Federal Income Tax law outline with professor Wiseman

8/10/2019 Federal Income Tax law outline with professor Wiseman

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Federal TaxationJudith Wiseman

Fall 2010Fundamentals of Federal Income Taxation, Fifteenth Edition, Freeland,

Lathrope, Lind, and StephensText, pp. 2!!

Orientation

" Key is learning to decipher the messages of the Internal Revenue Code" Two main types of tax practice

o (1) pplication of tax principles to past events or transactions

o (!) dvice as to how tax principles will apply to proposed events or transactions

"istory of #ederal Income Tax

" #irst tax enacted in 1$%1 on distilled spirits and stills" Income taxes e&&ed and flowed on similar items for several years" 'everal different attempts were made to organie tax laws

" ct of uly 1* 1+,!largely the &asis of our present system of taxations

" Internal Revenue Code of 1%-% . largely a matter or sorting and putting togethercurrently operative internal revenue statutes (codification)

" /ater codes in 1%0 and 1%+, would replace* revise and update the 1%-% Code" 2oal of 1%+, legislation 3 &road4&ased* simple* fair and revenue neutral

o ctually* &ecame much more complex than predecessor

Income Tax and the 5nited 'tates ConstitutionThe #o$er to Tax

" 6ower to tax is derived from rticle 1* 7 +* cl8 1o Confers on Congress the 9power to lay and collect taxes* duties* imposts and

exciseso 7 !* cl8 - and 7 %* cl8 further provide that 9direct: taxes &e apportioned among

the several states according to their respective populationso 7 +* cl8 1 further provides that 9all duties* imposts* and excises shall &e uniform

throughout the 5':

'till appliesConstitution re;uires geographic uniformity

"


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6rimary materials of #ed Tax/egislative* dministrative and udicial

6roceduresLe'islati(e )aterials. the power to tax is vested in Congress* so it is statutory

18 Internal Revenue Code of 1%+, . the code is the law!8 @ills . formal &eginning of the tax legislative process is the introduction of a &ill in the

"ouse

a8 Aost actually originate in Treasury


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c8 6rovides guidance to taxpayers as to whether the 'ervice agrees or disagrees inthe court>s determination of issues adverse to the government

d8 Gither ac;uiesce or nonac;uiescei8 If non4ac;uiesceplan to eep litigating the issue

Judicial )aterials

"Bhen a tax controversy gets into court* the court>s function at trial level is to identify the

pro&lem* determine the relevant facts and interpret the lawEcode provisions

" Hou may choose to &ring case to Tax court or federal courto Tax Court

o =ury* one of 1% =udges hears case

'ometimes* entire court reviews individual =udge>s decision

fter tax court* appeals are fed &ac into a federal court of appeals

o


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ross IncomeText* pp8 ,4,,Code? 7 ,1J Regs? 77 18,141* 18,141

ross Income- The Scope of Section %1

ode/+e'ulationsI+ %144 9ll income from whatever source derived* except as otherwise provided in thissu&title8:+e'. 1.%11 ross Income . all income from whatever source derived* unlessexcluded &y law8 Includes income realied in any form* whether in money* property* or services8Income may &e realied* therefore in the form of services* meals* accommodations* stoc* orother property* as well as in cash+e'. 1.%12 ompensation for ser(ices, includin' fees, commissions, andsimilar items

(a) Aany examples of things* paid in cash* that should &e included as gross income(d) Compensation paid other than cash that should &e included in gross income

If property or services are taen as compensation* the fair maret value of

such property or services should &e included as gross income+e'. 1.%11! )iscellaneous Items of ross Income. other items of grossincome* including? punitive damages* another person>s payment of a taxpayer>s income tax isgross income to the taxpayer* illegal gains* and treasure trove8 These things are gross income forthe taxa&le year in which it is reduced to undisputed possession8

Intro?Bhat is income

- Taxa3le income is 'ross income less certain authori4ed deductions

- ross income is 5all income from $hate(er source deri(ed6

- ccession to wealth (are you &etter off after the transaction than &efore)

- Bhen do you have an increase in wealthBhen you have dominion over the

possession

- To &e income* it must &e realied

- To &e realied* there must &e an event triggering an increase in value* unless there is

already a su&stantial value associated with the income item

- 'ummary? To have income* it must &e?

o n increase in wealth

o


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E7ui(ocal +eceipt of Financial 8ene9t

esarini (. :nited States. Luestion of treasure trove (yes 3 income)#acts?

- couple &ought an old piano in 1%0$* and in 1%, found M*,$ in the piano8

- Initially they filed a tax return and claimed that money in income* they paid M+-, intaxes for that money

- /ater they filed a filed a second return eliminating the piano money and re;uested a

refund for the M+-, they allegedly overpaid

- They claimed?

o 18 The M*,$ is not includa&le in gross income under 7 ,1 of the IRC

o !8 Gven if the money was includa&le under 7 ,1* it was due in the year the

piano was &ought (1%0$)* not the year the money was found* and if that>s thecase the 'tatute of /imitations has passed

o -8 If the treasure trove money is gross income for 1%,* it was entitled to

capital gains treatment8

- The IR' re=ected their refund claim8

"old?

- This court also concluded the tax payers are not entitled to a refund* nor was the gain

to have &een reported in the year of the piano purchase (must &e realied) nor is thegain entitled to capital gains treatment8

Reasoning

- 7 ,1 says gross income shall include all income from $hate(er sourcederi(ed* unless excluded in another statute

- Reg8 18,141 . 2ross income includes income realied in any form

- 6art III of 'u&chapter @ (7 1N1) specifically lists things not included as gross income*and found money is not listed8

- Rev8 Rul8 ,1* 1%0-41 says the finder of treasure trove is in receipt of taxa&le income

for #ederal income tax purposes in the *ear in $hich it $as reduced toundisputed possession8

- Gssentially . 6>s argument that it is not taxa&le overloos the statutory scheme

where&y income from all sources is taxed unless the taxpayer can point to an expressexemption

- +e'. 7 18,141Aiscellaneous items of gross income actually lists treasure trove asan item of gross income (this was never mentioned &y either party)

- The couples argument that the 'O/ has run is not appropriate &Ec the treasure trove isgross income when the found money was 9reduced to undisputed possession:

;ld olon* Trust o. (. ommissioner. Luestion of indirect incomeEtax payment (yes*income for taxpayer)#acts?

- Ar8 Bood engaged in an agreement with his employer* where the employer would

pay his taxes8

- "is employer did pay his taxes for 1%1+ and 1%1%* in the amounts of M,+1K andM-01K* &ut did not include such tax payments as part of gross income

Luestion?

-


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Income Without +eceipt of ash or #ropert*

2!- If propert* or ser(ices are rendered in exchan'e for somethin', the

fair mar?et (alue of that propert* or ser(ice must 3e recordedunder 'ross income

- ot pursuant to Revenue Ruling $%4!* &ut a reasona&le valuation of what the

property or services may cost is also sufficient in valuing the amount to record as

gross income8

@ean (. ommissioner. Luestion of company4owned home &eing lived in &y employee atno rent (unpaid rent is income)

- Occupancy in a home owned &y a corporation* &ut in which the taxpayer resides* isgross income

- @ecause the taxpayer lives in a home owned &y a corporation he must treat the fair

maret value of living there as gross income

- It was the taxpayer>s legal o&ligation to provide a family home and if he did it &y the

occupancy of a property which was held in the name of a corporation of which hewas president* we thin the fair value of that occupancy was income to him

- This is different from "elvering &Ec the Corporation here is a separate entity* in

essence the couple here is receiving services from 9someone else:

6RO@/GA'#. %%, A2(a) Regardless of the e;uality of the swap* &oth dr and lawyer would have to report the fairmaret value of the service received (M!NN) as part of each>s gross income (Rev8 Ruling $%4!)&ecause you are &etter off &ecause of receiving the services(&) o8 'imilar to the owner in


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ains from @ealin's in #ropert*Text* pp8 114110* 110411+* 11%41!1* 1!,41!+* 1!+41-NCode? 7 1NN1(a)* (&)* (c)J 1N11(a)J Regs? 181NN141(a)Cost @asis 4 77 1N1!J 1N1,(a)(1)2ift @asis 4 7 1N10(a)* (e)Interspousal Transfer 4 7 1N1(a)* (&)

c;uisition from


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Factors in the @etermination of ain

" ode 1001a B omputation of ain. The gain from the sale or otherdisposition of property is the excess of 9amount realied: (#AF M received) over the9ad=usted &asis: (how much have you got in something . CO'T) provided in section1N11

" ain is the amount o(er and a3o(e $hat *ouC(e put into the propert*" To ha(e a 'ain, there must 3e a sale or other disposition of the

propert* li?e tradin' it

" ode 1001a B omputation of Loss. /oss shall &e the excess of the9ad=usted &asis: provided in 7 1N11 for determining loss over the amount realied

omputation of ain or Loss B +e'. 1.10011a

" 2ives the general rules as determined in the statutes for computing a gain or loss" The amount realied from a sale or other disposition of property shall &e the sum of any

money received plus the fair maret value of the property (other than money) received

" The amount which remains after the ad=usted &asis has &een restored to the taxpayerconstitutes the realied gain

" If the amount realied upon the sale or exchange is insufficient to restore the taxpayer the

ad=usted &asis (cost) of the property* a loss is sustained to the extent of the difference&etween such ad=usted &asis and amount realied

mount Realied

" ode 10013" The amount realied from the sale or other disposition of property shall &e the sum of any


" Whate(er cash *ou 'et plus the fair mar?et (alue of an* other propert**ou ma* recei(e

Recognition of 2ain or /oss

" ode 1001c" Gxcept as otherwise provided in this su&title ('u&title . Income Tax) the entire amount

of the gain or loss* determined under this section* on the sale or exchange or exchange ofproperty shall &e recognied8

d=usted @asis for


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@etermination of 8asis B ost 8asisSee ode 1012@asis is how much you have in something . &asis and value must &e carefully differentiated(ex? you could pay M1N for a stoc and if it goes up to M10* the &asis would &e M1N and the value

would &e M10)

#hiladelphia #ar? &musement o. (. :nited States

- In 1++% a taxpayer was granted a 0N year lease to operate a railway8

- t the cost of M-+1K he &uilt a &ridge over the river for the railway8

- In 1%- he deeded the &ridge to the city in exchange for a 1N yr8 extension on the

leaseLuestion

- #or the purposes of calculating gains and losses* what is the cost &asis of the 1N yr8

extension of the taxpayer>s franchise8"old?

