Federal Income Tax
Kelly Moore – University of Toledo
· G.I. – AtL = AGI
· AGI – Std. + Exempt. = T.I. OR AGI – BtL + Exempt. = T.I.
o BtL: Can be itemized or miscellaneous itemized
§ Itemized – provided
§ Miscellaneous Itemized can be subtracted only to the extent that they cumulatively exceed 2% of AGI
· T.I. x Rates = Tax
· Tax – Credits = Revenue
IDENTIFICATION OF INCOME SUBJECT TO TAXATION
I. Gross Income: The Scope of Section 61
a. Introduction to Income
i. Gross Income Defined [Section 61] 1. “All income from whatever source derived”
2. “Accessions to wealth”
3. Including, but not limited to:
a. Compensation for services, including fees, commissions, fringe benefits, and similar items
b. Gross income derived from business
c. Gains derived from dealings in property
h. Alimony and separate maintenance payments
j. Income from life insurance and endowment contracts
l. Income from discharge of indebtedness
m. Distributive share of partnership gross income
n. Income in respect of a decedent; and
o. Income from interest in an estate or trust
ii. Bargain Purchase
1. GI does not include the economic benefit of a bargain purchase (i.e.: sweetheart deal)
iii. Illegal Gains
1. Are gross income EVEN if there is a legal obligation to make restitution.
b. Equivocal Receipt of Financial Benefit
1. 1.61-2(a)(1): Compensation for wages, salaries, tips, etc.
2. 1.61-2(d)(1): Compensation paid other than in cash
a. If services are paid for in property à FMV of the property must be included in income
b. If services exchanged for other services à FMV of the service is included in income
c. If stipulated price for services à price will be PRESUMED to be the FMV
3. 1.61-14(a): Miscellaneous Items of Gross Income
a. Punitive damages; another person’s payment of a taxpayer’s income taxes ; illegal gains; treasure trove (value in U.S. currency)
ii. Case Rules:
1. Found property is taxable for the year it was found or reduced to undisputed possession (GI) [treasure trove] – Cesarini v. US [cannot subtract out basis of item the treasure trove was found in, because that would not be the basis of the treasure trove.] 2. Employer paying an employee’s taxes = additional GI – Old Colony Trust Co v. Commissioner
a. Note: if paying son/daughter’s income tax – could exclude under 102(a)
3. Punitive damages = GI – Glenshaw Glass Co.
4. Charley v. Commissioner – scam to have clients pay for first class ticket, but would buy coach ticket and upgrade with frequent flyer miles, and then keep the extra cash; in this case – travel credits = GI
c. Income Without Receipt of Cash or Property
i. Imputing Wealth
1. We do not impute wealth
a. Ex) $10 in the bank earns 10% interest v. $10 in the mattress with no interest à cannot impute the interest that would have been earned
2. Helvering v. Independent Life Ins. Co. – rental value of building used by the owner is not imputed and therefore is not gross income [under 16th A] ii. Revenue Ruling 79-24
1. Legal services traded for painting = GI!
2. Art for rent = GI!
iii. Occupancy of a home owned by a corporation = GI of the taxpayer
1. Dean v. Commissioner
2. But, note à
a. Scenario #1: I live in a house I own à NOT G.I.
b. Scenario #2: Live in a house the corp. owns à same as getting a check from the corp.
II. NOT Gross Income (NGI)
a. Imputed Income
i. FMV of taxpayer’s performance of services for his personal benefit and the value of taxpayer’s personal use of property that he owns
ii. Amt. of imputed income = what the taxpayer would have to pay to hire the service or rent the property in the marketplace
iii. I.e.: value of housework and child care performed by stay-at-home spouse OR rental value of home owned by the occupier
iv. BUT, a barter transaction does not constituted imputed income and IS G.I.
b. Recovery of Invested Capital
i. Upon sale of property, taxpayer is only taxed on the income (profit) from the transaction
ii. Invested capital does not constitute G.I.
iii. Taxpayer is entitled to “recover his invested capital”
iv. I.e.: T buys land for $10 and sells it for $30
1. G.I. is $20; T will not be taxed on remaining $10, recovery of invested capital
i. Creation of a loan is not G.I. to the debtor.
ii. Repayment of a loan is not G.I. to the creditor
iii. BUT, if debtors obligation to repay is cancelled in whole or in part, debtor will have discharge of indebtedness income equal to the cancelled amount
1. But, Section 108 excludes from G.I. certain discharge of indebtedness
d. Non-economic or non-material benefits
i. I.e.: living in a beautiful place; enjoyment of one’s job; beauty of a spring day; personal satisfaction of being close to family
III. The Exclusions of Gifts & Inheritances
a. Rules of Inclusion and Exclusion
i. G.I. includes the receipt of any financial benefit which is:
1. Not a mere return of capital [i.e.: loan], and
2. Not accompanied by an obligation to repay, and
3. Not specifically excluded.
i. The Income Tax Meaning of Gift
1. Section 102(a)
a. (a): General Rule
i. GI does not include the value of property acquired by gift, bequest, devise, or inheritance.
2. Duberstein: “detached and disinterested generosity; out of affection, admiration, charity or like impulses”
3. Excluded gift includes given by a will AND passing intestate (without a will; passes by virtue of position as an heir)
a. In intestate – we ignore the “disinterested generosity” definition of gift
4. [[do not need ‘donative intent’ like you do in T&E]] ii. Employee Gifts
1. Section 102(c): Employee Gifts
a. 102(a) shall not exclude from G.
achievement in one of several specified fields (religious, charitable, scientific, educational, artistic, literary, or civic) IF
a. Recipient was selected without any action on the recipient’s part to enter the contest AND
b. Was not required to render SUBSTANTIAL future services as a condition to receiving the prize or award AND
c. Immediate transfer to CHARITY!
3. (c): Carved our exception for Employee Achievement Awards BUT beware of:
a. Length of Service Award – does not qualify UNLESS
i. Service for 5 years or more AND
ii. Person has not received such award in the past 4 years
b. Safety Achievement Awards – does not qualify UNLESS
i. Made to someone other than the manager, administrator, clerical employee or other professional employee AND
ii. 10% or less of employees receive such an award
c. **274(j) – provides that the person giving the award cannot claim a deduction for cost of the award.
b. Scholarships & Fellowships
i. Section 117(a) & (b) – *Must be a noncontractual flavor* [like a gift] 1. (a): Excludes from G.I. amounts received as a “qualified scholarship” by a degree candidate at an educational organization
2. (b): “Qualified Scholarship” = any amount received as a scholarship or fellowship grant in accordance with the grant is used for “qualified tuition and related expenses.”
a. Includes tuition and fees for enrollment
b. Fees, books, supplies and equipment required for courses
c. **Not room/board**
3. (c): Generally, no exclusion if teaching/other services required [this would be G.I.] ii. Section 117(d): Employment-related Exclusions/Fellowship
1. Allows a “qualified tuition reduction” to be excluded from G.I. in the case of education below the graduate level or at the graduate level if the grad student is engaged in teaching or research activities
iii. Section 127: Educational Assistance Programs
1. Exclude up to $5250 for amts paid by the employer for educational assistance – must have non-discrimination policy
VI. Gains From Dealings in Property
a. Factors in the Determination of a Gain
i. Section 1001(a):
1. Amount realized – Basis = Gain
2. Amount realized = amt. of $ received and the FMV of property (other than $$) received on the disposition.