I. What is Income?
Is employer-provided health insurance a non-taxable fringe benefit?
i26 USC §106: Except as otherwise provided in this section, gross income of an employee does not include employer- provided coverage under an accident or health plan.
What is considered a residence under section 121?
includes house, house trailer, house boat, stock in cooperative housing unit, and any other dwelling place 🡺 Can include surrounding vast acreage, so long as it is not used for business or profit
Section 119(d) allows for an exclusion of lodging from GI if the lodging is what?
located on or in the proximity of the campus of the educational institution in the case of an employee of an educational institution.
If an annuitant dies without fully recovering her investment (i.e., lives shorter than her life expectancy), what happens to the amount of the unrecovered investment?
That amount is allowed as a deduction on her last income tax return.
True or false: Any amount paid by employer for death benefits is generally included in gross income of recipient, unless the death benefit is part of a life insurance arrangement.
True.
True or false: Damage recoveries under section 104 applies to damages received whether by suit or settlement AND whether as lump sum or periodic payments.
True.
True or false: Include in GI any amount, otherwise excluded under §104 and §105(b), which constitutes reimbursement of a medical expense that served as the basis of §213 deduction in a prior year 🡺 avoid double-tax benefit of deduction in prior year and exclusion in current year 🡺 if reimbursement is received in the same year as the expense incurred, the exclusion applies, as there has been no deduction with respect to that amount in any prior taxable year 🡺 consistent with §213(a), which denies the deduction for expenses of medical care that are compensated by insurance or otherwise
True.
True or false: decedent leaves T stock 🡺 the value of the stock received is not taxable 🡺 any future dividends are taxable.
True.
True or false: if the spouses file a joint return, §§71, 215 are inapplicable.
True.
True or false: Rule 71(c)(3) Short changing payments: if in any year the full amount of support is not paid, child support is treated as being paid first and then any amount in excess of child support is considered alimony.
True. Example: If agreement sets forth alimony of $6k and child support of $4k, where by husband only pays $5k 🡺 $4k treated as child support and $1k treated as Alimony.
True or false: A surviving spouse has two years to get the full 500k exclusion after the date of the death of the spouse.
True. See, 121(b)(4).
What is the limit for deductible amount of business gifts per donee per year?
$25 - Section 274(b)(1)
T has $900 in medical expenses 🡺 receives $400 from T's own policy and $800 from employer-funded policy. What amount from employer-funded policy may be excluded?
$800/($400+$800) = 2/3 benefits received from employer policy 🡺 2/3 of the medical expense is deemed paid by the employer policy 🡺 (2/3)*($900) = of the $900 in medical expenses, $600 will be considered paid out of the proceeds of the employer policy 🡺 of the $800 in proceeds from the employer policy, $600 is excludable, the remaining $200 is taxable because §105(b) limits the exclusion to the amount of reimbursement for actual medical expenses 🡺 the full $400 received from T's policy is excludable under §104(a)(3), which has no such limitation for actual expenses.
§61(a)(12): General Rule - income from discharge of indebtedness is included in GI. What are the five exceptions found in 108(a)?
(A) discharge occurs in bankruptcy; (B) discharge occurs when T is insolvent; (C) discharged debt is qualified farm indebtedness; (D) except for C corporations, the discharged debt is qualified real property business indebtedness; OR (E) the discharged debt is qualified principal residence indebtedness which is discharged before January 1, 2017 or subject to an arrangement that is entered into and evidenced in writing before January 1, 2017.
What is the equation for determining gains from property?
(Gain from Property = Amount Realized - Adjusted Basis)
Gain allocated to periods of non-qualified use are included in gross income. What is the non-qualified use portion equation?
(amount of gain * ratio) = amount INCLUDED in income
§1041 Property Settlement - Treated as a gift if: (two things)
(i) incident to a divorce and (ii) and within 6 years of divorce
Employee gifts are an exception to the general rule that gifts are not taxable. What are some exceptions to this exception?
- Exception for certain traditional retirement gifts 🡺 treated as de minimis fringe benefits - §132(e) - Exception for certain employee achievement awards under §74(c) to the extent a deduction is allowable by the business under §274(j) 🡺 $400 for non-qualified plan awards; $1,600 for qualified plan awards - Exception under §1.102(f)(2) for extraordinary transfers to the natural objects of an employer's bounty if the employee can show that the transfer was not made in recognition of the employee's employment
How does one determine what the unrecovered amount is that an annuitant can claim on their last tax return?