-

The ct8 holds the cost 3asis of the propert* recei(ed in a taxa3leexchan'e is the fair mar?et (alue of the propert* recei(ed in theexchan'e, not the propert* 'i(en.

- Bhen property is exchanged for property in an exchange the taxpa*er is taxedon the diDerence 3/t the adusted 3asis of the propert* 'i(en inexchan'e and the F) of the propert* recei(ed in exchan'e

- Therefore the cost &asis of the 1N4year extension of the franchise was its fair maret

value on the date of the exchange (ug8 -* 1%-)8

- In an arms4length transaction two properties exchanged are presumed to &e e;ual invalue . so loo at value of &ridge to determine value of 1N4yr franchise

6RO@/GA'

#. 11G, A1a, 3, d, f(a) 2ain 3 amount realied . cost &asis 3 M1,4M1N 3 M, gain2ain is the amount over and a&ove what you put into the property

(&) 2ain 3 amount realied . cost &asis 3 M1,4M1N (% and 1 for option) 3 M, gainHour &asis would &e the total cost to you

(d) 2ain 3 amount realied . cost &asis 3 M1,4M1N (! in cash and + in mortgage) 3 M, gainThis would apply regardless of whether it was a recourse or nonrecourse mortgage

The focus on &asis is what does it tae to ac;uire that property


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#ropert* &c7uired 3* ift B ift 8asisSee ode 101Ha, e

- pplies to 2ifts fter


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#ropert* &c7uired 8et$een Spouses or Incident to @i(orceode 10!1a

- o gain or loss shall &e recognied on a transfer of property from an individual to?

- 18 a spouseJ or

- !8 a former spouse* &ut only if the transfer is incident to the divorce

- ains can still 3e reali4ed, ust not reco'ni4ed in these situations

- #olic* reason- the code in man* places reco'ni4es hus3and and$ife as a sin'le entit*

ode 10!13

- In any transfer of property descri&ed in section (a)* for the purposes of this su&title

should &e treated as a gift* and

- The &asis of the transferee in the property shall &e the ad=usted &asis of the transferor8

6RO@/GA'#. 12G, A1(a) o tax conse;uences 4 7 1N1(a) . o gain or loss shall &e recognied on a transfer or

property from an individual to a spouse (ndre still realies a M- gain* &ut the gain is notrecognied for income tax purposes)(&) @ased on 7 1N1(&) . The property shall &e treated as ac;uired &y the transferee &y gift .&asis of the transferee . so what ndre>s &asis is 3 M(c) If 'teffi sells for #AF* 2ain 3 amount realied (M$) . d=usted @asis (M) 3 M- gain(d) 'till no tax conse;uences for ndre and pursuant to the statute* 'teffi>s ad=usted &asis is stillndre>s &asis which is M* so if 'teffi sold it for -* her loss would &e 1(e) o recognied tax gains or losses for the exchange8 The &asis of the property ndre receivedis M0 and the &asis of the property 'teffi received is still M8


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#ropert* &c7uired from a @ecedentode 101!a1

- The &asis of the property in the hands of a person ac;uiring the property from a

decedent shall &e the #AF of the property at the date of the decedent>s death* &utonly

- if not sold* exchanged* or otherwise disposed of &efore the decedent>s death &y such

person8 (this could occur if *ou ?no$ *ouCre 'ettin' propert* from arelati(e and *ou enter into a to sell it 3efore the decedent dies,then *ou $ill not 'et the 5stepup 3asis6

o The polic* is that then it $ould 3e li?e an inter(i(os 'ift,'o(erned 3* 101H.

- This increased 3asis F) at time of decedentCs death, (ersus theinitial 3asis of the decedent is called a 5stepup 3asis6

ode 101!e- pplies when a decedent dies after s death* and

-

'uch property is ac;uired from decedent &y the donor of such property- The &asis of such property in the hands of such donor shall &e the ad=usted &asis of

such property in the hands of the decedent immediately &Ef the death of the decedent8

- #re(ents people from ta?in' ad(anta'e of the rule in 101!aode 101!f

- 'ection shall not apply to decedents dying after 1!E-1E!NN%

otes from text&oo on these sections?

- 5nder 7 1N1property ac;uired from a decedent generally receives a &asis e;ual toits #AF on the date on which it was valued for federal estate tax purposes (the dateof the decedent>s death)

- 7 1N1(e)prevents people from taing advantage of the rule in 7 1N1(a)

o #or instance* if someone transfers property to an elderly person with the ideathat if they die wEin a year* the decedent will transfer it &ac to the donor inhopes that the donor>s &asis will &e higher since 71N1(a) says it>s e;ual the#AF at time of decedent>s death8

o "owever 7 (e) prevents that from happening (see p8 1!% and top of 1-N for an

example)8o This $as co(ered in class, 3ut pro3a3l* $onCt 3e tested upon.

o The transfer from the decedent to the donee must occur $/ in

one *ear of the transfer from the donee to the decedent.s &asis will &e the donor>s &asis


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ains from @ealin's in #ropert*Text* pp8 1-1410NCode? 7 1NN1(a)* (&)* (c)J 1N11(a)J Regs? 181NN141(a)Cost @asis 4 77 1N1!J 1N1,(a)(1)2ift @asis 4 7 1N10(a)* (e)Interspousal Transfer 4 7 1N1(a)* (&)

c;uisition from


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mount Realied

" ode 10013" The amount realied from the sale or other disposition of property shall &e the sum of any


" Whate(er cash *ou 'et plus the fair mar?et (alue of an* other propert**ou ma* recei(e

omputation of ain or Loss B +e'. 1.10011a

" 2ives the general rules as determined in the statutes for computing a gain or loss" The amount realied from a sale or other disposition of property shall &e the sum of any


" The amount which remains after the ad=usted &asis has &een restored to the taxpayerconstitutes the realied gain

" If the amount realied upon the sale or exchange is insufficient to restore the taxpayer thead=usted &asis (cost) of the property* a loss is sustained to the extent of the difference&etween such ad=usted &asis and amount realied

@ischar'e of Lia3ilities B Inclusion in &mount +eali4ed. +e'. 1.10012a

" In general* the amount realied from sale or other disposition of property includes the

amount of lia&ilities from which the transferor is discharged as a result of the sale ordisposition

EDect of Fair )ar?et alue of Securit* B +e'. 1.100123

" The #AF of the security at the time of the sale or disposition isn>t relevant for purposesof determining under paragraph (a) of this section* the amount of lia&ilities from whichthe taxpayer is discharged or treated as discharged

" Thus* the fact that the #AF of the property is less than the amount of lia&ilities it securesdoes not prevent the full amount of these lia&ilities from &eing treated as money receivedfrom the sale or other disposition of property

Factors in the @etermination of ain" ode 1001a B omputation of ain. The gain from the sale or other

disposition of property is the excess of 9amount realied: (#AF M received) over the

9ad=usted &asis: (how much have you got in something . CO'T) provided in section1N11

" ain is the amount o(er and a3o(e $hat *ouC(e put into the propert*" To ha(e a 'ain, there must 3e a sale or other disposition of the

propert* li?e tradin' it

" ode 1001a B omputation of Loss. /oss shall &e the excess of the9ad=usted &asis: provided in 7 1N11 for determining loss over the amount realied

Recognition of 2ain or /oss

" ode 1001c" Gxcept as otherwise provided in this su&title ('u&title . Income Tax) the entire amount

of the gain or loss* determined under this section* on the sale or exchange or exchange of

property shall &e recognied8d=ustment to @asis . 2eneral Rule

" ode 101%a1" 6roper ad=ustment in respect of the property shall in all cases &e made for which

deductions have &een taen &y the taxpayer in determining taxa&le income for the taxa&leyear or prior taxa&le years

" d=ustment shall &e made to expenditures* receipts* losses* or other items* properlychargea&le to capital account

" o such ad=ustment shall &e made for taxes or other charges descri&ed in 7 !,,* or for


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&);:T +E&LIME@

International Frei'htin' orp, Inc. (. ommissioner (!ndCir8 Ct8 of ppeals 1%-)

- The taxpayer (the Corp8 listed a&ove) gave some of its outstanding employees a

&onus in stoc (s &asis should &e the cost* not the #AF

- This left a deficiency of +*$ resulting in ! short in taxes8

6rior "istory?

