TAX I – JAMES FEE – FALL 2014
Gross Income
§ 61 – from whatever source derived
§§ 71-90
Cesarini v. US: Piano case à found money constitutes gross on the date TP gains possession in accordance with state law
In order to tax something “found”, you must be able to separate the value from the item
Commissioner v. Glenshaw Glass: Punitive damages are includible in gross income
Court’s definition of gross income is, “undeniable accessions to wealth, clearly realized, over which TPs have complete dominion”
Has TP been enriched
Old Colony Trust Co. v. Commissioner: Employer paid state and local taxes for employee à this IS gross income
Helevering v. Independent Life Ins. Co.: Rental value of a property is not imputed into income
Living rent free in a home that you do not own IS gross income (Dean case)
Bartering Income: You have income at the time you “earn” your “bartering points”
Frequent Flier Miles: IRS has announced that frequent flier miles earned during business travel and used for personal is not includable in gross income 2002-18.
Except: It IS gross income if you convert them to cash (Charley case)
Other Items: Illegal income is still income; Embezzlement is income (James case) but repayment gives rise to a deduction
Alimony
§ 62(10) – subtract alimony (i.e., a deduction) from gross income
Deduction is granted under § 215
§ 71
(a): Gross income includes amounts received as alimony or separate maintenance payments
(b): 7 requirements
1) Payments in Cash (§ 71(b))(1) à cash means cash (includes checks and money orders; NOT notes or services or property)
2) Payments under a divorce decree or written separation instrument (§ 71(b)(1)(A))
3) Payor and Payee are not members of the same household at the time the payment is made (§ 71(b))(1)(C))
This only applies when you are legally separated from your spouse under a decree of divorce or of separate maintenance
4) Instrument does not specify as “Not Alimony” (§ 71(b))(1)(B))
5) No liability to make payments for any period after death of payee (§ 71(b))(1)
Either the decree or state law needs to have a termination at death provision
6) Payor and Payee don’t file a joint return (§ 71(b))(1)
7) Payments made “on behalf of” payee spouse must be evidenced by a writing (Reg. §1.71-1T(b)), Q&A 6,7))
So, you can pay wife’s mortgage, other bills, attorney’s fees, etc.
(c): Sub (a) does not apply to child support
(c)(2) – amounts reduced for certain contingencies involving the child
(c)(3) – if a person is delinquent on child support and alimony, but does not pay either in full, the amount is first allocated to child support, and the balance of the payment is applied towards alimony
(f): Alimony recapture; require addition to GI for payor and deduction for payee à to prevent front loading
Both the 2nd and 3rd Excess are recaptured in Year 3
2nd Year Excess = 2nd Year Payment – (3rd Year Payment + $15,000)
1st Year Excess = 1st Year Payments – [(2nd Year Payments – 2nd Year Excess + 3rd Year Payments) / 2 + $15,000]
(5): NO recapture if:
Either spouse dies within post separation years and payments cease as a result
Payee spouse remarries within post separation years and payments cease as a result
Payments are made pursuant to court order described in § 71(b)(2)(C)
Made pursuant to continuing liability for payer to pay a fixed percentage of income from business, property, or employment
§ 1041 (non-recognition provision)
Must be incident to divorce for former spouses
Incident to divorce means that the transfer occurs not more than one year after the date on which the marriage ceases OR the transfer is related to the cessation of marriage
Cessation of the marriage means pursuant to a divorce or separation instrument and the transfer occurs not more than 6 years after the date on which the marriage ceases (so, if you go beyond 1 year it must be pursuant to one of these documents to qualify for 1041)
Transferee gets transferor’s basis (transferred basis)
Rev. Rul. 87-112: Even though there may be no gain or loss in transfers of property between spouses, the one spouse may have to recognize the interest à Series E Bond example
Exclusions from Gross Income (§§ 101-138)
§ 102 – Gifts and Inheritances
Commissioner v. Duberstein: Look to the intent of the parties à Detached an
fied Employee Discounts §132(a)(2)
1) Property or service offered in the ordinary course of business; 2) Property or service must be in employee’s line of business; 3) Cannot discriminate
Limitations
Property: Gross Profit Percentage (aka Profit Margin)
(Aggregate Sales Price – Cost) / Aggregate Sales Price
Services: 20% of price offered to customers
Working Condition Fringes §132(a)(3)
Goods and services provided by employer to the extent that employee would be allowed a business deduction (§§162 and 167) if he paid for the property or services
Employer CAN discriminate
If taking educational course to improve/maintain skills in a profession in which you are already engaged, then they would be deductible under § 162 (note the interplay with section 132(d))
If not yet in the business, then it would not be deductible under § 162
De minimis Fringes §132(a)(4)
Infrequent and small so that accounting is unreasonable or administratively impractical
Look at cost and frequency
In 1992, Qualified Transportation Fringes §132(a)(5)
Includes transportation in a commuter highway vehicle; transit passes; qualified parking
Limitations:
Transit passes and CHV – $100/month
No constructive receipt if choice of benefits given
Employer CAN discriminate
In 1993, Qualified Moving Expense Reimbursement §132(a)(6)
Eating Facilities §132(e)(2)
On or near business premises
Revenue equals or exceeds direct operating costs
CANNOT discriminate
