Tax Outline
Spring 2009, Prof. Book
PART A: WHAT IS INCOME?
Gross Income
· General Rule -§61: Gross income is income from whatever source derived.
o §§71-90: list of what is included in income
o §§101-149: list of what is NOT included in income
· These are NOT exclusive lists
· Above the Line Deductions – §62: this section provides a list of things which are deducted above the line to reach Adjusted Gross Income → these items may be deducted even if taxpayer elects to take standard deduction.
o Items eligible for Above the line deduction are:
· Trade and Business Deductions §162
· Losses from Sale/Exchange of Property §161 and following
· Deductions attributable to rents/royalties
· Certain Deductions of life tenants/income beneficiaries
· Pension, profit-sharing and annuity plans of self-employed individuals
· Retirement savings
· Alimony
· Moving Expenses
· Interest on Education Loans
· Higher Education Expenses
· Health Savings Accounts
· Costs involving Discrimination Suits
· Below the Line Deductions/Standard Deduction – §63: After calculating AGI, taxpayer then subtracts either the standardized deduction or itemized deductions. This is basically the default for deductions – if not enumerated in §62, and it is a deduction, then would be a below the line deduction under §63.
o NOTE: for below the line deductions then need to distinguish between miscellaneous and Non-miscellaneous. (see below, discussion of the relevance under §67)
o Miscellaneous: anything not listed as non-miscellaneous, such as unreimbursed business expenses, and investment expenses under §212
o Non-Miscellaneous (§67(b): generally includes things like interest, taxes, casualty and wagering losses, charitable donations, medical expenses, and several others.
· Calculating Federal Income Tax Liability
o Calculate gross income (§61)
o Subtract “above the line” deductions (enumerated in §62)
o The resulting figure (Gross income – Above the line deductions (which are the same as “Exclusions”)) is Adjusted Gross Income (§62)
o Subtract “below the line deductions.” Below the line deductions are the sum of personal exemptions (§§151 and 152) and either a standard deduction (§63) or itemized deductions (start with §§67). Multiply deduction by # of exemptions claimed.
· The resulting figure is known as taxable income (§63)
· Apply the tax rate schedules (from §1) to taxable income to determine tentative tax liability.
· KEY POINT: this is a progressive rate! So the MTR only applies to the last amount of income, does NOT apply to all income.
· Subtract from tentative tax liability any available tax credits. Keep in mind the important distinction between deductions and credits: Deductions reduce income, whereas credits directly reduce tax liability.
· The remaining amount is final tax liability.
· Note: if TP cannot pay liability, IRS becomes in effect a supercreditor (IRS can take collection action against TP following notice to TP)
· IRS can garnish wages, impose tax liens on property, seize TP’s personal residence (in rare cases)
· Normally IRS will try to work out a payment plan, with certain interest rates and fees
· Cases:
o New Rule: Commissioner v. Glenshaw Glass Co.: Gross income includes all gains i.e. accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.
o Old Rule: Eisner v. Macomber defined income as derived from capital, labor or both combined.
GAINS DERIVED FROM DEALINGS IN PROPERTY
· Recovery of Basis
o Basis of Property (§10012): Basis of property is generally its cost.
o Determination of Gains or Losses (§1001): This section is used for computing the amount of gain or loss, which will then be used to adjust basis.
· §1001(a): Computation of gain or loss.
· Gains → Amount Realized – Adjusted Basis
· Loss → Adjusted Basis – Amount Realized
· §1001(b): Amount Realized – The amount realized from the sale or other disposition of property shall be the sum of any money received + the fair market value of the property (other than money) received. In determining the amount realized
· there shall not be taken into account any amount received as reimbursement for real property taxes which are treated under §164(d) as imposed on the purchaser, and
· there shall be taken into account amounts representing real property taxes which are treated under §164(d) as imposed on the taxpayer if such taxes are to be paid by the purchaser.
o Adjusted Basis (§1011): The adjusted basis for determining gain or loss from the sale or other disposition of property is the basis as provided under §1012, adjusted as provided in §1016.
o Adjustments to Basis (§1016): §1016(a)(1) -Adjustments should be made to basis for things such as expenditures, receipts, losses, or other items properly chargeable to capital account.
of the property given and the FMV of the property received.
o If the value of the property cannot be calculated with reasonable certainty, assume the values of exchanged property are equal, and use the value of the item given.
· Exchange of property for services
o When exchange property for services, the difference between the amount paid and the FMV is included in income. This becomes part of tax cost basis.
o E.G.
· Clare gives painting for $5,000 medical services debt.
· Painting has FMV of $5,000.
· Clare invested $100 in materials and 25 hours; her wealth has increased, but the Code waits until she disposes of it to tax.
· Amount realized $5,000 (discharge of debt)
· Adj. Basis 100 (tax cost basis)
· Gain on exchange $4,900
· Clare’s 25 hours is imputed income (providing her own services)
· Items which are Taxable Income
o Sale of goods/services
o Compensation
· Old Colony Trust (1929):
· Company pays taxes for President of Company
· Holding:the payment of an employer of income taxes assessed against an employee constitutes additional taxable income to the employee
o Form of payment makes no difference
o Immaterial that taxes were paid directly to Govt.
o Taxes being paid were compensation to Woods for services rendered by him to company
o Wood had an obligation to pay taxes, NOT the company
o thus anytime someone pays for someone else, the party receiving the benefit would have GI
§ Ex: payor spouse pays the cost of a divorce for payee spouse: this would not be a §212 expense for payor, but payee would have to add the monies paid by the payor to her GI, as she would have had to pay this, had the payor not paid
· McCann v. US (1983)
· Company gave husband and wife all-expenses paid trip to Las Vegas to attend work-related seminar in recognition of wife’s sales performance
· Only small number of employee qualified for trip and seminary
· Holding: Trip was compensation