- Tax Court held that the taxpayer was entitled to a deduction of !K* &ut in doing so

they realied a gain of an additional +8$ and were still deficient in the amount of!810,

This Ct>s s worth: is deemed the amount realied (!K) when there

is no 9property: or 9money: received8

- This means the gain was +K and the Tax Court is affirmedRationale?

- I#C gave the GG some stoc (M!0K) in return for some services

o @Ec this is compensation it>s income

-The stoc had an d=usted @asis to I#C of M1,K and a M!0K #AF

- "ere the taxpayer is saying that the R is M1,K (the &asis)* &ut the Ct8 saysotherwise8

o Hou gave stoc to the employees for M!0K worth of services8

o Therefore there is a gain to the co8 of M+8$K (R 3 !0* @ 3 1,8-)

- "old?

o This case sho$s that in addition to $hat 10013 de9nes as&mount +eali4ed, the (alue of ser(ices ma* also 3e used todetermine amount reali4ed.

o E(en 3roader this case sa*s that 10013 'oes 3e*ond

mone* recei(ed or F) of propert* in determinin' the

amount reali4ed8

)ain Ideas in the rane and Tufts ases

- 1. If *ou use de3t to ac7uire propert* *ou 'et to include the de3t in*our 3asis

- 2. When *ou are relie(ed of lia3ilities in a sale, exchan'e, or otherdisposition of propert* the amount of lia3ilities is included in theamount reali4ed.

- These t$o principals are expandin' on the theor* in the


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Exclusions from Income- ifts and InheritancesText* pp8 ,$4+N* +04++Code? 7 1N!J Regs? 181N!41

2ross Income? Inclusions and Gxclusions

" Certain items are specifically includa&le in gross income or partially includa&le 4 7 $14%N

" Other items are specifically excluda&le from gross income or partially excluda&le 4 71N141-%

"


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ode 102 B ifts and Inheritancesode 102a B eneral +ule

- 2ross income does not include the value of property ac;uired &y gift* &e;uest*

devise* or inheritance8ode 1023 B Income

- 'u&section (a) shall not exclude from gross income .

o 1 the income from any property referred to in su&section (a)* or

o !8 where the gift* &e;uest* devise* or inheritance is of income from property*

the amount of such income

Ex. When a donor 'i(es a donee stoc? $/ futuredi(idends, all future income is not excluda3le.

ode 102c B Emplo*ee ifts

- 'u&section (a) shall not exclude from gross income any amount transferred &y or for

an employer to* or for the &enefit of* an employee8o This sets a presumption that e(er*thin' 'i(en from an

emplo*er to an emplo*ee is not a 'ift, 3ut is insteadincluda3le as 'ross income.

+e'. 1.102a ifts and Inheritances B eneral +ule- 6roperty received as a gift or received under a will or under statutes of descent and

distri&ution* is not includi&le in gross income* although the income from suchproperty is includi&le in gross income8

- n amount of principal paid under a marriage settlement is a gift (7 $1 governs even

further)

- 'ection 1N! does not apply to pries and awards nor to scholarships and fellowshipgrants

+e'. 1.1023 Income from ifts and Inheritances

- The income from any property received as a gift* or under a will or statute of descent

and distri&ution shall not &e excluded from gross income under paragraph (a) of this

section8+e'. 1.1021f #roposed &mendment to +e'ulation

- (1) 'ection 1N! does not apply to

o 6ries and awards (including employee achievement awards) (see 7 $)

o Certain de minimis #ringe &enefits (when an employee dies) (see 71-!)

o ny amount transferred &y or for an employer to* or for the &enefit of* an

employee* or

o To ;ualified scholarships

- (!) #or purposes of 1N!(c) if an GG can show the transfer was not made inrecognition of the GG>s employment* then it can still &e considered a gift and 1N!(c)won>t effect it>s gift status8 Exception to the rule

-

#urthermore 7 1N!(c) won>t apply to related parties if the circumstances of thetransfer can &e attri&uted to the family relationship* not the circumstances of theiremployment8


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IFTS

Commissioner v8


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Emplo*ee ifts

2eneral Contexts?

(1) Gmployer to an employee during an ongoing employment relationship(!) Gmployer to an employee upon or after retirement(-) Gmployer to an employee>s survivors upon the death of an employee

Code Treatment

- Traditional 7 1N!(c) considers all transfers &y or for an employer to* or for the &enefitof* an employee as gross income ('o* you do not exclude these from gross incomelie other gifts under 7 1N!(a))

- Reg8 181N!41(f) lays out some exceptions to this rule . extraordinary transfers to thenatural o&=ects of an employer>s &ounty (if the employee can show that the transferwas not made in recognition of the employee>s employment)

Class otes?

- Bhen someone gives you M1NN is it income

- ot always* it could &e a /oan* return of capital* testamentary gift* inter vivos gift*

etc8

6RO@/GA'#. G0, A1 N AKA15nder 7 ,1* gross income is all income from whatever source derived* except as otherwise

provided7 1N!(a) provides general rule that gifts are excluded from income

7 1N!(c) however* provides exception to gift exclusion in that 9gifts: from employer toemployee are generally treated as incomeReg8 181N!41(f)(!) provides* however* that the 7 1N!(c) exception to the gift exclusion does notapply to amounts transferred &etween related parties if the purpose of the transfer was

su&stantially related to the familial relationship and not to the circumstances of the employment(so if employerEemployee are family and su&stantial relation of gift is to family tie it is a gift*

not employer4employee exception to gift exclusion)"ere* normal gift to employee was M1!N and this was M$NN so su&stantially related to

motherEson relationIf the son was higher4raned than other employees* it would loo more lie an employer4

employee compensation* not a gift* and thus the son would have to include it as incomeAK5nder 7 ,1* gross income is all income from whatever source derived* except as otherwise

provided7 1N!(a) provides general rule that gifts are excluded from income

7 1N!(c) however* provides exception to gift exclusion in that 9gifts: from employer to

employee are generally treated as incomeThe contri&ution (M!NNN) from the employer directly would seem to &e lie compensation for

past serviced renderedJ whereas the contri&ution (M-NNN) from his co4worers seems to &e morelie a an act of detached and disinterested generosity on their partThus* the M! would &e included as income under 7 ,1 and not privy to the 7 1N!(a) gift

exclusion &ecause of 7 1N!(c)7 1N!(c) trumps the normal gift exclusion* unless there is a family relation* then see regulation

The M- would &e excluda&le from gross income under 7 1N!(a)


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8EA:ESTS, @EISES, &@ I


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Exclusions from Income- Emplo*ee 8ene9tsText* pp8 +%4%+Code? 7 1-!(a)* (&)J Regs? 18,14!1(a)* (&)(1)4(!)J 181-!41(&)* 4!

Introduction?

" 7 ,1(a)(1) specifically includes in gross income 9compensation for services:

" 7 ,1(a)(1) is &road enough to include in taxa&le income any economic or financial&enefits conferred on the employee as compensation* whatever the form or mode &ywhich it is effected

" If an employee &enefits is not specifically excluded from gross income* its value must &eincluded within gross income under 7 ,1

" 1K2 excludes from 'ross income an e(er expandin' list of cate'oriesof frin'es


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ode 1K2a ertain Frin'e 8ene9ts B Exclusions from ross Income- 2ross income shall not include any fringe &enefit which ;ualifies as a?

o 18 no additional4cost service* !8 ;ualified GG discountJ -8 woring

condition fringeJ 8 de minimis fringeJ 08 ;ualified transportationfringeJ ,8 ;ualified moving expense reim&ursementJ $8 ;ualified

retirement planning servicesJ or +8 ;ualified military &ase realignmentand closure fringe

o T*picall* under %11a frin'e 3ene9ts are considered'ross income, this is an exception.

o 8ecause there is a statute on this, $hat is considered afrin'e 3ene9t is prett* narro$l* construed.

ode 1K23 o &dditionalost Ser(ice @e9ned- #or purposes of this section* the term 9no4additional4cost service: means any

service provided &y an GR to an GG for use &y such GG ifo 18 such service is offered for sale to customer in the ordinary course of

the line of &usiness of the GR in which the GG is performing serviceso !8 the GR incurs no su&stantial additional cost (including forgone

revenue) in providing such service to the GG (determined wEout regardto any amount paid &y the GG for such services)

ode 1K2c Auali9ed Emplo*ee @iscount- (1) the term ;ualified GG discount means any GG discount wE respect to

;ualified property or services to the extent such discount does not exceed .o (a) In the case of property* the gross profit percentage of the price at

which the property is &eing offered &y the GR to customers* oro (&) in the case of services* !NQ of the price at which the services are

&eing offered &y the GR to customers8

+e'. 1.%11 ross Income- (a) all income from whatever source derived* unless excluded &y law8 It

includes income realied in any form* whether in money* property* or services8Income may &e realied* therefore in the form of services* meals*accommodations* stoc* or other property* as well as in cash8

+e'. 1.%121 a1 Taxation of Frin'e 8ene9ts- (1) 7 ,1(a)(1) provides that* except as otherwise provided in su&title of the

IRC of 1%+,* 2ross Income includes compensation for services* including

fees* commissions* fringe &enefits* and similar items8- (1) Gxamples of fringe &enefits include? an employer4provided automo&ile* a

flight on an employer4provided aircraft* an employer4provided free ordiscounted commercial airline flight* an employer4provided vacation* anemployer4provided mem&ership in a country clu& or other social clu&* and anemployer4provided ticet to an entertainment or sporting event

+e'. 1.%121a2 Frin'e 8ene9ts Excluded From Income


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Exclusions For Frin'e 8ene9ts- If an employee &enefit is not specifically excluded from gross income* its

value must &e included wEin gross income under 7 ,1-

Aost of the exclusionary rules apply in 7 1-!- The exclusionar* rules must not discriminate

o The nondiscrimination re;uirement denies highly compensated

Gmployee>s an exclusion for those fringes unless the fringes areprovided on su&stantially the same terms to a &road group ofGmployee>s8

o If *ouCre 'oin' to exclude it from income it needs to 3ea(aila3le to all people.

