INDIVIDUAL INCOME TAX
PROFESSOR FORMAN
SPRING 2013
GROSS INCOME (61)
Gross Income (61)
Less: Above the Line Deductions (62)
Produces: Adjusted Gross Income (AGI)(62)
Subtract Either: Standard Deduction (62) or Itemized Deduction (161-222)
Subtract: Personal Exemption (151)
Produces: Taxable Income
Less: Credits (21-53)
Produces: Tax Liability
Above the line deductions – 62 (Taken from GI to produce AGI, which in turn has the potential of increasing certain itemized deductions that use % of AGI as a measure of deductibility)
1. Trade and business deductions (not as employee)
2. Reimbursed Expenses of Employees
3. Losses from Sale or Exchange of Property
4. Deductions attributable to Rents and Royalties
5. 222 Higher Education Expenses
6. Alimony
7. Moving expenses
8. Contributions to regular IRA
9. Losses
a. Only trade or business losses, losses from activities entered into for profit, and personal casualty losses
b. Only to the extent of personal casualty gains
i. Remaining losses are potentially deductible as part of the itemized deduction
10. Interest on education loans
11. Certain contributions to medical accounts
12. Costs incurred in civil rights and whistleblower cases
Below the Line Deductions-
1. Above or below the line?
a. Section 62 lists the above the line deductions
b. Section 67 lists below the line itemized deductions that are not miscellaneous
i. If listed, say its specifically listed
ii. If not listed, we assume it is a miscellaneous deduction subject to 2% floor of §67
CHAPTER 2: GROSS INCOME: SCOPE OF § 61
1. Equivocal Receipt of Financial Benefits (61) – all income from whatever source derived
a. Not mere return of capital
b. Not made with contemporaneously acknowledged obligation to pay
c. Not excluded by a specific statutory provision
2. Rule: Money is taxed the year you find [or receive] money [or benefit]; once the taxpayer has taken title [title determined by state property law] “reduced to undisputed possession”. Regs. 1.61-14
3. Rule: The discharge of a taxpayer’s obligation by a third party is equivalent to direct receipt by the taxpayer. (could have “grossed up” his salary instead)
4. Rule: Punitive damages are taxable – “instances of undeniable accession to wealth, clearly realized, over which taxpayer has complete dominion”
a. Loans are not income – no accession to wealth
5. Substance over form: Does not matter what you made it look like.
6. Rule: Security deposits are not “accession to wealth” until retained
7. Other:
a. Finding out that something you own is worth more than you thought is not taxable (yet)
b. The year that treasure trove is reduced to undisputed possession (set by state finders law), the income is taxable
i. Problem: May have to sell the item just to pay the tax
c. Giving things to employee’s wife: taxable income (viewed as compensation that the employee gifted to his wife)
d. Even if the source of income violates law (Al Capone)
e. IRS has pretty much given up on frequent flier miles taxation as a practical matter UNLESS they can be converted to cash.
8. Rule: Rental value of a building used by the owner does not constitute income
9. Rev. Rule 79-24 – 61a and 1.61-2 compensation for services (Both Taxable)
a. If services are paid for other than in money, the fair market value (FMV) of the property or services taken in payment must be included in income
b. If the services were rendered at a stipulated price, such price will be presumed to be the FMV in absence of evidence to the contrary
c. Have to report in the year that you receive the services, not in the year that you complete your end of the bargain
d. BARTER CLUBS – great way to get caught, however, mowing neighbor’s grass technically included as well – enforceability problems.
10. Rule: Using other people’s stuff is not imputed income (is taxable)
11. Imputed Income
a. Arises from use of household durables and household services
b. Not taxed – Pretty hard to value or draw the line, liquidity problem, unconstitutional?
CHAPTER 3 EXCLUSION OF GIFTS AND INHERITANCES
1. Rules of Inclusion and Exclusion
a. Specific Inclusions: sections 71-90
b. Specific Exclusions: sections 101-139E
i. Not exhaustive, but takes precedent over the general definition of income
2. Gifts – § 102 (not taxable) but there may be a gift tax for the giver
a. Definition of Gift – “Detached and disinterested generosity of the giver” (Duberstein)
i. Assumed not a gift in business context
1. Looks more like a gift if the donor doesn’t deduct them as a business expense
ii. Doesn’t follow the definition of gifts in other areas of law
iii. Substance over form
b. Employee Gifts § 102(c)
i. Items from employer presumed not to be a gift (not the same for former employees)
ii. § 102(c)(1) “an employee shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, the employee.”
1. Exception: Extraordinary transfers to the natural objects of an employer’s bounty if the employee can show that the transfer was not made in recognition of the employment (Reg. 1.102-1f(2)
2. Exception: 102(e) – certain traditional retirement gifts are treated a de minimis fringe benefits
3. Exception: 74(c) – certain employment achievement awards
iii. Exception: Certain fringe benefits and achievement awards
iv. If also family member/other capacity than employee – argue that it was a gift in that capacity
v. Post-resignation gifts may have less scrutiny since they are no longer technically employees
c. Gifts to Customers
i. 274b – Gifts to clients are not taxable
ii. Donor can deduct the first $25 of the gift if it is a small gift and to bolster goodwill
3. Inheritances (Bequest = personal property, devise = real
e under 162 (business deductions) or 167 (depreciation))
a. No discrimination limitation
b. Examples: Use of company car, bodyguard, on-the-job training (car salesman exception in 132(j)3(b))
c. Meals and entertainment while away from home
i. Employer would only be able to deduct 50% of these expenses
d. Exclusion here is better than a deduction because of the 2% floor
vii. De Minimis Fringe
1. So small as to make accounting unreasonable and impractical – 132(e)1
a. Factor: Frequency of similar fringes being provided
b. Examples: Secretaries doing your work, personal use of copy machine, cocktail parties, use of office coffee and coffee pot, occasional sports tickets, small holiday gifts – 1.132-6(e)
c. Occasional meal money or local transportation fare – 1.132-6(d)2
i. Meal money qualifies if:
1. Money provided only on occasional basis
2. Must be provided because overtime work necessitates an extension of the normal work schedule
3. Must be provided to enable the employee to work overtime
d. Also: traditional retirement gifts presented to employee after lengthy service
e. Discounts at employer operated eating facilities if not operating at a loss – 132(e)2
i. Non-discriminatory
ii. Not for food furnished to spouse or children of employee – 132(h)
viii. Qualified Transportation Fringe – 132(a)5
1. Includes value of benefits provided to an employee by an employer in the form of:
a. Commuter highway vehicle (132(f)1(a)): vehicle – used between employee’s residence and work, vehicle must have capacity for 7, and be used 80%+ for commuting or business trips – 132(f)5(b) ($175 limit/mo)
b. Transit pass, token, fare card, voucher for transit (7+ capacity vehicle) – 132(f)1(b)/5(a) ($175 limit/mo)
c. Qualified parking at business or park-and-ride – 132(f)1(c) – cannot be on or near one’s residence – 132(f)5(c) ($175 limit/mo)
d. Reimbursement for bicycle use ($20 limit/mo)
2. Cannot overlap with a working condition fringe or a de minimis fringe
3. Reimbursement is OK – 132(f)3
4. Non-discrimination requirement does not apply to qualified transportation fringe
ix. Athletic Facilities – 132(j)4
1. Exclude value of use of any on-premise athletic facility (gym, pool, tennis, golf)
2. Substantially all the use must be by employees and their spouses/dependants
3. Must be on premises and operated by the employer