- Unrecovered Investment = Investment in K - Total Amounts Previously Excluded
§ 104(a): Compensation for Injuries or Sickness - T may exclude from GI what following five categories?
1) Amounts received under worker's compensation as comp for personal injuries or sickness 2) Amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injury or physical sickness 3) Amounts received through accident or health insurance (or self-insurance arrangement) for personal injuries or sickness 4) Amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country or in the Coast and Geodetic Survey or the Public Health Service, or as a disability annuity payable under the provisions of section 808 of the Foreign Service Act of 1980 5) Amounts received as (disability) pension, annuity, or similar allowance for personal injuries or sickness resulting from active military service OR incurred as a direct result of terroristic or military action
What is the two step test for determining if damage recoveries are excludable from GI?
1. Is harm compensatory? a. If yes, possible exclusion 🡺 go to step 2. b. If no, then it is punitive and is included in GI. 2. Is there a physical injury a. If yes, then tax free b. If no, then included in taxable income
What are the main categories of non-taxable fringe benefits found in section 132?
1. No-Additional-Cost Service - §132(b) - 132(h) says that any use by the spouse or dependent shall be treated as use by the employee 2. Qualified Employee Discount (132(c) 3. Working Condition Fringe 132(d) 4. De Minimis Fringes 132(e) 5. Qualified Transportation Fringe 132(f)
§71(a)/§215(a): Alimony general Rule - alimony or separate maintenance payments made pursuant to a divorce or separate instrument are included in GI of the payee spouse (§71(a)), and deductible (ATL) by the payor spouse (§215(a)). However, does not apply to divorce decrees made after December 31 of what year?
2018
What is an annuity for tax purposes?
A K saying that a company will pay a certain amount each year to T starting at some point in the future in return for a premium payment now from T (or series of payments) 🡺 effectively, T buys a right to future payments.
Is income received through loans taxable?
A payment received with contemporaneously acknowledged obligation to repay (security deposit; loans) negates any accession to wealth and is not taxable income.
Keep an eye out for three fact patterns that look like alimony but are not:
Annuity payments, alimony trusts, invalid divorces.
What is the equation for determining the basis of a property (found in 1012(a))
Basis = cost + capital improvements - accumulated depreciation (pro rate if bundled)
What is a common law gift? Is it taxable?
CL Gift: Voluntary executed transfer of property to another without any consideration or compensation for it. Can be a gift, can be taxable. Need to do a donative intent analysis.
To determine whether or not something is a gift need to determine whether there was ________ ________ on the part of the giver 🡺 A gift is made with detached, disinterested generosity, out of affection, respect, admiration, charity or the like.
Donative intent
What is the Statute of Limitations as set by section 6501?
Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed w/in 3 years after the return was filed
Gross income includes amounts received in prizes and awards, but not "qualified scholarships" per §117. What are the two exceptions to this rule found in 74(b)-(c)?
Exception Rule §74(b): excludes prizes made in one of several specified fields if the recipient (1) was selected without any action on the recipient's part to enter the contest; (2) Was not required to render substantial future services as a condition; AND (3) Immediately transfers the prize to a governmental unit or charity without any use or enjoyment to the TP under 170(c)(1)/(2). Exception Rule --> Employee Achievement" §74(c): excludes awards up to the amount of the cost of the award to the employer that is deductible
True or false: A promissory note does count as alimony. A piece of property is alimony.
False, false. Neither are alimony
True or false: Nonphysical personal injuries, such as defamation, 1st Amendment rights, and sex/age discrimination, are not excludable under §104(a)(2).
False.
If the Donor's AB is greater than the FMV at the time of the gift, what basis is taken for determining gain? What basis is used for determining loss?
For determining gain, the donor's AB at the time of gift is used. For determining loss, the FMV at the time of gift is used.
What is the default principle of fringe benefits?
Fringe benefits are includible in gross income (§61) unless they are specifically excluded. Specific exclusions found in §132.
§101(a): excludes from gross income amounts received under a life insurance policy by reason of the death of the insured, whether paid in lump sum or in a series of payments. What if the series of payments are interest payments based on the principal of the original lump sum?
