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