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Tax > Scope of Income > Flashcards

Scope of Income Flashcards

1
Q

Test for income

A
  1. ascession to wealth
  2. realization event
  3. complete dominion (control)
  • test from Glenshaw Glass
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1
Q

Taxable income equation

A

Gross income
Less: Business deductions
= Adjusted Gross income
Less: standard or itemized deductions
Less: Personal exemptions (currently out of the code)
= Taxable income

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2
Q

Tax Rates (for class)

A

Ordinary income: 30%
Capital gain: 20%
Collectible: 28%

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3
Q

Statute of Limitations

A

3 years statute of limitations from the date filed, April 15th if filed early

6 years if issue w/ gross income

No filing or fraudulent filing = no limit

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4
Q

Are illegal gains taxed?

A

Yes. shown by SCOTUS decision and reg 1.61-14

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5
Q

Old Colony Trust Co - paying another’s taxes is discharge of indebtedness

A

D served as president of the American Woolen Company. Company had a policy to pay the income taxes of the company’s officers.

Rule: An employer paying an employee’s income taxes constitutes income (S 61(a)(11): Income from the discharge of indebtedness)

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6
Q

Genshaw Glass - Punitive damages are taxable

A

Punitive damages are taxable as gross income

“Here, we have undeniable (1) accessions to wealth, (2) clearly realized, over which the taxpayers have (3) complete dominion.”

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7
Q

Charley v. Commissioner - frequent flyer miles

A

Here, the issue is NOT a tax on frequent flyer miles, the IRS has explicitly stated the administrative costs of tracking flyer miles outweighs the benefits of taxation

Rule: An employee’s conversion of frequent flyer miles into cash in a travel account created by an employer constitutes gross income.

Rule works under two theories:
(1) additional compensation, or
(2) converting miles to cash was disposition of property

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8
Q

Helvering v. Independent Life Insurance Co.

A

Imputed wealth is not income (Filing your own tax return or Cutting your own hair)

A tax based on the rental value of someone’s property is unconstitutional, however

Congress is allowed to make taxpayers include an untaxable item, in this case the rental value of the portion of the building occupied by the insurance company, as gross income in calculations as a condition of utilizing a deduction relating to that property

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9
Q

Rev Rul 79-24 (barter income)

A

The FMV of the property or services must be included in gross income

The stipulated price is presumed to the be the FMV subject to contrary evidence

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10
Q

Dean v. Commissioner (rent free occupancy is income)

A

An employee’s rent free occupancy of an employer’s property is income equal to the fair rental value

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11
Q

Test for Gifts (gifts are excluded from income)

A

A “Detached and disinterested generosity” (look to the transferor’s intent)

Prof Note: “Generally, the larger the amount given, the higher the burden to prove it is a gift”

See Duberstein and Stanton

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12
Q

Is a tip considered a gift?

A

No. Although associated with generosity, under 1.61-2(a) - tips are explicitly taxable as income (therefore, not gifts)

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13
Q

1.102-1(2) Exception to the rule on employee transfers

A

If the transfer can be related to a familial relationship it is excluded from income

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14
Q

132(h) “Employee” includes

A
  • Spouses and dependents
  • Surviving spouses
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15
Q

Duberstein - A Cadillac given in exchange for business leads is compensation

A

A transfer is NOT a gift if the giver was motivated by
(1) a moral or legal duty;
(2) receiving an economic benefit; or
(3) receiving services, even ones with no economic benefit

The evidence supports a finding that Berman was not acting with disinterested generosity and that he transferred the Cadillac to Duberstein in exchange for customer leads Duberstein already produced or might later produce

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16
Q

Stanton - Whether or not a transfer is a gift is a “fact specific” inquiry into the transferor’s intent.

A

Stanton resigned after working for a church for over 10 years.

The church gave Stanton $20,000, calling it a “gratuity” in appreciation for Stanton’s prior services. Although the church did not owe Stanton any retirement benefits, the church also said that the payment released it from any retirement-benefit obligations.

