Winchester_FedTaxI_Fall_2017
FEDERAL INCOME TAXATION I – INDIVIDUALS
GROSS INCOME (Scope)
IF income is derived from any source THEN it is gross income UNLESS there is an exception in the subtitle. IRC § 61(a)
Source: Doesn’t matter (damages, punitive and otherwise) IRC § 61(a)
Form: Doesn’t matter. Treas. Reg. § 1.61-1(a)
Money, services, or property all count as gross income. Treas. Reg. 1.61-1(a)
Examples:
Cesarini: Property (Old money)
Glenshaw Glass: Money
Old Colony: Payment of a liability (debt relief)
Dean: Use of property
Example: Benefit conferred on taxpayer by way of compensation allowing taxpayer to utilize property, sort of like being paid.
If the medium of the transaction is not money, then the number you use is the FMV.
If both sides of the transaction are a service, and either of them have a stipulated price, that price is the FMV, and both are worth the same. Rev. Rul. 79-24.
Lawyer performs legal services for housepainter, who paints lawyer’s home in return.
Artist gives painting to landlord, who lets artist live in apartment rent free in return.
Fair Market Value (FMV): Whatever the average person would be willing to pay.
Income: (1). An undeniable accession to wealth (2). Clearly realized (3). Over which the taxpayer has complete dominion Commissioner v. Glenshaw Glass Co.
1. Accession to Wealth (Special Types)
Barter (compensation other than money): Fair Market Value (FMV) of property or services counts as income. If the services are rendered at a stipulated price then that price is presumed to be the FMV in absence of evidence to the contrary. Treas. Reg. 1.61-2(d)(1)
Loans: not considered an accession to wealth because there is a reciprocal promise to repay Commissioner v. Glenshaw Glass Co.
Treasure Trove: “Found” money which is “reduced to undisputed possession.” Cesarini v. United States.
Illegal Gain: Counts as gross income despite legal obligation to make restitution
Rental value: The rental value of a building used by the owner does not constitute income within the meaning of the 6th Amendment Helverling v. Independent life insurance.
Purchase of something does not create an income event.
2. Clearly Realized (Two ways)
1. Converting property. Charley v. Commissioner
Convert the value into cash or other property
Examples:
Piano that was worth more than the owner realized when he first purchased it).
Employee receives frequent flyer miles from trips paid for by his employer. Employee converts frequent flyer miles (from business travel) into travel credits (money). Charley v. Commissioner
2. Naked receipt of something that is valuable.
Actual receipt.
Beneficial receipt. Commissioner v. Giannini
Beneficial receipt = Dominance/ownership/control + Diversion/direction
Mere refusal to accept not equal a beneficial receipt.
If you refuse the income, but you still exercise any control over where it goes, it is not a mere refusal, and it counts as a beneficial receipt.
If you receive income, but the income is immediately turned over to your controlling entity (law professor doing a clinic case for the school) pursuant to a contract, then it will not be a beneficial receipt. Rev. Rul. 74-581.
Unrealized appreciation in value is not taxed. You must sell it to be taxed on it.
Every time something of value changes hands it is a realization event (taxable event). You want to eliminate as many steps as possible between the entities.
3. Complete Dominion
Tax Liability: = Taxable income x Tax rates IRC § 1
Taxable income: = Gross Income – Deductions IRC § 63
Full Formula: Gross Income – Deductions = Taxable Income x Tax Rates = Tax Liability
EXCLUSIONS FROM GROSS INCOME (Limitations on Scope)
Full outlay of the interplay between Gross income and gifts
Gross income is all income. IRC § 61(a).
Except Gifts. IRC § 102(a).
Except gifts by employer to employee. IRC § 102(c).
Except Natural objects of the employer’s bounty. Prop. Treas. Reg. § 1.102-1(f)(2).
Special rules
De minimis fringe benefits. IRC § 132(e).
Employee achievement awards. IRC § 74(c).
Gifts (Identifying gifts):
IF property is acquired by gift, bequest, devise, or inheritance, THEN it is not included as gross income. IRC § 102(a)
Rule: Look at the intent of the giver
Intent of the giver must be: Detached and disinterested generosity (Commissioner v. Duberstein)
Rule: The court will consider all of the facts and circumstances
Bequest: Personal property transferred by will
Intent of the parties
Reasons for the transfer
Whether parties’ performance was in accordance with their intentions
Example:
Taxpayer receives bequest from a deceased client in exchange for an agreement to work for her for free. That is income, not a true bequest. Wolder v. Commissioner.
Devise: Real property transferred by will
Inheritance: Personal or real property obtained without a will
Taxpayer challenges the will of her deceased grandmother and receives a distribution from her estate as a result of a settlement between all interested parties. This received money is inheritance and is not taxable. Lyeth v. Hoey.
Transfers to Employee: Gross income shall NOT exclude any amount transferred by or for an employer to, or for the benefit of, and employee. IRC § 102(a)
1. UNLESS extraordinary transfers AND
2. To the natural objects of an employer’s bounty AND
E.g. a father who employs his son and gives him a gift
The son is a natural beneficiary of the wealth of the father, as would be a spouse, daughter, etc., anyone who would usually benefit from a breadwinner’s income/wealth.
The context of the gift is NOT based on the employment relationship.
