TOPIC 3: WHAT IS GROSS INCOME? SIGNIFICANT GROSS INCOME INCLUSIONS AND EXCLUSIONS
(f) Same as (a), but Poor's Employer makes the $7,000 payment to Rich, renouncing any claim to repayment by Poor.
$10k - $7k comp. $3k CODI
o (d) Services, in the form of remodeling Rich's office, which are worth $10,000?
$10k income
o (e) Services that are worth $8,000?
$10k income. The debt was discharged for $2k less than the debt. $2k CODI and $8k compensation income.
same. as b but services only worth 6k
$14k excluded. $6k income for compensation.
· Problem 1: Poor borrowed $10,000 from Rich several years ago. What tax consequences to Poor if Poor pays off the so far undiminished debt with: o (a) A settlement of $7,000 in cash?
$3k income for CODI
· Example 2: o What if she gets a $400 discount? She pays $600 for the refrigerator.
§ $400 (discount) / $1,000 (original price) = 40% § $250 of her discount is excluded from her gross income. § $150 of her discount is INCLUDED on her gross income.
(m) Employer gives Employee a case of scotch each Christmas
§ A case of scotch will most likely be outside of the range of de minimis fringe and included on gross income.
· Problem 1: Consider whether it is likely that §102 applies in the following circumstances. o (f) Same as above, except Father died intestate and Daughter enforced the claim against the Estate.
§ Although this looks like Lyeth v. Hoey, this is a inter vivos agreement and §102 does not protect the daughter. $20,000 in income.
So, what is Inheritance in the Court's eyes?
Ultimately, look to substance of the transaction, not the form of the transaction
· Problem 1: Consider whether it is likely that §102 applies in the following circumstances. o (d) Father leaves Daughter $20,000 in his will stating that the amount is in appreciation of Daughter's long and devoted service to him.
Yes, no gross income
· Problem 5: Owner agrees to rent tenant her lake house for the summer for $4,000. o (a): How much income does Owner realize if she agrees to charge only $1,000 if Tenant will make $3,000 worth of improvements to the house?
§ $4,000. Income does not have to come in the form of money.
Elements of Income
1) Undeniable accession to wealth; 2) Clearly realized; and 3) Over which the taxpayers have complete dominion.
o (o) Employer provides Employee with $185 worth of vouchers each month for community on a public mass transit system.
Excludable. This is within the bounds of a qualified transportation fringe
Employee Achievement Awards §74(c) · General Rule
Gross income shall not include the value of an employee achievement award received by the taxpayer if the cost to the employer of the employee achievement award does not exceed the amount allowable as a deduction to the employer for the cost of the employee achievement award.
Part 2: Some Gross Income Inclusions and Commonly Encountered Exclusions Exclusions
IRC §§101-139 · Specific exceptions provided in the Code for amounts of income that can be excluded from the total calculation of gross income.
Same as a above except income is forgiven in 2026
Income unless 108f(1) applies
Tax-Exempt Interest General Rule §103
Interest income is taxable §61(a)(4).
Student received a $20k loan from Law School to be used for the payment of tuition and books a. What result if the loan is forgiven by Law School in 2022?
Not income
b. What result if the loan is forgiven because the law student provides services worth $20k to the law school?
Taxpayer in b would not get to exclude. ($20k)
· Problem 3: Employee receives a $5,000 trip on Employees 50th birthday. To pay for the cost of the trip, Employer contributed $2,000, and fellow employees of Employee contributed $3,000. Does employee have gross income?
The $2,000 contributed by the employer is definitely included in the employee's gross income. The employee will argue that the $3,000 contributed by the other employees will constitute a gift, which is not taxable Fellow employees probably not but yes for employer.
Exceptions §§74(b)-(d) §74(c)
The employee's exclusion amount is tied to the employer's allowed deduction under §274(j) - Dollar limit - generally avg. cost of $400 - Meaningful ceremony Not disguised compensation arrangement Length of service (only every 5 years) or safety Tangible personal property
· Problem 4: Insurance Adjuster refers clients to an auto repair firm that gives the adjuster a kickback of 10% of billings on all referrals. o (a): Does the adjuster have gross income? o (b): Even if the agreement violates local law?
o (a): Does the adjuster have gross income? § Yes, the adjuster has gross income on the 10% billing kickback for the referrals. o (b): Even if the agreement violates local law? § Yes, unlawful gains are taxed in the same manner as lawful gains. James v. U.S., 366 U.S. 213 (1961).
· Commissioner v. Glenshaw Glass (1955)
o ***Expanded the definition of income to include windfalls; current definition of income used.***
So, what is a Gift in the Court's eyes?
o A gift in the statutory sense. . . proceeds from a "detached and disinterested generosity." o The intent of the transferor or the grantor is what the Court will analyze. o This is an OBJECTIVE inquiry - reasonableness standard.