- o&dditionalost Ser(ices44 7 1-!(a)(1)o 'ervices provided to an Gmployee &y an Gmployer

o s* the services are

provide on a nondiscriminatory &asis8o The services must &e provided in the same line of &usiness as that in

which the employee is employed8 Gx8 n airline employee taing an open airline seat that would

not &e used* &ut the flight would occur anyway8 It does not apply to all the employees of &ig conglomerates8

o It is allowa&le for two companies to form an agreement where the

respective employees of one co8 can tae advantage of the services ofanother co8 and vice versa Gx8 If one airline co8 has an open seat an employee of another

airline co8 may use it if the two co>s8 have an agreement8

-Auali9ed Emplo*ee @iscounts44 7 1-!(a)(!)

o n Gmployee may exclude from 2ross Income the value of 9courtesy

discounts: on items purchased from his Gmployer for use &y theGmployee8

o


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well as spouses as dependent children of employees . +e'. 1.1K213

o Aust &e nondiscriminatory

o In terms of services the discount must not &e greater than !NQ

o In terms of property the discount must not &e more than the

Gmployer>s gross profit percentage on the goods in the Gmployee>sline of &usiness

aggregate sales price reduced &y cost aggregate sales price

- Wor?in' ondition Frin'e44 7 1-!(a)(-)o n exclusion for any property or services provided to an Gmployee the

cost of which* if the Gmployee had paid for the property or services*would have &een deducti&le &y the Gmployee as a &usiness expense or&y way of depreciation deductions8

o


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6RO@/GA'#. >G, A1aThis is excluda&le under 9no additional cost services: under 7 1-!(a)(1)

'ame line of &usiness

o additional cost to employer . no foregone revenue

5nder facts* seems non4discriminatory3This would not &e excluda&le under 9no additional cost services: under 7 1-!(a)(1) &ecause

the employer is foregoing income it would otherwise &e receiving'ot excluda&le under any of the exclusions from income &ecause it does not fit in 7 1-!(a)(1)

exclusionThis is not in the same line of &usiness

This would not &e allowed &ecause under 7 1-!(&)(1)* it is not in the ordinary course of the

line of &usiness of the employer in which the employee is performing serviceslThis would pro&a&ly classify as 9de minimis fringe: which is excluda&le per 7 1-!(a)() or 7

1-!(e)


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Exclusions from Income- Life Insurance #roceedsText* pp8 10!4100Code? 7 1N1(a)(1)* (!) (flush language)* (c)* (d)* (g)(1)* (!)* (-)()* ()J Regs? 181N14(a)* (&)

Introduction

" 7 1N1(a) provides general rule . however* it lays out some exceptionso 7 1N1(a)(!) . Transfer for Falue Rules

o 7 1N1(d) . 6rorated amount is excluded (&eyond that it>s not excluded)

o 7 1N1(c) . Interest payments on a policy are not excluded


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ode 101a #roceeds of Life Insurance ontracts #a*a3le 3* +easonof @eath

- (1) Gxcept as otherwise provided in 7 1N1(a)(!)* 71N1 (d)* 71N1 (f)* and 71N1(=)* gross income does not include amounts received (whether in a single sumor otherwise) under a life insurance contract* if such amounts are paid 3*

reason of the death of the insured.- (!) Transfer for Falua&le Consideration . In the case of a transfer for a

valua&le consideration* &y assignment or otherwise* of a life insurance K orany interest therein* the amount excluded from gross income &y paragraph (1)shall not exceed an amount e;ual to the sum of the actual value of suchconsideration and the premiums and other amounts su&se;uently paid &y thetransferee8

o The amount excluded cannot exceed The amount of consideration paidP and The premiums and other amounts su3se7uentl*

paid 3* the transferee

o The transferee can onl* exclude his or her in(estment inthe life insurance polic*.

ode 101c Interest from ertain @eath 8ene9ts- If any amount excluded from 2ross Income &y su&section (a) is held under an

agreement to pay interest thereon* the interest payments shall &e included ingross income

ode 101d #a*ment of Life Insurance #roceeds at a @ate Later Than@eath

- (1) If life insurance payments are prorated (spread out over several years) the

&eneficiary shall exclude the prorated payments from 2ross Income in theyear they>re received

o If the insurer is pa*in' the 3ene9ciar* 3/c of aninsurance contract, the 3ene9ciar* has to include inincome the amount a3o(e para'raph 1 B the amounta3o(e the polic* (alue

o See Auestion 1, part c- (-) this su&section shall not apply to any amount to which su&section (c) is

applica&le (Interest is still included in 'ross income

ode 101' Treatment of ertain &ccelerated @eath 8ene9ts

-(1) #or purposes of this section* the following shall &e treated as an amountpaid &y reason of the death of an insured?

o any amount received under a life insurance contract on the life of an

insured who is a (a) 9terminally: or (&) 9chronically: ill individual- (!) Treatment of Fiatical 'ettlements

o () If any portion of the death &enefit under a life insurance K is sold

or assigned to a viatical settlement provider* the amount paid for thesale or assignment of such portion shall &e treated as an amount paidunder the life insurance K &y reason of the death of such insured8


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otes?/ife Insurance

- Insurer 3 Insurance Company- Insured 3 6erson who the policy is on

- Owner 3 The owner taes out the life insurance policy on the insured- @eneficiary 3 Receives the face value of the policy when the insured dies8

o The owner determines who is the &eneficiary8

- The exclusion in 7 1N1(a) only applies to death &enefitso #or example* after a policy has &een in effect for some time* the cash

surrender value of the policy (the amount the insurer will pay thepolicy owner durin' the insured>s life in discharge of all rights underthe policy) will exceed the net premiums paid8

o If the insured taes the cash surrender value* the insured will realie an

amount in excess of &asis* which is a taxa&le gain unprotected &y the

exclusionary rules of 7 1N1(a)(1)* &Ec it is an amount notpaid &yreason of the insured>s death8- There is an exception?

o In 101' 3ene9ts paid out to a terminall* ill orchronicall* ill patient are treated as 5paid 3* reason ofdeath of the insured6 and are therefore excluded from'ross income.

o There is no ceiling on &enefits excluded &y 9terminally ill: patients*

&ut 9chronically ill: patients may only exclude M1$0 a day (M,-*+$0per year)8


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6RO@/GA'#. 1HH, A1a7 ,1 . 9all income from whatever source derived . unless otherwise provided:

7 1N1(a)(1) 4 gross income does not include amounts received (whether in a single sum orotherwise) under a life insurance contract* if such amounts are paid 3* reason of the

death of the insured37 ,1 4 9all income from whatever source derived . unless otherwise provided:

5nder 7 1N1(a)(1)* the M1NN proceeds are excluda&le* &ut 7 1N1(c) provides that interest paid

on the proceeds is not excluda&le as incomec7 ,1 4 9all income from whatever source derived . unless otherwise provided:

5nder 7 1N1(d)* the &eneficiary must include as income* any amount greater than the pre4defined proceeds amounts (M1NN) each year8 If she is to receive !0 years of payments* this woulde;uate with a M a year payment to her* which would &e excluda&le under 7 1N1(d)8 nythinga&ove M a year* would &e gross income that is not excluda&le8AK

aInsured . 2ain 3 R4@ 3 M,N4MN 3 M!N6urchaser (Child) . 5nder 7 1N1(a)(!)* the purchaser of a life insurance policy can only excludethe amount heEshe purchased the policy for (including any premiums paid on the policy)* so here*purchaser who received M1NN on the insured>s death would &e a&le to exclude M,N under 71N1(a)(!)* &ut would still have MN gross income on the insured>s death83Insured . 2ain 3 R4@ 3 M,N4MN 3 M!N realied gain* &ut under 7 1N1(a)* this amount isnot recognied6urchaser ('pouse) 4 5nder 7 1N1(a)(!)* the purchaser of a life insurance policy can only excludethe amount heEshe purchased the policy for (including any premiums paid on the policy)* so here*purchaser who received M1NN on the insured>s death would &e a&le to exclude M,N under 7

1N1(a)(!)* &ut would still have MN gross income on the insured>s death8cInsured . 5nder 7 1N1(g)(!)()* a terminally ill individual may exclude from gross income anyamount received from a Fiatical 'ettlerment 6rovider &ecause this is still considered a payment9&y reason of death of the insured:6urchaser 4 5nder 7 1N1(a)(!)* the purchaser of a life insurance policy can only exclude theamount heEshe purchased the policy for (including any premiums paid on the policy)* so here*purchaser who received M1NN on the insured>s death would &e a&le to exclude M+N under 71N1(a)(!)* &ut would still have M!N gross income on the insured>s death8


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Exclusions from Income- &nnuit* #a*mentsText* pp8 10,41,NCode? 7 $!(a)* (&)(1) (!)* (c)(1)

Introduction

" nnuity . arrangement under which one &uys a right to future money payments

" Gndowment . purchaser may &uy right to receive certain M per month for some specifiedperiod of time

" @oth annuities and endowments receive the same treatment under 7 $!

