Tax Lecture Notes Gell Spring 2012
GROSS INCOME
1. General Concepts
a. Basic Formula
i. Taxable Income x tax rate=tax
1. Taxable income=Gross Income-Deductions
b. Time Value of Money—this determines when you pay taxes
i. All things being equal, a taxpayer would rather pay a tax later rather than now.
ii. All things being equal, a taxpayer would rather take a deduction now, rather than later.
c. Burden of Proof
i. Burden of proof is on the taxpayer that they can take a deduction or that they don’t have to pay a certain tax, etc.
d. Sources of Law
i. You go to the Internal Revenue Code (Ex. Code sec. 61)
ii. If it’s not clear from the IRC, then you go to regulation (Reg. 1.61 explains code sec 61)
iii. Then you go to case law
2. Concepts and Limitations of Gross Income
a. Definition from IRC 61
i. “all income from whatever source derived.”
1. Very broad, and includes wages, interest, dividends, rents and gains from dealings in property., services, debt relief (instead of paying me, my employer pays off my credit card)
b. Treas. Reg. sec. 1.61-1 –
i. “. . .all income from whatever source derived, unless excluded…Gross income includes income realized in any form….”
1. Everything is income, unless it’s listed as an exception
c. Realization—income has to be realized
i. Basic tax principle is that gain is not included in gross income until it is clearly “realized.”
1. Example:
a. You buy stock and it goes up in value; you don’t pay tax until you sell the stock—that’s when it’s realized.
b. You sell an asset—you’ve realized the value
c. You pick up income on the street (find $1000)…when you pick up that money, you’ve realized it.
ii. Punitive Damages (Glenshaw Glass)
1. Gross Income:
a. Accession to wealth
b. Clearly realized
c. Over which the taxpayer has complete dominion and control
2. Court said that if you have the three items above, it’s gross income (even if it’s not listed in the statute) unless you can point to a specific exclusion in the code
iii. Bargain Purchase
1. If you buy something for a lot less than its worth, you have an accession to wealth, but it’s not gross income until you realize it (you sell it)
iv. Rebate Checks and Discounts
1. Not gross income because its just an adjustment in price, but it’s not realized
v. Third Party Payment of Debt
1. When an obligation is paid by a third party, then it’s income to you.
a. Employer pays a debt for you (employer pays off your credit card or pays your taxes), you claim it as gross income
vi. Treasure Trove—gross income
d. Rewards in Completion of Employment
i. McCann
1. If you receive a reward from your job (such as an all-paid trip) that is based on performance and such, it’s income to you versus something that is required as part of your job (going to visit a customer)
e. Services
i. If you exchange services for services or services for property, you’re going to use fair market value of the services you received to compute gross income
ii. Ask yourself, was there something you did to earn that reward or discount?
3. Effects of an Obligation to Repay
a. Not Gross Income
i. Loans
1. You don’t have an accession to wealth when you borrow money because you have to repay it (you’re just off-setting the obligation to repay)—no gross income
ii. Security Deposits
1. General rule is that receipt of deposits is not included in gross income
a. Security for a performance of an act to be done by the one making the payment (the transferor). Transferor can demand the return of the funds.
2. Difference between security deposit and advance payment: Look at the facts and circumstances of what it actually is; and then look to the guarantee of whether the taxpayer can keep that money (who has control over it).
b. Gross Income
i. Advance Payment
1. General rule: the general rule is that receipt of prepayments for services or property must be included in income upon receipt.
a. Protects against risk that the transferor will back out. Transferee has complete control and dominion over the funds. Transferor has no right to demand return of the funds.
ii. Claim of Right (if you may or may not have to pay something back, you’ve received it under claim of right)
1. General rule:
a. Property received with no consensual obligation to repay and with no substantial restriction on disposition or use, must be included in gross income.
i. AKA: amount received from claim of right, it is gross income
iii. Illegal Amounts
1. Income obtained by embezzlement or other illegal means is included in wrongdoer’s gross income even though he is obligated to return it (James v. US)
4. Gains Derived from Dealings in Property (61(a)(3))
a. General Formula
i. Gain/Loss=amount realized-adjusted basis
1. Amount realized: cash, property, services (fmv), debt relief
2. Adjusted
ot be a gift. IRC 102(c)
· Olk v United States: Reg. Sec 1.61-2(a)(1). Factors to consider: the regularity of the flow, the equal division of receipts, and the daily amount received.
o Income from Gifted/Inherited Property: 102(b) the gift or property will not be income, but any interest that you gain once you get it is taxable income.
o Two Basis Rules for Gift Property
· For purposes of determining gain on a subsequent disposition of property received as a gift, the basis used is the same as that basis “transferred” from the donor when the property was originally received.
o For example: Ben buys shares for $200. He gifts this to Jennifer. Her basis is $200.
· 1015(a) If you are gifted something that have a fair market value lower than the donors basis (lost property), give the donee two basis.
1. GB (Gain Basis): the donor’s basis when the property was transferred (Transfer basis).
2. LB (Loss Basis): Fair market value at the time of the gift.
3. If your amount is between gain basis and loss basis, there’s no tax consequence.
a. If it’s higher than gain basis, then you use the transfer basis formula
o Part Gift, Part Sale
· General Rule
o No gross income to donee
o Gain on sale is simply AR-AB
o No loss is recognized on part sale/part gift transaction (Reg. sec. 1001-1(e)
o Basis is the greater of amount donee paid for the property, or the donor’s transferred basis
o It’s the “greater of” the amounts; it’s to the tax payer’s advantage
· Example: Dan has buys land for $100. Fair market value is $250. Dan sells it to his son Will for $50
o Dan has AB of $100; fmv is $250
§ GB: $100
§ LB: $250
o Will: cost basis is $50; his gift basis is $100
§ He’s going to take the $100
o What about Dan?
§ AR-AB
· 50-100
· loss of 50
· If’s is part sale, part gift, he can’t recognize it.
o Inherited Property
· Fair market value at the decedent’s death
· Recipients gets what is known as a “stepped up” basis
· 1014(e): if you gift it to someone and get it back within 1 year, your basis will be…
Life Insurance
1. General Rule:
a. Amounts received form insurance on account on someone’s death are not included in gross income, whether received in single amount or otherwise
b. Look at face value of insurance at time of death
i. You only get to exclude that amount
ii. If interest accrues because it wasn’t paid out (idk..it was in dispute), then you have to claim that