· Employee Definition
o Any individual who was formerly employed by such employer in such line of business and who separated from service with such employer in such line of business by reason of retirement or disability, and o Any widow or widower of any individual who died while employed by such employer in such line of business or while an employee. · **Highly compensated individuals apply, but it must be available to each member of a group of employees** §132(j)(1)
· Buying Assets - NOT an Accession to Wealth
o Before § $10,000 Assets (Cash); 0 Liabilities o After § $10,000 Assets (Stock); $0 Liabilities § +$0 in Net Worth
· Increase in Value of Assets - NOT Accession to Wealth
o Before § $10,000 Assets (Stock Value); 0 Liabilities o After § $15,000 Assets (Stock Val. + 1 year); 0 Liabilities § +$5,000 in Net Worth
· Borrowing Money - NOT an Accession to Wealth
o Before § 0 Assets; 0 Liabilities o After § $20,000 Assets (Money rec'd); $20,000 Liabilities § +$0 in Net Worth
· Receiving Property - Accession to Wealth
o Before § 0 Assets; 0 Liabilities o After § $5,000 Assets ("FMV" of property received); $0 Liabilities § +$5000 in Net Worth
Undeniable Accessions to Wealth Examples pp. 60-61 · Earning Money - Accession to Wealth
o Before § 0 Assets; 0 Liabilities o After § $5,000 Assets; $0 Liabilities § +$5,000 in Net worth
o Problem 2: At the Heads Eye Casino in Vegas, Lucky Louie gives the maître d' a $50 tip to assure a good table and gives the croupier a $50 "toke" after a good night with the cubes. Does either qualify as gross income?
o Both of these situations look more like a form of compensation for services rather than a detached and disinterested gift.
· Narrow statutory exceptions:
o Certain employee achievement awards authorized by IRC §74(c). o Certain gifts treated as de minimis fringe benefits by IRC §132(e).
§ Transportation
o Commuter Highway Vehicles o Transit Pass Limited to $280 per month
§ Problem 2: Planner incorporated her motel business and the corporation purchased a piece of residential property adjacent to the motel. The corporation by contract "required" Planner to use the residence and also furnished her meals. Planner worked at the motel and was on call 24 hours a day. May Planner exclude the value of the residence or the meals or both?
o Courts are split on this issue. Comm'r v. Anderson says no, but Jack B. Lindeman says yes. It is dependent on whether a significant portion of the duties are performed at the residence. The meals are excludable.
Discharge of Indebtedness Exclusion §108 · §108(a)
o Debt forgiveness excluded from current income if: § Discharged by Bankruptcy Court § Taxpayer is insolvent Negative net worth = insolvent
· Tangible Personal Property - TCJA 2017
o Does not include cash, cash equivalents, gift cards, gift coupons, most gift certificates, vacations, meals, lodging, event tickets, stock, bonds, securities, or similar items.
Special Treatment for Certain Employee GI Employee Gifts §102(c) · General Rule
o Employee gifts are generally taxable. § Courts have interpreted this as compensation. § "Shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee." "GROSS INCOME SHALL NOT INCLUDE" = THE ITEM IS EXCLUDED FROM THE CALCULATION OF GROSS INCOME
· Problem 3: Employee has worked for Employer's incorporated business for several years at a salary of $80,000 / year. Another company is attempting to hire the Employee but Employer persuades Employee to agree to stay for at least two more years by giving the Employee 2% of the company's stock, which is worth $100,000, and by buying the Employee's spouse a new car worth $30,000. How much income does the Employee realize from these transactions?
o Employee will realize $30,000 from the Employer buying the employee's spouse a new car. While this looks like a gift, it is clearly given in consideration for the Employee staying at the Employer's incorporated business. However, the Employee will not realize the 2% of the company's stock until he sells the stock.
· Employer Rachel makes a $1,000 payment on the debt for employee Ian in addition to paying Ian's regular salary, Ian will recognize $1,000 in income. True or False?
o FALSE, Ian will recognize $2,000 in income because having a debt paid off by another constitutes an accession to wealth.
· Taxpayer will recognize and pay tax on the $5,000 gain from the stock at the end of the year. True or False?
o FALSE, taxpayer will not recognize and pay tax on the gain until the stock is sold. However, there will be a capital gain tax separate from the income tax.
· United States v. Kirby Lumber Co. (1931)
o Facts: § Corporation sold bonds and re-purchased them at a lower price than what they issued. o Holding & Synopsis: § The corporation "realized income" because there was an accession to income.
· Old Colony Trust Co. v. Commissioner (1929)
o Facts: § Employer paid employee's taxes as part of his compensation for work. o Holding & Synopsis: § The Court treated this scheme as if the employer was merely paying the employee.
