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Federal Income Tax
Villanova University School of Law
Book, Leslie M.

Intro to Fed Tax, Professor Book, Spring 2010
 
Ch. 2: Gross Income: Concepts and Limitations
o    ***PROBLEM – LOOK FOR (1) ACCESSION TO WEALTH (2) REALIZATION EVENT
o    §61: Gross Income Defined: may be realized in any form including money, property, or services. … gross income means all income from whatever source derived, including (but not limited to) the following items:
·         items (1)-(15) are a non-exclusive list of items
·         Specific Items included: §71 and following
·         Specific items excluded: §101 and following
·         Frequent Flyer miles excluded – – 2002-18
o    §1.61-2: Compensation for services, including fees, commissions, and similar items
·         Special Rules: prizes and awards; gifts; compensation for injuries; scholarships
·         1.61-2(a) – salaries and bonuses
·         Compensation paid other than in cash: if services are paid for in property (or other services), then the fair market value must be included as income for compensation. If there is a stipulated price, then such price will be considered the fair market value.
·         Rev. Ruling 79-24: Only services exchanged between two parties => recognize FMV of service as gross income
If parties not bargaining at arms-length (i.e. not family) – different
 
·         If property is transferred by an employer to an employee (or independent contractor) as compensation for service, for an amount less than its fair market value, then regardless of whether the transfer is in the form of a sale or exchange, the difference b/w the amount paid for the property and its fair market value is compensation shall be included in the gross income. Its basis shall be the amount paid for the property increased by the amount of such difference included in gross income.
o    §1.61-8: Rents and Royalties: Gross income includes rentals received or accrued for the occupancy of real estate or the use of personal property. Gross income includes royalties.
o    §1.61-9: Dividends: Dividends are included in gross income
o    §1.61-14: Miscellaneous items of gross income: Punitive damages, another’s payment of your income tax, illegal gains, treasure trove. Frequent flyer miles as a result of business travel do NOT count as gross income. Farm products consumed by owner are not gross income.
o    §62: Adjusted Gross Income Defined: in the case of an individual, gross income minus the following deductions:
o    Realization Requirement: not a constitutionally-required prerequisite to taxation — matter of timing
·         §1001: an exchange of property gives rise to a realization event so long as the exchanged properties are “materially different”. 
·         You might not be able to afford the taxes until you sell or realize the actual value
·         Losses are considered to be “realized” if they are “materially different”
·         Cottage – Exchange of property gives rise to a realization event so long as the exchanged properties are materially different
·          
·         Eisner v. Macomber: does stock dividend count as income? 
o               Gross Income = gain derived from capital, labor, or both combined
o   Mere appreciation in value of property is generally not taxable income
 
·         Imputed Income: imputer income is not taxed. Think homeowner (not taxed) v. renter (taxed on the rent he/she receives) — self-help services are not taxed.
·         Morris v. Commissioner: farm products consumed by owner are not income.
o    Bargain Purchases: bargain purchases generally do not constitute gross income.
*Compensatory bargain purchase is the exception. (e.g. where employer sells employee stock at a discount)
factual questions: offered to sale to third party, advertisements to general public, what would seller do with product if pruchaser did not commit, was purchaser aware of true worth of article
Knowledge of cheap price by seller
Intent to give bonus to employee
·         Pellar v. Commissioner: Pellar’s had a house build for them by a contractor that had been the contractor of the Pellar’s for other jobs in the past. The fair market value of the house was in excess of what was actually paid for the house. Is this bargain/purchase or is it gross income?
·         Court: more like a bargain/purchase (a good deal) then a payment for service (gross income). Partially decided that b/c there was no promise for future business. Suspect relationship here is b/w the contractor and the family’s parents (not the kids who were having the house being built). Maybe the better way to analyze this is to count this towards the gross income of the father and the father then giving an untaxable gift to the children.
o    Commissioner v. Glenshaw Glass
Punitive damages = taxable income
Sweeping scope of statute – gains from whatever source derived
Gross Income = Accession to wealth, realization of proceeds, and dominion over proceeds => enough to be taxable
 
o    Roco v. Commissioner: Roco brought an qui tam action against NYUMC and was awarded a commission for his work. Taxpayer argued that his income did not fall within the Eisner decision (which it might not have) but nonetheless it did fall under the definition of the Glenshaw Glass case. Taxpayer also argued that taxing such income would reduce the incentive for those who want to bring these cases.
·         Court: this was not a gift, but rather payment for services — gross income. §1.61-2(a)(1): rewards do count as income
o    Old Colony Trust Co.:
Employer paid taxes on behalf of employee
Taxes included as part of employees gross

  The AB for determining the gain or loss from the sale or other disposition of property shall be the basis adjusted as provided in §1016
·         Adjusted basis reflects the impact events occurring subsequent to one’s acquisition of property may have on the amount of one’s investment in the property a
o    §1012: Basis of Property – Cost
·         The basis of property shall be the cost of such property, except as otherwise provided in this subchapter.
·         Reflects dollars that have already been taxed, or will be taxed in the future, or that Congress decides not to tax
o    2 General Rules
1.      Recourse liabilities incurred by a taxpayer in the acquisition of property are included in the taxpayer’s basis in that property
2.      Recourse liabilities of a seller, assumed by a purchaser, are included in the seller’s amount realized
o    Philadelphia Park Amusement Co. v. United States: Park wanted to claim a deduction for the unrecovered cost of the franchise and contended that unrecovered cost had to be measured by reference to the unappreciated cost of the bridge which it had given in exchange for the extension of the franchise.
·         §1012: “the basis of property shall be the cost of such property”
§ 2 ways to view costs: fair market value of the property given up and/or the fair market value of the property the taxpayer receives (proper way to look at cost from a tax standpoint)
§ The cost basis of the property received in a taxable exchange is the fair market value of the property received in the exchange
·         Court: it would be reasonable to assume that the fair market value of the Strawberry Bridge was equal to the 10-year extension of the franchise.
o    Approach to Gains Derived From Dealings in Property
·         Do we have a realization event? (i.e. sale or other disposition)
·         If yes, calculate §1001 gain realized
§ Amount Realized
§ Adjusted Basis in property exchanging
·         Is the gain recognized? (i.e. included in gross income)
§ Or is there an applicable exclusion?
§ Or is there an applicable non-recognition/partial recognition provision?
·         If there is gain, what is the character of the gain? (i.e. ordinary, capital, 1231, recapture, etc.)