Income

Question 1

What is the meaning of income in 61?

Answer 1

Means the income as allowed by the 16th and. 61 scopes in all income that Congress can reach “except as otherwise provided”

Question 2

What is the calculus for including receipts in gross income?

Answer 2

if you get a receipt, you either have to find a code provision that exempts it or a basis to deduct or you need to add it to gross income

Question 3

What is the difference in a deduction and an exemption?

Answer 3

Deductions do not affect gross income - they only affect taxable income

Question 4

Can bartering groups dodge the income tax?

Answer 4

No. The form of receipts doesn’t matter. If comp is paid in a form other than cash, the amount of income is the FMV of the property/services received (1.61-2d1)

Question 5

If you win the lottery, find a doilar bill on the street or find a golden ticket in a chocolate bar, do you have income?

Answer 5

Yes, you might have some basis (cost of chocolate bar or lottery ticket) but most of this will probably be subject to tax

Question 6

What is the calculation of gross income?

Answer 6

Receipts - (Excludable receipts + Basis) = Gross Income

Question 7

What are the 3 requirements for income per Glenshaw Glass?

Answer 7

1) Accession to wealth 2) Clearly realized 3) over which you have dominion or control

Question 8

How is the accession to wealth component of Glenshaw Glass defined?

Answer 8

It’s broadly defined. A donation to a charity that you designate is an accession to wealth. The value of living in your own house is an accession to wealth.

Question 9

How is the “over which you have dominion and control” prong of Glenshaw glass applied?

Answer 9

Per Haverly, you must accept the property as your own to have dominion or control. (just putting book on the shelf is probably not d&c but donating to the library and claiming a deduction is d&c)

If McD pays for an attorney for an employee to manage its own reputational image, if employee accepts the help, d&c and income

Question 10

Your employer surprises you with a donation to a charity of your choice to receive $1000. Income?

The surprise donation is in your name and goes to unicef?

donation to a charity is in your contract to go to unicef

Answer 10

Yes because you have d&c when you pick the charity

No because no d&C

Yes because if it’s in the contract, we will presume you have d&c over how you receive your compensation

Question 11

What is the case about income imputed to parties based on payments directly to third parties. Holding?

Answer 11

Old Colony Trust. (American Woolen Co) If the payment to the 3rd party is an accession to wealth, clearly realized, over which you have dominion or control then it’s income to you regardless who receives the money

Question 12

Employer pays child’s tuition. Income?

Answer 12

If part of contract, definitely income. If a surprise, probably still income. If it’s a surprise and it’s your last day, maybe not income because it’s not clear you had dominion and control

Question 13

When does the old colony rule not make any difference?

Answer 13

If the money was directed in such a way that would have been included in income but also would have resulted in a full deduction to the taxpayer (think certain charitable gifts)

Question 14

when can income not be imputed to someone

Answer 14

If they are legally prohibited from receiving that kind of income (Commissioner v First Security Bank of Utah)

Question 15

Employer pays employee’s income tax. Income?

Answer 15

Yes. “Gross-Up” provisions causes the employee to receive income by the amount of the tax paid by the employer.

Question 16

What is the difference in a discount and imputed income?

Answer 16

Discounts are not given to compensate for labor/services/employment but imputed income is (but maybe there’s a fringe benefit exclusion)

Only the seller can give you a discount. If someone other than the seller is giving you the “discount” its’ probably imputed income (cash back on the credit card is basically the credit card paying you)

Question 17

Conceptually the government could tax you on the value you are receiving by living in your house and not renting it out

Answer 17

You have dominion/control, the value of the living in it is realized and it’s an accession to wealth
(You could rent out your house but instead you are consuming that value)

Question 18

What are the 2 meanings of fringe benefit?

Answer 18

1) Any form of non cash compensation (taxable or not)

2) Noncash compensation that is excluded from gross income

Question 19

You go out and by a ream of paper for your boss. Income?