Fully taxable: IF the excludable amount from §101(a)(1) is held by the insurance company as principal under an agreement for the insurance company to pay interest to the beneficiary 🡺 the interest payments are FULLY TAXABLE
1014 (Decedent property): If appreciated in value, the basis is "stepped-up"—no one pays tax on appreciation; a. If depreciated in value, the basis is "stepped-down"—no one gets deduction either. What is the exception to this rule?
If decedent acquired the property via gift within 1 year of their death AND it is willed back to the original donor of the gift, then you go back to the original basis (don't get the advantage of the stepped-up basis rule).
What is imputed income?
Imputed Income is the value of any services one performs for oneself or one's family and the value of any property used that one owns are imputed income, which is not considered income for purposes of federal income tax. IT IS NOT CONSIDERED INCOME UNDER OUR TAX SYSTEM.
Why is there a frontloading alimony recapturing provision in section 71(f)?
In Y3, any amount that is found to have been excess alimony will be treated as a deduction to the payee and will be included in the income of the person who paid it. POLICY: People are tempted to frontload and disguise what actually is a property settlement and call it alimony 🡺 beneficial to payor who gets increased deductions, but is detrimental to the recipient who has increased income.
Is income derived through illegal sources taxable?
Income derived through illegal means is taxable, despite a legal obligation to make restitution 🡺 there is no SOL on intentional tax fraud.
Home office salesman and his wife are sent to Hawaii by employer after being randomly chosen to "oversee [contest] winners." They did not get to shop or swim. McDonnel only reported the value of the wife's trip in gross income and Commissioner said there was a deficiency for entire cost of trip 🡺 Should the trip costs paid by the company ($1,121) be included in gross income?
NO, they were sent on assignment and it was immaterial that they enjoyed the trip. "The mere fact that they were selected by random drawing" does not make it a prize. The expenses for a trip paid for by an employer is not included as gross income if the trip is not provided in light of the employee's past work performance and is taken primarily for business purposes. There were sound business purposes for them to go and it wasn't optional—the trip was an assignment, not a vacation.
Are travel credits converted into cash taxable?
Taxable. Travel credits converted into cash through a personal travel account constitutes gross income and is taxable.
If the Donor's AB is less than the cost of what the donee disposes the property for, but the FMV of the gift at the time of the original gift is even higher, then what happens? Example: Donor has an AB of 10,000 in a car and gifts it to Donee. At the time of the gift, the FMV of the car is 30,000. The Donee disposes of the car for 20,000.
No gain or loss is recognized by the donee.
Does income have to be of a listed type in section 61 in order for it to be taxable?
No, see Cesarini. §61 is not limited to the enumerated sources of income—income is taxable unless there is an express exclusion. If there is an economic benefit, it is income.
1041: No gain or loss shall be recognized on a transfer of property from an individual to spouse or former spouse (but only incident to divorce). Does this apply to pre-nuptial agreements?
No, see Farid-Es Sultaneh.
Is employer-provided group-term life insurance non-taxable fringe benefit?
No, this is a taxable fringe benefit. (§79) - There shall be included in the gross income of an employee for the taxable year an amount equal to the cost of group-term life insurance on his life provided for part or all of such year under a policy (or policies) carried directly or indirectly by his employer (or employers); but only to the extent that such cost exceeds the sum of— 1. The cost of $50,000 of such insurance, and 2. the amount (if any) paid by the employee toward the purchase of such insurance.
T was devised a certain amount of money through will 🡺 T and others contested the will 🡺 a compromise was reached and T received more than actually devised in the will 🡺 Is this taxable?
No. the money the heir received through the compromise is not taxable 🡺 It is still an exclusion under the §102. In exempting from the income tax the value of property acquired by bequest, devise, or inheritance, Congress used comprehensive terms embracing all acquisitions in the devolution of a decedent's estate. The question as to whether the property was acquired by way of inheritance is not determined by local (state inheritance) law
Emotional distress itself is not a physical injury or physical sickness, even if emotional distress has physical manifestations 🡺 thus, damages received for emotional distress itself are not excludable EXCEPT to the extent damages are received for amounts T paid for medical care attributable to emotional distress. What is included in the category of physical manifestations?
Physical manifestations include Appetite loss, asthma, depressions, gastric and instestinal disorders, headaches, insomnia, skin irritation, stomach pain. 🡺 treated as non-physical, so are includable except to the extent damages are received for amounts T paid for medical care attributable to emotional distress.
What are the three main rules for divorce payments?
Property settlement - 1041 Alimony - 71, 215 Child Support - 71(c)
Many judgments have multiple claims/types of damages (excludable v. taxable) 🡺 the proper allocation among claims (physical personal injuries v. other injuries) and types of damages (compensatory v. punitive) are questions of fact for jury. What should be searched in your outline to find a section that clarifies this?
Raytheon inquiry.
§101(a): excludes from gross income amounts received under a life insurance policy by reason of the death of the insured, whether paid in lump sum or in a series of payments. What if someone who is terminally or chronically ill receives certain amounts under the life insurance policy?
STILL EXCLUDABLE (i.e., surrender value), so long as the rules are followed (see outline)
T received damages in settlement for an antitrust action 🡺 the illegal conduct of the other party completely destroyed the profitable enterprise (foreign and domestic) and goodwill of Raytheon 🡺 T sued to recover for its injuries. What is taxable? What is the lesson from Raytheon?
Some damages are taxable - question is, "In lieu of what were the damages awarded? Taxability is determined by identifying the nature of the injury." If damages are awarded for lost profits 🡺 taxable income. Damages for destruction to the business and goodwill of T are not taxable to the extent they represent a return of capital 🡺 such damages in excess of T's cost are considered gross income.
What is the non-qualified use ratio?
Start w/ sale date and look back every year through 2009 - see how many years are not PR use during those years (numerator) and denominator being the total number of years property owned (Ex: 3/5 or 7/14).
What is the alimony recapture formula?
Step 1: Year 2 - (Year 3 + $15,000) = Year 2 Recapture. Step 2: Year 1 - (((Year 2 alimony - year 2 recapture) + year 3 alimony) + 15,000) = year 1 recapture Step 3: Year 1 recapture + year 2 recapture = amount reportable in year 3 as income (to payor) or deduction (to payee). See examples in outline.
§108(f)(1): Student Loans - discharge of student loans are excludable IF
Such discharge was pursuant to a provision of the loan under which all or part of the debt of T would be discharged if T worked for a certain period of time in certain professions for any of a broad class of employers
annuities are taxed such that a portion of each payment is split into a taxable portion and a nontaxable (return of capital) portion. 🡺 For life expectancy, see Treasury Table V on page 1049 What is the exclusion ratio?
T's Investment in K / T's Expected Return T's investment is defined as the total amount T paid -- anything that T got back before it starts. T's expected return is defined as (annuity payment) * (T's life expectancy)
Transfer of Property acquirede between spouses or incident to divorce shall be treated as a gift, and the basis of the transferee in the property shall be the adjusted basis of the transferor (carry-over basis), HOWEVER, unlike gifts, the spouse always does what (even when computing loss)?
Takes the transferor's basis.
T issued bonds for his company at $12.1M. Later the same year, T repurchased the bonds for $137K less than they were issued for. Note, this could have been caused from interest rates increasing or if the issuer downgraded the bond. Kirby Lumber.
The difference b/w the price the bonds were issued for and the price for which the company bought them back for is includible in company's gross income. It was an economic benefit by way of increase in net worth 🡺 analogous to the corporation selling property at a profit. Treasury regulations say that if a corporation issues bonds and then re-purchases them or retires them at a lesser price than they were issued for, the excess of the issuing price is considered gain or taxable income.
What happens if an annuitant lives beyond her life expectancy and fully recovers her investment in the K?
The full amount of any subsequent annuity payment is included in her GI.
§ 117(a) - excludes from gross income amounts received as a 'qualified scholarship' by a degree candidate at an educational organization. Who bears the burden of proving that the amount received was used for qualified tuition and related expenses? What are these qualified expenses?
The student has the burden. §117(b) "qualified scholarship" must be for "qualified tuition and related expenses" including tuition, fees, books, supplies and equipment required for courses of instruction but NOT personal living expenses like room & board, travel, research, or meals.
T has 2 accident/health insurance policies 🡺 T pays for one, T's employer pays for the other 🡺 both compensate T for the same illness. What happens?
Under §104(a)(3), all proceeds from T's own policy are excluded from income, but §105(b) limits the exclusion for the employer-provided policy to amounts which reimburse T for medical care
To get the 500k exclusion for joint returns, only 1 spouse must meet the ownership requirement but BOTH spouses must meet the use requirements. What are the three use requirements?
Used the property as a principal residence for a period aggregating 2 or more years during the 5-year period ending on the date of the sale or exchange
Can T elect to not use 121 by using §121(f) on one residence so that the exclusion can be used on the sale of a second principal residence?
Yes, but that second principal residence must meet the ownership and use requirements.
T was an attorney who entered into agreement w/ client 🡺 would provide free legal services during life in exchange for a bequest of securities upon the client's death. Is this bequest taxable?
Yes, it is taxable income. The bequest was made in return for services rendered by T. There was no donative intent by the deceased 🡺 it was in consideration for services. A gift or bequest is not excluded from gross income if it is given in consideration for something. Substance over form 🡺 calling it a bequest does not make it a bequest 🡺 this is really a form of deferred compensation, so it will be treated as compensation. Even though labeled as a bequest by state and federal law 🡺 substance over form controls.
T, president of metal company, referred a client to business associate and friend, president of a different metal company. The referral turned out to be profitable and the business associate wanted to give T a present for his help. T told the associate he owed nothing, but he insisted on giving T a Cadillac 🡺 Was the Cadillac a gift? Was it taxable?
Yes, the Cadillac is taxable. It was not a gift, it was either compensation for past services or an inducement to provide future services. With respect to determining whether it is a bona fide gift, "most critical consideration is the transferor's intention."
Dean v. Commissioner Husband and wife (T's) continued to reside on property after it was transferred to the corporation for which they were sole shareholders. Is fair rental value of property taxable to Ts?
Yes, the fair rental value is taxable. Since the property is owned by the corporation and T's reside on it, it is taxable - even though the corporation is simply the means by which T and his wife they were sole shareholders. Is fair rental value of property taxable to Ts? carried on their business. Note: Would not be taxable if T's still owned it.
Are punitive damages includable in gross income?
Yes. Glenshaw Glass.
§71(b)(1): Alimony or Separate Maintenance Payments Defined - any payment of cash (or check or money order) IF 5 requirements are met (must meet all of them):
a. Such payment is received by (or on behalf of) a spouse under a divorce or separation instrument b. The divorce or separation instrument does not designate the payment as a non-alimony payment c. In the case of a decree of legal separation/divorce, the parties are not members of the same household at time the pymt is made d. There is no liability to make any payment in cash or property, after the death of the payee spouse AND no obligation to make substitute payments (in cash or property) after death of payee spouse e. The payment is not for child support
What are the Section 119 requirements to be able to exclude lodging?
a. The lodging is on the business premises of the employer, i. Commissioner v. Anderson: either at a place where he employee performs a significant portion of his duties or where the employer conducts a significant portion of his business 1. Being on call & nearby does not qualify - "on call" does not constitute a significant portion of employee's duties b. The lodging is furnished for the convenience of the employer, AND c. The employee is "required to accept such lodging... as condition of his employment" i. "Condition of his employment": Employee must be required to accept the lodging in order to enable him properly to perform the duties of his employment. Reg §1.119-1(b)
What is considered a principal residence under section 121?
second homes don't count 🡺 in close cases (T alternates between properties), depends on all the facts and circumstances 🡺 most relevant factor is where T spends majority of time
§117(c) - Except as provided in 117(a) and (d), a portion of the otherwise excluded scholarship is generally required to be included in gross income to the extent that the portion represents a payment for what?
teaching, research or other services by the student required as a condition for receiving the otherwise excluded amount.
§101(a): excludes from gross income amounts received under a life insurance policy by reason of the death of the insured, whether paid in lump sum or in a series of payments. What if someone buys the insurance contract for valuable consideration during the insured's life?
the buyer does NOT get the exclusion for the proceeds upon the insured's death (would otherwise be excludable) 🡺 the FMV of consideration given up in return for the policy (plus any subsequent premium payments) is their basis 🡺 when the policy pays off, any amount received in excess of basis is treated like a gain
§104(c): Punitive Damages Exception - Punitive damages are generally are included in GI (Glenshaw) 🡺 exception for punitive damages awarded in?
wrongful death suits after Sept. 1995
What is the general rule regarding gifts and inheritances found in section 102?
§102 (a) - GR - Exclude from GI the value of property acquired by gift, bequest, devise, or inheritance.
§71(c): Child Support - child support payments are Not included in payee's GI and are not deductible by payor. Why?
§262: except as otherwise provided no deduction shall be allowed for personal, living or family expenses. Child support falls into this category so it would contradict.