Individual Income Tax Outline
Fall 2010
Gross income includes the receipt of any financial benefit which is:
– Not a mere return of capital; and
– Not accompanied by a contemporaneously acknowledged obligation to repay; and
– Not excluded by a specific statutory provision
1) Gross Income
a) Definitions:
i) Haig-Simmons (theoretical): Consumption + Change in value of the store of property rights = Income
(1) This is measured during a taxable year.
(2) Generally, gains & losses however are not taxed until they are sold or exchanged.
ii) Eisner v. Macomber: Gross income includes only income that is gain derived (severed) from labor, for capital, or a combination of the two.
(1) Do not have to report income until you sell some or all of stock. Then report your gain based on your sale.
(2) The court back pedaled almost immediately and then redefined the definition in Glenshaw Glass
iii) Glenshaw Glass: Gross income is “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion”
(1) Realization from Eisner still necessary.
Elements of Gross Income – Glenshaw Glass
(A) accession to wealth…
(B) clearly realized…
(C) complete control or dominion…
iv) §61 – Definition of Gross Income: Except as otherwise provided, gross income means all income from whatever source derived. Unless excepted by statute.
(1) Including, but not limited to:
(a) Compensation for services: fees, commissions, fringe benefits, etc.
(b) Gross income derived from business
(c) Gains derived from dealings in property
(d) Interest
(e) Rents
(f) Royalties
(g) Dividends
(h) Alimony and separate maintenance payments
(i) Annuities
(j) Income from life insurance
(k) Pensions
(l) Income from discharge of indebtedness
(m) Distributive share of partnership gross income
(n) Income in respect of a decedent
(o) Income from an interest in an estate or trust
(2) Economic Benefit: Any economic benefit regardless of how the TP attains it.
(a) Tangible Items: Receipt of cash or other property generates income under this approach, even if it comes from an usual source. Like a chunk of cash inside an old piano. Cesarini v. U.S. (H&C #1 p. 1)
(b) Intangible Benefits: Receipt would be included in gross income.
(i) Ex. If one taxpayer satisfies another’s obligation, the satisfied must include the satisfaction as gross income. Old Colony Trust v. Com.
1. Technically that money came to the taxpayer first and then paid to the debt. Different from discharge of indebtedness because debt is never being paid.
(c) Realization – A person is not taxed until it has been realized.
(i) Policy: Hard to value objects until they are sold. Realization means don’t pay until you sell.
b) Certain Items That Are Not Income (Generally Under Tax Law):
i) Imputed Income: The value of any services one performs for oneself or family. Also the value of any property used that one owns are imputed income.
ii) Capital Recovery: Income from a sale or exchange of property is the profit on the transaction, not the full amount received. The receipt of capital investment is tax free – timing is a legislative issue.
iii) Loans: Creation nor repayment is a taxable event. Any excess made in interest is taxable. However forgiveness or discharge may generate income for the debtor.
c) Specific Inclusions in Gross Income – §61 provides a non-exclusive list of types of income specifically included in gross income.
i) Compensation Income – §61(a)(1): Income transferred as consideration transferred for the performance of services. Salary, fees, commissions, tips, bonuses, & severance. In the form of cash, property or other services. Rev. Reg §1.61-2(a)
(1) Amount included: Amount of cash or FMV of property or services received.
(2) Timing Issues: The taxable year in which the TP will include the income in will depend on TP method of accounting, and if restricted property is included. §83
(3) Character: Ordinary Income.
ii) Gross Income from Business – §61(a)(2): Sole proprietorships will report their business gains and losses on their individual tax return.
iii) Gains derived from dealing in Property – §61(a)(3): These are discussed on
iv) Investment Income – §61(a)(4-7): Various types of investment income are included in gross income, including dividends, interest (both explicit & imputed), rents, royalties, and income from annuities.
d) In-Kind Employer-Provided Benefits (Non-Cash)
i) 61(a)(1) provides that “compensation for services” including “fringe benefits” is included as gross income.
(1) Some are included as gross income in full, some are excluded entirely, and others are excluded subject to certain requirements and limitations.
(2) Reg. §1.61-1(a): Gross income includes income realized in any form, whether it money, property, or services”.
ii) Property as Compensation: If property is transferred by an employer to an employee as compensation for services for an amount below FMV, then the difference b/w FMV and amount paid is compensation at time of transfer and shall be included in gross income. Rev. Ruling § 1.61(d)(2) & IRC §83(a)
(1) TP must pay tax on full FMV of property at the time when:
(a) TP has ability to sell property, OR
(b) Restrictions are lifted on property and you cannot be forced to give property back. §83(c)(1)
(i) Companies give employees stock w/ requirement of employment for 5 years before they have right to stock.
1. TP in this situation has to include
its
(i) 132(e)(1) – Expenses so small accounting for them would be unreasonable – occasional parties, tickets, meals, drinks, etc.
(e) Qualified transportation fringe benefits
(i) Parking 132(f)(5)(C)
(f) Qualified moving expense reimbursements
(i) If deductible under 217 if paid by employee then excludable under 132(g)
(g) Qualified retirement planning services
(i) 132(m)
(h) Qualified military base realignment and closure fringe benefits. 132(j)
ix) Health Care Benefits from Employers §105: Reimbursement for medical services & value of services in excludable so long as the employer health benefit plan does not discriminate in favor of highly compensated employees.
(1) §106 excludes value of health and accident premiums.
(2) §213 allows for exclusion of non-reimbursed medical expenses subject to 7.5% floor and adjusted for gross income.
x) Imputed Income: The benefit one received from the use of one’s own property, the performance of one’s services, or the consumption of self-produced goods and services is not usually taxed as gross income
(1) Does the ownership of an object diminish in value with consumption?
(2) While this type of “earning” may fall under § 61 definition of gross income, Congress has never tried to include this type of income
(a) PROBLEM → How would you determine value in order to be taxed?
(b) POLICY → How do you explain this type of tax?
(i) Economists would argue that value earned from feeding family with vegetables grown in garden constitutes income b/c you are “saving” money you would have spent on market to feed family
(ii) Tax Code – NO unless you sell vegetables on the market and then must report the value earned (see Barter System below)
(3) Rental Value: The rental value of a building occupied by the owner does not constitute income
(a) Helvering v. Independent Life Ins. Co.: A taxpayer does not have to include the rental value of a building he owns and occupies as gross income
(b) Dean v. Commissioner (H&C #6 p.4)
.
xi) Barter System: Once you take your service into the marketplace, you have to report your gain as income – Rev. Ruling 79-24
(1) Barter System: Exchange of goods through services (barter) produces taxable services
Provides a general rule → Easier on the IRS to