Answer 19

No. reimbursements don’t count. it’s not an accession to wealth. Possession is not ownership. Ownership entails the customary benefits and burdens of ownership including the discretion of how the asset will be used in the future

Question 20

Can you exclude meals and lodging under 162?

Answer 20

No because 262 calls it personal plus 162 is a deduction not an exclusion

But you might be able to exclude under 119

Question 21

What are the requirements for a meal or lodging exclusion under 119?

Answer 21

1) For the convenience of the employer
2) furnished on the business premises of the employer
3) for lodging must be required to accept lodging as a condition of employment

Question 22

What’s not to like about 119 in theory?

Answer 22

119 is a violation of horizontal equity (one taxpayer gets fed and the other doesn’t and one’s better off and doesn’t get taxed any more)

Question 23

Why does 119 exist?

Answer 23

The valuation problem seen in Benaglia is where the employee receiving the meal/lodging might not value it at the market rate and that doesn’t seem fair and we don’t know how to put a value on it so we just exclude it

Question 24

What is the provision for fringe benefits?

Answer 24

132 allows taxpayer to exclude from gross income defined fringe benefits

Question 25

What are the kinds of fringe allowed to be excluded under 132?

Answer 25

1) No additional cost services
2) Qualified employee discount
3) Working Condition fringe benefit
4) De Minimis Fringe Benefit

Question 26

When does 132 not apply?

Answer 26

If the non-cash compensation is “of a type” covered by some other section. This that if there is another section addressing that type of compensation, you must use that section or none at all (e.g. the provision about excluding comp for undergraduate education)

Question 27

What are the requirements to exclude income from a no additional cost service 132b?

Answer 27

Provided by an employer to an employee or dependent or spouse if the service is provided to customers in the ordinary COB of the line of business the employee is engage in AND employer does not incur substantial additional cost providing the service (foregone revenue is a substantial cost) (act paid by employee ignored)

Question 28

What is the logic of the 132b no additional cost service exclusion?

Answer 28

the service is provided at no (or almost no) marginal cost, why would we want to discourage that value from being realized? We don’t want to encourage waste by taxing it

Question 29

What are the requirements to exclude income as a qualified employee discount in 132c?

Answer 29

Any employee discount for use on qualified property or services for employee/dependent/spouse that does not exceed (if property - the gross profit percentage of the price at which the property is being offered to customers) (if services - 20% off of the price that the services are being offered by the employer to the customers)

Qualified property or services means any property other than real property or investment property and any services which are offered for sale to customers in the ordinary COB of the line of business the employee works in

Question 30

What are the requirements to exclude income as a working condition fringe benefit 132c?

Answer 30

Any property/services provided to an employee by employer which if included in income would be allowable as a deduction under 162 or 167.

This prevents the IRS from taxing you not the value of sitting in your chair at work

Question 31

What are the requirements to exclude a deminimis fringe benefit 132e?

Answer 31

Any fringe benefit that when taken in the aggregate with other similar fringes is so small that accounting for it would be unreasonable/impracticable administratively

Question 32

What are examples of de minims fringe benefits?

Answer 32

employer might buy employees dinner if they work past 7. This might be de minimis if that is not a regular occurrence but might not be de minimis if it happens everyday. Then it would be included

Question 33

What are cafeteria plans?

Answer 33

Employers can offer a menu of fringe benefits and each employee can decide how much of each benefit they want to receive

Question 34

What is the theoretical problem with cafeteria plans?

Answer 34

If 132 was justified because we weren’t sure how much value hotel managers would place on their accommodations, that justification no longer works here

Question 35

Are loan proceeds taxed when received?

Answer 35

No because there is no net accession to wealth when we assume you will repay

Question 36

Is repaying a loan deductible?

Answer 36

No because you were not taxed when you received the loan proceeds. Plus there is no loss to wealth because the reduction in cash is offset by a reduction in the obligation to repay

Question 37

What are the 2 theories of DOI income?

