TAXATION OUTLINE – Prof. Sheaffer / Spring 2010 / Text: Individual Fed. Income Tax
WEEK 1- GROSS INCOME AND EXCLUSION FROM INCOME
Different forums for tax disputes
3 general forums: Tax court, Fed dist ct, and Ct of federal claims
Tax court – poor man’s court: you don’t have to pay to litigate. Purely hears tax cases.
Fed dist ct and Ct of federal claims – refund court, you have to pay any tax deficiency and then seek a refund in the court. (you may not want to have the tax geeks hear your case, you may want a jury to hear it; if it doesn’t purely involve tax law)
What is Gross Income? (look to the code book)
Section 61: Gross income is all income from any source derived, unless provided otherwise. (just because an item is not on that list doesn’t mean that it’s not gross income)
Commissioner v. Glenshaw Glass Co. – punitives are gross income
The argument is that Glenshaw should have included the punitive damages in the tax
They pursue the litigation without paying their deficiency b/c they were in the tax court. They held that punitive damages are not included in gross income.
The definition says gross income is income from capitol labor. Glenshaw argues the punitives here came from the settlement of the wrongdoing of the 3rd party. The Supreme Court says the Eisner case only applies to a specific set of facts, and doesn’t apply here.
Gross income is broadly defined, therefore the court holds that the punitive damages are gross income. Page 35: any accession to wealth over which the taxpayer has dominion and control. (you have received some financial benefit here, and that is why it is a part of gross income)
Any accession to wealth clearly realized; an economic benefit.
Realization: when you receive the property, or when you dispose of it.
Fluctuation in price during ownership is not realization
Cesarini v. United States- treasure trove is gross income
Family purchases a piano, and in 1964 they decide to sell the piano. They get the piano cleaned and find $4000 in the piano. They filed the money with the gross income, and then said they made a mistake and wanted it back.
1st arg: Taxpayer argues this is not gross income: since congress hadn’t mentioned treasure trove specifically as gross income, so it is not.
Trying to argue that prizes and awards are not gifts, and failed to adopt a code section specifically stating treasure trove is is GI, so they must have meant to exclude it as gross income.
BUT, GI is broadly defined unless the code expressly excludes it. The burden is on the taxpayer to find a code section that authorizes the exclusion to gross income.
Here, there is no section that excludes treasure trove as gross income
2nd arg is over timing, that the SOL has run and you have no ability to go back, but that “treasure trove” is gross income. the court does not agree with the taxpayer here. The court looked to Ohio law, and the family hadn’t found the money until 1964, and that is the appropriate year they became a finder.
RULES to take from case:
TREASUE TROVE IS INCLUDABLE IN GROSS INCOME.
Once the TP has an accession to wealth, the burden is on the TP to find an exclusion, the IRS does not have the burden to show it exists.
Hypo: What if the C’s finds a stamp and the FMV of the stamp at the time is worth $10,000?
Their net worth has been increased by 10K, whether treasure trove, cash or property, then you must include it in your GI. Receipt (when you find it) is realization.
Mere increases in value don’t result in realization of a gain, and decline in value doesn’t include a realization of a loss.
Once you receive it is realization!!!
When they find the stamp: gross income
If they hold it for a while and it increases in GI: must report the gain associated with the stamp (only pay tax on the increase in value)
The mere act of buying something doesn’t result in gross income. Treasure trove is GI b/c there is an accession to wealth
Taxpayer has the burden to find some code section that authorizes you to not include this as gross income. If there is no exception then you must include it as gross income and pay taxes on it
The actual receipt of property is realization, b/c it’s an accession to wealth.
Realization: some disposition of the asset
Bargain purchase is NOT gross income: it’s too hard to deal with
Barter exchange: services for property. Person providing the services has to include that amt in the FMV.
If there is a discount in what you got something for, you have to include the FMV
*ALWAYS GIVE THE DEFINITIONS OF GROSS INCOME!!!!
THE FORM OF GROSS INCOME
Comes in any form, as long as it’s an accession to wealth it will most likely still be gross income
Old Colony Trust Company v. Commissioner
If you receive something in exchange for your services, this is compensation for your services. This is included in gross income.
Here the form is debt relief to a 3rd party in exchange for services. This is includable in gross income. The form does not matter.
