Tax and Income Generally

Question 1

§61

Answer 1

defines gross income

Question 2

§62

Answer 2

defines adjusted gross income

Question 3

§63

Answer 3

defines taxable income

Question 4

Why do we have a tax system

Answer 4

A tax system provides revenue to the government so it can operate

Question 5

What is the biggest source of tax revenue and how much is it?

Answer 5

Income tax is the largest source of revenue and it accounts for $1.5-1.7 trillion annually.

Question 6

What is the second biggest source of revenue and what does it fund?

Answer 6

Payroll tax is the second largest form

Question 7

What is the difference between the tax court and the federal court when challenging a tax issue?

Answer 7

If youre willing to pay, you can take a case to the regular federal court. If youre not willing to pay, you go to the tax court for a ruling.

Question 8

§119

Answer 8

– Meals or lodging furnished for the convenience of the employer

Question 9

§132 –

Answer 9

Certain fringe benefits

Question 10

What is §161’s definition of Gross Income

Answer 10

gross income includes income realized in any form, whether in money, property, or services.”

Question 11

Haig-Simons defiition of income

Answer 11

the taxpayers personal expenditures plus (or minus) and the increase (or decrease) in the taxpayer’s wealth.

Question 12

What is a noncash benefit

Answer 12

A noncash benefit can include things like medical care, life insurance, meals, lodging, and other miscellaneous items.

Question 13

when can a meal be excluded from income?

Answer 13

if (1) the employer furnishes the meal,

(2) the meals are provided for the convenience of the employer, and
(3) the meals are provided on the business premises of the employer.

Question 14

What additional element does lodging require to be excluded from income?

Answer 14

Same as meals but it also has to be required as a condition of employment.

Question 15

Bengalia v. Commissioner

Answer 15

Lavish lodging and meals can be excluded despite pricetag. He was a manager of Hawaiian hotel. Req’d him to be on the premises.

Question 16

How can put a value on noncash benefits?

Answer 16

could do either fair market value, but may not be fair to the employee. Tax the value of alternative arrangements or on the subjective value to the employee, but both are very hard to determine.

Question 17

When considering a fringe benefit, what should you look for?

Answer 17

if there is additional cost to the employer, in the same line of business, that a discount qualifies, or the value is de minimus., transportation benefits.

Question 18

When would an employee discount not be allowed as a fringe benefit?

Answer 18

If it is based on performance or not available to all employees,

Question 19

What is imputed income?

Answer 19

Imputed income is the accession to wealth that can be attributed, or imputed, to a person through non-market transactions, when for example, he avoids paying for services by providing the services to himself.

Question 20

Why do we care about Imputed Income?

Answer 20

It matters because we care about taxing increases to wealth, and technically this is income. But it is awkward for us as a society to be taxing work done in the home. It also raises seemingly insurmountable problems in regards to valuation.

Question 21

Are windfalls taxed (case)?

Answer 21

Yes. Glenshaw said that punitive damages needed to be taxed (historically, income was only gain from capital or labor)/

Question 22

How do you tax windfall from treasure trove? Antiques?

Answer 22

Treasure trove should be taxed once you discover it. Antiques or other items that you discover are worth considerably more than you realized should be taxed once you realize that income (when it is sold)

Question 23

Gifts are excluded from income. what is the section number and test?

Answer 23

The section is §102. THe test is duberstein which says amounts received must have been given with a “detached and disinterested generosity” to be considered a gift

Question 24

Can employers give employees gifts to be excluded? why

Answer 24

Generally no. it would incentivize all income to be a ift and avoid taxes.

Question 25

what happens with the basis in a gift transfer?

Answer 25

basis transfers with the gift.

Question 26

How to figure out basis on a gift when you sell it.

Answer 26

If it is for a gain, you use the donor’s basis that transferred with the gift. If for a loss, the donee takes a basis equal to the FMV of the property at the time of the transfer.

Question 27

What happens with basis for property acquired by reason of death. WHy is this interesting?

