Select Page

Federal Income Tax
Widener Law Commonwealth
Prescott, Loren D.

Federal Income Tax Outline
Prof. Prescott 2008

I. Chapter 2 — Gross Income
a. § 61 – Gross Income — defined as all income from whatever source derived, unless excluded by law.
i. §1.61 – 1(a) – Gross income includes income realized in any form – money, property or services.
1. income may be realized in form of services, meals, accommodations, stock, other property or cash.
2. if a gift – see §102; is GI but excludable unless from employer.
ii. §1.61 – 2 Compensation for Services
1. §1.61-2(d)(1) – Compensation other than cash
2. if services are paid for in property à FMV of property is measure of compensation.
3. if services are paid for in exchange for other services à value of the services received is the amount of compensation.
4. If services rendered at stipulated price à price presumed to be FMV of the compensation received in absence of evidence to contrary.
a. Philadelphia Park – tells us if it is an arm’s length transaction, the price paid is presumed to be at FMV.
5. §1.61 – 2 (c) – payment to charitable org (§170(c)) on behalf of person rendering services.
a. Amount paid to charitable org is GI to person rendering services.
6. Rev. Ruling 79-24 – Barter – in a barter transaction, if the services are paid for other than in cash, FMV of property or services taken is income (§1.61-2(d)(1)).
b. Specific Guidance:
i. McCann v. US – employer sent husband to seminar and wife went too. Travel expenses were paid by er as a reward to ee. It’s economic benefit to the husband and wife and therefore the FMV of the trip paid by er is income to the ee.
ii. Glenshaw Glass – held that Congress intended to exert full measure of its taxing power in defining income. Antitrust litigation settlement proceeds were an “accession to wealth”, clearly realized and under the complete dominion of Glenshaw. Punitive damages are not gifts nor do they fit under any of the code’s exemptions. Therefore, settlement is taxable income. Generally, an accession to wealth constitutes income.
iii. Cesarini v. US — court held money found in old piano was a “treasure trove” and as such is taxable income (to the extent of its value in US currency) for the year it is found (Rev. Rul. 61). In addition – see §1.61-14 — misc. items of gross income.
iv. Old Colony Trust v. Comm. – where officer of company had agreement with company they would pay his income taxes for him, this was income.
v. Roco v. Commissioner – tax court applied Glenshaw Glass to conclude qui tam payments under the Federal False Claims Act constituted income.
vi. US v. Kirby Lumber – a discharge of corporate debt for an amount less than the face of the debt constitutes income to the debtor.
vii. Service Announcement 2002-18 – taxpayer who accumulates frequent flyer miles as a result of business travel paid by employer is not required to report gross income for receiving the frequent flyer miles or for using them for personal travel.

dealings in property
a. §61(a)(3) – provides gains derived from dealings in property constitute gross income.
III. Exclusions from Gross Income:
a. Chapter 5 – Gifts, Bequests and Inheritances
i. Case-by-case approach to characterization of gift is necessary. Apply your “experience with the mainsprings of human conduct” as the SC says.
ii. §7701(a) (43) – this is Transferred Basis Property – property having a basis determined by reference to the basis in the hands of the donor, grantor or transferor.
iii. Gifts & Inheritances – §102(a) – Gross income does not include the value of property acquired by gift, bequest, devise or inheritance. Although it is income, it is not included in gross income. Includes gifts of cash, property or anything the person wants to give.
1. property received must be able to be characterized as a gift, bequest, devise or inheritance to be excluded. (between family and close friends are easy to identify as gifts)
2. §1.102-1(a) – property received as gift or inheritance is not GI
3. §1.102-1(b) – the income from any property received is GI
§1.102-1(c) – if the gift, bequest, etc. is of the income from property, it is GI.