Answer 37

Now for then theory (recognize income now to correct for the under inclusion of income then when you received the funds but would not repay) decisive in rail joint

Freeing of assets theory (retiring a debt for less than what was received “frees assets” that were set aside for debt repayment and those assets are income) This is a broader reading of kirby lumber and rail joint would have come out the other way

Question 38

When can a taxpayer exclude DOI income in bankruptcy?

Answer 38

In bankruptcy, taxpayer can exclude DOI income but loses favorable tax attributes proportionally to the extent they have them (like deferring the tax) 108

But can elect to lose adjusted basis first

Must be the debtor in bankruptcy, not just a discharge by the bankruptcy court

Question 39

When can a taxpayer exclude DOI income if insolvent and not in bankruptcy?

Answer 39

Can exclude DOI income from gross income to the extent of the insolvency (Liabilities - FMV of assets). Anything above this is income. Creates perverse incentive to file bankruptcy because you need to give the equity some incentive to stick around

Question 40

I’m not in bankruptcy and not insolvent, can I still exclude by DOI income?

Answer 40

Probably not but…
if payment of the indebtedness would have been deductible, then you can exclude the DOI income

(Imagine a world without §108(e)2. I owe $1K to the plumber but have $0. I could stiff the plumber, but then I would have $1000 DOI income. Instead, I go to the bank, borrow $1000, pay the plumber, take the full deduction, then stiff the bank and recognize $1000 DOI income.)

AND a reduction in the amount of a purchase money debt owned to the seller of the goods/services is treated as a reduction in price not income

Question 41

Why do we have a section on medium of payment cases?

Answer 41

There are a lot of ways to transfer value and the tax consequences of the transfer often depend on the intent behind the transfer and its context

(can pay someone’s taxes, discharge a debt they owe you out of gift/devise or via a bargain)

Question 42

What income does TP have in each of the following:

1) Employer pays off TPs personal loans
2) TP stiffs bank and personal loans discharged
3) Personal loan is to a friend and friend cancels the debt

Answer 42

1) Employee has compensation income if employer pays student loans. The bank still gets paid, so no DOI income as in Kirby
2) TP has DOI income like Kirby lumber
3) Non-taxable gift under 102

Question 43

What is a bargain sale?

Answer 43

It’s part sale part gift

Question 44

What are the gain/loss rules for bargain sale?

Answer 44

the giftor/seller cannot deduct a loss under 165 if amount realized

Question 45

What is the special rule for bargain sales to charities?

Answer 45

1011
TP can only use the % of basis associated with the sale part of the transaction to offset the amount realized. (Govt is fine letting sellers/giftors use their entire basis in other transactions because the buyer is taking a lower basis, but for charities, basis is meaningless

Question 46

What basis does the buyer/giftee take in a bargain sale?

Answer 46

Basis is the greater of cost and basis that would obtain if gift (usually carryover)

Equivalently, basis = carryover + gain recognized by donor

Question 47

How do you determine the tax consequences fo a below market loan?

Answer 47

Recharacterize the loan as a loan at market (plus accompanying interest) PLUS compensation/gift/devise to fill the gap between the market loan and reality.

Commit to the fiction that it is a loan at market terms and then ask yourself why someone else is paying all/part of the interest payments

Question 48

What are the consequences (to employer and employee) of an employer’s below market loan to an employee

Answer 48

Creditor recognizes income on the fictional interest received and deducts the fictional interest they paid (162)

Debtor is taxed on income to the extent the creditor paid their fictional interests (as compensation)

Question 49

What are the consequences (parent and child) of a parent’s below market loan to a child?

Answer 49

If gift, then creditor recognizes income on the fictional interest received but cannot deduct anything because fictional interest paid is a gift (crazy! parent could be taxed on below market loan to child)

Debtor can exclude the fictional interest paid on their behalf as a gift (102)

Question 50

Why do you care if income is DOI income as under Kirby lumber or a gift or compensation?

Answer 50

Only DOI income can benefit from 108

Might affect if it’s ordinary or capital gain

Question 51

What are the two types of debt?

