Fed Income Case Law

Question 1

Glenshaw Glass

Answer 1

Established the 3-part test for income: (1) undeniable accession to wealth, (2) clearly realized, and (3) complete dominion

Question 2

Old Colony Trust

Answer 2

employer making a payment to discharge other financial obligations (such as paying taxes) is still income

Question 3

Collins

Answer 3

Unlawful gains including stolen winnings in horse betting is taxable income

Question 4

Gamble

Answer 4

the cost basis of the foal is whatever amount of the $60,000 purchase price of Champagne Woman was actually meant to pay for the foal. Because Gamble obtained a $20,000 insurance policy on the unborn foal, it is reasonable to infer that Gamble targeted $20,000 of the total purchase price to pay for the foal. This court holds that the proper cost basis of the foal is $20,000. This is an example of buying in bulk.

Question 5

First NW Industries

Answer 5

When determining basis, which is the burden of the taxpayer, the taxpayer cannot include rights in the basis that were not transferred.

Question 6

Inaja Land

Answer 6

For purposes of federal tax law, proceeds from the sale of an easement will reduce a taxpayer’s basis in his land

Question 7

Duberstein

Answer 7

To determine if there is a tax free gift, look to the facts and the intent. Here, the car was given primarily in response to assistance and even perhaps to secure continued assistance. Therefore, it is not a tax-free gift.

Question 8

Faris-Es-Sultaneh

Answer 8

the presence of any consideration in the ante-nuptial agreement negates the possibility that the shares were a tax-free gift, since gifts must be made with a purely donative intent. Farid-Es-Sultaneh gave up her marital rights in return for the stock and thereby purchased it.

Question 9

Goodwin

Answer 9

in the case of an entire congregation paying a minister aggregate, “special occasion” payment, the court in the Goodwin case concluded that the amounts were taxable compensation because the congregation understood that the payments were expected by the minister, and that if the minister had only received his specified salary, he probably would have quit and joined a different congregation. The court emphasized that the payments were made as part of a highly structured program. Thus, the payments were in the nature of compensation for services.

Question 10

Taft

Answer 10

A donee will pay tax on the appreciation which occurs during her ownership of the gifted property and on the appreciation which occurred during the donor’s ownership. This is because of the carryover basis rule.

Question 11

Jaycees

Answer 11

Even if the business premises is a residence (i.e., a chef, live-in nanny, live-in bodyguard, butler), it is still considered a business premises. It’s determined on if it’s where the employee performs his official duties

Question 12

Turner

Answer 12

In regard to prizes that are luxury items and must be used in one year, if they can only be used at a time agreed upon by a third party, the item is a service and not property, and the item is not transferable, then a subjective approach will be used to determine what should be included in income. Here, the cruise tickets were a luxury prize that was a service and had to be used at the time determined by the cruise company. Therefore, there is a benefit derived but it might not be the retail value (as seen here).

Question 13

Bruise Ruling

Answer 13

If damages or settlement are not allocated, then anything after the “first pain incident” (bruise, cut, visible bodily harm) will be a result of personal physical injury.

Question 14

Robinson

Answer 14

An allocation of damages to determine what is a result of personal physical injury cannot be tax motivated

Question 15

Amend

Answer 15

the origin of the expense was business-related because the executive consulted the Christian Science practitioner for help making business decisions, but the nature of the services (namely praying) was personal and therefore it did not qualify.

Question 16

Trebilcock

Answer 16

Trebilcock’s company, Litco, is engaged in wood-products brokerage. Therefore, to be a deductible business expense, Trebilcock’s expenditures must be of a kind commonly incurred in the wood-products brokerage business. His ministry related expenses do not relate to his business.

