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67 Cards in this Set
- Front
- Back
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What courts have jurisdiction to resolve tax issues?
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1. Tax Court (trial court)
2. Federal District Court (trial court) 3. United States Court of Federal Claims (trial court) 4. Appeals |
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How do you calculate TAXABLE INCOME FOR INDIVIDUALS WHO DO NOT ITEMIZE THEIR DEDUCTIONS?
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Adjusted Gross Income
(MINUS) Standard Deduction AND Deduction for Personal Exemptions Provided in Section 151 |
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How do you calculate TAXABLE INCOME FOR EVERYONE ELSE?
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Gross Income
(Minus) Deductions allowed by Chapter 1 Subtitle A of the Internal Revenue Code |
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How do you calculate Adjusted Gross Income?
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Gross Income
(Minus) Certain Deductions (Above-the-line deductions/Below-the-line deductions) |
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What is the difference between a deduction and a credit?
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A credit reduces one's tax on a dollar for dollar basis.
A reduction reduces taxable income, thus providing a reduction in tax that is dependent on the tax bracket of the individual. |
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What are the three major features of the Federal Income Tax system (policy arguments)?
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1. Progressivity
2. Social Policy Maker 3. Economic Policy Maker |
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What is the hierarchy of authority for tax law?
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1. Internal Revenue Code
2. Regulations (promulgated by the Department of Treasury) 3. Case Law 4. Revenue Rulings 5. Private Letter Rulings |
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What are the six fundamental tax questions?
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1. Who is the taxpayer?
2. Does the taxpayer have income? 3. What deductions may the taxpayer claim? 4. Timing issues (in what taxable year is the income allowed) 5. Character of income and loss 6. Rates and Credits |
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What is fair market value?
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The price a willing buyer would pay a willing seller, with neither under a compulsion to buy or sell, and both having a reasonable knowledge of relevant facts.
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What are above-the-line deductions?
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Above-the-line deductions are used to calculate adjusted gross income and generally relate to business activity.
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What are below-the-line deductions?
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Below-the-line deductions are used to calculate adjusted gross income and are generally unrelated to business activity.
Deductions which the taxpayer may take into account only after the adjusted GI has been determined. |
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IRC § 67
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2% floor on Miscellaneous Itemized Deductions - provides that certain itemized deductions may not be deducted except to the extent that in the aggregate such deductions exceed 2% of the taxpayers' adjusted gross income.
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IRC § 68
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Overall Limitation on Itemized Deductions - otherwise allowable itemized deductions are reduced by 3% of the amount by which the taxpayer's adjusted gross income exceeds an inflation-adjusted "applicable amount."
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What are personal exemptions?
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The personal exemption and standard deduction provide a floor assuring that taxpayers will not be taxed unless they have income greater than the combined amount of the personal exemptions allowed and the standard deduction.
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What is gross income (IRC § 61)?
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Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:
1. Compensation for services, including fees, commissions, fringe benefits, and similar items; 2. Gross income derived from business; 3. Gains derived from dealings in property; 4. Interest; 5. Rents; 6. Royalties; 7. Dividends; 8. Alimony and separate maintenance payments; 9. Annuities; 10. Income from life insurance and endowment contracts; |
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OLD COLONY TRUST v. COMMISSIONER
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Fact Summary: The Commissioner (P) sought to tax, as additional income to the employee, the amount to his federal income taxes that were paid on his behalf by his employer.
Rule of Law: The payment by an employer of the income taxes assessed against his employee constitutes additional taxable income to the employee. |
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McCANN v. UNITED STATES
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Fact Summary: The McCanns (P) received an all-expenses-paid trip as a reward for Mrs. McCann's job performance, but they did not include the value of the trip in their gross income calculation on their joint income tax returns.
Rule of Law: When services are paid for in a form other than money, the fair market value of the thing received must be included in gross income. |
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PELLAR v. COMMISSIONER
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Fact Summary: The Pellars (P) paid $55,000 for a house fairly valued at $70,000, but paid no taxes on the $15,000 difference that they realized.
Rule of Law: The purchase of property for less than its fair market value does not, of itself, give rise to the realization of taxable income. |
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ROCO v. COMMISSIONER
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Fact Summary: Roco (P) claimed that a $1,568,087 qui tam payment should not have been included in his gross income and that an accuracy-related penalty for failing to report this amount was unwarranted.
Rule of Law: A qui tam payment made under the False Claims Act (FCA) is includable in gross income. |
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What is imputed income?
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Imputed income is commonly recognized that if a taxpayer produces and consumes for their own benefit it is not considered gross income.
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What is bargain purchase?
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In the absence of any indication that the sale/purchase was not an arm's length transaction, the person has no income.
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Are loans considered gross income?
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No. There is no code provision or regulation that announces this rule, but the rule is absolutely clear and fixed, and the rationale for it is straightforward.
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What is the claim of right doctrine?
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If a taxpayer receives earning under a claim of right and without restriction as to its disposition, he has received income which he is required to return [that is, to report on his tax return], even though he may still be adjudged liable to restore its equivalent.
