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Income Taxation
University of South Carolina School of Law
Roberts, Tracey M.

ROBERTS – INCOME TAX OUTLINE – FALL 2012

I. COMPUTING TAX LIABILITY 5-STEP FORMULA

Step 1. GI – §62 Deductions = AGI

Gross income (GI) – Above the Line Deductions (listed under §62) = Adjusted Gross Income (AGI)

Step 2. Choose between Standard and Itemized Deductions

(a) Identify Itemized Deductions (Below the Line).

(b) Apply Limitations of §67 and §68 to Itemized Deductions

(c) Compare Itemized Deductions (reduced by §67 and §68) with Standard Deduction to determine which option yields greater amount of deductions.

Step 3. AGI – [PE + (Greater of Std Deduction or Itemized Deduction)] = Taxable Income

From Adjusted Gross Income SUBTRACT

Either (a) Standard Deduction + Personal Exemption

OR (b) Itemized Deductions (Below the Line) + Personal Exemption

= Taxable Income

Step 4. Taxable Income x Rates = Tentative Tax Liability

(a) Separate Taxable Income into 2 baskets: (1) Ordinary Income and (2) Income from Capital Gains, Dividends and Conversions/Hotchpot

(b) Apply Ordinary Rates (§1(a)-(d)) to Ordinary Income

(c) Apply Capital Gains Rates (§1(h) to Capital Gains, Dividend and Conversions/Hotchpot Income, as appropriate [Use formula])

(d) Add Tax from OI to Tax from CG = Tentative Tax Liability

Step 5. Tentative Tax Liability – Credits = Tax Liability

(a) Nonrefundable Credits may reduce Tax Liability to 0

(b) Refundable Credits may reduce your Tax Liabilty below 0 (allow you to receive a Refund)

II. INCOME

Economic Definition: Haig – Simons Income = Consumption + Change in Wealth

Tax Definition: Glenshaw Glass

· Accession to Wealth

· Clearly Realized

o §1001 Measure income from property when sale, exchange or other disposition occurs

· Over which TP has Dominion and Control

o Eisner v. Macomber

§ Capital / Income = Tree/Fruit, Land/Crop, Reservoir/Stream argument; income must be severed from capital for TP’s separate use and enjoyment (relates to dominion and control).

§ While increase in wealth held by TP in the form of additional stocks of corporation, corporation controls use of retained earnings and choice of how to spend them. TP has control over her share of corporation’s profits only upon sale of stock.

A. ITEMS INCLUDED IN INCOME

1. COMPENSATION §61(a)(1)

a. Wages, salaries, tips, commissions, bonuses, pensions, severance pay 1.61-2

(1) Fringe Benefits (payments in food, lodging, stock, other services); §83 Gifts or other transfers of property from employer are compensation

Exceptions: Statutory carve-outs for certain fringe benefits

§119 Convenience of the Employer

§132 Certain Fringe Benefits

(i) Employer Transfers of Property

· Amount of Income from Employer Transfers of Property = FMV of Property

· Property under Substantial Restriction

Timing and amount of inclusion determined under §83(a) and (b).

Timing: TP has choice of when to include property that is subject to a substantial risk of forfeiture or limit on transfer. TP can include at FMV when received or can wait and include FMV of property at time property vests (substantial risk of forfeiture and restrictions on transfer lapse).

· Property Received at a Discounted Price

Amount of Income from Property received at a discount price = Difference between the FMV of property and amount paid at time of transfer. 1.61-2(d)(2)(i)

· Employer payments in Services

Amount of Income from Payments in Services = FMV of Services

· Employer payments of TP’s debts and obligations

Old Colony Trust (US 1929)

· Employer payment of TP’s tax obligations was income from labor.

· Form of payment makes no difference.

o SIDEBAR: If you want to calculate how much you would have to pay to achieve an after tax sum: Gross income = 1/(1-x) where x is TP’s marginal tax rate

b. Exchange of Services

Rev. Ruling 80-52

Inclusions: FMV of property or services received 1.61-2(d)

Timing: Cash method TP has income when actually or constructively received, when placed in an account, set aside, or otherwise made available for TP to draw down [See Section IV below]

2. GAINS DERIVED FROM DEALINGS IN PROPERTY §61(a)(4) (See Part IV below)

Income from Sales of Inventory / Retail Sales / Sales of Manufactured Goods §§1.61-3(a), 1.162-1(a) Total Sales – Cost of Goods Sold = Income

3. AWARDS §74

Exceptions:

1. §74(b) Award received for scientific charitable, etc. activities; TP directs award to charitable organization

2. §74(c) Employee Achievement Awards – exclusion limited by amount deductible by employer; remainder is included in income.

4. RECEIPT OF CONSUMPTION

Standard: Gotcher – (1) Economic Benefit (Accession to Wealth) (2) Primary Benefit to TP (Clearly Realiz

ts associated with children are considered to be child support and are not deductible.§71(c)(2)

(3) Property Settlement. Amounts payable to the estate of a spouse (not terminating at death of spouse) are considered to be part of the property settlement and are included in income to payee and are not deductible to payor. §71(b)(1)(D); §215

(4) Front Loading. Excess front-loaded alimony for the first 2 years is included in the income of the payor and deductible to the payee in year 3. §71(f)

B. ITEMS NOT INCLUDED IN INCOME

1. GIFTS §102

Standard: Duberstein

Exception: Gifts from Employers / Business Associates – See Compensation

2. BEQUESTS / INHERITANCES §102

3. IMPUTED INCOME

Imputed income is not included in taxable income

Exception: Imputed Interest on related party loans is INCLUDED in income §7872

4. LOANS

Loans are not included in income upon receipt.

Rationale: Ledger – Assets (loan proceeds) are offset by Liabilities (obligation to repay loan); no accession to wealth

James – Question whether embezzled funds would be included in income (like funds from extortion) or treated like a loan (no income). Court determined that embezzled funds were income: (1) acquisition of earnings (in contrast with loans where, no accession to wealth b/c obligation to repay), (2) no consensual recognition (express or implied) of obligation to repay (in contrast with loan), (3) held without restriction as to disposition (in contrast to loan, where obligation to repay and often, limitation on how loan proceeds are used).

Rochelle – No intent to repay if obtained loan under false pretenses.

Buff – Time to determine intent to repay at time of receipt of proceeds.

Gilbert – Consensual recognition (express or implied) of obligation to repay stretched to include situation in which corp officer took corporate funds, BUT provided promissory notes, pledges of collateral and had ability to repay.

NOTE: Release from debt gives rise to discharge of indebtedness income.