Tax Outline

TAXATION OUTLINE

WEEK 1- GROSS INCOME AND EXCLUSION FROM INCOME
Chapters 1 & 2

Background info:
· What is the internal revenue code? A congressional statute (federal law, passed by congress)
· This is how congress raises funds for the treasury.
· We’re not talking about state law and gift tax; just income tax
· What are regulations? Administrative agencies implantation of the internal revenue code (IRC), their interpretation of the IRC
· Regulations have a general application as long as you are a US taxpayer
o They are binding on the courts as long as they are reasonable. The only way they are not enforced is for the court to find it unreasonable.
· What are revenue rulings? An administrative finding or interp of a specific set of facts and is only applied to those ppl who have the same specific set of facts.
o These are not binding on the courts. The courts view them as one parties’ opinion to the litigation

Different forums for tax disputes
· 3 general forums: Tax court, Fed dist ct, and Ct of federal claims
o Tax court – poor man’s court: you don’t have to pay to litigate. Purely hears tax cases.
o 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)

Gross Income
Less Section 62 Deduction
= Adjusted Gross Income

Less personal exemptions & itemized deduction
= Taxable income

Times Tax Rate = gross tax liability

Who’s gross income is it?
What deductions can be taken against GI?
When must income be reported and when can a deduction be taken? (what yr)
When there is a disposition of property at a gain, should a special tax rate apply?

As your income level rises, your tax rate also rises. The more money you make, the more tax you will pay.
People with less money have less cash flow and cannot afford the higher taxes.

What is Gross Income? (look to the code book)
Section 61: Gross income is all income from any source derived, unless there are specified exclusions in the code (provided otherwise)

Accession to wealth= better economic position having received the item, cash or services
GI (assets) – liabilities = net worth

Elements of gross income
1) Any accession to wealth,
2) clearly realized,
3) over which the taxpayer has dominion and control: the person is getting an economic benefit.

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)
Ø Any accession to wealth, clearly realized, over which the taxpayer has dominion and control: the person is getting an economic benefit.
Ø Realization: when you receive the property, or when you dispose of it.
Ø Fluctuation in price during ownership is not realization

Treasure trove= finding something on the street
· You have to report it in the year that you found it

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.
o 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.
o 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.
o 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:
o TREASUE TROVE IS INCLUDABLE IN GROSS INCOME.
o 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?
o Their net worth has been increased by 10K, whether treasure trove, cash or property, then you must include it in your GI.
o Receipt (when you find it) is realization, there is no question of entitlement
o Mere increases in value don’t result in realization of a gain, and decline in value doesn’t include a realization of a loss.
o 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)
o Treasure trove is GI b/c there is an accession to wealth
o 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 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. It doesn’t matter what form it comes in.

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

Revenue ruling 79 – 24
Artist: Include fmv for services you receive
Buyer: Include the fmv for the use of the bldg
Landlord: fmv of the portrait
In TP exchanges, we presume that the values are equal, it must be an even exchange

McCann v. United States – compensation for services
· Facts: Taxpayer received this trip as a reward for his services, and the spouse was allowed to go.
· Gross income or not?
o Yes, income includes any economic or financial benefit you receive in exchange for your services.
o This trip is clearly a reward, which is more personal. But if the trip is more for the benefit of the company and they make you go on the trip, the qualifications would not be reward based and not included in GI.
o 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.
o 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

1. Where you have an asset and do not dispose of it
a. mere appreciation is not gross income b/c there is no realization (when you dispose of it)
2. where you purchase something
a. when there is a deal (a sale for example) do you have an accession to wealth? Probably yes.
i. These are called bargain purchases and meet the definition of GI; however, if you buy something for less than it’s fmv, you do not have a GI inclusion.
ii. This would