FEDERAL INCOME TAX OUTLINE
GENERAL TERMS
· Depreciation – Spreading the cost of an asset over the span of several years, based on the reduction in the value of an asset due to wear and tear, using the item’s useful life.
o IRC §167(a) – Depreciation deduction is allowed for exhaustion, wear and tear or property used in the trade or business and property held for the production of income.
· Accrual v. Cash Method
o Accrual Method – Income and expenses are credited as incurred or earned, although they may not have been received.
o Cash Method – Expenses recorded when cash paid, revenue recorded when cash received.
· Zero Bracket Amount- If income is less than [Standard Deduction – $5,700] + [Personal Exemption – $3,650] = [$9,350], then no tax liability.
INCOME
· Definitions
o IRC §61. Gross income – All income from whatever source derived, including:
§ Compensation for services, including fees, commissions, fringe benefits, and similar items;
§ Gross income derived from business
§ Gains derived from dealings in property;
§ Interest;
§ Rents;
§ Royalties;
§ Dividends;
§ Alimony and separate maintenance payments;
§ Annuities;
§ Income from life insurance and endowment contracts;
§ Pensions;
§ Income from discharge of indebtedness;
§ Distributive share of partnership gross income;
§ Income in respect of a decedent; and
§ Income from an interest in an estate or trust
o Reg § 1.61-1. Gross income – …includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meanls, accommodations, stock, or other property, as well as cash.
o Reg §1.61-2(d) – If services are paid for property, the fair market value of the property taken in payment must be included in income as compensation.
o Commissioner v. Glenshaw Glass – “accessions to wealth, clearly realized, and over which an individual has complete dominion.”
· Noncash Benefits
o Meals and Lodging Provided to Employees
§ Benaglia v. Commissioner – P lived @ hotel and received meals from hotel for the convenience of his employer. Living at the hotel was a requirement of Ps employment, and Ps services couldn’t be performed without living @ the hotel. Living expenses non-taxable.
§ Statutory response to Benaglia
· IRC § 119. Meals or lodging furnished for the convenience of the employer – There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him, his spouse, or any of his dependants by or on behalf of his employer for the convenience of the employer, but only if –
o (1) in the case of meals, the meals are furnished on the business premises of the employer, or
o (2) in the case of lodging, the employee is required to accept such lodging on the business premises of his employer as a condition of his employment.
o Fringe Benefits
§ IRC § 132. Certain Fringe Benefits – Gross income shall not include any fringe benefit which qualifies as a –
· (1) no-additional-cost service,
· (2) qualified employee discount,
· (3) working condition fringe,
· (4) de minimis fringe,
· (5) qualified transportation fringe,
· (6) qualified moving expense reimbursement,
· (7) qualified retirement planning services, or
§ Old Colony Trust – An employer’s payment of federal income taxes on behalf of its employee constituted income to the employee.
o Valuation
§ Turner v. Commissioner – P won airfare tickets. Value for purposes of taxable income was arrived at by looking at subjective value to P, what P could afford and resale value, arbitrary decision – no precise method for valuation.
· Imputed Income
o The value of services one performs for oneself or one’s family and the value of any property used that
n be taxed, because the succeeding owner must assume the place of their predecessor – “carry over basis.”
· Donor’s basis can usually be determined because there is usually a relationship between both parties where information is freely available.
o Transfers at death
§ IRC §1014 – The recipient of property through inheritance taxes as their basis in the property the FMV of the property on the date of the decedent’s death or the alternate valuation date (up to 6 months).
· Encourages keeping property that increased value until death
· Encourages selling property that decreased in value before death, so a loss can be recognized
· Recovery of Capital
o When a taxpayer makes an investment and later sells the property, the taxpayer is not taxed on the portion attributable to their initial investment. Example: Buy land for 100k, Sell land for 120k, 100k not taxed (capital recovery), 20 taxed (gain).
§ When a taxpayer sells a portion of their property, the taxpayer must allocate the basis to the part that was sold (survey, pro-rata application, experts)
§ If cannot make a reasonable allocation, wait until remaining portion of property sold to determine taxable gain.
· Inaja Land ∏ received $ for easement to flood a portion of their property. Since it was impracticable to accurately apportion a basis to the easement, and properly allocating the proceeds of the easement required an appraisal of the remaining land, ∏ could wait until the remaining land sold to determine their taxable gain.