Question 17

Welch

Answer 17

the individual was not allowed to deduct the amounts paid to discharge the debts of a bankrupt company because paying those expenses was extraordinary or bizarre

Question 18

Jenkins

Answer 18

the court concluded that Conway Twitty’s primary motive in paying the debts was to protect the business reputation as a Country & Western singer because the investors were in the industry and the restaurant used his name. The tax court found a sufficient proximate relationship to the business of country-music singing

Question 19

International Freighting

Answer 19

In situations where services are received instead of money, the value of the services received operates as the amount realized. By issuing bonus shares to its employees in exchange for their services, International Freighting’s assets were decreased in an amount equal to the value of the shares. Thus, regardless of what International Freighting paid for the shares, the bonuses amounted to a fair market value business expense, which International Freighting properly deducted on its tax return.

Question 20

Californians Helping

Answer 20

can still deduct any ordinary and necessary business expenses not related to the controlled substance trafficking – in this case, it was caregiving expenses

Question 21

Olive

Answer 21

Olive’s business consists solely of marijuana, and marijuana is a controlled substance prohibited by federal law. Olive may not take deductions for his business expenses associated with his dispensary. The fact that medical marijuana has become legal in California is of no avail to Olive. He did perform other services but he offered those for free so no deductions available.

Question 22

Higgins

Answer 22

Higgins’ offices existed solely to handle his personal investment activities. In that regard, the offices’ activities do not constitute the carrying on of a trade or business and are deemed personal profit-seeking activities.

Question 23

Gilmore

Answer 23

paying for a high-priced attorney in your divorce case so you don’t lose a business has a personal origin and nature, and the attorney’s fees are not deductible as a business expense.

Question 24

Cavanaugh

Answer 24

principal owner of business supplying drugs to his gf while they were on vacation is not deductible because it is personal in nature and the owner was not engaged in a profit-seeking activity. The board being worried about reputational consequences is irrelevant. The attorney’s fees are not deductible as a business expense.

Question 25

Kopp’s Company

Answer 25

Corporation incurs non-deductible attorney fees as a result of a lawsuit involving the corporations president negligently entrusting a company car to his son for a party

Question 26

Gilliam

Answer 26

While artists and art teachers ordinarily engage in business travel, the legal fees at issue arise from Gilliam’s altercations (fight) during his travel, rather than the travel itself. The fees are not deductible as a business expense.

Question 27

Leland Schoen

Answer 27

dog is not a dependent and the father did not qualify as a dependent based on the law stating he must have received half of his care for the year from the petitioner

Question 28

W.B. Counts

Answer 28

a child can deduct a parent’s nursing home costs if they can claim that parent as a dependent. The primary purpose of being in the nursing home needs to be to seek medical care (it does not need to be the principal or dominant purpose)

Question 29

Bilder

Answer 29

Traveling to the warmer climate on doctor’s orders – can deduct the mileage, but not meal and lodging

Question 30

Thoene

Answer 30

what the doctors were recommending were purely personal activities: Postoperative mild exercise activity and engagement in social activity. The fact that petitioner secured both activities in the dancing studio does not mean the activities can be characterized as anything but personal in nature

Question 31

Ferris

Answer 31

when a doctor recommends a pool, the taxpayer can likely only deduct the minimal reasonable cost of a functionally adequate pool (and related housing structure if it needs to be indoors for some reason). The maintenance of the pool is deductible and it does not matter if others use the pool too

Question 32

Tso

Answer 32

Navajo medical treatments performed by a Navajo medicine man may be deductible as a medical expense

Question 33

Herman Schonhoff

Answer 33

when determining whether theft occurred for casualty loss purposes, it likely is necessary to analyze state law

Question 34

Chamales

Answer 34

O.J. Simpson was their neighbor and during the trial the traffic in the neighborhood increased which caused damage to their property. They cannot deduct this as a casualty loss because the loss in value was not proximately caused by the murder. Further, today this is not a federally declared disaster either.