· Helvering v. Braun (1940)
o Facts: § Landlord's defaulting tenant made improvements to the land. o Holding & Synopsis: § The gain need not be in cash; it may occur bay exchange of property, payment of indebtedness, relief from liability, or other profit realized via transaction.
· Specific Inclusions §61(a)(1)-(15) w/ reg. §
o §1.61-2 - Compensation o §§1.61-3; 1.61-4 - Derived from Business o §1.61.6 - Gains from dealings in property o §1.61-7 - Interest o §1.61-8 - Rents o §1.61-8 - Royalties o §1.61-9 - Dividends o §1.61-10 - Alimony o §1.61-10 - Annuities o §1.61-10 - Life ins. o §1.61-11 - Pensions o §1.61-12 - Discharge of Debt o §1.61-13 - P'ship GI o §1.61-13 - IRD o §1.61-13 - Estate/Trust Income
Inheritance Illustrations o Lyeth v. Hoey (1938)
o Facts: § Mary Longyear died in 1931, and Petitioner is her grandson. She left four children as heirs and Petitioner and his brother, who were sons of a deceased daughter. § Decedent left more than $3 million to a trust. During probate, heirs objected that there was a lack of testamentary capacity and undue influence. A compromise was reached wherein Petitioner received $80 in cash and shares of a corporation valued at $141,484. § The Commissioner of Internal Revenue treated this as income. o Holding & Synopsis: § The Supreme Court noted that what Petitioner received and the reason he received it was because of his status as an heir. It does not matter that Petitioner received the property via a court settlement.
o Wolder v. Comm'r (2d Cir. 1974)
o Facts: § Petitioner, Victor Wolder, was an attorney and he entered into an agreement with a client that the client bequeath to him 500 shares of common stock or other security in return for lifetime legal services without charge. § The client did leave Petitioner $15,845 in cash and 750 shares of stock. § Petitioner argued that the amount is excluded from income. o Holding & Synopsis: § The Court of Appeals found that parties entered into a contract for services. Payment for such would normally be income and such a result should not be any different here. § The parties delayed payment and payment was accomplished through a devise in a will. This was not a true gift or devise excludable from gross income.
· Cesarini v. United States (N.D. Ohio 1969)
o Facts: § Taxpayers found $4,000 in a Piano that they bought 6 years earlier for $15. § They argue that: (1) it is not income; (2) if income, it was income at the time the piano was required - statute of limitations; (3) long-term capital gain if income at all. o Holding & Synopsis: § This was a treasure trove, and thus is income under the definition provided by Glenshaw Glass. § An undeniable accession to wealth is any transaction that results in an increase in net worth (Assets - Liabilities).
§ Qualified Parking
o For employees o Located on or near the business premise or carpool designation o Limited to $280 per month.
Exceptions §§74(b)-(d) · §74(b)
o Gross income does not include amounts received as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if: § (1) the recipient was selected without any action on his part to enter the contest or proceeding; § (2) the recipient is not required to render substantial future services as a condition to receiving the prize or award; and § (3) the prize or award is transferred by the payor to a governmental unit or a qualified charitable organization.
Qualified Employee Discount §132(c) · General Rule
o Gross income shall not include an employee discount for qualified property or services: § Non-investment personal property § Services sold to customers in the same line of business
Disaster Relief §139 - terrorist or military action, federally declared disaster, accident from a common carrier, and others § General Rule
o Gross income shall not include any amount received by an individual as a qualified disaster relief payment.
No-Additional-Cost Service §132(b) · General Rule
o Gross income shall not include any service provided by an employer to an employee for use by such employee if: § Same line of business - conglomerates with multiple lines of business § No substantial additional cost Discriminatory plans subject to penalty Can be provided under reciprocal agreement Employee is defined in section 132(h)
On Premises Athletic Facility §132(j)(4) § General Rule
o Gross income shall not include athletic facilities provided by employers that are: § On business premises; § Operated by the employer; and § Substantially all use is by employees, spouses, or kids.
Meals & Lodging §119 § General Rule
o Gross income shall not include the value of any meals or lodging furnished to him, his spouse, or any of his dependents by or on behalf of his employer for the convenience of the employer, but only if— § Meals · The meals are furnished on the business premises of the employer · Courts have generally read meals as only meaning meals; groceries and reimbursement are not included. § Lodging · The employee is required to accept such lodging on the business premises of his employer as a condition of his employment.
Exceptions §§74(b)-(d) · §74(d)
o Gross income shall not include the value of any medal awarded in, or any prize money received from the United States Olympic Committee on account of, competition in the Olympic Games or Paralympic Games. § This shall not apply to any taxpayer for any taxable year if the adjusted gross income of such taxpayer for such taxable year exceeds $1,000,000.