Answer 51

recourse debt (rights against the debtor personally can be with or without a security interest)
Nonrecourse debt (right against the collateral only, will often be covenants about upkeep of property/sale/etc)

Question 52

If TP takes out a non recourse debt at a value higher than TPs basis, is taking out that mortgage considered a taxable event?

Answer 52

No - Woodsam

This is despite the non recourse debt “locking in” a certain amount of gain. (if property value goes down, gain is Amt non recourse debt - Basis. If property value goes up, gain is even higher than Amt non recourse debt - Basis) Classing Govt losing by winning situation

Question 53

If you purchase something with recourse debt, is it added to basis?

Answer 53

Yes

Question 54

I sold a property subject to recourse debt. How do I treat that when calculating gain or loss?

Answer 54

Old colony says that paying TP’s obligations is the same as paying TP, so you add the amount of the debt transferred to amount realized

(of course, no seller would just sell it subject to the obligation without transferring the “recourse” to the buyer, otherwise seller basically becomes guarantor)

If it was non recourse, you’d cite to tufts

Question 55

I sold a property subject to a non-recourse debt. How do I treat that when calculating gain or loss?

Answer 55

Tufts says you include it in amount realized.
It’s ok that non recourse debt is inflating basis in property per Crane, but we’re assuming you’re going to pay it. If you transfer subject to the non recourse debt, that assumption proved to be false so we inflate the amount realized to compensate.

If it was recourse, you’d cite to old colony

Question 56

Why would Tufts not have reduced the basis by the amount of non recourse debt outstanding when calculating gain?

Answer 56

Because if the TP had depreciated the property, the basis could be so low that deducting the non recourse debt outstanding would put it into negative numbers and the tax code doesn’t do negative numbers

Question 57

What is a good way to check the gain calculated when selling subject to debt?

Answer 57

Look at the economics of the transaction and they should square with the tax gain.

Question 58

What is the gain calculation for selling property subject to non recourse debt? Is it the same for recourse debt?

Answer 58

Yes, same as for recourse debt but cite to old colony instead of tufts

Amount realized = Amt rec’d in cash and property + Amt of outstanding debt
Adjusted Basis = total Cost (inc. equity and debt) - Depreciation

Question 59

I just set up a sale leaseback tax scheme where I’ll inflate my basis under ______ and then deduct the depreciation. Sure, I recognize a bunch of Tufts income in the end, but deferral is always nice. Works?

Answer 59

fill in the blank is Crane

Doesn’t work because of Estate of Franklin. Seller financed non recourse is a red flag. If FMV < debt, everyone knows the taxpayer probably won’t repay the debt, so it’s not automatically added to basis

Question 60

Under estate of franklin, is the recourse debt ever added to basis?

Answer 60

As TP pays down the debt, the debt is added to basis

Question 61

I just bought a property in good faith and the non-recourse debt is slightly over the FMV. Add debt to basis?

Why?

Answer 61

Yes, but only to the extent of the FMV.

This is Pleasant Summit (preventing an unpleasant cliff between Crane and Franklin). Franklin says include none in basis. Crane says include all in basis. Pleasant summit allows FMV on the theory that if you approach the lender in a good faith transaction and asked for a writadown to FMV, they would probably give it to you

Question 62

I just bought a property with non recourse debt and the FMV is greater than the amount of debt I took out on it. Add to basis?

Answer 62

Yes, this is Crane

You can also claim depreciation on that debt because we’re assuming there is a high probability that you will repay that debt, and even if you don’t you’ll have an offsetting higher amount realized under Tufts later

Question 63

Does repaying debt impact basis?

Answer 63

No unless in estate of franklin territory but it does reduce the amount of debt outstanding which would decrease the amount of tufts income you would have to add to amt realized

If estate of franklin, then repaying the loan does add to basis

Question 64

Into what asset does the basis from debt go?