EXAMPLE: Publisher miscalculates the royalty owed to Author on a recently published novel and pays Author $10,000 more than Author is entitled to receive. Author receives the royalty check in Year 1 and reports it as income on her income tax for Year 1. In Year 2, Publisher discovers its error, notifies Author, and Author returns the $10,000. May Author properly file an amended tax return for Year 1 reporting $10,000 less income? ANALYSIS: Under the claim of right doctrine, Author appropriately included the entire royalty payment receive in Year 1. |
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Does illegal income constitute gross income?
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It has been long held by the courts that gains from an illegal business may be taxed.
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JAMES v. UNITED STATES
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The Court held that embezzled funds are included in gross income.
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GILBERT v. COMMISSIONER (ILLEGAL INCOME)
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When a taxpayer acquires earnings, lawfully or unlawfully, without the consensual recognition, express or implied, of an obligation to repay and without restriction as to their disposition, he has received income which he is required to return, even though he may still be adjudged liable to restore its equivalent.
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KREIMER v. COMMISSIONER
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Although the taxpayers had misrepresented the transactions, nonetheless the proceeds they obtained were loans, not gross income, since the taxpayers had always regarded and treated the obligations as bona fide debt they intended to repay.
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DEPOSITS
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An advance payment of income is still income.
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COMMISSIONER v. INDIANAPOLIS POWER & LIGHT COMPANY
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The Court concluded that the customer deposits were not advance payments.
The key in determining complete dominion whether the taxpayer has some guarantee that he will be allowed to keep the money. |
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WESTPAC PACIFIC FOOD v. COMMISSIONER (DEPOSITS)
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The Court concluded that the cash advances at issue were like the security deposits in Indianapolis Power because they were subject to repayment if the minimum purchases commitments were not met.
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What is I.R.C. §61(A)(3)?
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Gross income includes "gains derived from dealings in property."
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What is realization?
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Realization occurs when there is a sale, exchange or other disposition of property.
In order to RECOGNIZE (report for taxing purposes) gain, one must first REALIZE it. |
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What is gain?
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Gain is the excess of the amount realized over the unrecovered cost or other basis for the property sold or exchanged.
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What is amount realized?
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The amount realized on the sale or disposition of property equals the money received plus the fair market value of any other property received.
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What is IRC §1012?
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Basis equals cost "except as otherwise provided..."
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What is the Barter Transaction Rule?
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Barter transactions are GROSS INCOME for parties who trade services.
McCann v. United States: If an employer sends an employee on a legitimate business trip and the dominant purpose is business related then it can be excluded from Gross Income. But if the dominant purpose is not business then it cannot be excluded from Gross Income. |
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What are the three limitations on gross income?
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1. Realization
2. Bargain Purchase 3. Imputed Income |
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What is realization?
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Realization occurs whenever an economic benefit is reduced to cash or a cash equivalent.
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What is imputed income?
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Imputed income is NOT included in gross income and it occurs when a taxpayer creates and consumes their own wealth.
Imputed income from SERVICES: (e.g., Lawyer does his own will) Imputed income from PROPERTY: (e.g., a person grows vegetables and then sells it to others) |
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What is a bargain purchase?
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A bargain purchase occurs when a taxpayer pays for a product or service under Fair Market Value.
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PELLAR v. COMMISSIONER (BARGAIN PURCHASE DOCTRINE)
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Facts: The Pellars (P) paid $55,000 for a house fairly valued at $70,000 but paid no taxes on the $15,000 difference that they realized.
Rule: The purchase of property for less than its fair value does not, of itself, give rise to realization of taxable income. |
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ROCO v. COMMISSIONER (QUI TAM ACTION)
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Facts: Roco (P) claimed that a $1,568,087 qui tam payment should not have been included in his gross income and that an accuracy-related penalty for failing to report this amount was unwarranted.
Rule: A qui tam payment made under the False Claims Act is includable in gross income. An accuracy-related penalty may be imposed where the understatement of income is neither based on substantial authority nor adequately disclosed by the taxpayer on his return or on a statement accompanying the return. |
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Are loans considered gross income?
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No. A loan does not represent an accession of wealth or an increase to the taxpayers' net worth because the loan proceeds are accompanied by an equal offsetting liability.
The borrower has an obligation to repay the loan, and it is this repayment obligation that negates treatment of a loan as income. Equally, repayment of a loan does not reduce gross income. |
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What is the claim of right doctrine?
(North American Oil case) What is the proper tax treatment of money (or other property) received subject to a contingent repayment obligation? |
North American Oil Consolidated v. Burnet (1932)
Facts: Income earned in 1916 from property in the hands of a receiver was not reported or given to North American Oil until 1917. Rule: No income has been earned where a company might never receive it and has no right to demand payment. Money received under a claim of right, w/o restraint as to disposition, is income; the contingent repayment obligation does not allow the receipt to be treated as a loan. |
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Can illegal income be considered gross income? (James v. United States)
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James v. United States (1961)
Facts: James (D) embezzled in excess of $738,000 during the years 1951 through 1954, but he did not report these amounts in gross income. Rule: All unlawful gains, including embezzled funds, are to be included in gross income in the year in which the funds or other property are misappropriated. |
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What is AMOUNT REALIZED?
