TAX
Spring 2007
Sources of Tax Law:
The Internal Revenue Code is 26 USC § XXX
Treasury Regulations are 26 CFR § XXX
Revenue Rulings – Are issued by the chief counsel of the IRS, and aren’t binding on the IRS
Private Letter Rulings – Are issued on an individual basis and cannot be relied on by other taxpayers.
130 million people and 5 million businesses file tax returns each year.
Statute of Limitations:
Generally, the statute of limitations for a tax action is three years. If T doesn’t file a return at all, then the SOL is indefinite; if T files a fraudulent return then this also extends the SOL indefinitely.
INCOME
COMPENSATION FOR SERVICES AND FRINGE BENEFITS Pg. 91-120
REMEMBER: Anything that is compensation for services is income, except fringe benefits.
§ 61 Gross Income Defined
Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including but not limited to the following items:
(1): Compensation for services, including fees, commissions, fringe benefits, and similar items,
(2): Gross income derived from business,
(3): Gains derived from dealings in property,
(4): Interest,
(5): Rents,
(6): Royalties,
(7): Dividends,
(8): Alimony and separate maintenance payments,
(9): Annuities,
(10): Income from life insurance and endowment contracts,
(11): Pensions,
(12): Income from discharge of indebtedness,
(13): Distributive share of partnership gross income,
(14): Income in respect of a decedent, and
(15): Income from an interest in an estate or trust.
Treas. Reg. § 1.61-1 and 2 for more information on gross income.
Compensation for Services:
Anything of value that is given as compensation for services is income to the beneficiary; it is included in gross income.
Old Colony Trust Co v. Commissioner: As part of his compensation, the President of a company received payment of his income taxes, with the intent of allowing him to retain his gross salary. The question is whether this payment is income that is itself taxable. The court determines that it is. “The payment of the tax by the employers was in consideration of the services rendered by the employee, and was a gain derived by the employee from his labor.” This is not a gift, it is compensation.
If income tax on T’s salary is paid as part of T’s income, then this is additional ordinary income. Payment of any liability, including debts and taxes, is income to the beneficiary.
If the company wants to do this then they need to determine how much is needed to pay T before taxes in order to allow him to net X amount at the end of the year. Remember that state taxes
f the stock. If the stock is worth $3k, then T would be taxed on $3k. $3k then becomes T’s basis in the stock—it will be used to determine his tax when he sells the stock (assuming that there is a gain.) REMEMBER that under § 275 T gets an itemized deduction for certain taxes, like state tax.
Fringe Benefits: Fringe benefits are value given in compensation for services rendered; however, fringe benefits for the most part are not included in gross income. Employee discounts, free office space, pensions, health insurance, etc. are all forms of non-taxable fringe benefits.
§ 132(a) Exclusion of Certain Fringe Benefits from Gross Income: These items are considered fringe benefits and are excluded from gross income.
Gross income shall not include any fringe benefit which qualifies as—
(1): No-additional-cost service, – employee definition § 132(h)
(2): Qualified employee discount, – employee definition § 132(h)
(3): Working condition fringe,
(4): De minimis fringe,
(5): Qualified transportation fringe,
(6): Qualified moving expense reimbursement,