De Minimis Fringe §132(e) § General Rule
o Gross income shall not include the value of gifts/other benefits provided to the employee by the employer if the value is so small as to make accounting unreasonable or administratively impractical (e.g., coffee, snacks, etc.). § Specific Exception for Employer Operated Eating Facilities o For employees o Located on or near business premises o Operate at break even or profit o Discriminatory benefit is taxable to highly compensated employees
Working Condition Fringe §132(d) § General Rule
o Gross income shall not include the value of property or services provided by the employer if the employee would have been entitled to a deduction for the cost under §162 or §167. § Example o A work convention, continuing education seminar
Qualified Transportation Fringe § General Rule
o Gross income shall not include the value of qualified transportation fringe provided by an employer to an employee.
Qualified Employee Discount Examples · Example 1: o Mandy is a bookkeeper who works at an appliance store that offers employees a discount.
o Gross profit of appliance store: § Gross sales $800,000 § Cost of goods $600,000 § Gross profit $200,000 o Gross profit percentage § =25% (max. excl. benefit) Gross profit$200,000 § Gross sales $800,000 o The refrigerator Mandy wants costs $1,000. She gets a $250 discount. She pays $750 for the refrigerator. § $250 (discount) / $1,000 (original price) = 25% § Her discount is excluded from her gross income.
Discharge of Indebtedness Illustrations: · Zarin v. Comm'r (3d Cir. 1990) o Facts: § Appellant Zarin, a taxpayer, was extended gambling credit by casino and became a compulsive gambler. The state casino control commissioner issued an emergency order making further extension of credit to the taxpayer illegal, but the casino continued to extend credit. Zarin ran up a debt in excess of $3 million, and the casino filed suit to collect. § The taxpayer stated that the debt was unenforceable under state law, and the matter settled for $500,000. The Internal Revenue Service asserted that the forgiven portion of the contested debt was income to the taxpayer and imposed tax. § The United States Tax Court agreed, and the taxpayers sought review of the decision of the Tax Court, which held that taxpayer recognized income from discharge of indebtedness resulting from his gambling activities and that he should be taxed on the income.
o Holding & Synopsis: Under the contested liability doctrine, if a taxpayer, in good faith, disputed the amount of a debt, a subsequent settlement of the dispute would be treated as the amount of debt cognizable for tax purposes § The excess of the original debt over the amount determined to have been due is disregarded for both loss and debt accounting purposes.
· United States v. Kirby Lumber (1931) o Facts: § Kirby Lumber Company issued its own bonds for $12,126,800 for which it received their par value. Later in the same year, it purchased in the open market some of the same bonds at less than par, the difference of price being $137,521.30.
o Holding & Synopsis: § Corporation realized income when it repurchased its own bonds (loans) for < the price at which they were issued.
No-Additional-Cost Service Examples · Lawyer provides legal service to assistant's son. Normal bill to client would have been $6,000. Taxable to legal assistant?
o Maybe, while this is the same line of business, it is a substantial additional cost. If not during work hours, might not be additional cost. She is the real employee so it would be her taxes affected.
· If a couple bought a piano for $100, but later found out that it was worth $500,000, what is the tax result?
o No income to be recognized until the piano is sold.
Discharge of Indebtedness Exclusion §108 §108(f)
o Non-taxable discharge if: § Discharge of student loan in exchange for work in certain professions in certain areas 2021-2025 exclude vast majority of student loan discharges. Maybe not after 2025
· Discount Limit
o Property - Gross Profit Percentage § The excess of the aggregate sales price of property sold by the employer to customers over the aggregate cost of such property to the employer, is of the employer's experience during a representative period. o Services § 20% of the price charged to customers · **Highly compensated individuals apply, but it must be available to each member of a group of employees** §132(j)(1)
· Misc. Items of Gross Income Reg. §1.61-14 Examples
o Punitive Damages o Payment of Another's Taxes o Illegal Gains o Treasure Trove
Qualified Moving Expense Reimbursement §132(g) § General Rule
o SUSPENDED BY TCJA 2017 o Moving expenses are NOW includable in gross income
§ Problem 3: State highway patrolman is required to be on duty from 8AM to 5PM. At noon, he eats lunch at various privately-owned restaurants which are adjacent to the state highway. At the end of each month the state reimburses him for the luncheon expenses. Are such cash reimbursements included on his gross income?
o Section 119 only applies to meals, not cash reimbursement.
· Problem 2: The congregation for whom Reverend serves as a minister gives her a check for $5,000 on her retirement. Does Reverend have gross income?
o The Reverend would argue that this is not a gift from the employer, thus it removes him from §74(c). Excludable 1.102 (f) 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. However, the IRS would most likely consider this an employee gift because it is made as compensation for his long service to the church.
