Federal Income Tax Outline

FEDERAL INCOME TAX OUTLINE
Professor Prescott
Spring 2008

I. §63(a) Taxable Income: Taxable income means gross income (I (included), II (excluded), III (proper taxpayer), IV (timing and limitations of recognition of GI) – deductions (V (AGI = GI – deductions) other than standard deductions (Itemized/Non-Itemized) (VI. A.) – Personal Exemptions (VI. B.)

II. ITEMS INCLUDED IN GROSS INCOME:
a. Added Case Law
i. Commissioner v. Glenshaw Glass: Money received as punitive damages must be included as gross income
ii. Reg. 1.61-14: punitive damages such as treble damages under the anti-trust laws and exemplary damages for fraud are gross income.
iii. Any accession to wealth, the very broad statutory definition is given full effect and deference. Essentially a rough starting point is that everything is gross income unless explicitly excluded.
iv. Cessarini v. United States: treasure trove is not exempted from gross income (found money). Unless expressly excluded by law gross income includes income from whatever source derived.
v. Start with the proposition that any benefit received is income, and then remove specific circumstances from the definition.
vi. Old Colony Trust Co v. Commissioner: the payment by an employer of the income taxes assessed against his employee constitutes additional taxable income to the employee.
vii. Reg. 1.61-14: provides that another person’s payment of the taxpayer’s income taxes constitutes gross income to the taxpayer unless excluded by law.
viii. The discharge by a third person of an obligation to him is equivalent to receipt of income. Considered compensation for services.
ix. McCann v. United States: when services are paid for in a form other than money, the FMV of the thing received must be included as gross income.
x. Absent any stipulated value for non-cash payments, courts will rely upon the actual monetary cost of providing the payment to the employees.
xi. Revenue Ruling 79-24: Compensation for Services: refers us to applicable §61(a) and Reg. 1.61-2: FMV of the goods or services exchanged are includible in Gross Income.
xii. Pellar v. Commissioner: the purchase of property for less than its FMV does not of itself give rise to the realization of taxable income.
xiii. Bargain Purchases: arms length transactions, no gross income for a bargain purchase. However, if property is transferred as compensation for services in an amount less than FMV, the difference between the amount paid and the FMV is gross income. Reg. 1.62-2(d)(2) – see Pellar
b. §61 – Gross Income / Compensation:
i. ISSUE: Whether __________ is considered income under § 61 and thus should be included in the taxpayer’s Gross Income.

ii. General Rule: §61(a): “gross income includes all income from whatever source derived.”
1. What is NOT included in Gross Income:
a. Imputed Income: Not included in GI
i. Example: (1) benefiting from ownership and use of ones own property; (2) doing services for oneself (lawyer drafts his own will)
b. Recovery of Capital: If you are to receive a rebate from property purchased, then that is not Gross Income
i. Rev. Ruling 81-277: “For a taxpayer to have income under §61, there must be an economic gain that benefits the taxpayer personally.”
1. When a lender receives cash, that cash represents a return of the cash that the lender originally gave the borrower, and thus there is no profit or economic gain.
c. Borrowed Funds: Only if there is an obligation to repay
i. How to make this determination:
1. The recipient’s recognition of an obligation to repay
2. AND an intention to repay
2. What IS included in Gross Income:
a. Commissioner v. Glenshaw Glass: “Gross Income = all accessions to wealth, punitive damages are taxable income.”
b. Compensation: §61(a)(1):
i. Reg. 1.61-1: “gross income includes income realized in any form, money, property or services.”
ii. Reg. 1.61-2: Compensation (Cash) for Services, including:
1. Fees, commissions and similar items
iii. Reg. 1.61-2(d)(1): Compensation paid OTHER than Cash
1. “Fair market value of property taken for payment must be included in gross income as compensation.”
2. Services paid for by other services: “fair market value of other services received is included in gross income.”
3. Rev. Ruling 79-24: Barter Transactions (Services for Services): “must include the value of property and services as Gross Income.”
iv. Reg. 1.61-2(d)(2): Property transferred by Employer to Employee
1. Gross Income includes transfer as compensation; value of compensation (employee) = “difference in the value paid for the property and the FMV at the time of transfer.”
v. Reg. 1.61-14(a): Punitive Damages
1. Glenshaw Glass: these “unanticipated gains” the SC states are included in Gross Income
2. According to the Treasury Regulations, the Gross Income concept has expanded to include receipts without a compensatory nexus, i.e. Treasure Troves
vi. Reg. 1.61-21: Fringe Benefits: listed items provided by employer to employee (vacations, sports tickets, etc.)
1. How to determine:
a. GI = FMV – Amounts Paid
b. Gotcher: “fringe benefit must benefit the taxpayer to be included in gross income.”
i. Test: economic gain must be for personal benefit of taxpayer, and not predominantly business related to be compensation & therefore Gross Income.
vii. Reg. 1.61-12: Discharge of Indebtedness may result in a realization of income
1. For Example: if a debtor performs services to a creditor and the creditor discharges the debt, then the debtor realizes income for the amount of the debt discharged.
viii. §74: Prizes & Awards: General Rule: Reg. 1.71-1(a): “amounts received as prizes and awards are included in Gross Income, with exceptions:
1. See §74 & Reg. 1.74(a)/(b):
2. §74(b): this exclusion was designed to reward activities that primarily benefit society rather than the individual who received the award
a. Prizes and awards made primarily in recognition of religious, charitable, scientific, education, etc. CAN be excluded IF the recipient:
i. Took no action to compete for the award; AND
ii. Was not required as a condition of the award to perform substantial future services.
ix. §85: Unemployment Compensation: General Rule: “Gross Income includes unemployment compensation.”
x. Claim of Right Doctrine: provides that when a taxpayer receives funds with these two conditions, those funds are to be inclu