Question 35

Corbaley

Answer 35

the engine failed due to extensive wear throughout it and it was not sudden and unexpected force

Question 36

Termite case

Answer 36

termite damage is a gradual deterioration. Time of discovery of the damage, in some situations, may affect the extent of the damage, but this does not change the form or the nature of the event, the mode of its operation, or the character of the result

Question 37

Helvering

Answer 37

Owens bought a car for $1,825. He wrecked the car and before the accident, the car was worth an estimated $225. After the accident, the car was worth $190. A deduction of $35 is appropriate here.

Question 38

Cinergy

Answer 38

bought building with asbestos which did not create a problem for years, but a situation of crumbling asbestos occurred and there was a danger of circulation. The court allowed the immediate deduction of asbestos removal because it created a situation, and they were returning the property to the before condition and value

Question 39

Northwest Corp.

Answer 39

The repair of the asbestos was not immediately deduction that year because it was a plan for rehabilitation an modernization

Question 40

Fall River Gas

Answer 40

the appliance company installs many appliances over time. Some of those installations are short-lived, but many are long-term. Looking at the totality of the circumstances, the appliance company could anticipate long-term gain from the installations. Therefore, the tax court did not clearly err in determining that the installation costs were capital and must be capitalized

Question 41

United Dairy

Answer 41

buying property with an environmental flaw and knowing that there was an environmental problem that would immediately need to be fixed will not allow for a deduction of the expenses. And those expenses would likely be part of the taxpayer’s basis (rather than being immediately deductible)

Question 42

Hannah’s Club

Answer 42

o Taxpayer could not depreciate a car if it is antique and he displays it as a thing of beauty in a for-profit museum and it is never driven, or if it is displayed as a historical novelty in a restaurant for winning a prestigious race

Question 43

Thor Power Tool

Answer 43

In writing down certain items of its inventory, Thor valued that inventory below market value but did not present any supporting evidence that the valuation clearly reflected its income. The accounting thus did not clearly reflect Thor’s income

Question 44

Paccar

Answer 44

a taxpayer should not include an item in inventory if it no longer has title to the item – transfer of title alone is not determinative, and a sale will only be respected for tax purposes if it is bona fide when considering economic substance

Question 45

Watson

Answer 45

his education expense deductions for training in psychiatry were allowed because it was helping him improve his skills and practice in the medical field. If he was getting a new specialty though, then that would not be maintaining or improving

Question 46

Coughlin

Answer 46

an attorney and goes to a big fancy seminar and deducts for room, food, etc. Court allows it because he is improving.

Question 47

Hernandez

Answer 47

must reduce deduction to the extent they received any intangible religious benefit in return. His donation gave him auditing and training sessions which he derived a benefit from

Question 48

Sklar

Answer 48

A donor paying for schooling that is the same amount as nonsecular is not a deductible contribution. Getting education in return

Question 49

Lary

Answer 49

Donating blood is seen as a service rather than a donation of your property

Question 50

Rev. Rul. 64-275 on Olympics

Answer 50

• An organization formed for the purpose of training suitable candidates in the techniques in national and international competition, and thereby improving the calibre of candidates representing the United States in Olympic and Pan-American games, qualifies for exemption as an educational organization

Question 51

Lions Associated Drag Strip

Answer 51

exclusively organized and operated for charitable or educational purposes of keeping juveniles off the streets. Can get damages for the refund of all prior income taxes paid since they qualify as tax exempt organization since their creation.

Question 52

Rev. Rul. 70-4 on adult amateur sports

Answer 52

Promoting amateur adult sports is purely recreational and entertainment and is therefore not educational.

Question 53

Rev. Rul. 65-2 on children sports

Answer 53

promoting sports for children likely will qualify as a charitable organization.