Must include the fair market value of what you received in your gross income
The taxpayer argues this should not be included in gross income b/c it’s taxing upon taxes (it’s just another tax liability) The court says they are not faced with this issue at this time
McCann v. United States
Taxpayer received this trip as a reward for his services, and the spouse was allowed to go. Gross income or not?
Yes, income includes any economic or financial benefit you receive in exchange for your services.
This trip is clearly a reward, which is more personal. But if the trip is more for the benefit of the company then they make you go on the trip, the qualifications would not be reward based.
In addition, spouses must provide some benefit to the meetings if they went along on the trip. Here, this was not the case. The spouse provided no benefit and it’s clearly a personal trip.
You would have to have more business content if the beneficiary is the employer and not rewarding the employee.
Situations where there is NO GROSS INCOME:
Where you have an asset and do not dispose of it
Mere appreciation is not gross income b/c there is no realization (when you dispose of it)
where you purchase something (b/c usually it is of equal value)
When there is a deal (a sale for example) do you have an accession to wealth? Probably yes.
These are called bargain purchases and meet the definition of GI; however, if you buy something for less than its FMV, you do not have a GI inclusion.
This would be an administrative nightmare to track these bargain purchases
Hypo: Say Cooley has a dining room and offers to sell a buffet thing to S for 500 instead of 1000 IF Prof. S agrees to teach more classes that people hate.
SUBSTANCE OVER FORM: The substance of the transaction is that Cooley is giving S the buffet for his services. Look to the substance, i.e. employer giving employee compensation for his services, which is includable in GI. So this would be taxed under gross income.
Does Ted have gross income? YES, he received this tether for services. You have to include the FMV of property at time of receipt. He has to report $96,000 at time of income.
What about the fact that the property increased in value? Irrelevant b/c it hasn’t been realized yet (i.e. he hasn’t sold it or exchanged it)
You would want to have other appraisers look at the item and get their o
never get the money back. You have no right to ask for return funds
A security deposit is NOT gross income b/c you do not have control over the money
In these situations, you want to know who controls the money and whether or not you’re going to get the money back.
Ex: Usually in a rental agreement, if you don’t damage your property and you pay your rent then you’ll get the money back. Here, the landlord is not in control over the funds. The tenant is in control depending on whether they pay or not.
What’s important is who CONTROLS those funds. If customer controls, then it’s a deposit and not GI.
Commissioner v. IPL:
FACTS: IPL had deposits that customers can put down, and if the customer decides to use the services then the money can go towards the bill or they can get the money back at the end when you pay your last bill. IPL was co-mingling the funds, and not separating it into a different account. They were getting interest on these deposits.
But the company has no dominion over the money. If the customer satisfied the credit test then they got the money back. What IPL does with the money depends on what the customer wants. If the customer doesn’t want services, they can terminate and get the deposit back.
IPL did not report the deposits until they were actually used to purchase the services or pay off a bill. At that time the money then became gross income. (IRS thinks this should be paid on receipt. They classify this as an advance payment b/c it’s being used to secure future services.) Ultimately the funds are almost always being used for services.
REASONING: Here the customers could demand the money back. So this is not an advance payment: recipient controls whether or not they receive the funds back.
RULE: The focus is on control!!! If the customer controls whether or not they get the funds back (i.e. meet credit rating check or discontinue their service), then it’s a deposit and not includable in gross income. It’s more like a loan. If the seller is in control, then it will be an advance payment and it will be GI
When the purpose of the deposit is to guarantee the customer’s payment of amounts owed to the creditor, such a deposit is treated as an advance payment
But when the purpose of the deposit is to secure a property interest of the taxpayer, the deposit is regarded as a true security deposit.
WEEK 2 – HYPO
The fact that the money is subject to litigation in 2004 is irrelevant. He held the funds under a claim of right in 2003 and must report the full 75,000.
He has to repay the funds that he held and gets a deduction or credit
GAINS DERIVED FROM DEALINGS IN PROPERTY
Disposition of Property
If you sell something for more than you purchased it for, you have gross income.
You measure the accession to wealth by the difference btw the BASISof the property given (what the taxpayer bought it for) and the FMVof the property received in exchange (what the taxpayer sells for) Sec 61(a) §1001