3. Employee can show the transfer was NOT made in recognition of his employment THEN
4. The “gift” or item of value will not be considered a transfer to, or for the benefit of, the employee Treas. Reg. § 1.102-1(f)(2)
Income from Property Acquired by Gift, Bequest, Devise, or Inheritance: Gross income shall NOT exclude income from property acquired by gift, bequest, devise, or inheritance. IRC § 102(b)(1)
Special Rules:
Certain traditional retirement gifts are treated as de minimus fringe benefits. IRC § 132(e)(1)
Certain employee achievement awards. IRC § 74(c)
Fringe Benefits:
IF it is a no-additional-cost service, THEN NOT included in gross income. IRC § 132(a)(1)
No-additional-cost service (What is it?) IRC § 132(b)(1)
Any service
Ordinarily offered for sale to the employer’s customers. IRC § 132(b)(1)
Offered at no substantial additional cost. IRC § 132(b)(2)
Excess capacity (e.g. employee of airline flying for free only if there is room, or employee of hotel staying in an empty room). Treas. Reg. § 1.132-2(a)(2)
Provided by an employer to an employee
Employee works in the same line of business. IRC § 132(b)(1)
Former employees (retirement, disability). IRC § 132(h)(1)(A)
Widows/widowers. IRC § 132(h)(1)(B)
Reciprocal agreements. IRC § 132(i)
Must be in the same line of business (e.g. Delta employees ride American)
For use by employee
Spouses. IRC § 132(h)(2)(A)
Dependent child. IRC § 132(h)(2)(B)
Former employees. IRC § 132(h)(1)(A)
Widows/widowers. IRC § 132(h)(1)(B)
No discrimination. IRC § 132(j)
A highly compensated employee who receives a no-additional-cost service can exclude the value of the service from gross income ONLY IF the employer does NOT offer the service on more favorable terms to highly compensated employees. IRC § 132(j)(1)
So, if you discriminate in favor of highly compensated employees, let’s say, in regard to 2 classes (higher and lower) of hotel rooms, and the highly compensated employee chooses the lower tier hotel room, it doesn’t matter. The highly compensated employee still cannot exclude it from gross income because the POLICY is discriminatory.
Basically,
You can group your employees however you want and offer different things to different groups.
You can also discriminate by compensation so long as you do not favor the highly compensated employees.
You can even discriminate in favor of highly compensated employees, but they won’
MV of the property. It is the FMV of the property you have acquired that is the
Basis if property was acquired by gift. IRC § 1015(a).
GENERAL RULE: The gift recipient inherits the basis of the gift giver, IRC § 1015(a), OR the last owner from whom it was not acquired by gift. Treas. Reg. § 1.1015-1(a)(1).
ANOTHER WAY TO STATE IT: Recipient…
Inherits basis
Inherits a built-in gain (value of property likely went up)
Inherits tax bill
Tax bill is the difference between FMV and original basis.
NOTE: The reason for this is because you inherit the appreciation that the property has gathered and this gain hasn’t been taxed because there hasn’t yet been a taxable event.
What happens if there is a loss? (If built-in gains come with a tax bill, then built in losses come with a tax refund).
UNLESS: the adjusted basis is greater than the FMV at the time of the gift (built-in loss). THEN: if the taxpayer sells the property at a loss the taxpayer must use the FMV at the time of the gift as the adjusted basis. Treas. Reg. 1.1015-1(a)(1).
Another way to state the rule: Treas. Reg. 1.1015-1(a)(1).
The General rule applies, BUT
IF The taxpayer is selling property acquired by gift, AND
IF there is a built-in loss (FMV < adjusted basis at the time of the gift), AND
IF the taxpayer sells the property for a loss
You determine this by comparing the FMV against the inherited adjusted basis.
THEN use FMV at the time of the gift to compute the amount of loss
IF, after using the FMV to compute loss, there is a gain, then the answer is zero. Treas. Reg. § 1.1015-1(a)(1).
Basis if property was acquired from a spouse
RULE: When there is any transfer of property between spouses there is NO gain or loss to the transferor. IRC § 1041(a)(1).
RULE: The transferee spouse is treated as though they received a gift. IRC § 1041(b)
RULE: The transferee spouse ALWAYS gets the adjusted basis of the transferor. IRC § 1041(b).
RULE: This section also applies to former spouses, but only when the transfer is incidental to divorce. IRC § 1041
Basis if property was acquired from decedent (by bequest, devise, or inheritance)
RULE: The tax basis of property acquired from a decedent is the FMV (stepped-up value) at the time of death.
NOTE: Death wipes out any built-in loss or built-in gains
Basis if property was acquired by transfer that was part gift part sale. Treas. Reg. § 1.1015-4(a).
The basis will be the greater of:
1. The amount paid by the transferee for the property, OR
2. The transferor’s adjusted basis in the property at the time of the transfer
How to recognize a part gift part sale?
Transfer is the product of detached and disinterested generosity, OR
Parties are not dealing at arm’s length.
Basically, this is like a father selling property to his son for a steep discount.
Gift within 1 year of decedent’s death
RULE: IF a donor gifts property to a decedent within 1 year of the decedent’s death, AND the property returns to the hands of the donor (or donor’s spouse), THEN the donor’s basis is the basis in the hands of the decedent immediately before the decedent’s death. IRC § 1014(e)(1)(A-B).
Basis if the property is sold in parts
NOTE: Allocate the basis proportionally between the parts
