Income Tax Outline
I. GROSS INCOME – § 61 – income from whatever source derived.
A) § 1.61-1(a) – GI means all income from whatever source derived, unless excluded by law. GI includes income realized in any form, whether in money, property or services.
B) Cesarini v. U.S. – Found $ in piano. Filed return claiming $. Filed claim for refund. See outline
1) Filed action in District Court since tax already paid, claiming refund. Taxpayer argued (p. 43):
a) Not gross income within §61.
b) Statute of limitations question. Piano purchased in 1957, not applicable to 1964 return; SOL tolled.
(1) SOL for return is 3 years from date of filing.
(2) Taxpayer may waive SOL though to avoid immediate assessment.
(3) SOL is 6 years, if greater than 25% of gross income was omitted from.
c) Capital gain treatment.
2) Held: Treasure is treated as Gross Income § 1.61-14
C) Old Colony Trust Co. v. Commissioner – Dude making some serious cash, company decided to pay tax liability for him also. 1918 GI = $978K; Tax liability = $681K. 1919 GI = $548K, Tax liability = $351K.
1) Issue – If Company pays tax liability, is this payment of tax liability by the company also income?
2) Held – Yes, it is GI.
D) Commissioner v. Glenshaw Glass – Litigation originated in tax court and then also won in court of appeal without paying any of tax liability. However, when lost at the Supreme Court had to pay interest from date tax due.
1) Issue – If you sue and receive treble damages from a judgment, is that income under §61?
2) Held – Yes, it is GI.
E) Charley v. Commissioner – Travel expenses billed to client at first class rates, however travel agent would book coach tickets and then use frequent flyer miles to upgrade and difference between 1st class and coach was set aside for him to use for other purposes (in a kitty for him to draw).
1) Held – this additional money was income under §61.
2) Rationale – Trading/selling his frequent flyer miles for cash to his company.
F) Frequent flier miles generally – outside of this kitty situation in Charley. IRS treats this as a reduction in purchase price, not as income; even if use for personal use when your company purchases original ticket.
G) Unless you can find an exclusion (except repayment of loan, or return of capital), it is probably GI.
H) Problems (58 – 59)
1) Only becomes an issue if he sells it. Recognition v. Realization. Mere appreciation in value happens all of the time, until you convert it to cash it isn’t income.
2) When you win a raffle it is included as gross income unless you can find a statutory exclusion.
3) Employee realizes the additional $20K of stock as GI as well as the $15K of the car as GI. Realizes additional $35K of GI. GI of property = fair market value of the property. Even though to spouse, indirect payment to the employee.
4) Adjuster gets kickback for referral.
a) Yes, compensation for services is GI.
b) Still included in GI if illegal activities.
5) Rent = $1,000, Services = $3,000
a) GI = $4K rent + improvements §1.61-8
b) Still $4k of GI for lessor.
c) $2,500 reduction in rent, service coming back to lessee, receipt of an economic benefit.
6) Frequent Flyer Miles
a) No, miles part of price of the ticket, nothing to do with business context.
b) Business flights for the employer, since assignable they have value (fair market value)
c) If non-assignable, do they have value? Not GI, can’t do anything with them, must be used for business.
d) No authority on point; however if used for personal trip, likely to be classified as GI, since using for personal benefit unless find a employer/employee exclusion.
II. Income Without Receipt of Cash or Property –
Code §61, Reg. §1.61-2(a)(1), -2(d)(2)(.i).
A) Revenue Ruling (Treasury Department’s Litigating Position) 79-24.
1) Situation 1 – Fair market value of the services received by the lawyer and the house painter are includible in their gross incomes under §61 of the Code.
2) Situation 2 – The fair market value of the work of art and the six months fair rental value of the apartment are includible in the gross incomes of the apartment-owner and the artist under §61 of the Code.
B) Dean v. Commissioner – 80% owned by wife, 20% owned by husband, house transferred in as an asset of the corporation; corp. owns the house. Living in the house is GI since corp. flipping the bill for them staying in the house.