Question 54

St. Louis Science Fiction

Answer 54

Look to the predominant purpose of the activities to determine if the organization is operating exclusively for the charitable purpose. the predominant purposes were social or recreational and therefore not educational

Question 55

Minnesota Kingsmen Chess

Answer 55

the court focused on the purpose of the tournaments and concluded that even though there were some educational benefits to the individuals involved, the tournaments were designed for social and recreational purposes and tax-exempt status was denied

Question 56

North American Oil

Answer 56

indicates that a plaintiff has a claim of right if (1) the trial court concluded the plaintiff was entitled to the amount; (2) the amount is actually paid to the plaintiff; and (3) the plaintiff is free to use the amount (in other words, there are no restrictions on its disposition)

Question 57

Lewis

Answer 57

Lewis had the right to use the bonus the year he got it so he must pay the taxes on it under the claim of right doctrine. However, the year he has to pay it back to the employer, he may be entitled to a deduction

Question 58

McKinney

Answer 58

Embezzled money may not be held under claim of right but can be deducted the year they have to pay it back.

Question 59

Hornung

Answer 59

under the cash method, 68 miles was a substantial limitation on having constructive receipt of the lottery ticket winnings AND the company made no efforts to make it available to him that day nor did he have keys or title. The dealership was closed and he did not have constructive receipt.

Question 60

Ames

Answer 60

under the cash method, Ames did not have unfettered control over the illegal payments that the USSR promised in 1985. Ames obtained unfettered control over these payments only after he handed over the stolen government documents and the USSR deposited the payments in the secret locations

Question 61

Tampa Bay

Answer 61

under the accrual method, taxpayer did not have to include the prepayment of cash in gross income in the year the cash was received because (1) it was certain when the taxpayer would be required to perform the services and (2) the taxpayer could prove when the major expenses corresponding to the pre-paid revenue would be paid/incurred

Question 62

IRS revenue procedure 2004-34

Answer 62

accrual basis taxpayer is permitted to defer prepayments for services for one year if the taxpayer also deferred including the amount as income on its financial accounting statements

Question 63

General Dynamics

Answer 63

under the accrual method, the Supreme Court concluded that the taxpayer could not deduct medical expenses for services already provided to their employees until the employee submitted a claim form

Question 64

Chrysler

Answer 64

Under the accrual method, Chrysler was unable to deduct warranty expenses until the car dealer submitted a claim form for the repair of the car

Question 65

Rice

Answer 65

A property that a taxpayer has kept for investment purposes and has not held primarily for sale to customers in the ordinary course of the taxpayer’s business is a capital asset.

Question 66

Lattera

Answer 66

selling your right to installments for a lump-sum payment is ordinary income

Question 67

Long

Answer 67

Because the purchased assignment to the position in the lawsuit gave the buyer the potential to earn income, the money Long earned from selling the assignment was a capital gain

Question 68

Williams v. McGowan

Answer 68

split up a businesses assets to determine whether things are capital assets or ordinary income.

Question 69

Gilson

Answer 69

a transfer of property consisting of all substantial rights to a patent by the person who created the property is treated as a sale or exchange of a capital asset, resulting in long-term capital gains treatment

Question 70

Hort

Answer 70

income derived from a leased rental is taxable as ordinary income. If the taxpayer agrees to cancel a lease in exchange for a lump sum, that lump sum is a substitute for rent that is also taxable as ordinary income.

Question 71

Williamette Industries

Answer 71

Willamette opted to salvage its assets by merely changing the conditions under which they were used. The trees damages by weather and insects were not replaced or sold, but were prematurely harvested, processed, and turned into commercial products. Willamette was entitled to do so without losing eligibility for relief

Question 72

Santucci

Answer 72

the Santuccis have failed to prove that the printing company they purchased with the proceeds from the condemnation of their car wash is substantially similar in function to the car wash

Question 73

PLR 8127089 on artwork

Answer 73

artwork in one medium which you received the involuntary conversion of money for cannot be replaced with artwork in another medium.

Question 74

Johnson

Answer 74

Johnson used both the farm property and the gas-station property for rental income. Although the tenants of the properties used the properties in substantially different ways, Johnson’s relationship to each property was the same

Question 75

Bowling Alley Ruling

Answer 75

billiard equipment is not the same as bowling equipment