TAX OUTLINE Schenk
I. WHAT IS INCOME?
A. §61: gross income means “all income from whatever source derived.”
B. What is included?
1. Compensation for services
a. Is it compensatory in nature?
b. Is it an accretion to wealth over which the taxpayer has control? Control can be demonstrated by actions (taking a deduction for something).
2. Fees and commissions
3. Fringe Benefits
a. §132 excludes certain fringe benefits
1) No additional cost services
a) ordinarily offered to customers in the ordinary course of the employer’s business (widget manufacturer gives widgets)
b) additional cost can’t be “substantial”
2) Qualified employee disounts (20% limit of price if services and gross profit % limit if property)
3) Working condition fringe
a) if the employee had paid for it himself, it would be allowed as a deduction under §162 as an ordinary and necessary business expense or under §167 if it is property that depreciated
b) sometimes difficult to tell if it is a working condition fringe or is “in-kind compensation”. Look to…
(1) whether it is for the benefit of the employer
(2) whether it has a non- compensatory business purpose
(3) whether employee had the option to accept or reject it
(4) whether it provides a benefit to the employee’s family
(5) whether it is provided routinely (if routine, then compensation)
(6) whether an employee would typically pay for it with after tax dollars (if so, then comp.)
4) De minimus fringe
a) Unreasonable or administratively impracticle to account for.
b) Eating facilities if on or near the busines premises of the employer and the benefit is not discriminatory.
5) Qualified transportation fringe
a) Employer provided or reimbursed parking, commuting pass.
6) Doesn’t matter if one employer gives a benefit to another employer’s employee provided there is a written agreement between the employers and no substantial addition cost.
7) Employers can deduct fringe benefits provided to employees under §162 as long as…
a) “ordinary and necessary”
b) meets non-discrimination requirements
8) If tax rates rise, employees have more incentive to ask for compensation in the form of excludable fringe benefits.
-potential equity problem because potentially disproprotionately available to certain employees and if two people that make effectively the same amount of money, the one who is not taxed on the portion given in fringe benefits is better off.
4. §119; Cash provided to employees to buy meals. Kowalski.
5. §102; Employer provided gifts to employee
6. §83; Property transferred in connection with the performance of services.
a. Fair market value less the price originally paid for the property.
b. FMV determined at moment rights are transferable or are not subject to substantial risk of forfeiture (ie: there is a condition for future performance of “substantial” services), which ever occurs earlier.
c. You can elect to include it in the year of transfer but if you are going to do this, it must be done within 30 days.
d. §83(h); the employer can deduct the value of property when the employee includes it in income. Might be an incentive on part of employer to make the employee include it in income.
7. When an employer allows an employee to use property without charge, that value of that use is income.
8. §79; group term life insurance purchased for the employee by the employer
9. §105; unlike §104, amounts reveived under accident and health plans by an employee are included if plan attributable to contributions by the employer and were not includible in the gross income of the employee and are paid for by the employer. But this doesn’t apply if the amounts are paid to reimburse the taxpayer for expenses incurred by him for the medical care. Also doesn’t apply if the
le. One spouse may decide it is more efficient to stay home. (The gov. thus loses in taxes. Solution- provide a tax credit or deduction for families in which both spouses work.)
f. A house sits for B and waters the plants. Both have income; A in the form of property benefits and B in the form of compensation for the use of property in the form of services. (rent §61(a)5)
16. §72;a portion of each annuity payment is included but a portion of them are excluded to the extent that this amount is expected to just restore the capital in full when the final payment is received. Excluded amount cannot exceed the unrecovered investment in the contract.
a. The investment in an annuity basically constitutes the person’s basis that is “recovered” as annuity payments are received.
b. Thus, portion received is recovery but a portion is also a taxable rate of return. (rate of return determined by life expectancy, installment payments).
c. Where taxpayer dies or annuities cease before the entire investment is recovered, the Code provides for a deduction on the taxpayer’s last income tax return. §72(b)3. (b)2 taxes mortality gains.
17. Discharge of Indebtedness-to be considered “discharge of indebtedness” there must by a “freeing up of assets that the taxpayer would otherwise have been required to use to pay the debt.”
-ask if something of value has been received
a. §108; no discharge of indebtedness is included, however, if the reason is bankruptcy, the taxpayer’s insolvency (FMV of assets over liabilities determined at the time immediately