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Federal Income Tax
University of South Carolina School of Law
Handel, Richard

GROSS INCOME – § 61 – income from whatever source derived.

A. § 1.61-1(a) – GI means all income from whatever source derived, unless excluded by law. GI includes income realized in any form, whether in money, property or services.

B. Cesarini v. U.S. – Found $ in piano. Filed return claiming $. Filed claim for refund. See outline

1. Filed action in District Court since tax already paid, claiming refund. Taxpayer argued (p. 43):

a) Not gross income within §61.

b) Statute of limitations question. Piano purchased in 1957, not applicable to 1964 return; SOL tolled.

(1) SOL for return is 3 years from date of filing.

(2) Taxpayer may waive SOL though to avoid immediate assessment.

(3) SOL is 6 years, if greater than 25% of gross income was omitted from.

c) Capital gain treatment.

2. Held: Treasure is treated as Gross Income § 1.61-14

C. Old Colony Trust Co. v. Commissioner – Dude making some serious cash, company decided to pay tax liability for him also. 1918 GI = $978K; Tax liability = $681K. 1919 GI = $548K, Tax liability = $351K.

1. Issue – If company pays tax liability, is this payment of tax liability by the company also income?

2. Held – Yes, it is GI.

D. Commissioner v. Glenshaw Glass – Litigation originated in tax court and then also won in court of appeal without paying any of tax liability. However, when lost at the Supreme Court had to pay interest from date tax due.

1. Issue – If you sue and receive treble damages from a judgment, is that income under §61?

2. Held – Yes, it is GI.

E. Charley v. Commissioner – Travel expenses billed to client at first class rates, however travel agent would book coach tickets and then use frequent flyer miles to upgrade and difference between 1st class and coach was set aside for him to use for other purposes (in a kitty for him to draw).

1. Held – this additional money was income under §61.

2. Rationale – Trading/selling his frequent flyer miles for cash to his company.

F. Frequent flier miles generally – outside of this kitty situation in Charley. IRS treats this as a reduction in purchase price, not as income; even if use for personal use when your company purchases original ticket.

G. Unless you can find an exclusion (except repayment of loan, or return of capital), it is probably GI.

H. Problems (58 – 59)

1. Only becomes an issue if he sells it. Recognition v. Realization. Mere appreciation in value happens all of the time, until you convert it to cash it isn’t income.

2. When you win a raffle it is included as gross income unless you can find a statutory exclusion.

3. Employee realizes the additional $20K of stock as GI as well as the $15K of the car as GI. Realizes additional $35K of GI. GI of property = fair market value of the property. Even though to spouse, indirect payment to the employee.

4. Adjuster gets kickback for referral.

a) Yes, compensation for services is GI.

b) Still included in GI if illegal activities.

5. Rent = $1,000, Services = $3,000

a) GI = $4K rent + improvements §1.61-8

b) Still $4k of GI for lessor.

c) $2,500 reduction in rent, service coming back to lessee, receipt of an economic benefit.

6. Frequent Flyer Miles

a) No, miles part of price of the ticket, nothing to do with business context.

b) Business flights for the employer, since assignable they have value (fair market value)

c) If non-assignable, do they have value? Not GI, can’t do anything with them, must be used for business.

d) No authority on point; however if used for personal trip, likely to be classified as GI, since using for personal benefit unless find a employer/employee exclusion.

Income Without Receipt of Cash or Property – Code §61, Reg §1.61-2(a)(1), -2(d)(2)(.i).

A. Revenue Ruling (Treasury Department’s Litigating Position) 79-24.

1. Situation 1 – Fair market value of the services received by the lawyer and the house-painter are includible in their gross incomes under §61 of the Code.

2. Situation 2 – The fair market value of the work of art and the six months fair rental value of the apartment are includible in the gross incomes of the apartment-owner and the artist under §61 of the Code.

B. Dean v. Commissioner – 80% owned by wife, 20% owned by husband, house transferred in as an asset of the corporation; corp. owns the house. Living in the house is GI since corp. flipping the bill for them staying in the house.

C. Problems (62)

1. Veggy growing vegetables.

a) Harvest does not constitute GI.

b) Consume does not constitute GI.

c) Sales of vegetables = GI.

d) Exchange for tuna = GI.

e) Exchange for providing service = GI. She must pay tax on her proceeds along with the fair market value ($50) of the renting of the space.

e basis …

1. § 1012 – Cost Basis

a) Philadelphia Park – Cost basis is determined by the value of what is received. If the FMV of what received is unascertainable, then the FMV of the property given may be used to determine basis.

b) Taxpayer taxed on difference b/w the FMV of property received and adjusted basis of property sold.

c) Property Received Included in Income

d) Property Received Permanently excluded from income (Ee discount is exclusionary not deferral so retail price is basis)

e) See Crane (A/B includes non-recourse or recourse debt)

f) Problems (116 – 117)

(1) Purchased for $10K, sold for $16K

(a) $6K gain.

(b) If $1K option, then $9K paid, still paid $10K and sold for $16K. A/R = $16K, A/B = $10K ($1K + $9K) – – $6K gain.

(c) Sold option for $1500. A/R = $1500, A/B = $1000 — gain = $500.

(d) A/R = $18K, A/B = $12 [Cost basis (Code § 1012) of $10K + improvement (Code § 1016) of $2K].

(e) A/R = $18K, A/B = $10K, gain = $8K. Don’t realize the $2K of improvements made by lessee as adjusted basis until you sell, so that you have pay for the increase in value?

(f) A/R = $16K, A/B = $10K; $3K of income tax not included to adjust basis since it was actually income in the form of property and not a gift and treated as an “improvement.”

g) A/R = $16K, A/B = $10K, gain = $6K. Since §132(a)(1) excludes employee benefit as GI. If you only use basis of $9K would actually act as a deferral, so you treat basis as if discount does not exist and = value of product w/o discount.

2. § 1016 – Adjustments

a) Improvements – Increase Basis

b) Depreciation – Decrease Basis

3. § 1019 – Property improvements made by lessee is not income to lessor and does not adjust basis for lessor

4. § 1015 – Gift Basis

a) Basis shall be the same basis as donor’s basis

b) Except if basis is greater than FMV, then basis is FMV for determining loss.