Key Concepts

" Income connotes 2ain" mere return of capital is not income


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ode =2a eneral +ule for &nnuities- Gxcept as otherwise provided in this chapter* 2ross Income includes any

amount received as an annuity (whether for a period certain or during one ormore lives) under an annuity* endowment* or life insurance contract8

ode =23 Exclusion +atio- (1) 2ross Income does not include that part of any amount received as an

annuity under an annuity* endowment* or life insurance K which &ears thesame ratio to such amount as the investment in the K (as of the annuitystarting date) &ears to the expected return under the K (as of such date)

- (!) Gxclusion /imited to Investment . The portion of any amount received asan annuity which is excluded from gross income under paragraph (1) shall notexceed the unrecovered investment in the contract immediately &efore thereceipt of such amount8

- Exclusion +atio ost of /Expected +eturno The taxa3le portion is the amount a3o(e the cost of the

per pa*ment. Qou can 'et this 3* ta?in' the #a*mentx Exclusion +atioo This is reall* all $e need to ?no$ a3out annuit*

pa*ments

ode =2c @e9nitions- (1) Investment in the K . #or purposes of su&section (&)* the investment in the

K as of the annuity starting date is .o () the aggregate amount of premiums or other consideration paid for

the K* minuso (@) the aggregate amount received under the K &efore such date* to the

extent that such amount was excluda&le from gross income under thissu&title or prior income tax laws8

- (-) Gxpected Return . #or purposes of su&section (&)* the expected returnunder the contract shall &e determined as follows?

o () . /ife Gxpectancy 4 If the expected return under the K* for the

period on and after the annuity starting date* depends in whole or inpart on the life expectancy of one or more individuals the expectedreturn shall &e computed wE reference to actuarial ta&les prescri&ed &ythe 'ecretary

o (@) Installment 6ayments . If su&paragraph () does not apply* the

expected return is the aggregate of the amounts received under the K

as an annuity8

otes?


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- n annuity is an arrangement under which one &uys a right for future moneypayments

- Gxample?o Typically an insurance co8 sells annuities8 person may pay M!NK for

a M!K payment a year for the rest of their life once they reach the age

of P8- The annuities are sort of a 3et $/ the insurance co.

o If someone outli(es their life expectanc* the insuranceco. loses, 3ut if the* li(e shorter than their lifeexpectanc* the insurance co. $ins

- n endowment contract would exist if the purchaser &ought the right toreceive P amount of money a month for !N years and the payments wouldcontinue to the designee in the event of the purchasers death8

- Types of nnuities?o Sin'le Life &nnuit*. calls for fixed money payments to the

annuitant for her life after which all rights under the K cease

o Self and Sur(i(or &nnuit* Bfixed payments are made to anannuitant during her life and are then continued to another after herdeath8

o JointandSur(i(or &nnuit* B6ays amounts =ointly to twoannuitants while &oth are living* and then payments are continued tothe survivor

4 Key concepts in understanding the taxing of annuitieso Income connotes gain* and

o mere return of capital is not income8

- W/ annuities in each pa*ment the onl* part taxed is theexcess of the 5expected return under the 6 o(er the

5in(estment in the 6

6RO@/GA'#. 1%0, A1a6er 7 $!(&) the only part of an annuity which may &e taxed is the expected return in excess of theinvestment in the K8

o Return on capital is not taxed (so M+ of the M$! will not &e taxed)

o "ere the expected return is M$!K (! years times M-K per year)

o The investment in the K is M+K

o M+EM$!K 3 !E-

Therefore only 1E- of each year>s payment is taxa&le8 'o only M1K of the M-K each year is included in 2ross Income

35nder 7 $!(&)(!)* if an annuitant lives &eyond her life expectancy and fully recovers herinvestment in the contract* the full amount of any su&se;uent annuity payment is included in hergross income


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Exclusions from Income- @ischar'e from Inde3tednessText* pp8 1,!41$-Code? 77 ,1(a)(1!)J 1N+(a)* (d)(1)4(-)* (f)(1)J Regs? 181NN14!(a)(1) (!)


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ode %1 ross Income @e9ned

(a) Gxcept as otherwise provided in this su&title* gross income means all income fromwhatever source derived* including?

a8 (1!) Income from discharge of inde&tedness- @ischar'e of Inde3tedness @;I or ancellation of @e3t ;@ is

considered ross income

- :S (. ir3* expresses this. if a corporation purchases and retires any of such&onds at a price less than the issuing price or face value* the excess of the issuingprice or face value over the purchase price is gain or income for the taxa&le year

- If a Taxpa*er pa*s oD a de3t for less than the amount o$in', thediDerence constitutes income to him, 3ecause he reali4es aneconomic 3ene9t 3* $a* of an increase in his net $orth much as ifhe had sold propert* at a pro9t

ode 10Ga Exclusions Where thereCs ancellation ;f @e3t or @ischar'e ;fInde3tedness income

- (1) Gxclusion from 2ross Income . 2ross income does not include any amount

which would &e includi&le in gross income &y reason of the discharge (in whole or inpart) of inde&tedness of the taxpayer if .

o () the discharge occurs in a title 11 case* or

o (@) the discharge occurs when the taxpayer is insolvent*

o (C) the inde&tedness discharged is ;ualified farm inde&tedness* or

o (


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C'G'

:.S. (. ir3* Lum3er o.(58'8 'upreme Ct8 1%-1)4 If a taxpayer pays off a de&t for less than the amount owing* the difference constitutesincome to him* &Ec he realies an economic &enefit &y way of an increase in his net worthmuch as if he had sold property at a profit8

Marin (. ommissioner (5' Ct8 of ppeals -rdCircuit)

- Sarin appeals the tax court8>s decision where they determined his discharge of M!8%

million in gam&ling de&t was considered income and should &e taxed8

- Sarin eventually raced up a M-8 million dollar gam&ling de&t

o Sarin claimed the casino was partially responsi&le &Ec he was a compulsive

gam&ler8

- Gventually the casino settled their case wE him for M0NNK8

- The Tax Court then ruled that he had received income of M!8% million for the releaseof his inde&tedness (e;ual to the amount he owed minus the amount he settled theclaim for)8

"old?- The general rule is that income from the discharge of inde&tedness is considered

gross income8 7,1(a)(1!)

- "owever* the court here determines Sarin did not actually have de&t8

o They &elieve that gam&ling chips are merely an accounting mechanism to

evidence de&t8

- They also &elieve that the contested lia&ility doctrine applies

o 5nder this doctrine* if a taxpayer* in good faith* disputed the amount of a

de&t* a su&se;uent settlement of the dispute would &e treated as the amountof de&t cognia&le for tax purposes8

o #or this to occur there must &e a disputed amount and there must &e a

settlement

-

Therefore all that was cognia&le for tax purposes in Sarin>s case was the M0NNK andpaying this amount to the casino e;ualed the amount he had 9&orrowed: from them .so no taxa&le event

lass otes-- 10Gd $as used to de9ne inde3tedness

- Taxpa*er is sa*in' this isnCt a de3t other$ise he $ould ha(eancellation ;f @e3t or @ischar'e ;f Inde3tedness income.

- The commissioner is sa*in' this is a de3t and he o$ed on ade9cienc*

- The Taxpa*er sa*s this is unenforcea3le 3/c J had la$ desi'ned topre(ent compulsi(e 'am3lers for losin' lots of mone*.

-

Therefore 3ecause the* settled for OH00 the OH00 $as his de3t,$hich he repaid in full

- Where there is a disputed lia3ilit* there is not a de3t until *ou ha(ea determination of $hat the lia3ilit* is.

o Qou canCt ha(e ancellation ;f @e3t or @ischar'e ;fInde3tedness until *ou ha(e an undisputed lia3ilit* or thede3t is certain.

o These situations usuall* arise $hen ser(ices or 3illin' rates

are in(ol(ed.


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'ummary?- Kir&y 3 you owe money for CO< or


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Exclusions from Income- @ama'esText* pp8 1$%41%NCode? 7 1N(a)J Regs? 181N41(c)


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ode 10!a ompensation for Inuries or Sic?ness

- (a) Gxcept in the case of amounts attri&uta&le to (and not in excess of) deductions

allowed under 7 !1- (relating to medical* etc8 expenses) for any prior taxa&le year*gross income does not include .

o (1) amounts received under wormen>s compensation acts as compensation

for personal in=uries or sicnessJ

)ust 3e 5o3related6 not merel* under a statuteentitled 5$or?erCs compensation6

o (!) the amount of an*damages (other than punitive damages) received(whether &y suit or agreement and whether as lump sums or as periodicpayments) on account of personal ph*sical in=uries or physical sicness

Gmotional distress shall not &e treated as a physical in=ury or

physical sicness unless the* are a result of the personalph*sical inuries in $hich case an* dama'es resultin'from a personal ph*sical inur* except puniti(e areexcluda3le from 'ross income.

