Taxation
Professor Gell
Spring 2014
1. Gross income (start with code -> reg. -> case law)
a. Definition (treasury reg1.61-1) – Gross income means all income from whatever sources derived, realized in any form, unless excluded by law.
i. Accessions to wealth – excludable income = gross income
ii. Basic formula – total taxable income x tax rate = tax – tax credit = final tax
iii. Taxpayer v. commissioner instead of defendant v. plaintiff
iv. Deduction – lowers the amount of taxable income
v. Credit – directly reduced tax liability
b. Definition (IRS code) – same as above
c. Definition (case law definition) – Case Glenshaw Glass, Gross income is
i. An accession to wealth
ii. Clearly realized
iii. Over which the taxpayer has complete dominion and control
iv. Examples
1. Coupons has 1 and 3 but not clearly realized
a. Reduction in sales price is not considered realized
b. Rebate same – reduction in sales price
2. Gift card – has all 3
d. Ability to pay concept
i. Progressive tax system
ii. The more you make the more you pay
e. Forms of gross income
i. Cash
ii. Compensation for services
iii. Debt relief
iv. Property
f. Important forms of gross income (easily mistaken)
i. Substance over form
ii. Bonus and tips
1. All expenses paid trip (if not required, so considered a bonus/compensation for service. If required, then no.)
iii. Regular sizable payments made by persons to whom the taxpayer provides are customarily regarded as a form of compensation
1. Reverend receives regular collections from congregation that is routine and structured to supplement his salary)
2. Lives free on the employer’s property, rent as compensation
iv. Treasure Trove
1. An item that the taxpayer finds, claims possession of, and is entitled to keep
a. Finds $10 bill, FMV of whatever was found, and FMV is also the amount needs to be realized
b. Gross income realized at the moment of finding (vs. bargain purchase- no gross income till sale)
v. Illegal income
vi. Compensation as gross income
1. Debt paid by a third party in exchange for service
2. Barter transaction – personal property or other services in exchange for services
3. Financial benefits in exchange for services
a. Bonus and tips and trips (above)
4. Purchasing item from employer at bargain price
5. Exception
a. Imputed income-when a taxpayer provides services for himself or his family
b. Not required to include the value of services in his gross income
vii. Bargain purchases
1. If simply a good deal, no tax consequence
2. If the reduced price is a disguised payment to taxpayer, the basis in property + the tax cost basis = fair value basis
3. No realization till sale of the purchase (i.e. no tax consequence – FMV at time of sale – cost basis = gross income v. treasure trove – immediate tax consequence/gross income + appreciation tax consequence)
2. Gains and losses involving Property
a. No gains or losses realized until he disposed of the property
i. The source of basis is irrelevant
1. i.e. the type of payment received for the property is irrelevant
ii. Basis – the amount of after-tax investment able to recover
b. If the basis is unclear, the basis is the FMV of the property RECEVIED
i. If the property received is subject to a debt, the amount of payment + debt = FMV
ii. If the property sold is subject to a debt, the amount of payment for the debt is not value of the property
1. For the seller, the amount of debt relief is part of the amount realized for the seller. (FMV = debt relief + value of other property received)
c. Recognized definition – amount of gain realized that must be reported on income tax return
d. Realized definition – amount the property sold for
e. Gain or loss realized = amount realized – adjusted basis
f. All gains realized must be recognized unless excluded
3. Deposits and Prepayments
a. Receiving a prepayment is an accession to wealth. Receiving a loan or deposit is not
i. Transfer of property to family members (not taxed) to minimize tax
ii. Example – A mom transfers a gas station to her child before a sale. The mom should report income. The substance of the transfer was a sale by the mom alone. She must report all gains from the sale
f. General rule
i. compensation for services must be included in the income of the person who earned it
ii. Income from property and gains from sale of a property must be included in the income of the taxpayer who controls the property
1. Examples –
a. Mom must pay at her tax rate for salary she earned even if she assigns the salary to her children
b. Mom owns a rental building. He must pay tax on the rental income at her tax rate even if she assigns all rental income to her children
iii. Gains from disposition of property must be included in the income of the taxpayer who owned the property.
g. Gift basis calculation
i. (restudy)
5. Tax consequences of a divorce
a. Child support
i. No gross income or deduction applied to payer and recipient
ii. Cannot be alimony if expressly child support
iii. If a payment is made in relation to a child, it is child support
b. Elements of alimony (must know the elements)
i. Recipient’s income, payer’s deduction
ii. must be
1. in the form of cash (i.e. not property or debt relief)
2. to or for the benefit of the spouse
3. pursuant to a divorce or separation agreement that is in WRITING
4. Not designated as not alimony
5. Not members of same household if legally separated or divorced
6. No liability after the death of the payee and
7. Not for child support