Gift Examples: § 102 Problems pp. 76 o Problem 1: Our system of self-assessment requires taxpayers to make the initial determination of gift or income, and tax administration procedures give the comm'r power to challenge that decision. If a judicial controversy develops, why is the decision of the trial court so important, and what role may an appellate court play?
o The decision of the trial court is so important because the court in Duberstein makes it clear that gifts are judged by a case-by-case basis in which the appellate court will only reverse if it is clear that the trial court made a sweeping observation without taking into account the facts of the transferor's intent.
Employee Gift Examples pp. 78 · Problem 1: Employer gives all of her employees, except her son, a case of wine at Christmas, worth $120. She gives her son, who is also an employee, a case of wine, worth $700. Does the son have gross income?
o The son will likely have $120 worth of gross income. The son would argue that the entire $700 is not taxable because no other employee received that amount. He got an extra $580 worth of wine as a gift from mother to son. - 1.102(f) - exception to 1.102(c) for family employees
o Holding & Synopsis: Duberstein and Stanton
o When determining whether something is a gift for U.S. federal income tax purposes, the critical consideration is the transferor's intention. o This is a question of fact that must be determined on a "case-by-case basis". o On review, the trier of fact must consider all of the evidence in front of it and determine whether the transferor's intention was either disinterested or involved: § Gifts result from "detached and disinterested generosity" and are often given out of "affection, respect, admiration, charity or like impulses". § Contrast payments given as an "involved and intensely interested" act.
· Raffle ticket holder wins a watch worth $200; will the winner have to include the $200 in gross income when she wins?
o Yes, raffle and prize money are considered includable in gross income.
§ Problem 4: Doodle, a high-tech firm in Silicon Valley, hires Jacques and his staff from an exclusive restaurant to provide gourmet meals at its offices around the clock to its employees. Doodle believes the meals will incentivize employees to work longer hours, shorten the time taken for meal breaks, attract new employees, and help it remain competitive with other Silicon Valley high-tech firms.
o Yes, these are most likely excludable. Substantial, non- compensatory reason is reuired. Doesn't matter whether meals re reasonable.
Gift Illustration: Comm'r v. Duberstein (1960) o Fact Pattern (Dual Case):
§ Berman was president of Mohawk Metal Corporation. Duberstein was president of the Duberstein Iron & Metal Company. § They would often talk on the phone and give each other names of potential customers. After receiving some particularly helpful information, Berman decided to give Duberstein a gift of a Cadillac. § Although Duberstein said he did not need the car as he already had a Cadillac and an Oldsmobile, he eventually accepted it. § Mohawk Metal Corporation later deducted the value of the car as a business expense, but Duberstein did not include the value of the Cadillac in his gross income when he filed his tax return, deeming it a gift.
(h) Same as (g), except that Employee is a comptroller of the conglomerate
§ Comptroller touches both sides of the business. Therefore, it is in his same line of business and can get the discount + not include it in on gross income.
· Problem 1: Consider whether it is likely that §102 applies in the following circumstances. o (h) Father appointed Daughter as executrix of his estate and the will provided that Daughter was to receive $20,000 for services.
§ Contract for services. She wouldn't get the $20,000 if she didn't serve as executrix. Therefore, it is gross income.
· Problem 4: Decedent owed Friend $5,000 and Nephew owed Decedent $10,000. o (a) At Decedent's death, Friend neglected to file a claim against Decedent's estate in the time allowed by state law and Friend's claim was barred by statute of limitations, what is the result?
§ Decedent's estate has +5K in income due to a discharge in debt.
o (p) Employer puts in a gym at the business facilities for the use of the employees and their families.
§ Excludable. This is within the bounds of the athletic facilities fringe. Must be on-premises, operated by employer.
o (j) Employee is a salesman in a home furnishings store. The prior year the store had $1,000,000 in sales and a $600,000 cost of goods sold. Employee buys a $2,000 sofa from Employer for $1,000.
§ First, we have to calculate the gross profit percentage. The gross profit percentage is $1,000,000/$600,000 = 40% discount allowable. A 40% discount of the $2,000 couch would be $1,200. Therefore, the employee must include $200 on her gross income.
· Problem 1: Consider whether it is likely that §102 applies in the following circumstances. o (i) Father appointed Daughter as executrix and made a $20,000 bequest in lieu of all compensation or commissions she would otherwise be entitled to as executrix.
§ Here, she would get the money bequeathed to her without serving as executrix. It is not gross income under §102.
Illustration: Hatt v. Comm'r (T.C. 1969) § Facts: o Hatt met and married Echols, the president and majority stockholder of Johann. Johann was an Indiana corporation that ran a funeral home in Evansville, Indiana. o After Hatt and Echols married, Echols transferred a majority of her shares to Hatt and made him president and general manager of Johann. Hatt moved in with Echols, who lived in an apartment in the same building as the funeral home. o Evidence demonstrates that it was customary in the area for funeral homes to have someone live in the same building as the funeral home in order to accommodate customers.
