FEDERAL INCOME TAX
OUTLINE
Professor Lilly/Spring 2011
Basic Questions
1. Who is the taxpayer?
2. What? Income or deduction?
3. When does the tax apply?
4. Why?
5. How much?
What we should look for in a good tax policy
1. Fairness/equity
2. Ability to pay
3. Neutrality/Efficiency in policies terms—should neither encourage or discourage taxpayer choice; the more neutral a tax is the better
4. Administrability
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I. DETERMINING INCOME SUBJECT TO TAXATION
GROSS INCOME
STATUTE §’s: 61
1. Section 61—Defines gross income (gross income is taxable income)
a. “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including but not limited to…”
(when determining gross income look at each TP individually)
2. Equivocal Receipt of Cash Income
a. Income includes everything, even things not mentioned in the reg. See Cesarini v. US (money found in a piano was gross income), Old Colony (company pays employees income tax payment of an obligation is gross income) and Charley (frequent flyer miles cashed out)
b. INCOME = UNDENIABLE ACCESSION TO WEALTH, CLEARLY REALIZED, AND OVER WHICH TAXPAYER HAS COMPLETE DOMINION
i. Undeniable
1. Except: illegal income is still income even though not really undeniable
ii. Accession to wealth
1. Something that makes you richer
iii. Clearly realized
iv. Tp has complete dominion
1. If you don’t own it against all the world than you don’t have dominion
c. Loans are not gross income because the accession to wealth is offset by an obligation to repay.
d. Bonuses are still gross income—because it is still compensation for services, a job well done
e. Note on cost and value: if there is a difference between the two the reference point will be value; however generally we can take cost and value to be the same thing.
3. Income without Receipt of Cash or Property
a. Non-cash items can still count as gross income
b. Generally, gross income = value received
i. In a barter—it doesn’t matter if TP would have charged someone else differently, what matters it what TP received in the transaction.
ii. (Idea that something is worth what you will take for it—if they were valued together, the values would match up between the two TP’s, but this doesn’t actually happen that much)
c. If services are paid for other than $, the fmv of the property or services taken in payment must be included in income. See Dean (TP has to pay tax on the FMV on the home that employer gave him to live in.)
i. Imputed Income: However, there is no taxable income (imputed income) for living in a house that you own. See Regan Independent Life Insurance
1. Imputed income: gain obtained from benefit achieved by TP—no third party involved, ie. when a lawyer does their own taxes, or farmer eats their own crops
d. Remember: you have to have a taxable event, ex. discovering the worth of something you already own is not a taxable event; also mere fluctuations’ in value are not taxable events
GIFTS
STATUTE §’s: 102, 274(b) (deduction)
1. Definition of Gift
a. §102(a) Gifts: “Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.”
b. GIFT = proceeds from a detached and disinterested generosity, out of affection, respect, admiration, charity or like impulses. (this is not the same as the common law property def. of gift) See Duberstein.
i. Case by case determination on the facts to determine motive
c. Look at transferors intent/look at motive
d. Note: tips are income not gifts.
2. Employer Gifts
a. §102(c): Any amount transferred by or for an employer to or for the benefit of an employee is not excluded from gross income.
b. EXCEPTION:
i. If employee can show that the transfer was not made in recognition of the employees employment
1. Burden is on the EE
ii. Also 102(b)&(c) for certain retirement and de minimus gifts
c. DOMINANT MOTIVE IN XFER: a donor can only have one motive so we look for the motive that is dominant
i. Ex. If mom/boss gives gift to son/employee—was gift as mom or boss?
ii. There is no bifurcation of motives
iii. However, each donor can have their own motive in a multiple doner situation
d. Note: look for the EE/ER relationship
BEQUESTS, DEVISES AND INHERITANCES
STATUTE §’s: 102
(Inheritance: what happens when there is no will; Devise: disposition of real property; Bequest: disposition of personal property)
1. §102(a): Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.
a. Still grounded in notions of detached and disinterested generosity.
2. If amount is received in a will settlement? He still got it because he is an heir so it is included in the exclusion. See Lyeth v Hoey.
a. Generally look at the intent of congress; detached and disinterested generosity
b. However, if contesting will as a creditor then 102 will not apply.
3. Note: Remember if amount received is received as compensation for services—NOT excluded. See Wolder (lawyer gets his payment in client’s will).
a. Can’t avoid taxation by having payout be through will.
4. Note: Inhe
On or near the business premises
2. Revenue directed normally equals or exceeds the costs of such facilities.
a. Must at least cover the direct operating costs from charges made to EE
b. Direct operating costs—cost of supplies and food prep people but NOT costs of facility
i. Can loose money as long as these direct costs are covered.
3. Discrimination rule
iv. Ex. typing of personal letter by secretary, personal use of copy machine, occasion cocktail party, coffee and donnuts, low value gifts.
e. §132(a)5 Qualified Transportation Fringe
i. Transportation in a commuter highway vehicle for travel between residence and place of employment à $100 a month
ii. Any transit pass à $100 a month
iii. Qualified parking à $175 a month
iv. Bicycle commuting à $20 multiplied by number of bicycling months during the year
f. §132(a)6 Qualified Moving Expenses
g. §132(j)4 On premises gyms and other athletic facilities
i. Located on the premises of ER, operated by ER, Substantially all the sue of which is by employees of employer, their spouses and children
h. Who these Fringes Apply to?
i. §132(h)—employee, retired and disabled employee, spouses and dependant children
i. §132(j)1 Non-discrimination Rule
i. Denies highly compensated EEs and exclusion for fringes unless the fringes are provided on substantially the same terms to a broad, reasonably defined group of employees.
ii. If classification is discriminatory, highly compensated EEs have GI but the exclusions still applies to those EEs who receive the benefits and who are not members of the highly compensated group.
iii. Rationale: to prevent unfairness and allowing execs sneakily avoid taxation.
iv. Highly Compensated EE: (§414(q))