Stanton argued gift and IRS disagreed, court remanded for more fact finding (but now, 102(c) does not allow employee gifts)

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17
Q

Disputes over whether a transfer is an employee gift come up in three common scenarios

A
  1. to an employee during an ongoing employment relationship;
  2. to an employee upon or after retirement; and
  3. to survivors upon the death of an employee
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18
Q

102(c)(1) prevents exclusions of “benefits” to employees

A

Summary: No employee gifts

An employee “shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee.”

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19
Q

two things that likely qualify for the exception to the “no employee gifts” rule 102(c)

A

Section 132(e ): certain traditional retirement gifts are treated as de minimis fringe benefits; and

Section 74(c ): certain employee achievement awards are freed from tax.

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20
Q

If there is a settlement over a contested will, are the proceeds of the settlement taxable?

A

Lyeth v. Hoey - property received from a settlement resolving a will is not taxable income

(if the judgment or settlement grants the distribution to the heir because of his or her heir status)

inheritances excluded from income

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21
Q

Are bequests taxable?

A

Wolder - where a bequest is made in return for services rendered, that bequest constitutes taxable gain.

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22
Q

exception to 102(c) “the no exclusion of employee gifts rule”

A

“extraordinary transfers to the natural objects of an employer’s bounty if the employee can show that the transfer was not made in recognition of employment.”

heavy burden to establish that there was not a compensatory purpose to the transfer

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23
Q

Does 102(c), no exclusion for employee gifts, apply to bequests?

A

Most likely, yes.

There may be an argument that 102(c) does not apply to bequests.

Still, there is an issue of whether the circumstances indicate that the bequest was made as compensation for services rendered.

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24
Q

While fringe benefits to employees are included in gross income, there are 6 common exceptions

A

132(a)(1) No additional cost services

132(a)(2) Qualified employee discounts

132(a)(3) Working condition fringes

132(a)(4) De minimis fringes

132(a)(5) Qualified transportation fringes

132(j)(4) Athletic Facilities

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25
Q

Test for 132(a)(1) No additional cost services

A

Excludable if
(1) Same line of business, and
(2) does not displace non-employee customers

Subject to:
- nondiscrimination rule
- Reciprocal agreements must be in the same industry

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26
Q

Test for 132(a)(2) Qualified employee discounts

A

Excludable if
(1) same line of business (employer AND employee),
(2) the discount is for
(a) personal property not held for investment, or
(b) services (including insurance, but not loans for employees of banks)
and
(3) the discount does not exceed
(a) gross profit percentage for property, or
(b) 20% for services

amounts in excess of the limits are includable

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27
Q

Test for 132(a)(3) Working condition fringes

A

“The cost of doing business” CLE’s or a company car for business purposes

Rule: if the employee paid for it and could deduct the expense (162 or 167), it is excludable from income

132(j)(3) Special exclusion for Auto salesmen use of demonstration cars
(1) be used primarily for facilitating company duties, and
(2) have substantial restrictions on personal use

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28
Q

Test for 132(a)(4) De minimis fringes

A

Examples
- coffee machine in the break room
- “traditional” retirement gifts given “upon retirement” after a “lengthy service”

Also includes:

“Bargains” at employer operated eating facilities IF
(1) located on or near the premises, and
(2) the revenue generated normally equals or exceeds their operating costs.
nondiscrimination rule for meals

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29
Q

Test for 132(a)(5) Qualified transportation fringes

A

(A) Transportation in a commuter highway vehicle between the residence and place of employment.
(B) Any transit pass.
(C) Qualified parking.
(D) Any qualified bicycle commuting reimbursement.

Exclusion does NOT apply if employee receives cash up front, but will apply for reimbursement. Having the option is okay.

Transit pass reimbursement only excludable if passes are not readily distributable

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30
Q

Test for 132(j)(4) Athletic Facilities

A

Applies to a gym, pool, golf course, tennis courts or other athletic facility
(1) located on the employer’s premises,
(2) operated by the employer, and
(3) where substantially all use is by employees, spouses, and dependent children

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31
Q

What is the nondiscrimination rule?