§ Holding & Synopsis: o The "condition of his employment" requirement of section 119 means that the employee must be required to accept the lodging in order to enable him properly to perform the duties of his employment. o Lodging will be regarded as furnished to enable the employee properly to perform the duties of his employment when, for example, the lodging is furnished because the employee is required to be available for duty at all times. § How Hatt would have been different if he was a sole proprietor: o Because Hatt was an employee, he was qualified. o If he was a sole Member LLC or a proprietor, then he could not have used it because he is not an "employee", he is acting individually and would not have been able to exclude the value of the property from his income.
Meals & Lodging Examples pp. 103-104 § Problem 1: Employer provides Employee and Spouse and Child a residence on Employer's business premises, having a rental value of $15,000 per year, but charging employee only $6,000. o (a) What is the result if the nature of employee's work does not require the live on the premises as a condition of employment?
§ IF the nature of the work does not require the employee to live on the premises, then there is a gross income of $9,000 as a result between the rental value and discount.
o (i) Employee sells insurance and employer insurance company allows 20% off of the $1,000 policy.
§ In the case of services, the employee can get up to 20% of the services deducted without including it on gross income under §132(a)(2) as a qualified employee discount. Therefore, the employee has no income included from the discount. (for property, do the gross income percentage calculation, but this is a service)
Prizes & Awards Examples pp. 110 · Problem 1: Each year, national sportswriters get together and select the single most outstanding amateur athlete in the country and award that person a check for $5,000. Michael, a talented swimmer, has been selected for this year's award. The ward is given with the stipulation that the winner deliver a 15-minute "acceptance speech" at an awards banquet. Michael, essentially delivering an acceptable rejection "acceptance speech," designates the award to the Paralympic Games, a charity under §170, to receive the award. The sportswriters send the check to the Paralympic Games. o (a): Will Michael be able to exclude the $5,000 from his gross income?
§ Most likely no, but he will have to make a convincing argument. This is because §74(b) limits these awards to religious, charitable, scientific, educational, artistic, literary, or civic achievement. Sports are not included in this category. Additionally, the award required him to give a speech, which conflicts with §74(b)(2). Michael will argue that this was not a substantial future service. However, it will most likely be gross income.
o (b) What is the result to the estate if instead, the friend simply permitted the statute to run out stating that she felt sorry for the widow?
§ No income, this is a detached and disinterested gift.
· Problem 1: Consider whether it is likely that §102 applies in the following circumstances. o ) Father leaves Daughter $20,000 pursuant to a written agreement under which Daughter agreed to care for Father in declining years.
§ No, this is a contract for services. Gross income on the payment.
Problem 1: Vegy grows vegetables in her garden. Does Vegy have gross income when: o (b) Vegy and her family consume $100 worth of vegetables?
§ No. Again, this would be imputed income.
Problem 5: Owner agrees to rent tenant her lake house for the summer for $4,000. o (b) Is there a difference if the Tenant effects exactly the same improvements, but does all of the labor himself and incurs a total cost of $500?
§ No. There is no difference to the Owner because he is still getting $4,000 in value.
Examples pp. 63 · Problem 1: Vegy grows vegetables in her garden. Does Vegy have gross income when: o (a) Vegy harvests her crop?
§ No. This would be imputed income.
Problem 2: Doctor needs to have his income tax return prepared. Lawyer would like a general physical checkup. Doctor would normally charge $200 for the physical and Lawyer would normally charge $200 for the income tax return preparation. o (b) Does Lawyer realize any income when she fills out her own tax return?
§ No. This would be imputed income.
o (n) Employee is an officer of a corporation which pays Employee's parking fees at a lot of one block from the corporate headquarters. Non-officers pay their own parking fees.
§ Qualified transportation fringe does not have a discriminatory limitation like qualified employee discounts and no-cost-additional-services; therefore, the exclusion is allowable.
· Problem 1: Consider whether it is likely that §102 applies in the following circumstances. o (g) Same as above, except Daughter settled the claim for $10,000.
§ Same as above, except it is $10,000 of gross income.
Defining Income: Illustrations · Eisner v. Macomber (1920) o Holding:
§ Shareholder's dividend of common stock was not income. o Income Definition: § "Income may be defined as the gain derived from capital, from labor, or from both combined."
· Example 3: o What if Mandy was a manager and she is the only person who gets a big discount ($400) - others only get ($100). What is her discount now?
§ She still gets the $400 discount, but ALL $400 is taxable.
o (b): What result if Michael receives the $5,000 check from the U.S. Olympic Committee for his performance at the Olympics and deposits the check?