Answer 64

It depends on where the $ goes. If the money from the debt goes into the collateral, basis goes to the collateral. If the debt goes to something else, basis goes into something else

Question 65

Why was illegal activity originally not taxable?

Answer 65

the criminal simultaneously incurs an obligation to repay, so Commissioner v Wilcox said there was no income (like a loan)

Question 66

Is income from illegal activity includable in income?

Answer 66

Yes, the income is taxed and then if restitution is made later, that is deductible

Question 67

What is the unusual consequence of saying that income from criminal activity is taxable?

Answer 67

The government has a claim for unpaid income tax that is superior to the victim’s right to restitution (this is usually true because the govt will usually file a tax lien before the victim files a judgment lien)

Question 68

Are expenses deductible for criminal activity?

Answer 68

Yes (Sullivan) but claim them at your own risk

Question 69

What are some payments associated with criminal activity that would normally be deductible as expenses but are disallowed?

Answer 69

various carveouts in 162 for fines and penalties, bribes and kickbacks, payments that are in violation of generally enforced state law, drug trafficking business expenses

Question 70

What is the rule on deductibility of sexual harassment and sexual abuse settlements?

Answer 70

Might be deductible under 162 if no NDA. If NDA, then not deductible

Question 71

Why is it hard to claim deductions for criminal activity?

Answer 71

The burden for proving a deduction is on the taxpayer and it’s tough to prove almost any deduction without disclosing the nature of the business

Question 72

What are the types of exempt income?

Answer 72

Life insurance payments, personal injury recoveries, tax exempt state and local bonds

Question 73

What is special about costs spent to earn exempt income?

Answer 73

The costs spent to earn it are not deductible.

Question 74

I sue to get $ from an estate. Deductible? for a Personal injury? for a tax exempt bond?

Answer 74

None of them are deductible because they’re all exempt. We only allow deductions to reduce gross receipts to income but if we aren’t going to tax income, we don’t need deductions

Question 75

What about state and local bonds is excluded from income?

Answer 75

Just the interest. Any gain or loss on the price of the bond is excluded

Question 76

Why is the interest on state and local bonds excluded from income?

Answer 76

It’s an indirect subsidy to state and local governments

It’s also a leaky subsidy that tends to benefit high bracket taxpayers by giving them an after tax yield that is higher than they would have been able to get elsewhere (assuming there are so many state and local bonds that rich people don’t compete away their advantage)

Question 77

Why do states not want to replace the leaky indirect subsidy from the state and local bond interest income exclusion with a direct subsidy?

Answer 77

States fear that Congress will shortchange them on the subsidy. States know that the 103(a) subsidy is locked in for the life of the bond whereas if the subsidy was direct then it’s always in jeopardy

Question 78

What were arbitrage bonds?

Answer 78

States selling their own tax exempt bonds which were backed by US treasuries and pocketing the spread between the rate they could get as tax exempt and the treasury rate

Question 79

What were private activity bonds?

Answer 79

States would borrow at their low tax free rate and loan the $ to private businesses and private businesses would repay the state plus some public work

Question 80

What happens if a personal injury recovery is not covered by 104a2?

Answer 80

It’s taxable as income

Question 81

Which personal injury recoveries are excluded from gross income under 104?

Answer 81

physical injury/sickness only. Plus if you have any emotional distress to go along with it, that can be excluded. But no pure emotional distress

Question 82

Evaluate the theory of the personal injury exclusion?

Answer 82

Makes no sense because some of the compensation is probably for lost wages (and those would have been taxable). Plus, the law doesn’t recognize a basis in bodily health (people sell their health for $ all the time - daredevils/football players and can’t claim a deduction)

Question 83

Why do parties with personal injuries like to settle with annuities?

Answer 83

“structured settlements” because the “inside buildup” or the interest earned in the hands of the insurer is not taxed

Plus, whoever is paying the settlement can deduct the full amount immediately as if it was cash

Question 84

Are life insurance premiums deductible?

Answer 84

No because the payouts under them are excludable under 101