A

Certain benefits must be available to all employees to be excludable

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32
Q

To what exclusions does the nondiscrimination rule apply?

A

(1) No-additional cost services,
(2) Qualified employee discounts, and
(3) Meals provided at an employer-operated eating facility

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33
Q

What are the limitations on 132(a)(5) Qualified transportation fringes?

A
  • Aggregate value of commuter highway travel and a transit pass $175 per month
  • Qualified parking $175 per month
  • Bike reimbursement limited to $20 per month that cycling was the primary travel to work and employee did not receive the other benefits
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34
Q

Test for excluding value of meals and lodging (S 119)

A

Provided
(1) on the business premises (adjacent property okay, but not across the street)
(2) for the convenience of the employer

Lodging adds:
(3) as a condition of employment

meal exclusion not available if employee has option of receiving compensation in lieu of meals

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35
Q

When does an employee accept loding as a “condition of employment”?

A

Hatt (funeral home case): An employee accepts the housing as a condition of employment if his continuous presence is necessary in order to adequately perform his duties.

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36
Q

What are the two exceptions to the “typical” rules on lodging

A

S 119(d) employee of an educational institution may exclude lodging if located on or in the proximity of campus

S 107 Housing benefits for “minister of the gospel,”
- MUST be furnished as compensation
- must be specifically earmarked
- exclude value of home or rental benefits provided to the extent that are used for principal residence

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37
Q

Business trip or an awarded vacation?

A

The expenses for a trip paid for by an employer is not included as gross income if the trip is
(1) NOT provided in light of the employee’s past work performance and
(2) is taken primarily for business purposes.

The presence of a business purpose or the obligatory nature of a trip are significant, but not conclusive, indications of a business trip

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38
Q

The general rule for S 117 scholarships and fellowships

A

Scholarships for tuition (and related expenses) are NOT taxable, however, amounts for lodging and services are taxable

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39
Q

S 117(a) excludes “qualified” scholarships

A

Qualified means: used on qualified tuition and related expenses
- tuition and enrollment fees,
- other fees,
- books,
- supplies, and
- equipment required for courses of instruction

No exclusion for personal living expenses, travel, or research

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40
Q

S 117(c) limits the 117(a) scholarship exclusion

A

Must include any portion of scholarship that represents payment (even if for services required of all students)

The exception is athletic scholarships with a “gratuitous flavor.”

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41
Q

Athletic scholarships with a “gratuitous flavor”

A

The university
(1) expects, but does not require, the student to participate in a particular sport,
(2) requires no particular activity in lieu of participation, and
(3) cannot terminate the scholarship if the student cannot participate

42
Q

117(d) allows a “qualified tuition reduction”

A

Excluded in the case of
(1) employees (including spouses and dependents)
(2) below the graduate level

at the graduate level for teaching or research assistants

  • Not excludable if for payment and
  • Nondiscrimination rule
43
Q

S 127 exclusion for educational assistance

A
  • up to $5,250
  • Includes tuition, books, supplies and an employer provided educational course,
  • Does NOT include assistance for courses involving sports, games, or hobbies.

Until the year 2026, also includes payments on a qualified education loan

By its very nature the educational assistance is compensation; so no need to jump compensation hurdle

44
Q

What is the “same line of business rule” used in exclusions?

A

The employer AND employee must be in the same line of business as the benefit provided

Includes those who provide substantial service to a line of business

(Ie an accountant for a furniture store can receive discounts and exclude)

45
Q

Steps for Determining Gain

A

(1) Realized earnings - adjusted basis = realized gain, then
(2) Recognize a realized gain unless on non-recognition exception applies

46
Q

Examples of Realization events

A

(1) Cash sale
(2) Exchange of property
(3) The use of property as currency
(4) The transfer of property subject to a liability

47
Q

No accession to wealth from:

A
  • mere appreciation
  • borrowed money pursuant to a loan
48
Q

Philadelphia Park Amusement Co. v. United States (Cost as Basis)

A

Franchise interest exchanged for bridge with no known value

“the value of the two properties exchanged in an arms-length transaction are either equal in fact, or are presumed to be equal.”