If the cause of action is emotional distress it is

excluda3le from 'ross income to the extent tocompensate for medical expenses

R For example- if a # has to see a ps*chiatrist tohelp cure the emotional distress, the 3ills for theps*cholo'ist are excluda3le from 'ross income

o (-) amounts received through accident or health insurance for personal

in=uries or sicness (other than amounts received &y an employee* to theextent such amounts? () are attri&uta&le to contri&utions &y the employerwhich are not includi&le in the 2I of the GG* or (@) are paid &y the GR)8

o () amounts received as a pension* annuity* or similar allowance for personal

in=uries or sicness resulting from active service in the armed forces of anycountry or in the Coast 2eodetic 'urvey or the 6u&lic "ealth 'ervice* or as a

disa&ility annuity paya&le under the provisions of 88o (0) amounts received &y an individual as disa&ility income attri&uta&le to

in=uries incurred as a direct result of a terroristic or military action

+e's. 1.10!1a, c, d ompensation for Inuries or Sic?ness

- (c) the term 9damages received (whether &y suit or agreement): means an amountreceived (other than wormen>s compensation) through prosecution of a legal suit oraction &ased upon tort or tort type rights* or through a settlement agreement enteredinto in lieu of such prosecution8

+e(enue +ulin' =>K1K#acts

" Taxpayer sustained severe and permanent personal in=uries as the result of &eing struc&y a car driven &y P

" A* P>s insurer* proposed a settlement of taxpayer>s suit against P* which the taxpayeraccepted

" A agreed to mae 0N consecutive annual payments to the taxpayer for 9personal in=ury*pain and suffering* disa&ility* and loss of &odily function8:

"olding

" 7 1N(a)(!) . gross income does not include the amount of any damages received onaccount of personal in=uries or sicness


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s purse in the form of tax lia&ility on the receipt of a damageaward

- 7 1N(a)(!) exclusion only applies if the action is &ased on tort or tort4type rights andthe damages are on account of ph*sicalin=uries or ph*sical sicness

o onph*sical inuries such as defamation* #irst mendment rights* and

sex and age discrimination are no longer excluda&le8

o Gmotional distress damages depend on the situation as to whether they are


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Exclusions from Income- Sale of +esidence Income EarnedText* pp8 !1+4!!-Code? 77 1!1(a)* (&)* (c)(!)* (d)(1)4(-)J Regs? 181!141(&)* 181!14!(a)(-)


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ode 121 Exclusion of ain from Sale of #rincipal +esidence

ode 121a Exclusion of ain from Sale of #rincipal +esidence

- (a) Gxclusion? 2ross Income shall not include gain from the sale or exchange of

property if* during the 0 . year period ending on the date of the sale or exchange*such property has &een owned used &y the taxpayer as the taxpayer>s principal

residence for periods aggregating ! years or more

- e* characteristics for this section to appl*-o #rincipal +esidence

o ;$n 2 of last H *ears

o Li(ed 2 of last H *ears

o )arried 'i(es extra mone* to excludeP see 1213

- on'ress enacted this statute in parto To 3ene9t the people $ho need to do$nsi4e

The elderl*, people $/ a do$n turn in their 9nanceso To reduce the 3urden for taxpa*ers ha(in' to ?eep trac? of

the proper 3asiso on'ressmen sa*in' 5ItCs ust not ri'ht to ha(e to pa* taxes

on *our house6 This is an example of somethin' in the code $here

on'ress feels itCs ust not ri'ht to ma?e taxpa*ers pa*a certain tax

ode 1213 Limitations of the Exclusion of ain from Sale of #rincipal+esidence

- 18 The amount of gain excluded from 2ross Income under su&section (a) wE respectto any sale or exchange shall not exceed M!0N*NNN

- !8 'pecial Rules for oint Returns . hus&and wife mae =oint return

o 8 Bhen a =oint return is filed M0NNK shall &e su&stituted for M!0NK if .

(i) either spouse meets the ownership re;uirements of su&section (a)

wE respect to such propertyJ

(ii) &oth spouses meet the use re;uirements of su&section (a) wE

respect to such propertyJ and (iii) neither spouse is ineligi&le for the &enefits of su&section (a) wE

respect to such property &y reason of paragraph -8

o This means that 3oth spouses must meet all re7uirements of

su3section & for the OH00 exclusion on a oint return toappl*.

Ex. If & li(ed in a place for 10 *ears as a principleresidence for the last ten *ears and then 'ets married

a *ear a'o $ill the OH00 exception appl*R If the* li(ed to'ether for at least 2 of the last H

*ears prior to this *ear then the* 7ualif* for theOH00 exclusion

R If not then the* can onl* use a O2H0? exceptionR Furthermore if the ne$ spouse had recentl* sold

her house, then she $ould not 7ualif* and the*could not 'et the OH00? exclusion

What if the* canCt 9le for the OH00 exclusion @o the*


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Exclusions from Income- Income Earned &3roadText* pp8 !!4!!0Code? 7 %11

Income Earned &3road

- >11? Income Garned &road may &e excluded from 2ross Income* &ut an mericanmust?

o @e a &ona fide resident of a foreign country or countries for an uninterrupted

period that includes an entire taxa&le year oro n merican citien or resident must &e present in a foreign country or countries

for at least --N days during any period of twelve consecutive months

- >1131&-exclusion applies only to income from a foreign source which isattri&uta&le to the taxpayer>s performance of services8

o Aaximum exclusion is +N*NNN (indexed for inflation !NN,)


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Exclusions from Income- Federal Taxes/State &cti(itiesText* pp8 !--4!-$Code? 77 1N-

ode 10K Interest on State and Local 8onds

- (a) Gxclusion. Gxcept as provided in su&section (&)* 2ross Income does not include

interest on any 'tate or local &ondo This exclusion applies for FE@E+&L income tax purposes

- (&) Gxceptions. 'u&section (a) shall not apply to (meaning that interest income

received on these &onds is 2ross Income) .o (1) #ri(ate &cti(it* 8ond Which is ot a Auali9ed 8ond. ny

private &ond which is not a ;ualified &ond (wE in the meaning of 7 11)

& pri(ate acti(it* 3ond is an* 3ond that is part of a3ond issue $here, in 'eneral, more than 10V of theproceeds are to 3e used for pri(ate use.

Ex. & 3ond to 3uild a 3uildin' for a pri(ate co. to usetaxfree, to encoura'e it to locate $/in a state or

communit*.o (!) r&itrage @ond . ny ar&itrage &ond (wE in meaning of 7 1+)

o (-) @ond ot in Registered #orm* Gtc8 . ny &ond unless such &ond meets

the applica&le re;uirements of 7 1%

- (c)


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Income Tax Treatment- Separation and @i(orce B &limon* @irect #a*mentsand Indirect #a*mentsText* pp8 1%!41%$* !N!4!NCode? 77 $1(a)4(e)* !10(a)4(c)J Regs8 18$181T(&) L04$


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ode =1 &limon* and Separate )aintenance #a*mentsode =1a &limon* and Separate )aintenance #a*ments B eneral +ule

- 2ross income includes amounts received as alimony or separate maintenance

payments

ode =13 &limon* and Separate )aintenance #a*ments @e9ned

-#or the purposes of this section .

- (1) The term 9alimony or separate maintenance payment: means any payment in

cash if .o () 'uch payment is received &y (or on &ehalf of) a spouse under a divorce

or separation instrument

The 5or on 3ehalf of6 indicates pa*ments ma* 3e madeindirectl* See spouse +e' 1.=11T3&%)

o (@) The divorce or separation instrument does not designate such payment as

a payment which is not includa&le in 2ross Income under this section and notallowa&le as a deduction under section !10

o (C) In the case of an individual legally separated from his spouse under

decree of divorce or of separate maintenance* the payee spouse and the payorspouse are not mem&ers of the same household at the time payment is made

Qou could ha(e married indi(iduals $ho are marriedand forced to ma?e support a'reements $hile stillmarried. This section does not appl* to them, the*ma* still li(e in the same house.

o (


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Income Tax Treatment- Separation and @i(orce B #ropert* SettlementsText* pp8 !N04!N+Code? 77 1N1(a)4(c)J Regs8 181N141T* L,4%


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ode 10!1a Transfers of #ropert* 3/t Spouses or Incident to @i(orce

- o gain or loss shall &e recognied on a transfer of property from an individual to?

