxed when they live in a home provided by their employer (Dean—taxpayers taxed on the value of home owned by a corporation that allowed them to live there rent-free). This is the same as the employer paying part of salary in the form of rent
(2)               Taxpayers are taxed on interest-free loans (fiction that taxpayer received interest and gave it to borrower)
b)                  Taxpayers are not taxed on self-help (e.g., attorney drafts his own will). This only extends to the family unit
c)                  Taxpayers are not taxed on informal bartering (it’s technically income, but the Service has chosen not to enforce it)
D.                Gifts
1.                  General rules
a)                  Gross income includes the receipt of any financial benefit that is
(1)               Not a mere return of capital
(2)               Not accompanied by a contemporaneously acknowledged obligation to repay, and
(3)               Not excluded by a specific statutory provision
b)                  Gifts are excluded from income, whether by gift, bequest, or inheritance (§ 102(a))
(1)               Exception—income from property received as gift is included in income (§ 102(b)(1))
(2)               Exception—where the gift, bequest, devise, or inheritance is of income from property, the amount of such is included in income (§ 102(b)(2))
(3)               Exception—amounts transferred to an employee by an employer are not excluded (§ 102(c)(1))
(a)                Car given to non-employee taxpayer in appreciation for referrals is taxable income (Duberstein)
(b)               Exception—fringe benefits (§ 132)
(c)                Exception—modest employee achievement awards
c)                  Definition of gift—property given with detached and disinterested generosity out of affection, respect, admiration, charity or like impulses
(1)               Definition of gift under con

to the employee (§ 132(a)(1), (b)). Even cash rebates qualify [check with Cecil to make sure this is true]. Definition—service provided by an employer to an employee for use by such employee if (§ 132(b)). Section 132 does not apply to any fringe benefits of a type the tax treatment of which is expressly provided for in any other section of this chapter (§ 132(l))
(a)                Offered by the employer to the public in the ordinary course of the employer’s business (§ 132(b)(1)
(b)               Employee is employed in the same line of business as the service that’s being offered (§ 132(b)(1))
(c)                Employer does not incur substantial additional costs or forego revenue in providing the services (§ 132(b)(2))
(d)               Usually only applies to employers giving to their own employees. However, reciprocity agreements between employers are an exception (§ 132(i))
(i)                 Service must be provided pursuant to a written agreement such employers, and (§ 132(i)(1))
(ii)               Neither of such employers can incur any substantial additional costs (including foregone revenue) in providing such service or pursuant to such agreement (§ 132(i)(2))
(iii)             Cecil adds that the employers must be in the same line of business
(e)                Hotel rooms are services (Treas. Reg. 1.132-2(a)(2)). Insurance policies are services, not property
(f)                If there’s a discount at all, it can’t be a no additional cost service
(g)               Expanded definition of employee applies (§ 132(h)).
(i)                 Spouse
(ii)               Dependent children
(iii)             Retired employees
(iv)             Employees with disability
(v)               Surviving spouse
(vi)             Parents (for airline services)
(h)               Non-discrimination rule applies (§ 132(j)(1))
(2)               Qualified employee discount (§ 132(a)(2), ©))
(a)                Definition—any employee discount with respect to qualified property or services to the extent such discount does not exceed (§ 132(c)(1))
In the case of property, the gross