Answer 27

Beneficiary takes a basis equal to the fair market value at the time of the decedent’s death. It is interesting because the increase of wealth is never taxed.

Question 28

Are tips considered gifts?

Answer 28

generally no.

Question 29

When are scholarships excludable from income?

Answer 29

qualified scholarships are excludable under 117. Scholarships in compensation for services (like teaching, research, work study) are not qualified scholarships. Room and Board is not deductible. For books and supplies is deductible.

Question 30

Is welfare considered income?

Answer 30

no

Question 31

Is social security considered income?

Answer 31

historically excluded, but is taxed as income once you reach a certain income level.

Question 32

What is an example of recovery of Capital?

Answer 32

a person buys property for $100, and sells for $120, they are taxed on the $20 profit, but not the $100 recovery of capital.

Question 33

How is basis allocated upon a partial sale?

Answer 33

Apportionment. You must assign a basis to the portion sold. Determine the basis based on the relative value of the sold and unsold portions of property at the time of purchase. (ie, if you are selling 10% of value of property, assign 10% of basis for K recovery)

Question 34

When is apportionment ignored for partial sales?

Answer 34

When it is impossible or impractical to do so. Or when the government takes over through eminent domain.

Question 35

What if you are recovering from a loss for K recovery?

Answer 35

§165(d) – capital recover is not taxed.

Question 36

How are gambling winnings and losses treated?

Answer 36

They are treated through basketing. This means winnings must be counted as income, but you are allowed to deduct your losses up to the amount of your winnings. You must be able to substantiate your losses.

Question 37

How are gambling winnings and losses treated?

Answer 37

They are treated through basketing. This means winnings must be counted as income, but you are allowed to deduct your losses up to the amount of your winnings. You must be able to substantiate your losses.

Question 38

What is an annuity?

Answer 38

An annuity is a contract that provides for a series of payments in return for a fixed sum. Like Life Insurance

Question 39

Are annuity payments treated as income?

Answer 39

Yes, but you can exclude some of it. Take the amount of the payment and multiply by the ‘exclusion ration’

Question 40

What is the exclusion ratio?

Answer 40

The exclusion ratio equals the cost of the annuity contract divided by the expected return on the annuity contract.

Question 41

Is exclusion for annuity payment limited to the original investment?

Answer 41

Yes. Start taxing fully on payments once payment is recovered.

Question 42

Is exclusion for annuity payment limited to the original investment?

Answer 42

Yes. Start taxing fully on payments once payment is recovered.

Question 43

What are the consequences of an annual accounting period?

Answer 43

Most individuals are on a calendar year accounting period. Corporations can be on a different period (fiscal year, sports teams can do it by season. It is better administratively. Could penalize a company that loses 100k in year one and earns 100k profit year two

Question 44

How does the code deal with losses in an annual accounting period?

Answer 44

§172 - A net operating loss suffered in any year can be carried back to the previous two taxable years. The tax payer just needs to file an amended return for that year by the loss carryback. applied first against income from the earliest elegible prior year; any loss left after reducing operating income to zero in that year is applied against income from the next earliest year, and so on. You can also carry forward losses for 20 years.

Question 45

What is the claim of right doctrine?

Answer 45

In cases where two taxpayers claim ownership over the same stream of income, the claim of right doctrine says the taxpayer who has possession of the income is taxed on the income despite the dispute. If that taxpayer is later forced to give up that income, adjustment takes the form of a deduction in the year the dispute is resolved. (in the form of a deduction in the year in which the income was repaid).

Question 46

How does §1341 effect the claim of right doctrine?

Answer 46

ensure a tax payer paying back on a claim of right issue isn’t negatively effected by change of rates. They can reduce their tax liability for the year by the amount they paid previously for having the claim. This rule however creates a windfall opportunities

Question 47

Explain the inclusionary rule/exclusionary rule

Answer 47

Inclusionary – requires taxpayer to include item in income.

Exclusionary – permits taxpayer to exclude item that would otherwise be included in income under the inclusionary rule