- 18 a spouseJ or

- !8 a former spouse* &ut only if the transfer is incident to the divorce

- ains can still 3e reali4ed, ust not reco'ni4ed in these situations

-

#olic* reason- the code in man* places reco'ni4es hus3and and$ife as a sin'le entit*

ode 10!13 Transfer Treated as a ift, Transferee


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Income Tax Treatment- Separation and @i(orce B hild SupportText* pp8 !N%4!1NCode? 77 $1(c)

ode =1c #a*ments to Support the hildren

- (1) 'u&section (a) shall not include payments or portions of any payment which the

terms of the divorce or separation instrument fix as a sum which is paya&le for thesupport of children of the payor>s spouse8

o hild support pa*ments are neither considered 'ross income

3* the pa*ee, nor are the* deducti3le 3* the pa*orCs spouse+e' 1.=101T3&1H

o Ex. If pa*or is re7uired to pa* OKH to di(orced pa*eespouse, and after pa*eeCs death continue to pa* O1H topa*eeCs children, then onl* O20? of the initial OKH ma* 3ecounted as alimon*.

hild Support

-

Child support is not deducti&le &y the parent paying the child support nor is itconsidered gross income &y the spouse receiving it8

- Congress later stated that any amount specified in an instrument will &e reduced on a

child 9attaining a specified age* marrying* dying* leaving school* or upon a similarcontingency* or at a time which can clearly &e associated wE such contingency* suchamount will &e treated as child support8

6RO@/GA'#. 211, A1a5nder 7 $1(c)* child support payments are not considered alimony and therefore are notincludi&le as 2I under 7 $1(a)* nor deducti&le under 7 !10(a)

Therefore* the M expressly supporting the child is not alimonys to the other M,* liely alimony* &ut need more facts

35nder 7 $1(c)* child support payments are not considered alimony and therefore are notincludi&le as 2I under 7 $1(a)* nor deducti&le under 7 !10(a)#urther* 7 $1(c)(!) provides that contingency payments &ased on the child attaining a certain

age are considered fixed payments for child support"ere* M which ends on child turning !1* will &e considered child support

eed more facts a&out the other M,


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&ssi'nment of IncomeText* pp8 !N4!$!Code?


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ode 1 Tax Imposed

ode 1a )arried Indi(iduals Filin' Joint +eturns and Sur(i(in' Spouses

- There is here&y imposed on the taxa&le income of .

o (1) every married individual (as defined in section $$N-) who maes a single

return =ointly wE his spouse under 7 ,N1-* and

o (!) every surviving spouse (as defined in 7!(a))*

- tax determined in accordance wE the following ta&le?

- See p. 1 in ode 3oo? for Ta3leode 13


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&ssi'nment of Income-

- E(er*thin' is a ud'ment 3* the court, there is no statute

- We ha(e a tax s*stem that has a 'raduated rate scale-o The hi'her the income the hi'her the tax rate

-&ssi'nment of income comes into pla* $hen people in hi'her tax3rac?ets attempt to assi'n their income to people at lo$er tax.

o It $ould 3e 3ene9cial for a parent to transfer to their childrenmone* 3/c the child $ould li?el* ha(e a lo$er tax rate.

o This doesnCt al$a*s $or?.

Example- iddie tax

iddie Tax B if a ?id is under 1G the* are taxed at theirparentCs rate.

Fruit and Tree @octrine

- )om o$ns a tree and the apples are the income

-Qou can transfer the apples to the ?id, 3ut *ou canCt transfer theapple income unless *ou transfer the $hole tree.

- The income is associated $/ the tree and the onl* $a* to transferthe income to the ?id is to transfer the source of the income

- Qou could transfer half the tree and then half the income $ould 'oto the ?id.

- Income in this sense is ross Income that is taxa3le.

Reading otes on ssignment of Income?

- Tax is imposed on 9taxa&le income: at 9progressive: rates under which increasingrates are applica&le to additional increments of taxa&le income

- 6rogressive rates provide incentive to fragment income

o Taxpayer in a high &racet can transfer some income to another individual in

a lower &racet

- Congress has attempted to limit the fragmenting of income to some degree

o #or instance they>ve enacted a 9iddie tax: which states a child 1+ years and

under is generally taxed on almost all of her unearned income at her parentsrate* nullifying the tax advantage &y assignment of income to such minors8

- 7$- provides that 9amounts received in respect of the services of a child shall &eincluded in his (the child>s) gross income8

o This is also favora&le to taxpayers &Ec it doesn>t say who gets to eep the

money only who is taxed upon the money8

o This would trump any state law that says a minor child could &e taxed to the

parents as the parents* for federal income tax purposes8


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Lucas (. Earl

- man only paid taxes on half of the money he earned as an attorney

- "is reasoning was that he and his wife entered a contract where&y everything they

possessed* earned* owned* etc8 was to &e held in =oint tenancy and this meant theyshared everything e;ually

- The man>s argument was that half of the money he earned was his and half was his

wife>s* therefore he felt he should only have to pay half the taxes8

- The ct8 disagreed and ruled that the tax statute allowed for the taxing of statutes tothose who earned them and provided that the tax could not &e escaped &y anticipatoryarrangement and K>s however sillfully devised to prevent the salary when paid fromvesting even for a second in the man who earned it8

Class otes?

- There was no pro&lem wE the K here* it was valid8

- s name (the profits from the year didn>t ;uite add up to M180 million so the

taxpayer contri&uted the remaining M1!K on his own)8- The commissioner argues that one half of the M18-0$ million should have &een

reported &y the taxpayer and the other half reported &y his wife since they filedseparately

- Commissioners argument?

o The actual receipt of money or property is not always necessary to constitute

taxa&le incomeJ that it is the 9realiation: of taxa&le income rather thanactual receipt which gives rise to the tax

o taxpayer realies income when he directs the disposition thereof in a

manner so that it reaches the o&=ect of his &ounty

- Luestion?

o

s un;ualified refusal not to tae income remove the&urden of the taxpayer to pay taxes

- The taxpayer argues that his refusal to tae the property is a renunciation of the

proffered property wEout a transfer of such right to another8

- The Ct8 sided wE the taxpayer?

- The* sa* the facts sho$ that 3/c the taxpa*er ne(er recei(ed themone*, and that he did not direct is disposition it could not 3econsidered compensation.

o "e did not direct where the compensation go* he simply refused to accept it8

"old?


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Indi(idualCs @eduction&dusted ross Income &I)o(in' Expenses B &3o(etheline %2 @eductionStandard @eductionText* pp8 $14$-* 0N40!* 0-40$* 0,,40,%Code? 7 !,!(a)J 77 ,!* 18,!4!(c)()J 77 !1$(a)4(c)* 1-!(g)J 7 ,-


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- I %2 @eductions &I

- &I B #ersonal Exemptions 1H1, 1H2 B Either Standard@eductions or Itemi4ed @eductions %Ke Taxa3le Income

- Taxa3le Income x +ate Tax Lia3ilities

- Tax Lia3ilities B redits Tax @ue +efund

- Standard @eduction %Ko Fixed &mount

Fixed amount depends on Filin' Status c2 2

R


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&dusted ross Income

ode %2a &dusted ross Income

- (a) #or purposes of this su&title* the term 9ad=usted gross income: means* in the case

of an individual* gross income minus the following deductions?

o The 3elo$ list is not $h* *ou 'et to deduct thin's, it $here*ou 'et to deduct these thin's.

o (1) Trade and @usiness s . The deductions allowed

&y part FI (7 1,1) which consist of expenses paid or incurred &y thetaxpayer* in connection wE the performance &y him of services as anemployee* under a reim&ursement agreement wE his employer8

R If itCs a reim3ursement from *our emplo*er it$ould 3e a3o(e the line.


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);I E#ESES


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ode G2 +eim3ursement of )o(in' Expenses

- Gxcept as provided in 7 1-!(a)(,)* there shall &e included in 2ross Income (as

compensation for services) any amount received or accrued* directly or indirectly* &yan individual as a payment for or reim&ursement of expenses of moving from oneresidence to another residence which is attri&uta&le to employment of selfemployment

o +eim3ursements B Since the mo(in' expense deduction is ana3o(e the line deduction, an* reim3ursement of deducti3lemo(in' expenses $ould result in 3oth an inclusion in and adeduction from 'ross income $hen calculatin' &I, thusresultin' in a 5$ash6 for tax calculatin' reportin' purposes.

ode 1K2a% )o(in' Expense as a Frin'e 8ene9t- 2ross Income shall OT include any fringe &enefit which ;ualifies as a . ;ualified

moving expense reim&ursement

ode 1K2' Auali9ed )o(in' Expense +eim3ursement-

#or purposes of this section* the term U;ualified moving expense reim&ursement>means any amount received (directly or indirectly) &y an individual from anGmployer as a payment for (or reim&ursement of) expenses which would &ededucti&le as moving expenses under 7 !1$ if directly paid or incurred &y theindividual8

ode 21=a )o(in' Expenses &3o(e the line %2a1H

- (a) There shall &e allowed as a deduction moving expenses paid or incurred during

the taxa&le year in connection wE the commencement of wor &y the taxpayer as anemployee or as a self employed individual at a new principal place of wor8

ode 21=3 @e9nin' )o(in' Expenses

-

(1) #or the purposes of this section the term 9moving expenses: means only thereasona3leexpenses .o () of moving household goods and personal effects from the former

residence to the new residence* and

o (@) of traveling (including lodging) from the former residence to the new

place of residence ('uch term shall not include any expenses for meals)

- (!) In the case of any individual other than the taxpayer* expenses referred to in

paragraph (1) shall &e taen into account only if such individual has &oth the formerresidence and the new residence as his principal place of a&ode and is a mem&er ofthe taxpayer>s family and the new residence as his principal place of a&ode and is amem&er of the taxpayer>s household

o In o$n $ords the deduction for mo(in' expenses $ill appl* to

an* other indi(idual if such indi(idual has 3oth the formerresidence and ne$ residence as his principal place of a3ode&@ is a mem3er of the taxpa*erCs household.

ode 21=c onditions for &llo$ance

- (c) o deduction shall &e allowed under this section unless .

o (1) The taxpayer>s new principal place of wor .

