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Income Taxation
University of Wyoming School of Law
Delaney, James M.

U. Wyoming, Income Tax, James Delaney, Spring 2010
 
EXAM TIPS
 
Use the book bracketed amounts, but especially the percentages/fractions (most important)
 
Employ IRAC
I:          What . . .
R:        Regulation § 1.61-1 …
A:        Apply rule + math to facts
C:        Tax liability will be ….
–           Don’t forget the I, R, or A in the exam answer!
 
“19/20” points awarded for “35% * $100,000”, but perfect for “$35,000” with explanation
 
Refer to statutes when you see realized gain (loss).
 
Show work.
 
If the answer appears simple, still say “since there appear to be no other exceptions . . .”
 
For transactions between spouses, be sure to put down ‘realization’ of income between spouses but that there is no ‘recognition.’
–     There are tax consequences (even a new basis is a tax consequence), just none that recognize gain or loss.
–     “Don’t get duped on the tax consequences of divorce.”
 
Problem pp. 151–52  WILL BE ON THE EXAM
 
For § 179(b)(1)–(2), use $125,000 & $500,000
 
Deprecation Problems will look like Problems pp. 441–442
1.   Calculate depreciation for certain number of years
2.   ACRS vs. straight line
3.   Basis for Sale
4.   Sharp bifurcation of personal and business
5.   § 179 reduction
6.   Use charts to check answers and check back of the book p. 1872
 
If taxpayer is engaged in this activity for profit, go to §§ 162, 165
If not, then go to § 183
If related to residence, go to § 280A
 
For exemptions and deductions, use $2000 for the exemption for standard deduction: $6000 for married jointly, $4400 for HOH, $3000 for single/separately.
 
SPEND THE AMOUNT OF TIME RECOMMENDED FOR EA. QUESTION.
 
GROSS INCOME
 
Introduction
Roadmap
Gross Income = All “income” from whatever source derived
Adjusted Gross Income (AGI) = Gross Income – Above the Line Deductions (+ Adjustments)
Taxable Income (TI) = AGI – Personal Exemptions – Max(Itemized,Standard)
Tax Liability (TL) = TI * Ordinary Tax Rate + (Net Capital Gains * CG Tax Rate) – Credits
 
§ 61.    Gross income defined
(a)        General definition
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.
 
(b) Cross references
§ 71 et seq.: specifically included in gross income
§ 101 et seq.: specifically excluded from gross income
 
Equivocal Receipt of Financial Benefit
 
§ 1.61-1           Gross income
(a)  General definition. Gross income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as in cash. Section 61 lists the more common items of gross income for purposes of illustration. For purposes of further illustration, §1.61–14 mentions several miscellaneous items of gross income not listed specifically in section 61. Gross income, however, is not limited to the items so enumerated.
 
§ 1.61-2           Compensation for services, including fees, commissions, and similar items
(a)        In general. 
 
(1)  Wages, salaries, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses (including Christmas bonuses), termination or severance pay, rewards, jury fees, marriage fees and other contributions received by a clergyman for services, pay of persons in the military or naval forces of the United States, retired pay of employees, pensions, and retirement allowances are income to the recipients unless excluded by law. . . .
. . .
(d) Compensation paid other than in cash—
 
(1)  In general. . . . if services are paid for in property, the fair market value of the property taken in payment must be included in income as compensation. If services are paid for in exchange for other services, the fair market value of such other services taken in payment must be included in income as compensation. If the services are rendered at a stipulated price, such price will be presumed to be the fair market value of the compensation received in the absence of evidence to the contrary. . . .
 
§ 1.61-14         Miscellaneous items of gross income
(a)  In general. In addition to the items enumerated in section 61(a), there are many other kinds of gross income. For example, punitive damages such as treble damages under the antitrust laws and exemplary damages for fraud are gross income. Another person's payment of the taxpayer's income taxes constitutes gross income to the taxpayer unless excluded by law. Illegal gains constitute gross income. Treasure trove, to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession.
 
Cesarini v. U.S. [Treasure Trove] Application of § 1.61-14(a) wrt treasure trove in a piano, reduced to undisputed possession in the year it was found.  Taxpayers properly paid tax on it       .
 
Noel v. Parrott [Bonuses]: Bonuses are compensation for services rendered
 
Old Colony Trust Co v. Commissioner [Grossed Up Taxes]: Monies paid by a company for an employee’s salary taxes are also taxable
 
Tax Gross-up Formula: Gross income = Wages / (1 – Tax Rate)
 
Commissioner v. Glenshaw Glass Co. [Punitive Damages]: Punitive damages are income.
Glenshaw Glass General proposition: All receipts are income unless specifically excluded.
 
Charley v. Commissioner [Exchange of Airline Miles for Money] Facts: CEO of company would have company bill clie

e, if T effects exactly the same improvements but does all the labor himself and incurs a total cost of only $500.  Answer: Given (a), we presume the FMV of his services (property) rendered is $2,500, meaning O has received $1,000 + $500 materials + $2,500 labor = $4,000.
(c)  Are there any tax consequences to T in party (b) above?       Answer: Yes, T paid $1,500 for $4,000 of value, so he has realized $2,500 in gain and must recognize it per § 1001(c).
 
Income Without Receipt of Cash or Property
 
Helvering v. Independent Life Insurance Co. [Use of One’s Own Property] Issue:  Whether a taxpayer must include in his gross income the rental value of a building owned and occupied by the taxpayer
Held:   Rental value is not income to the owner, because it would otherwise be a direct tax requiring apportionment.
Helvering Rule: Use of one’s own property does not comprise income.
 
Revenue Ruling 79-24 [Barter] The FMV of services or property received by both parties to a barter transaction are includible in their gross incomes under § 61(a) and § 1.61-2(d)(1).
 
Dean v. Commissioner [Free Occupation of Corporate Housing]: Taxpayer occupation of corporate real estate without paying rent is income to the residents-taxpayers.
 
Problems p. 66
1.         Vegy grows vegetables in her garden.  Does Vegy have gross income when:
a.   Vegy harvests her crop?          Answer: A farmer does not realize gross income until she sells produce.  § 1.61-4(a)(1)
b.   Vegy and her family consume $100 worth of vegetables?     Answer: Same as (a).  No sale, therefore no realization of income.
c.   Vegy sells vegetables for $100.          Answer: Vegy realizes $100 of gain (minus water & seed cost?) and must recognize it.
d.   Vegy exchanges $100 worth of vegetables with Charlie for $100 worth of tuna which Charlie caught?            Answer: Both realize $100 of gain.
 
2.   Doctor needs to have his income tax return prepared.  Lawyer like a general physical check up.  Doctor would normally charge $200 for the physical and Lawyer would normally charge $200 for the income tax return preparation
a.   What tax consequences to each if they simply swap services without any money changing hands? Answer: Each realizes $200 of gain.
b.   Does L realize income when she fills out her own tax return?           Answer: No. Helvering.
 
§ 1.61-4 Gross income of farmers
(a)  Farmers using the cash method of accounting. A farmer using the cash receipts and disbursements method of accounting shall include in his gross income for the taxable year—