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§ 1001(b). The sum of any money plus + the FMV of the property (other than money) received. (total sale amount)
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What is AMOUNT RECOGNIZED?
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§1001(c). Must Recognize Gain or Loss unless there is a non-recognition statute.
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What is ADJUSTED BASIS?
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§1012 . Adjusted Basis is cost and shall be made in respect of the property.
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PHILADELPHIA PARK AMUSEMENT CO. v. U.S. (Gain)
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Facts: Philadelphia Park Amusement Co. (P) deeded its interest in a bridge to the city in exchange of a ten-year extension on a franchise.
Rule: Where a taxable exchange of property occurs, gain or loss should be recognized in establishing the basis for the property on the date of the transfer. |
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Is a gift considered gross income?
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Gross income does not include the value of property acquired by gift, bequest, devise or inheritance.
Gifts may be subject to a gift tax. |
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What is the exception to § 102(a)?
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§ 102(b) Exceptions - 1. The income from any property referred to in subsection (a) will be included in gross income.
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COMMISSIONER v. DUBERSTEIN (Determining a gift)
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Facts: Duberstein (P) was given a car by a business associate but did not declare the car as taxable income, deeming it a gift.
Rule: The determination as to whether transferred property constitutes a gift requires an analysis by the trier of fact of all relevant factors. |
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What is the rule for bifurcated transactions (part gift/part sale)?
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The sale of property for less than fair market is common between family members and even close friends.
The transaction involves a sale in part and a gift in part. |
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WOLDER v. COMMISSIONER (Gift for the purposes of payment - decedent)
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Facts: Wolder (P) agreed to render legal services to a client without billing for them in exchange for money and stocks bequeathed to him in her will.
Rule: While gross income will generally not include property acquired by gift, devise, or bequest, where such property is received for the purpose of payment for services performed, it becomes taxable. |
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OLK v. UNITED STATES
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Facts: Olk (P), a craps dealer, claimed that monies known as "tokes" given to him by players at the casino were nontaxable gifts.
Rule: Receipts by taxpayers who are engaged in rendering services that are contributed by those with whom the taxpayers have some personal or functional contact are taxable income when in conformity with the practices of the area and easily valued. |
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What is the stepped up basis rule?
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Basis is "stepped up" to the Fair Market Value at the time of death.
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GOODWIN v. UNITED STATES?
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Facts: Reverend and Mrs. Lloyd Goodwin argue that "special occasion gifts" made to them by members of their congregation were nontaxable gifts.
Rule: Regular, sizable payments made by persons to whom the taxpayer provides services are customarily regarded as form of compensation and may be included as taxable income. |
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What is the mainspring of human conduct?
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1. This is a facts and circumstances test attempting to determine whether something is a gift by considering the mainspring of human conduct, whether the intention of the donor was a gift of competition
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What are the two basic exclusions as to the sale of a principal residence?
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1. Exclude recovery of basis
2. Exclude all or part of the gain |
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What are the current requirements of §121?
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1. Ownership and Use Requirements
2. Amount Excludable 3. Principal Residence |
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What is the general rule from §121(a)?
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GI shall not include gains on the sale of your principal residence if you have owned and used it as your “principal residence” for an aggregate of 2 of the 5 yrs prior to the date of the sale (does not have to be consecutive).
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Do the aggregate years under §121(a) have to be continuous?
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No. The aggregate years under §121(a) do not have to be continuous.
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What are the exceptions to the ownership/use requirements and the 1 sale every 2 year requirements?
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§ 121(c)(2)(B) - You failed to satisfy the ownership/use requirement or the 1 sale every 2 year requirement. You will be excused if such sale of exchange is by reason of a:
Change in employment Health or To the extent provided for in the regulations, "unforeseen circumstances" |
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What is the distance safe harbor for change of employment under §121(c)?
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The change of employment must occur during the period of the taxpayer's ownership and use of the property
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What happens if one spouse obtains property from another spouse for the purposes of ownership under § 121(a)?
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§ 121(d)(3)(A) This statute will apply when a transfer pursuant to §1041 occurs (a transfer of property b/w spouses or former spouses)
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How do you identify a taxpayer's principal residence?
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1. Taxpayer’s place of employment;
2. Taxpayer’s place of abode of family members; 3. The address listed on the taxpayer’s federal and state tax return, driver’s license, automobile registration, and voter registration card; 4. The Taxpayer’s mailing address for bills and correspondence; 5. Location of Taxpayer’s banks: and 6. Location of Taxpayer’s religious organizations and recreational clubs which the taxpayer is affiliated. |
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GUINAN v. UNITED STATES
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Facts: The Guinans (P), who owned residences in Georgia, Arizona, and Wisconsin, contended that for the purposes of excluding gain realized from the sale of their Wisconsin residence, the mere fact that they occupied the Wisconsin residence for more days than any other residence, during the five years from the time they bought the Wisconsin residence to the time they sold it, rendered it their "principal residence."
Rule of Law: Time spent in a residence is not the single determinative factor as to whether the residence is a taxpayer's "principal residence" for purposes of excluding gain realized from the sale of that residence. |