Rule: when you do not know the price of property, it is presumed to be equal to the value of the property given in exchange

49
Q

Basis for gifts

A

Dual Basis Rule:
- Carryover basis unless it would result in a loss, then
- FMV is the basis

if the FMV basis results in a gain, no gain no loss

50
Q

Basis for transfers between spouses

A
  • Always carryover basis
  • no gain no loss
51
Q

Is refinancing a mortgage a taxable event?

A

No (Woodsam associates v. commissioner)

52
Q

If taxpayer receives shares of stock in exchange for marriage, is the stock considered a gift?

A

Farid Es Sultaneh v. Commissioner
- No

  • the presence of any consideration, even consideration that would be considered inadequate under contract law, negates the possibility of something being a gift
  • indicates a lack of purely donative intent.
53
Q

Basis for part gift part sale

A

Donee’s basis is the greater of
- Amount paid, or
- Donor’s basis

If Donor basis is greater than FMV at the time of transfer, FMV at the time of transfer is basis for any loss

54
Q

Are transfers between spouses subject to the dual basis rule?

A

No. Always carryover basis, even when it results in selling for a loss.

55
Q

What is the basis for a donee of a decedent?

A

FMV

56
Q

If a company pays bonuses to employees through stock, must they realize any gains on that stock?

A

Yes.

International Freighting Co.
Rule: The disposition of stock in exchange for services rendered is a taxable event.

57
Q

Is selling virtual currency a realization event?

A

Yes. Disposition of virtual currency is a realization event and any appreciation must be realized.

58
Q

Purchasing property with a loan on it

A

Purchaser will pay FMV
- Money owed to the creditor, and
- Anything leftover to the seller

Sale/disposition of the property discharges the original lienholder’s liability for the loan (even if not paid, so long as the purchaser agrees to take the loan on, and they always do)

59
Q

If taxpayer sells property with a loan on it, do they reduce their amount realized by the amount of the principal left on the loan?

A

No.

Crane v. Commissioner:
The amount realized in the disposition of property subject to a mortgage includes the amount of the principal left on the mortgage

60
Q

If taxpayer sells property that is underwater (mortgage principal exceeds FMV), is the principal still considered in the amount realized?

A

Yes.

Tufts:
The rule in Crane applies even if the principal value of the mortgage exceeds the property’s FMV

61
Q

Does discharge of indebtedness income apply to family loans?

A

Yes

62
Q

Three exceptions to discharge of indebtedness income

A

(1) debt discharged in bankruptcy, and

(2) insolvent debtor exception (Example: debtor has 5g and owes creditor 10g, debtor pays 5g and creditor forgives 5g, no taxable income)

(3) discharged student loans (including those repaid by schools for pursuing public interest)

63
Q

If a company issues debt, and the buys back that debt at a lower price, do they have income?

A

Yes. This is essentially discharge of indebtedness.

Kirby Lumber

64
Q

Is the return of capital income?

A

No. The return of capital is not income, but interest is.

65
Q

Two elective exclusions from discharge of indebtedness income

A

“qualified real property business indebtedness”
and
Mortgage acquisition indebtedness

66
Q

elective exclusion Mortgage acquisition indebtedness

A
  • may exclude up to $750k from the discharge of mortgage on principal residence
  • applies if restructuring or foreclosure
  • reduce basis by the amount excluded
66
Q

elective exclusion “qualified real property business indebtedness”

A
  • applies only after the bankruptcy, insolvency, or qualified farm indebtedness exceptions
  • real property used in a trade or business
  • reduce basis by the amount excluded
67
Q

How do you recognize compensation made in return for the destruction of goodwill?

A

Raytheon
compensation for the loss of goodwill in excess of its cost is gross income

compensation reduces basis, once basis hits 0 you start to recognize gain

68
Q

Are punitive damages included in gross income?

A

Yes. Punitive damages are NEVER excluded from gross income.

69
Q

What damages are excluded from gross income?

