TAX I OUTLINE SHUE FALL 2012
Tax Formula
§ Gross income
§ Less §62 deductions
§ Adjusted gross income
§ Less itemized deductions or standard deduction and exemptions
§ Taxable income
§ (Corporations go from gross income to taxable income)
GROSS INCOME
§61 Gross Income
§ All income from whatever source derived
o Compensation for services, including fees, commissions, fringe benefits and similar items
o Gross income derived from business
o Gains derived from dealings in property
o Interest
o Rents
o Royalties
o Dividends
o Alimony and separate maintenance payments
o Annuities
o Income from life insurance and endowment contracts
o Pensions
o Income from discharge of indebtedness
o Distributive share of partnership gross income
o Income in respect of a decedent and
o Income from an interest in an estate or trust
Cesarini v. United States
§ Found $4,476 in the piano
§ Treasure trove, to the extent of its value in US currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession
o Income in the year that they found the money
Old Colony Trust Co v. Commissioner
§ Taxpayer’s company paid his taxes for him for 2 years
§ You do not have to have direct receipt of the item to have income, you can have indirect receipt to have income
o Taxes paid by the employer were additional taxable income
Commissioner v. Glenshaw Glass Co
§ Gross income is
o Undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion
Charley v. Commissioner
§ Frequent flier miles were considered taxable income
§ Realized either because
o Additional compensation or
o Gain from sale of FF miles
§ Illegal income is taxable even if there is a legal obligation to make restitution
Imputed income
§ Flow of satisfactions from durable goods owned/ used by TP or arising from services from personal exertion of TP for his own benefit (applied within a family unit)
§ Helvering v. Independent Life Ins Co
o The rental value of the building used by the owner does not constitute income (imputed income) within the meaning of the 16th Amendment
o Income earned from using your own assets (living in your own house) not taxed
§ Dean v. Commissioner
o Using business assets is income
o Fair rental value of corporate property is income
EXCLUSIONS
§102 Gifts
§ (a) General Rule – Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance
§ (b) Income – Subsection (a) shall not exclude from gross income
o (1) The income from any property referred to in subsection (a) or
o (2) Where the gift, bequest, devise, or inheritance is of income from property, the amount of such income …
§ (c) Employee Gifts –
o (1) In general – Subsection (a) shall not exclude from gross income any amount transferred by or for an employer to or for the benefit of an employee
o (2) Cross references – For provisions excluding certain employees achievement awards from gross income, see §74(c)
§ Commissioner v. Duberstein
o To determine if a gift is made, must look into the transferor’s intent (detached and disinterested generosity out of affection, respect, admiration, charity or like impulses)
§ §274(b) – a deduction for gifts limited to $25
o If donee is able to exclude the gift under §102, then limited deduction up to $25 for all gift to that donee for that taxable year
Bequests, etc
§ Lyeth v. Hoey
o Excludable even though paid on the settlement because of his position under inheritance §102
§ Wolder v. Commissioner
o The lawyer’s payment came under the will to be paid at a later day, and there is no exclusion in §102 for services, so there so no exclusion for the income received
§132 Fringe Benefits
§ Fringe benefits provided by an employer are generally considered gross income §61(a)(1)
o Cost of the fringe benefit is deductible by the employer
§ (a) Gross income shall not include any fringe benefit which qualifies as a
o (1) No-additional-cost service
§ Line of business, no substantial additional cost
o (2) Qualified employee discount
§ Line of business the employee works in
· Limit
o 20% for services
o Gross profit % for property (employer cannot sell below the cost)
o (j)(1) Neither can discriminate in favor of highly compensated employees
o (3) Working condition fringe
§ Any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under §§162 or 167
o (5) Qualified transportation fringe
§ Transportation in a “commuter highway vehicle” between the employee’s residence and place of employment
· $175 per month
§ Qualified parking
· $240 limit (2012)
§ Reimbursement for commute by bicycle
· $20 per month
§119 Meals and Lodging
§ (a) The meals or lodging is furnished for the convenience of the employer
o Convenience of the employer – facts and circumstances test §1.119-1
§ (b)(1) The meals are furnished on the business premises of the employer
§ (b)(2) The lodging is on the business premises of the employer and the employee is required to accept such lodging as a condition of his employment
o Condition of his employment – the employee must be required to accept the lodging in order to enable him properly to perform the duties of his employment §1.119-1(b)
§74 Prizes and Awards
§ (a) Except as otherwise provided in this section or in §117, gross income includes amounts received as prizes and awards
§ Exceptions
o (b) Civic, chari
n
o No DDI income, the full amount of the debt will be included in the amount realized
§ Exclusions from DDI income
o §102 Gift
o §108(a)(1)(A) & (B) Bankrupt or insolvent TP
§ (b) May loose tax incentives such as basis
· The amount excluded from gross income shall be applied to reduce the tax attributes of the TP in the following order
o Net Operating Loss
o General Business Credit
o Minimum Tax Credit
o Capital Loss Carryovers
o Passive Activity Loss and Credit Carryovers
§ §1017 Basis not reduced if liabilities exceed basis
o §108(e)(5) Adjustment of purchase price
§ Tradeoff – reduce purchase price
· If the reduction does not come from a title 11 case or when the purchaser is insolvent
· Seller financed purchase and the amount of debt is reduced by the seller, then it will be treated as a purchase price adjustment, not as gross income
o §108(f) Student loans
§ Will exclude the amount of forgiveness
o §108(h) Qualified principal residence indebtedness
§ Tradeoff – possible basis reduction
§ Basis gets reduced to the extent you are able to exclude under this section
§ Applies to acquisition indebtedness
· Principal residence (same definition as §121)
· Limit $2 million
§ (4) Order ruling
· Where both qualified and nonqualified debt
· Discharge applied 1st to nonqualified debt (as determined immediately before the discharge)
· Only excess over nonqualified debt is excluded
Damages
§ A specific code section may govern the tax treatment for either part of all of amounts received as damages
§ If not, the nature of the recovery determines taxability
§ Raytheon Production Corp v. Commissioner
o Lost profits are taxable (income)
o Damage to goodwill not taxable (recovery of capital)
§ Punitive damages are taxable
§104(a)(2) Personal Physical Injury & Sickness Damages
§ (a) Gross income does not include
o (2) The amount of any damages on account of personal physical injuries or physical sickness
o Emotional distress shall not be treated as a physical injury or physical sickness
§ Exclude amount paid for medical care if TP did not deduct under §213
§ Exclude if they are a consequence of personal physical injury or sickness
§ The complaint is the best proof towards what the damages are going towards
