F e d e r a l I n c o m e T a x O u t l i n e Spring 2000 - Professor Robert Popovich Part One - G R O S S I N C O M E A. Basic Structure. GROSS INCOME Adjusted Gross Income 1) Itemized Deductions -or- 2) Standardized Deduction - AND - 3) Personal Exemption(s) = Taxable Income B. Code Sections. a) ' 61. Gross Income defined. (a) General definition. Aall income from whatever source derived.@ Code sections lists income sources (not exhaustive). C. Regulation Sections. a) ' 1.61-1. Gross Income. (a) General definition. Income may be realized in the form of services, meals, accommodations, stock, or other property, as well as cash. b) ' 1.61.14. Miscellaneous items of gross income. (a) In general. - punitive damages [Comm v. Glenshaw Glass] - another person=s payment of the taxpayer=s income taxes - illegal gains 1) tax avoidance: legally taking advantage of tax system; 2) tax evasion: illegal non-representation of income - treasure trove c) ' 1.61-2. Compensation for services. (d) compensation paid other than in cash 1) In general. 2) Property transferred to employee or independent contractor. D. Other Definitions. a) Realization: in order for there to be Aincome@ it must be realized. Some Atriggering@ event occurs when income is realized. Ex: selling an item is a triggering event. You then have a gain. Ex: appreciation in value is not enough to say Agross income.@ b) Macomber: Gross income is the Again derived from capital, from labor, or from both combined.@ c) Glenshaw Glass: Gross income is: Aundeniable accessions to wealth, clearly realized, and over which the taxpayer has complete dominion.@ E. Examples. a) Loans: not income because there is no Anet accession to wealth.@ b) Travel credits [Charlie v. Comm] alone are not income but, his conversation of the credits into cash resulted in the net accession to wealth. c) Business building: use of building for business is not income. d) Employer who pays employees rent: this is income. Employee must report fair rental value. F. Income Without Receipt of Cash or Property. a) Exchange of Services. 1) Rev Rule 79-24. Exchange of services is gross income. Services are still something received. Fair market value of services received is gross income. There is no de minimis rule B no matter how small the service, it is gross income. 2) ' 1.61-2(d)(1). Provides that if services are paid for other than in money, the fair market value of the property or services taken at payment must be included in income. Includes services-for-services as gross income. 3) Single Family Home: if you are living in house yourself, not income. [Dean v. Comm]: fair rental value of house must be included as income because the Deans= did not own the house; they transferred ownership to their wholly-owned corporation. Corporation is a separate entity which must be considered. G. Problem Set - Gross Income Hypo1 B Vegy grows vegetables in the garden. Does Vegy have gross income when: 1) Vegy harvests his crop? No b/c no realization as need a triggering event. 2) What if Vegy is a Corp and A is an EE and consumes 100 worth of vegetables? Its income to A b/c same as Dean v. Commissioner. 3) Vegy sells vegetables for 100? Income to Vegy b/c realized it. 4) Vegy exchanges 100 worth of vegetables w/ Charlie for 100 worth of tuna which Charlie caught? Exchange of property so income to both and equals FMV of prop. 5) Vegy agrees w/ Grocer to sell his vegetables in Grocer=s market which previously did not have a vegetable section. Grocer pays 50 per month to landlord for the portion of the market used by Vegy but Grocer does not charge Vegy any rent. Vegy keeps all proceeds from his sales. Money is income and benefits are received on both sides. Grocer is receiving benefit of having a vegetable section and value to Vegy is the 50 per month. Exchange is assumed to be of equal value. Hypo2 B Dr. needs to have his tax return prepared. Lawyer would like a general physical check up. Dr would normally charge 200 for the exam and lawyer would charge 200 for tax return. 1) What tax consequences to each if they simply swap services w/o money changing hands? Income = 200 b/c that=s value of services exchanged. 2) Does lawyer realize any income when she fills out her own tax return? No. II. The Exclusion of Gifts and Inheritances A. Rules of Inclusions and Exclusion. (interpreted narrowly) 1) ' 102. Gifts and Inheritances. (a) General rule. Gross income does not include the value of property acquired by gift, bequest, devise or inheritance. (b) Income. Subsection (a) shall not exclude from gross income-- (1) income from any property referred to in (a) - invest $$ from (a); income from the original gift, or inheritance is gross income. 2) ' 1.102-1. Gifts and Inheritances. (a) General rule. Property received as a gift or inheritance is not includible as gross income. - amt. of interest paid on marriage settlement is a gift - does not apply to prizes or awards - does not apply to scholarships or fellowship grants (b) Income from gifts and inheritances. Income from property received as gift or inheritance shall not be excluded from gross income under (a) of this section. B. The Income Tax Meaning of Gift. 1) ' 102(a). Gifts and Inheritances. 2) [Commissioner v. Duberstein]: Gifts in the business setting. Business contact gave D a Cadillac for valuable business referrals. D did not include the value of the car on his taxes, claiming it was a gift.
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