C) Problems (62)
1) Veggie growing vegetables.
a) Harvest does not constitute GI.
b) Consume does not constitute GI.
c) Sales of vegetables = GI.
d) Exchange for tuna = GI.
e) Exchange for providing service = GI. She must pay tax on her proceeds along with the fair market value ($50) of the renting of the space.
2) Doctor/Lawyer swap services.
a) Exchange of services, must pay GI on fair market value of services.
b) Can’t charge yourself for your own services.
III. EXCLUSION OF GIFTS AND INHERITANCES
A) Rules of Inclusion and Exclusion – Code §102(a) and 1st sentence of 102(b). Reg. §1.102-1(a) and (b).
1) Gross Income includes the receipt of any financial benefit that is:
a) Not a mere return of capital, and
b) Not accompanied by a contemporaneously acknowledged obligation to repay, and
c) Not excluded by a specific statutory provision.
a) IRC § 61 – GI
b) IRC § 71 – Alimony, etc.
a) IRC § 102 – Gifts and inheritances.
(1) IRC §102(a) – GI does not include the value of the property acquired by gift, bequest, devise, or inheritance.
(2) IRC §102(b) – Revenue from the value of the gift can’t be excluded.
(3) Commissioner v. Duberstein – Referral fee (Cadillac) was not a gift. Whether the property is regarded as a gift or not is a question of fact, looking basically at the transferor’s “intention.” Qu
1015 – Gift Basis
a) Basis shall be the same basis as donor’s basis
b) Except if basis is greater than FMV, then basis is FMV for determining loss.
(1) If A/R falls between, then no G/L in this situation
c) Donee’s A/B becomes the greater of the gift tax paid or donor’s A/B, if donee pays gift tax on gift
d) Problems (123)
(1) A – §1015
(a) 1 – $15K gain
(b) 2 – $5K loss; A/R = $15K, A/B = $20K.
(c) 3 – $5K gain; A/R = $25K, A/B = $20K.
(2) B – Exception to §1015
(a) 1 – $5K gain; A/R = $35K, A/B = $30K
(b) 2 – $5K loss; A/R = $15K, A/B = $20K
(c) 3 – No loss or gain; A/B falls between the basis and the FMV.
5) § 1041 – Transfers between spouses or former spouses
a) Treated as gift and transferee’s basis is the same as transferor’s basis, even if FMV < Basis and computing loss
b) Problems (126)
(1) D purchased lands $4K, appreciated to $7K, and sold to wife Marla for $7K.
(a) $0; gain realized = $3K, however under 1041(b) no gain is recognized.
(b) Marla’s basis = $4K, which is Donald’s basis under §1011/§1012 – transferred to Marla under 1041(b).
(c) $3K gain §1001(.c) since her transferred basis is $4K under §1041(b).
(d) a – $0; loss recognized. b – $4K. c – $1K loss recognized. If Marla was Donald’s daughter under §1015 g/l = $0 since when determining loss, take lower of FMV/Basis.
c) No recognized gain/loss; exchange basis with Marla’s @ $4K and Donald’s @$5K.
6) § 1014 – Basis of Property Acquired from a Decedent
a) Basis = FMV of Property at date of death
b) If ½ or more is held in community property state and was subjected to estate tax, then FMV also.
(1) EX: Wife gets step-up basis to FMV for entire community even though only half taxed.
VI. AMOUNT REALIZED MINUS ADJUSTED BASIS
§ 1011: Gain/Loss
A) § 1041 – No G/L between spouses or former spouses if divorce decree – (Probs. Pg. 126)
1) A/R 7K (§1001(B)) A/B 4K (§1012) G Real 3K (§1001(c) G Reg. (§1041)
2) 4K § 1041
3) 3K § 1001(c)
4) same, same,(1000)
5) Don 0,0,5000 Basis: Marla 0,0,4000 Basis
B) Gain to Donor when Donee pays gift tax (Diedrich)
1) Gain is amount of gift tax paid over the donor’s A/B
2) Donee’s A/B becomes the greater of the gift tax paid or donor’s A/B
C) Crane – Relief of non-recourse debt over A/B is income (Gain)