§ So long as Michael does not have a gross income of greater than $1,000,000, then Michael can exclude it from his gross income.
Gift Illustration: Comm'r v. Duberstein (1960) o Fact Pattern (Dual Case): o Stanton
§ Stanton worked for the Trinity Church in New York City as the comptroller of the Church corporation and president of the corporation. He resigned from both positions to go into business for himself. § As a "gratuity" the corporation's director awarded Stanton $20,000 in appreciation of the services rendered. § While some directors testified that Stanton had been well liked by all in the Vestry and the $20,000 was a gift to show that good will, there was also some evidence given that Stanton was being forced to resign. § The trial judge made a simple finding that the payments were a "gift".
o (e) Same as above, except that the Employee stays in the hotel of a rival chain under a written reciprocal agreement under which employees pay 50% of the normal rent.
§ The 50% reduced rate is not included in gross income of the employee. §132(i)(2).
o (g) Hotel chain is owned by a conglomerate, which also owns a shipping line. The facts are same as (a), but Employee works for the shipping line.
§ The employee must include the cost of the hotel room on gross income because it is not the same line of business as the employees.
o (b) What is the result if the Employer and Employee simply agreed to a clause in the contract requiring Employee to live in the residence?
§ The employment contract is not determinative. The court will look to other facts and circumstances to see if it is truly required for the employee to live on the premises.
Life Insurance Examples pp. 162 · Problem 1: Insured died in the current year owning a policy of insurance that would pay beneficiary $100,000 but under which several alternatives were available to the Beneficiary. o (a) What result if Beneficiary simply accepts the $100,000 in cash?
§ The insured taking the proceeds by reason of death are NOT taxable, so this is acceptable.
o (b) What result if the Beneficiary leaves the proceeds in the company and they pay her $6,000 interest in the current year?
§ The proceeds are not taxable because the beneficiary has not taken them, but the $6,000 interest is taxable and included in gross income.
o (b) Same as above, except the desk clerk bounces a paying customer so the employee can stay rent-free.
§ This is includable in gross income because there is an additional cost associated with the employee booting a customer from his room. - may be able to exclude 20% under qualified employee.
o (d) What if the Employer just transferred the residence to the Employee in fee simple for the year?
§ This is just a conveyance of real property, it is not addressed by the statute and the employee would not have gross income, but it would have to pay other taxes related to the property. Statute does not contemplate giving the property in fee simple.
Fringe Benefits Examples pp. 99-100 § Problem 1: Consider whether or to what extent the fringe benefits listed below may be excluded from gross income: o (a) Employee of a national hotel chain stays in one of the chain's hotels in another town rent-free while on vacation. The hotel has several empty rooms.
§ This is not included in gross income per the No-Additional-Cost Service Rule in §132(b).
o (c) Same as above, except the employee pays the bill and receives a cash rebate from the chain.
§ This is not included in gross income per the No-Additional-Cost Service Rule in §132(b). It does not matter that the employer gave a cash rebate or the employee receiving it outright for free.
o (d) Same as above, except that the employee's spouse and dependent children travelling without the employee use the room.
§ This is not included in gross income per the No-Additional-Cost Service Rule in §132(b). The wife and dependent children of an employee are considered employees for tax purposes.
o (l) Employer has a bar and provides employees with a happy hour cocktails at the end of each week.
§ This might constitute de minimis fringe. Because the employer has a bar, it is more likely to be excludable from gross income.
o (f) Same as above, except that Employee is an officer in the in the hotel chain and rent-free use is provided only to officers in the chain and all other employees pay 60% of the normal rent.
§ This violates the non-discrimination rule provided in §132(j). The officer must include the discount in gross income. - entire amount.
o (c) What is the result if the Employee's work and contract require the Employee to live on the premises and Employer furnishes the Employee and family $6,000 worth of groceries during the year?
§ This will be included on gross income, most likely. This is because courts have limited the meaning of meals to truly just meals. Groceries are just components of meals.
· Problem 2: Doctor needs to have his income tax return prepared. Lawyer would like a general physical checkup. Doctor would normally charge $200 for the physical and Lawyer would normally charge $200 for the income tax return preparation. o (a) What tax consequences to each if they simply swap services without any money changing hands?
§ This would constitute $200 of gross income for both the attorney and the doctor. Income does not have to come in the form of $$.
o (k) Employee attends a business convention in another town. Employer picks up the Employees cost.
§ This would constitute a "wash." There is no gross income, nor deduction for the employee. Working condition.
o "Employee Achievement Award" means an item of tangible personal property which is—
§ Transferred by an employer to an employee for length of service achievement or safety achievement, § Awarded as part of a meaningful presentation, and § Awarded under conditions and circumstances that do not create a significant likelihood of the payment of disguised compensation.
o (c) What result if Decedent left in his will that estate not collect against Nephew's debt?
