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Federal Tax Law
terms and codes
| Question | Answer |
|---|---|
| Simons-Haig definition | value of property consumed and the change in value of savings |
| Eisner v. Macomber (1920) definition of income | "Income may be defined as the gain derived from capital, form labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital" |
| Why is Eisner v. Macomber definition of income faulty? | for not including discharge of indebtedness |
| Commissioner v. Glenshaw Glass (1955) Definition of Gross Income | "undeniable accession to wealth, clearly realized, and over which the tax payers have complete dominion." |
| Clearly realized | not just paper wealth i.e. stock appreciation not realized |
| § 61 definition of income | "all income from what ever source derived" |
| REG. sec. 1.61-1 | includes income in any form, not limited to the enumerated items |
| §61 (a) (1) Compensation for services | "Compensation for services, including fees, commissions, fringe benefits, and similar items;" |
| REG. 1.61-2 | Tax the fair market value of non-cash compensation |
| Old Colony Trust Co. v. Commissioner | Discharge of indebtedness is income. Payment by an employer to an employee of employee's taxes is taxable as income if it is compensation. |
| The tax-inclusive base | § 275 (a) (1) specifically precluded a deduction for federal income taxes |
| Below market interest rate loan | Sec. 7872 |
| Sec. 7872 applies to | any below-market gift loan or demand loan |
| Tax treatment of a below market interest rate loan | The forgone interest is treated as 1) Transferred to the lender to the borrower, and 2) Retransferred by the borrower to the lender as interest 3) On the last day of the calendar year |
| Gift loan | interest free loan in the form of a gift |
| Demand loan | callable on demand |
| Section 7872 c 3 | diminimus exception for when the loan is less then $10,000, applies when the total principal is more than $10,000 |
| Applicable federal rate | subsection e - gov determination of an interest rate - published rate |
| Imputed income | the benefits derived form labor on one's own behalf or the benefits from the ownership of property . |
| Authority for not taxing Imputed income? | None, IRS policy |
| United States v. Gotcher | Under section 61, there must be 1) a gain to the taxpayer and 2) the gain must be for the benefit of the employee to treat the amount as income |
| Property transferred in connection with performance of services | