What is income?

Haverly v. United States

"Claiming a charitable deduction does manifest an intent to accept the property as one's own": realization event

Amount realized

= (1) cash + (2) FMV of other property received: Section 1001(b)

Gain or loss

= amount realized - adjusted basis: Section 1001(a)

"Exclusion ratio"

= principal / expected return -> the portion of each payment excluded from income, the difference being taxable income 72 (b)(1) Ratio calculated at the annuity starting date

Eisner v. Macomber

A stock dividend is capital not income but payment in more stock

Qualified real property business indebtedness 108(c)

Acquisition debt only, Required to reduce your basis

Annuity for life

Aggregate amount is determined by the person's life expectancy under sec. 72(c) (3), Taxable Mortality gain when the person outlives the life expectancy under sec. 72(b)(2), mortality losses are deductable when the person does not live to the life expectancy sec. 72(b)(3)

Old Colony Trust Co. v. Commissioner

Discharge of indebtedness is income. Payment by an employer to an employee of employee's taxes is taxable as income if it is compensation.

Sec 108 contains a number of exclusions for discharge of debt income

Discharges in bankruptcy under chapter 11, When taxpayer is insolvent,Qualified farm indebtedness, Qualified real property business indebtedness 108(c), Qualified principal residence indebtedness, student loan forgiveness program

Employee transfers sec. 83 property to anyone

Fair market value of the property is taxed as incomecf. reg. 1.61 (2) (d)

Qualified farm indebtedness

From a qualified person: unrelated person; Must be a farmer: in the business of farming and half of gross receipts came from farming

Gifts and bequests Sec. 102.

Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.

Family support -

IRS has never taxed it

Disposition of a portion of property

Reasonable allocation and divide the basis among the parts, Equitable division: Reg. sec. 1.61-6(a)

health insurance

Sec 105 excludes Medical reimbursement and premiums for health insurance

Adjustments to basis

Section 1016: prescribes adjustments to basis, i.e., for capital losses, expenditures, receipts, depreciation, etc. Generally, capital expenditures increase basis, while deductable losses and depreciation reduce basis

Certain Fringe Benefits

Section 132

REG. 1.61-2

Tax the fair market value of non-cash compensation

COD's effect on basis

The amount realized from a sale or other disposition of property includes the amount of liability from which the transforeror is discharged as a result for the sale or disposition

How is a fringe benefit taxed?

The fair market value (plus any payment) of property transferred as compensation is gross income Sec. 83, Fair market value for the fringe benefits REG 1-61.2 D

Cottage savings Ass'n v. Commissioner

There has been a disposition of properties only if the properties are materially different: different legal entitlements

Cesarini v. United States

Tres reg §1.61-14 In addition to the items enumerated in section 61 a, there are many other kinds of gross income. Treasure trove, to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession

Commissioner v. Duberstein:

What is a "Gift"?- a transfer made out of detached and disinterested generosity, out of affection, respect, admiration, charity or like impulses." the most important consideration is the intention of the transferor. Cf. Gotcher

Taxation of law suit Settlements

What she is being compensated for must be determined, No amount will be attributed to punitive damages if the taxpayer can prove that the actual damages are more than the award

Hort v. Commissioner

When computing the net gain or loss for income tax purposes, a taxpayer cannot offset the value of the canceled lease against the consideration received by him for cancellation. A lease is not part of the basis.

Cancellation of indebtedness

is income 108(f)

Cancellation of debt (COD)

is income to a third party under Old Colony Trust

Compensation for lost profits

is taxable, since the expenses would be deducted and the foregone profits would have been taxed

Scholarship received for teaching, research, or other services required as a condition for receiving the scholarship is

not excludable 117 (c ): compensation

Clearly realized

not just paper wealth i.e. stock appreciation not realized

Amounts paid under a life insurance contract by reason of the death of the insured are

not subject to income tax regardless of the amount of gain that actually many be involved sec. 101(a)

Welfare

not taxed, unemployment, social security, state aid to the blind

Sec 103 excludes from income interest

on state and local obligations.

How are employee discounts taxed when not excluded?

only tax the amount of the discount greater than the gross profit margin

Capital expenditures

permanent improvements to your property

Realization

property is not taxed unless and until the income has been realized, Implicit in the tax law, § 1001(a) refers to a realization event, Reflected in Glenshaw Glass definition of income: "clearly realized"

Interest paid on damages

taxable

Punitive damages are

taxable Glenshaw Glass

Interest is generally

taxable under sec. 61 (a) (4)

Compensation for the loss of property

the compensation is amount realized and the AR less Basis is taxable gain

Gilbert

the taxpayer used funds without permission but had expected permission would be granted by his company, and he secured his "loan" immediately, showing he had the means and intention to pay back the loan

Nonrecourse debt

where the borrower is not personally liable and the lender can look only to the assets that secure the debt for repayment

Cost basis

you paid tax on the income you used to purchase the investment, paying taxes on the realized gain (with the cost basis) would be double taxation

The tax-inclusive base

§ 275 (a) (1) specifically precluded a deduction for federal income taxes

Mortality gains and losses in life insurance

Ignored for taxation purposes

Timing of taxation of sec. 83 property

Income for taxation purposes Determined at the first time the person having rights in the property that are transferable and not subject to forfeiture

Distinguishing loans from unlawful taxable gains

Loans are identified by the mutual agreement of the parties to make a loan, which will be repaid in the future

Meals and Lodging "Convenience of Employer Test"

Meals are provided for the convenience of the employer only If there is a substantial noncompensatory purpose

Taxation of loans: Lender

No deduction when making loan. No income on repayment of the loan principal - recovery of capital. Interest is income

Taxation of loans: Borrower

No income when the loan proceeds are received, No change in net wealth because there is an offsetting obligation. No deduction when principal payments are made

Authority for not taxing Imputed income?

None, IRS policy

Sec. 104(a)(2) excludes from income the amount of any damages

(other than punitive damages) received (weather by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or illness

Meals and lodging exclusion "The business premises test"

Is the purpose of the location to do business or is there a substantial amount of business done at the location? Functional rather than spatial test

108(d)(3) what is insolvency

Liabilities exceed the FMV of assets immediately before the discharge, 108(a)(3) the insolvency exemption shall not exceed the amount by which the taxpayer is insolvent

Helvering v. Le Gierse

Life insurance policy and life annuity for a single premium. Court ruled that the policy eliminated any risk to the insurer of premature death. "risk shifting are risk distributing are at the heart of insurance The policy was not life insurance under sec. 101(a) and the proceeds were subject to the exclusions for life insurance

Tax treatment of a below market interest rate loan

The forgone interest is treated as 1) Transferred to the lender to the borrower, and 2) Retransferred by the borrower to the lender as interest 3) On the last day of the calendar year

Damages to business interests

The tax consequences of a compensatory damages award or reimbursement depend on the tax treatment of the item for which the reimbursement is intended to substitute. judicial doctrine

REG. sec. 1.61-1

includes income in any form, not limited to the enumerated items

James v. United States

all unlawful gains are taxable

Recourse debt

borrower is personally liable for the repayment of the debt

Qualified principal residence indebtedness

discharged before Jan 1 2013

Damages for Lost wages

excludable under sec. 104

Kirby lumber co.

held that a corporation had taxable discharge of indebtedness income when it repurchased in the market at less than par bands that had been issued earlier in the year at par. Cf. sec. 61(a)(12) taxation of the discharge of an obligation as income

total Cost of a life insurance policy

cost of pure insurance + loading fee + the savings portion of the premiums paid up the the surrender date

basis (generally)=

cost, Sec 1012

Tax cost basis

create the basis as the amount you paid taxes on: otherwise you would be taxed twice on the same amount

Section 7872 c 3

diminimus exception for when the loan is less then $10,000, applies when the total principal is more than $10,000

No additional cost services

does not include services where labor required

Why is Eisner v. Macomber definition of income faulty?

for not including discharge of indebtedness

Sec. 83(c) (1) property is subject to a substantial risk of forfeiture if

full enjoyment of the property is conditioned upon the future performance of substantial services by an individual

Prizes and awards

generally taxable even if it was gratuitous. See regulation 1.102-1(a)

Employee achievement awards -

gold watch awards §274(j)(3) not taxed if under the limit of $400 Section 74c

Deferred annuities

interest accrues, but is not taxed until payments are maid under sec. 72(b)

Gift loan

interest free loan in the form of a gift

Any transfer made as an incentive for future benefit or out of a moral obligation

is not a gift

Sec. 83 (b)

may elect to pay taxes on property subject to a substantial risk of forfeiture in the current year

Student Loans

not taxed, but paid back in after tax dollars

Determining basis

Section 1011 (a): in general, adjusted basis = basis determined under section1012, adjusted as provided in sec 1016

§61 (a) (1) Compensation for services

"Compensation for services, including fees, commissions, fringe benefits, and similar items;"

Eisner v. Macomber (1920) definition of income

"Income may be defined as the gain derived from capital, form labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital"

§ 61 definition of income

"all income from what ever source derived"

Commissioner v. Glenshaw Glass (1955) Definition of Gross Income

"undeniable accession to wealth, clearly realized, and over which the tax payers have complete dominion."

Athletic scholarship

- only if it is not conditional upon playing a particular sport and does not cancel if they stop playing

Inheritance

- property received when the decedent dies intestate

Under section 74 prizes are excludable if

1)they are not retained by the recipient 2)award in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement and 3) recipient must have taken no effort to enter the contest

Exclusion for No Additional Cost Service Sec. 132(b)

1. Service is offered for sale to customers in the ordinary course of business of the employer and 2. The employer incurs no substantial additional cost

Basis of property acquired from a decedent

Section 1014 (a) in general basis -FMV on date of death "Stepped up basis" (e) appreciated property acquired by decedent by gift within one year of death will have a basis equal to the basis at the time of the death

Sec. 83(b) Election's Effect on the employer

Employer claims deduction in the year that the restrictions are lifted and the employee takes the income

life insurance fringe exlcusion

Sec 79 excludes $50,000 of group term life insurance provided by the employer

Meals and lodging exclusion

Sec. 119 An employee may exclude from income " the value of any meals 1) furnished to him by his employer 2) for the convenience of the employer, 3) but only if the meals are furnished on the business premises of the employer"

Below market interest rate loan

Sec. 7872

Property transferred in connection with performance of services

Sec. 83

Accident and health plans

Sec 106 excludes employer contributions to accident and health plans from the gross income of employees

Clergy housing

Sec 107 excludes ministers housing

Tuition discounts

Sec 117 (d) Employee of a university will not be taxed on tuition discounts

Cafeteria plan

Sec 125 ?

Education expense assistance

Sec 127 excludes Education compensation Up to $5,250 a year Includes tuition, fees, and books but does not include living expenses

Dependant care

Sec 129 excludes Daycare for the children of the employee Limited to $5,000 a year

Basis of property acquired by gift

Section 1015 basis of donee = basis in hands of donor (i.e., a "carryover basis"). Exception: For determining a loss, the basis is the lesser of the FMV or the donor's basis on the date or the gift. If the sale donee's disposition price is between the FMV at receipt and donor's basis at receipt, there is neither a gain or a loss See Reg. § 1.1015-1(a)(2)

United States v. Gotcher

Under section 61, there must be 1) a gain to the taxpayer and 2) the gain must be for the benefit of the employee to treat the amount as income

Sec. 7872 applies to

any below-market gift loan or demand loan

Sec. 132(d) working condition fringe

any property or services provide to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 or 167

Political contributions in RR 68-512, 1968-2 C.D. 41,

are not taxable if they are used for expenses of a political campaign.

Proceeds received upon the termination of a cash value of a life insurance policy through surrender, rather than death

are taxable to the extent that they exceed the total cost of the policy

Demand loan

callable on demand

Bequest

property, other than real estate, left to a beneficiary in a will

§132 (a)(7) employers who maintain a qualified pension plan can

provide tax-free retirement planning services to their employees

Sec. 132(c) excludes qualified employee discount if

qualified property or services to does not exceed (A) in the case of property, the gross profit percentage of the price at which the property is being offered by the employer to customers, or (B) in the case of services, 20 percent of the price at which the services are being offered by the employer to customers

Devise

real estate left to a beneficiary in a will

Death bed: we will give you property and you bequeath it to us

resets the basis at the time of the death, which can largely eliminate the tax burden of low basis property with large gains

Adoption assistance

sec 137 Maximum amount excludible is $10,000, phased out for AGI exceeding $150,000, not available when AGI is more than $190,000, Includes adoption fees, attorney fees, and court fees

Military housing

sec. 134 No taxation of the rental value of military housing

Annuity Taxation

sec. 72 The annuitant has income to the extent he receives more than he paid for the annuity

Moving expenses exemption

sec.132(a)(6), sec. 132(g) excluded to the extent the employee could have deducted the expenses if paid directly under sec. 217

Applicable federal rate

subsection e - gov determination of an interest rate - published rate

Tips

taxable income. See reg. sec. 1.61-2(a)

Fringe benefits

taxed as gross income under § 61(a)(1) "compensation for services, including ... fringe benefits

Sec. 83 property Basis is determine when

taxes are paid

Imputed income

the benefits derived form labor on one's own behalf or the benefits from the ownership of property .

Where a taxpayer is permitted to purchase property or services at a price below fair market value because the seller is compensating the purchaser for services,

the purchaser has gross income in the amount of the discount. 83 a

Sec. 132(e) De Minimis Fringe exclusion

the value of the benefit is so small that accounting for it would be unreasonable and impracticable

Risk of a 83 (b) election

there is no offsetting deduction if the property is forfeited

Scholarship and fellowship "Qualified expenses"

tuition and fees for enrollment or attendance by a student enrolled in a school and fees, books, supplies, and equipment required for the course of study (no room and board)

Simons-Haig definition

value of property consumed and the change in value of savings

No income is realized by the transferee under sec. 83

when the property is nontransferable and subject to a substantial risk of forfeiture at the time of the transfer

Scholarships and Fellowships

§117 Not taxed as income if used by degree candidates for qualified tuition and related expenses

Retirement benefits

§401-404 and 410-416