() Is 0N miles farther from his former residence than was his former

principal place of wor* or +ead arefull*


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ST&@&+@ @E@:TI; S. ITE)IME@ @E@:TI;S


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ode %Ka Taxa3le Income @e9ned

- (a) Gxcept as provided in su&section (&)* for purposes of this su&title* the term

9taxa&le income: means gross income minus the deductions allowed &y this chapter(other than the standard deduction)

ode %K3 Indi(iduals $ho do ;T Itemi4e their @eductions

-In the case of a person that does not elect to itemie his deductions for the taxa&leyear* for purposes of this su&title* the term 9taxa&le income: means ad=usted grossincome* minus .

o (1) the standard deduction* and

o (!) the deduction for personal exemptions provided in 7 1018

ode %Kc Standard @eduction

- (1) Gxcept as provided in this su&section* the term standard deduction means the sum

of .o () the &asic standard deduction* and

o (@) the additional standard deduction

-

(!) The &asic standard deduction is .- (-) dditional 'tandard


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'T


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Extraordinar* )edical ExpensesText* pp8 0+400+Code? 7 !1-(a)4(c)(1)* (d)(1)* (%)J Reg8 18!1-41(e)


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ode 21Ka )edical, @ental, Etc. Expenses 8elo$ the Line @eductions

- (a) There shall &e allowed as a deduction the expenses paid during the taxa&le year*

not compensated for &y insurance or otherwise* for medical careof the taxpayer*his spouse* or a dependent* to the extent that such expenses exceed $80Q

- +e7uirements-o 1. )ust 3e paid,

o 2. Insurance canCt pa* for it

o K. For taxpa*er, spouse, or a dependent

o !. ;nl* the dollar amount o(er =.HV of &I can 3e deducted

- Thin's this includes for deductionso lasses, 3races, en4*me solutions for soa?in' contacts,

seein' e*e do', chiropractor, modi9cations to *our homemedical reasons person in a $heel chair, mental healthdisease 21Kd, acupuncture, arti9cial teeth, motori4ed$heel chair, chan'es to automo3iles, 'uide do's, lon' termcare, smo?in' cessation pro'rams, reha3 centers, nursin'homes the nursin' home $ill 'i(e *ou a statement sho$in'

$hat portion is for the medical 3ills, fertilit* treatments, selfemplo*ed indi(iduals pa*in' o$n health insurance

;TE- all deductions must 3e reasona3le.

ode 21K3 Limitation $/ +espect to )edicine and @ru's- n amount paid during the taxa&le year for medicine or a drug shall &e taen into

account under su&section (a) only if such medicine or drug is prescri3edor isinsulin

ode 21Kd @e9nitions See Text

- (1) The term 9medical care: means amounts paid .

o () #or the diagnosis* cure* mitigation* treatment* or prevention of disease* or

for the purpose of affecting any structure or function of the &ody

Interpreted (er* 3roadl*, see p. HHKo (@) #or transportation primarily for and essential to medical care referred to

in su&paragraph ()

o (C) #or ;ualified long4term services

o (


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harita3le ontri3utionsText* pp8 $%N4+N1J $+,4$+%Code? 7 1$N(a)(1)* (c)* (e)(1)* (0)


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ode 1=0a harita3le ontri3utions and ifts B &llo$ance of @eduction

- (1) There shall &e allowed as a deduction any charita&le contri&ution (as defined in

su&section c) payment of which is made wEin the taxa&le year8 charita&lecontri&ution shall &e allowa&le as a deduction only if verified under regulationsprescri&ed &y the 'ecretary

lass otes-- harita3le contri3utions are not miscellaneous and are not su3ect

to the 2V Uoor

- +e7uirementso 1. )ust 3e the proper t*pe of or'ani4ation under the statute

o 2. It must 3e a 'iftP no 7uid pro 7uo

The charita3le deduction is onl* the part that is a true'ift that *ou are not 'ettin' somethin' 3ac? in return

Ex. If *ou pa* O100 to a charit* and 'et to run in araceP the onl* part that is a charita3le donation is theamount a3o(e the (alue of the race $hat *ou 'ot in

return. &n* or'. that ta?es contri3utions must 'i(e a receipt

that sa*s $hat *ou 'ot in returno K. &mount of ift

enerall* 'et F) deduction of a charita3le 'ift

Ex. If *ou 'i(e O100 and 'et nothin' in return the(alue of *our 'ift is O100

Ex. Qou 3u* a share of stoc? for O10 and *ou sell it forO100 *ou ha(e a O>0 'ain enerall* 'et F)deduction of a charita3le 'ift

R If *ou 'a(e that stoc? directl* to a charit* 3eforesellin' it then *our deduction is the F) of thepropert*

R Essentiall* if *ou 'i(e propert* *ou a(oid alltaxation on the 'ain.

o There are a lot of exceptions to this 3ut

$e $onCt 'et into all this 1=0e

R Exceptions 1o It depends on $hether it is ordinar*

income or a capital 'aino The statute sa*s *ou donCt 'et to ta?e

F) *ou ta?e 3asis if the income *oureco'ni4e if *ou $ould ha(e sold it $ould

ha(e 3een ordinar*R Exception 2

o If *ou 'i(e tan'i3le personal propert* not

realt*

Tan'i3le propert* is *ou can feel itor touch it

Intan'i3le propert* is li?e a 3an?account, stoc?, or patent

o If *ou 'i(e tan'i3le personal propert* to a


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InterestText* pp8 $4$,* %14%+Code? 7 1,-(a)* (h)* (d)(1)4(-)


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ode 1%Ka Interest B eneral +ule

- There shall &e allowed as a deduction all interest paid or accrued wEin the taxa&le

year on inde&tedness8o 1%Kh limits the deduction under 1%Ka

ode 1%Kh @isallo$ance of @eduction for #ersonal Interest

-(1) In the case of a taxpayer other than a corporation* no deduction shall &e allowed

under this chapter for personal interest paid or accrued during the taxa&le year8

- (!) 6ersonal Interest means any interest allowa&le as a deduction under this chapterother than . (This section sho$s $hatCs actuall* deducti3le

o () Interest paid or accrued on inde&tedness properly alloca&le to a trade or

&usiness (self &usiness)

Ex. )om or #opCs rocer* Store their interest paid onde3t $ill 3e deducti3le

o (@) ny investment interest (wEin the meaning of su&section (d))

Interest incurred on de3t used for in(estment.

R Ex. Qou $ant to in(est in some stoc?s, *ou $ant

to in(est in stoc?s and *ou ta?e out a loan to doso. The interest on that de3t is deducti3le.

In(estment interest is onl* deducti3le to extent thatthere is in(estment income

R Ex. Qou ta?e out a 100? to 3u* land as anin(estment the interest on de3t is notdeducti3le 3/c it does not earn *ou income

R If *ou had a 100? loan to 3u* stoc? and thestoc? produced a H0? di(idend, *ou coulddeduct up to OH0 3/c that is the extent thatthere is in(estment income

o C8 ny interest which is taen into account under 7,% in computing income

or loss from a passive activity of the taxpayer

Will not tal? a3out this, for the purposes of this class.o


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TaxesText* pp8Code? 7 1,(a)* (&)* (d)(1)


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ode 1%!a Taxes 8elo$ the Line Itemi4ed @eduction

- (a) Gxcept as otherwise provided in this section* the following taxes shall &e allowed

as a deduction for the taxa&le year wEin which paid or accrued?o (1) 'tate and local* and foreign* real property taxes

o (!) 'tate and local personal property taxes

o (-) 'tate and local* and foreign* income* war profits* and excess profits taxes

o () The 2'T tax imposed on income distri&utions

o (0) The environment tax imposed &y section 0%

ode 1%!3 @e9nitions and Special +ules

- (1) 6ersonal 6roperty Taxes . The term 9personal property tax: means an ad valorem

tax which is imposed on an annual &asis in respect of personal property

- (!) 'tate or /ocal Taxes . 'tate or local tax includes on a tax imposed &y a 'tate* a

possession of the 58'8* or a political su&division of any of the foregoing* or &y the


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Floor on )iscellaneous Itemi4ed @eductionsText* pp8Code? 7 ,$(a) (&)J Reg8 18,$41T(a)


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7 ,$8 !4percent floor on miscellaneous itemied deductions8

(a) 2eneral rule8 In the case of an individual* the miscellaneous itemied deductions for anytaxa&le year shall &e allowed only to the extent that the aggregate of such deductions exceeds !percent of ad=usted gross income8

(&) Aiscellaneous itemied deductions8 #or purposes of this section* the term Vmiscellaneousitemied deductionsV means the itemied deductions other than44 (1) the deduction under section 1,- WIRC 'ec8 1,-X (relating to interest)* (!) the deduction under section 1, WIRC 'ec8 1,X (relating to taxes)* (-) the deduction under section 1,0(a) WIRC '

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Federal Income Tax law outline with professor Wiseman

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