Individual Income Tax
Professor Mark Gillett
Fall 2012
1. Tax Practitioner’s Tools
a. Legislative Materials
i. Constitution
1. 16th Amendment: Congress has the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States and without regard to any census or enumeration (income tax not subject to the rule of apportionment)
ii. The Code: 26 USC
iii. Bills
iv. Hearings/Committee Reports
1. Legislative Committees
a. Ways & Means Committee – 35 members (House)
b. Finance Committee – 21 members (Senate)
b. Court System
i. Supreme Court
ii. Courts of Appeals
1. U.S. Tax Court
2. U.S. Court of Federal Claims
3. U.S. Western District Court
c. Administrative Materials
i. Regulations
ii. Mayo-standard of review for regulations is whether it was a reasonable interpretation of the statute
iii. Revenue Rulings
iv. Actions on Decisions
d. Two Limitations for Taxing
i. Apportionment-once Congress established sum to be raised by direct tax, then the sum must be divided among states in proportion to their respective populations
ii. Rule of Uniformity: same manner or mode of taxation must be used everywhere throughout the U.S.
1. Applies to income collected under 16th Amendment
2. Gross Income:
a. Federal income tax is imposed on a net figure known as taxable income
b. Taxable income is gross income (§61 & 71) minus exclusions (§101) and deductions (§151)
c. Cesarini v. United States
i. Finder of treasure trove is in receipt of taxable income in taxable year it is reduced to possession
ii. Regulation: 1.16-14 “treasure trove is gross income”
d. Old Colony Trust Co. v Commissioner pg 58
i. Taxpayer cannot induce a 3rd party to pay his income tax in order to avoid making a return and payment of corresponding taxes
e. Commissioner v. Glenshaw Glass Co pg 60
i. Money received as punitive or exemplary damages must be reported as GI; not a gift
ii. Instances of undeniable accessions to wealth clearly realized and over which the taxpayers have complete dominion
f. Regulation: 1.61-14 Miscellaneous items of gross income. [encompasses the holding from all 3 cases above]
g. Charley v. Commissioner pg 64
i. travel credits converted to cash in a personal travel account established by employer constitute GI
h. Helvering v. Independent Life Ins. Co
i. Not taxable because imputative income
ii. Rental value of building used by owner doesn’t constitute GI within meaning of 16A
i. Revenue Ruling 79-24
i. FMV of the services reported by giver and receiver
ii. Barter is subject to tax
1. Lawyer and housepainter swap services
2. Landlord takes painting from artist
j. Dean v. Commissioner
i. The rental value of property held in the name of a corporation
ii. Taxable GI because taxpayer occupied valuable corporate real estate & corporation is a separate taxable entity
k. Exclusion Sec 119 deals with Pres Boren’s house, Pres of the U.S., etc
l. Exclusion Sec 107 Rental value of parsonages
3. Chapter 3: The Exclusion of Gifts and Inheritances
a. How to analyze gift questions
i. Was the amount/item a gift, bequest, devise, or inheritance?
1. If bequest, devise, or inheritance then NO income tax unless receiving actual income from the item.
2. If Gift-Look to Donor’s Intent
a. If donor’s intent is detached generosity (i.e. not compensating for something) then there is NO income tax.
i. Restrictions: (1) Donee does not have to pay income tax and (2) Donor is limited to a $25 deduction by §274(b)(1).
b. If not a gift, then income taxes are due and deductibility by the gifter is available. Generally: (1) paid in context of employment and (2) treated as a biz expense
b. Commissioner v. Duberstein (2 cases)
i. Pres. Of Mohawk wanted to give him a Cadillac
1. SC held it was compensation for services
ii. Stanton; comptroller for Trinity Church resigned & given $20,000 in cash
1. Gift is a detached and disinterested generosity
c. Gifts to Employees
i. 102(C)
ii. Exclusion for employee achievement awards under §74(c)
d. Bequests, Devises, and Inheritances
i. Lyeth v. Hoey
1. Policy: uniformity across the U.S. because they did not want to make it dependent upon which state law you apply
ii. Wolder v. Commissioner
1. Attorney contracts to perform lifetime legal services for a client and the client will leave him the money in a bequest
2. Under 61 (a) interpreted broadly…income from whatever source derived….
3. Test is based on the “intent of the parties”
4. Not an excludable gift 102(a)
e. How to format an answer on the exam:
i. 61 (a) (1) includes fringe benefits but 132 (a)(3) & (d) provide an exclusion
f. Exclusions for Meals and Lodging
i. Herbert G. Hatt
1. Court found it was excluded under the 3 part test found in Sec. 119
a. Lodging is on the business premises of the employer
b. Lodging is furnished for the Convenience of Employee
c. Condition of his employment Required to accept such lodging
4. Chapter 5 Awards
a. General Rule 102: Gifts received are excluded as GI except under 102(c)
b. Inclusions Provisions: Sec 74 Prizes and Awards
i. Test 74(b), Deductibility for Employer under 274(j) (limited to $400 annualy)
ii. Sec 74 (c) Exception: Employee Achievement Awards [reference 274 (j)]
1. Must be for length of service or safety of greater than 5 years. §274(j)(4)(B)
c. Allen J. McDonell
i. Court held expenses not included in GI because it was his duty to work on the trip
ii. Today: 274 (m)(3): Additional limitations on travel expenses
1. 274 Exception requires A, B, & C to be met
d. Scholarships & Fellowships
i. 117 exceptio
gets paid accidental health insurance policy. Taxable: No, unless had received a prior tax benefit for the premiums paid.
§105(a)-Amounts received under accident & health plans
General Rule: amount paid by an employer for an employee is income
Exceptions:
§105(b)-employer reimburses the employer for their healthcare costs (employee already paid taxes on income used to reimburse employer)
§105(c)-payment for loss of functionality not falling under the workers comp statute
Ex. Employee has $900 claim. $400 form individual policy and $800 from employer’s policy. If employee had “purchased” both policies then all reimbursement would be excluded. Since employer paid part of the claim the calculation is different. 800/1200=2/3rd of income. IRS then takes the claim amount of 900*2/3rd =$600 of non-taxable income and then $800-$600=$200 of taxable income. i.e. excess above and beyond claim.
Pg. 200 Rev. Rule 79-313-income from the disposition of a personal injury lawsuit are not taxable.
a. Raytheon Case
i. Held: Compensation for Taxpayer’s loss of good will in excess of its cost is GI
8. Chapter 10: Separation and Divorce
a. Alimony and Separate Maintenance Payments
General rule: alimony payments are taxable to the recipient and deductible by the payor
b. Classification is important b/c property settlements generally are not modifiable, but alimony is modifiable.
c. Property settlement: no tax consequences even if monthly money payments
§ 71 Alimony (included in income Requirements)
d. 1. Alimony or separate maintenance payment must be in “cash”
e. 2. Must be received by the spouse (not child or other figure)
f. 3. Must be under an instrument of separation or divorce
i. decree of divorce, decree of separation, decree requiring a spouse to make separate maintenance payments (i.e. temporary support decrees pending the dissolution of a marriage)
g. Child support payments are not alimony
Recapture Rules
h. § 71(f)-Front-loading of alimony payments
i. Excess alimony payments
ii. Ex. Alimony paid
1. Year 1: 80k
2. Year 2: 80k
3. Year 3: 30k
4. Year 4: 30k
a. Take the excess of the amount paid in year 2 (80k) minus the amount paid in year 3 (30k) plus 15k equals 45k. Total overpayment is 35k.
b. Take year 2 + 3 and divide by 2. (45k + 30k /2= 37,500 + 15k=52,500. 80k-52,500=27,500.
