Morrow Federal Income Tax Fall 2017
GENERALLY
Effective v. Marginal Tax Rate
Effective tax rate: tax liability as a percentage of income
Marginal tax rate: rate of tax applied to the last dollar
Tax Formula, Generally
Tax formula for itemized deduction 63(a)
Gross income – 62(a) above the line deductions = AGI – personal exemptions – itemized deductions = taxable income
See rules about itemized deductions below.
67(a)-(b): 2% haircut on miscellaneous itemized deductions
ii. 68: you don’t get as much itemized deductions if you make too much money.
Tax formula for standard deduction 63(b)
AGI – personal exemptions – standard deduction = taxable income
Starts with AGI. To get AGI, take gross income and subtract 62(a) deductions
GROSS INCOME GENERALLY
Income from whatever source derived. 61(a)
Offers 15 examples, but list is not exhaustive
Gross income = (1) accession to wealth, (2) clearly realized, (3) control (Glenshaw Glass)
Everything that meets these factors is gross income, unless express exception in caselaw/statute
(2) Realization Event (Eisner v. Macomber)
Facts: Company offers 50% stock dividend. Because all shareholders participated, no change in proportionate ownership, no exchange in proportional interest/intrinsic value of holding
No realization event. Each dollar she spent remains property of company- no separate use and benefit. No change in wealth
Finding stuff (Cesarini v. US)
Facts: Purchased a used piano. Found money inside
Rule: If you find something of value, then it is gross income as soon as it is in your control.
Ex: some states have reporting requirements for some stuff
Rule defining gross income is intentionally broad
Finding thing = realization event, you have something new.
Amount of Gross income = FMV
When you find something, it may not be gross income if it is part of something you own
Ex: you buy a house, contract says everything in the house is included. Then find valuable painting. (if contract didn’t mention everything in the house being included- and you just find the painting- then gross income. Not part of house)
No gross income if you got a good deal (ex: buy piano at garage sale for $10, it’s actually worth $10k)
Immediate Disclaimer Rule- allows a moment after finding something to say you don’t want it
BARTER EXCHANGES 1.61-2(d) (pg 33)
If services are paid for in other than money, the FMV of the property/services received = gross income
BUT, some other caselaw/statutory exception may apply, like employee discounts
If services were given at a stipulated price, we assume it’s FMV, regardless of evidence to the contrary. Revenue ruling 79-24, textbook page 74
IMPUTED INCOME
Benefits resulting from personal efforts are NOT income (ex: paint your own house, not income)
Then why do you have to pay if you barter?
You would pay money if you weren’t paying with services; we don’t have people to get out of paying taxes by not using money
ILLEGAL INCOME (James v. US)
Facts: D embezzled money from company. Tried to claim that, because of obligation to repay, no accession to wealth/gross income.
Glenshaw Glass: (1) accession in wealth (didn’t have money before, now he does); (2) realization (because new asset); (3) control (he could spend it, etc.)
Rule: Although there technically is an obligation to repay, because a thief is not likely to repay money, stolen money is gross income.
If victim retakes stolen money, then get deduction
COMPENSATION
PAYMENTS TO THIRD PARTIES
Old Colony Trust Co. v. Commissioner discharge of a liability
Facts: Company agrees to pay income tax for its officers.
RULE: Gross income can b
ter the working hours of the employee, 1.119-1(a)(2)(i), UNLESS:
Meal is given to restaurant employee immediately before/after shift is excluded. 1.119-1(a)(2)(ii)(d)
If employer would have given meal during working hours, but employee didn’t have time to eat because of job and ate right after working hours, excluded. 1.11901(a)(2)(ii)(f).
(3) On business premises of employer
Commissioner v. Kowalski
Facts: NJ gave officers a cash meal allowance. This is considered income under 61(a)(1)
RULE: 119 applies to meals, NOT cash for meals
119(b)(2)- the fact that a charge is made for such meals/that employee may deny meals should not be taken into account
Lodging:
(1) Furnished by employer
(2) For convenience of employer
(3) On business premises of employer
(4) Employee required to accept as a condition of employment
Must enable employee to properly perform the duties of his employment. 1.119-1(b).
Ex: employee must be available for duty at all times, or employee could not perform required services unless he is furnished lodging
Adams v. US
Facts: Japan-based company gives its CEO a house to live in. Had business meetings at house, required to live there.
Holding: can exclude FMV of living in house from gross income
This is a very rare case- perfect facts.
Convenience of employer- requires direct nexus between housing furnished and business interests of employer. See 1.119-1(a)(2)(ii)(a), pg 63
On the business premises- largely factual, use common-sense