A

Exclusions under 104(a)(2), damages for:

  • (1) Physical injury
  • (2) Emotional distress that is attributable to a physical injury
  • (3) Amounts of medical expenses related to the physical manifestations of emotional distress

arguably damages for sexual harassment is excludable if there was touching

70
Q

When can you NOT exclude damages under 104(a)(2)?

A

If deducted as a medical expense in year 1, can’t exclude damages received for that expense in year 2

71
Q

Three things that are “incident to divorce”

A
  1. Alimony (must be cash payments),
  2. Property settlements, and
  3. Child support
72
Q

Are alimony and maintenance payments included in the payees GI and deductible by the payor?

A

If a divorce instrument is executed before the year 2019, S 71 and S 215 apply, unless
- The instrument is modified after the year 2018, and
- The modification expressly provides such sections are inapplicable

73
Q

S 71: include alimony and maintenance payments in GI if

A

(1)The payment is received by, or on behalf of, a spouse under a divorce or separation instrument;

(2)The divorce or separation instrument does not designate the payment as a non-alimony payment;

(3)parties are not members of the same household at the time of payment;

(4)No liability to make any payment in cash or property, after the death of the payee spouse; and

(5)The payment is not for child support

74
Q

S 215: deduct alimony or separate maintenance payments

A

to the extent the payments are includible in the gross income of the payee spouse under Section 71

75
Q

How are transfers that are “incident to divorce” treated?

A

have the same treatment as transfers between spouses
- no gain no loss
- carryover basis

76
Q

Test for what transfers are “incident to divorce”

A

(A) the transfer occurs within one year after the parties cease to be married, or

(B) is related to the divorce
(1) The transfer is pursuant to a divorce or separation instrument (including modification and amendments), and

(2)The transfer occurs not more than 6 years after the date on which the marriage ceases

failing the test creates a rebuttable presumption

77
Q

How to overcome the presumption if you fail the incident to divorce test

A

Must show

(1) outside factors hampered an earlier transfer of property, and

(2) transfer was made promptly after the impediment was removed

presumption is very difficult to overcome

78
Q

Transferring property to satisfy an obligation “arising out of divorce”

A

Young v. Commissioner
Rule: Transfers of property made by a former spouse to satisfy obligations arising out of a divorce is incident to divorce and therefore not a taxable event

Professor: the origin of the claim was out of divorce

79
Q

Exclusion for gain on the sale of a principal residence (S 121)

A

Exclude up to $250,000 ($500,000 if married filing a joint return) of gain realized on the sale or exchange of a principal residence occurring on or after May 7, 1997

Must have owned and occupied as a principal residence for at least two of the five years prior to the sale or exchange

Exceptions resulting in a fraction of the exclusion include reasons of
1. employment
2. health, or
3. unforeseen circumstances

80
Q

What qualifies as a residence?

A
  • House,
  • House trailer,
  • Houseboat,
  • Stock in a cooperative housing unit, and
  • Any other dwelling

Also includes surrounding vast acreage IF it is not used for business or profit

81
Q

Does S 121, exclusion of gain on the sale of a principal residence, apply to weekend or summer homes?

A

No! Those are not principal residences. However, the code does allow for temporary rental of your principal residence.

82
Q

Factors for “principal residence”

A

(1) property used for the majority of the time
(2) Employment
(3) Principal residence of family
(4) Addresses
(5) Location of bank(s)
(6) Location of religious organization(s)

83
Q

Is S 121, exclusion of gain on the sale of a principal residence, elective?

A

Yes.
Taxpayer can elect to not have S 121 apply to a sale in anticipation of a future subsequent sale occurring within the two year period

84
Q

Exclude interest income from state and local bonds (S 103)

A

Exclude interest received from state or local government bonds, unless

It is a (1) private activity bond that is not (2) a qualified bond

85
Q

What is a “private activity bond”?

A

more than 10% of proceeds used for private business

86
Q

What is a “qualified bond”?