§ While this is a discharge of the debt, the decedent bequeathed this to him, which makes it not income.
· Problem 1: Consider whether it is likely that §102 applies in the following circumstances. o (a) Father leaves Daughter $20,000 in his will.
§ Yes, no gross income.
· Problem 1: Consider whether it is likely that §102 applies in the following circumstances. o (b) Father dies intestate and Daughter receives $20,000 worth of real estate as his heir.
§ Yes, no gross income.
· Problem 1: Consider whether it is likely that §102 applies in the following circumstances. o (c) Father leaves several family members out of his will and Daughters and other attack the will. As a result of the settlement, Daughter receives $20,000.
§ Yes, no gross income. See Lyeth v. Hoey.
Problem 5: Owner agrees to rent tenant her lake house for the summer for $4,000. o (c) Are there any tax consequences to the tenant if the tenant incurs a total cost of $500?
§ Yes. The tenant would have an income of $2,500 because he realizes that much from the amount avoided from paying. $4,000 - $1,000 rent - $500 improvements = $2,500.
Problem 1: Vegy grows vegetables in her garden. Does Vegy have gross income when: Vegy exchanges $100 worth of vegetables with charlie for $100 worth of tuna Charlie caught
§ Yes. This is bartering. See Rev. Rul. 79-24.
Problem 1: Vegy grows vegetables in her garden. Does Vegy have gross income when: Vegy sells vegetables for $100.
§ Yes. This is compensation/sale of goods, which is classic gross income.
Part 1: The Scope of "Gross Income" Gross Income in General Gross Income - IRC § 61
· "Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including but not limited to the following items. . ."
Gifts and Inheritances Exclusions of Gifts & Inheritances - IRC §102
· (a) General Rule o Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance. · (b) Exceptions to the Exclusion o Gross income does include the income earned on a gifted property. o Example: Katniss received a building as a gift. The building is turned into a rental property and thus generates rent. Therefore, the rent us income earned on the gift and therefore, part of gross income.
Another Way to Think of Income
· Any financial benefit received which is: o Not a mere return of capital o Not a loan, and o Not excluded by a specific provision
Discharge of Indebtedness (CODI) General Rule §61(a)(11)
· Any forgiveness of indebtedness or reduction of liabilities without payment of liability is taxable.
Relief of Debt Example - $60,000 Relief
· Before o Value of Assets $5,000 o Liabilities <$60,000> o Net Worth <$55,000> · After o Value of Assets $5,000 o Liabilities $0_____ o Net Worth $5,000 · +60,000 income for tax purposes!
Life Insurance Proceeds General Rule §101
· Benefits paid NOT by reason death are taxable. · For example: o Insured takes cash surrender value of policy. o Alternative lifetime benefits under the policy. · §101(g) - Exception for accelerated death benefits for terminally or chronically ill · §101(c) - Interest earned on life ins. proceeds is taxable
Discharge of Indebtedness Exclusion Examples
· Examples o Lawyer working for gov't or non-profit o Teacher in urban schools o Doctor in rural areas
Bartering
· General Rule o Bartering for goods/services constitutes income. · Rev. Rul. 79-24 o Situation 1: Lawyer performs services for house painter and painter paints lawyer's house. o Situation 2: Tenant transfers painting to Landlord for use of apartment for 6 months.
Frequent Flyer Miles
· General Rule - Announcement 2002-18 o IRS has announced it will not assert that GI includes the receipt or use of frequent flyer miles or other in-kind promotional benefits (e.g., rental car and hotel points) attributable to business travel. · Exceptions o Travel benefits that are converted to cash. Charley v. Commissioner (9th Cir. 1996). o Compensation that is paid in the form of travel or other promotional benefits. o In other circumstances where these benefits are used for tax avoidance purposes.
Exclusion §103
· Interest on qualifying state and local bonds is exempt from taxation (i.e., excluded from gross income).
§ Qualified Disaster Relief Payment Definition o Any amount paid to or for the benefit of an individual— § To reimburse or pay reasonable and necessary:
· Personal, family, living, or funeral expenses incurred as a result of a qualified disaster · Expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster - neighbors, friends, family don't need this section because gifts - employers need this section
Prizes and Awards General Rule §74(a)
· Prizes and Awards are taxable to recipient to the extent of cash and fair market value of property received.
Inclusions - IRC §§61(a), 71-91
· Specific items provided in the Code that MUST be included in the total calculation of gross income.
Imputed Income
· Taxpayer's use of his own property or know-how doesn't create income o "a flow of satisfaction from durable goods owned and used by the taxpayer, or from goods and services arising out of the personal exertions of the taxpayer on his own behalf" · Imputed income rule also applies to taxpayer's family unit