A

(1) an exempt facility bond,

(2) a qualified mortgage bond,

(3) a qualified veterans’ mortgage bond,

(4) a qualified small issue bond,

(5) a qualified student loan bond,

(6) a qualified redevelopment bond, or

(7) a qualified 501(c)(3) bond.

87
Q

Exclusion for foreign earnings (S 911)

A

Up to $110,000 from a foreign source which is attributable to the taxpayer’s performance of services

Must elect the exclusion on a “timely return,” meaning before IRS contacts you, so file even if you don’t owe

88
Q

Eligibility for S 911, exclusion of foreign earnings

A

American citizen or resident present in a foreign country for at least 330 days during any period of 12 consecutive months (objective), or

American citizen must be a “bona fide resident” of a foreign country for an uninterrupted period including a taxable year (subjective)

objective test preferred

89
Q

What is the “kiddie tax”?

A

The kiddie tax is a tax designed to stop parents from assigning income to children to avoid paying taxes.

The parent’s tax rate is imposed on income that is
(1) unrelated to employment
(2) earned by individuals 18 years of age or under—or dependent full-time students under age 24

90
Q

In Lucas v. Earl, Earl assigned half his income to his wife, but it was all still taxable to him. Why?

A

This case is referred to as “the armor”

“You can’t separate the fruit from the tree.” You must give away the tree to avoid income.

Earl EARNED the income, so Earl is taxed

91
Q

Why is Giannini known as “the chink in the armor”?

A

Giannini did not accept a portion of his salary and the board decided to donate it to the university of California.

Rule: Income is includible in gross income if the taxpayer is entitled to “dominance or control over its use”

The degree of control is very important (argue both sides)

92
Q

If you are the executor of an estate, can you waive payment? How?

A

Waiving income as executor of an estate can be done

(1) explicitly in writing, or

(2) Implied waiver (Do nothing. Just can’t show an intent to seek payment)

93
Q

What if you earn income as an agent, then turn that income over to the principal? Do you have income?

A

No.

Income is not included in gross income if
(1) The income is earned as an agent, and
(2) Immediately turned over to the principal

94
Q

Donor gives donee interest coupons detached from bonds. When interest is paid, who receives income?

A

The donor. Helvering v. Horst

Here, Horst gave away the fruit, but not the tree, and is thus taxed

95
Q

Blair assigned a portion of his future income from a life trust to his children and, unlike Horst, was not taxed. Why?

A

Blair v. Commissioner

(1) Tax liability from income from property attaches to ownership, and

(2) Interest in a trust is a property interest (not just an assignment of payments)

96
Q

When can you exclude future income from assigned property?

A

When there is a bona fide sale (Estate of Stranahan)

A (1) bona fide sale (2) for valid consideration = no tax liability for future income from assigned property

A sale is likely bona fide if
(1) there is a change in beneficial ownership, and
(2) the purchaser assumes some form of risk in the transaction.

97
Q

What is the rule regarding “ripeness”?

A

Rule: The tax consequences of a property sale are determined by the substance, not the form, of the transaction.

“if the fruit is not ripe then the income stays with the donor” (Salvatore)

how ripe is an important issue (argue both sides)

98
Q

Trusts are a separate taxable entity, and there are two types

A

Simple trusts = conduit entity, beneficiaries pay tax

Complex trust = all or part of the trust income is accumulated
- Some tax to trust
- Some tax to beneficiaries

99
Q

How are partnerships taxed?

A

Use pass through taxation: pay tax as income is earned, not as it is distributed
- Tax increases basis
- Distributions reduce basis

Special allocations subject to “economic substance”

100
Q

Taxation of Corporations

A
  • separate taxpayer
  • could have lower rate than partnerships (21%) but need to pay dividends (20%) to receive cash
101
Q

S-Corps

A
  • like partnerships but with limited liability
  • must have fewer than 100 owners

NO special allocations

102
Q

LLCs

A

Generally not tax paying entities

  • 1 owner = “disregarded entity” taxed same as an individual
  • 2+ owners can elect taxation
    • C corp,
    • S corp, or
    • Partnership

Tax (6 decks)

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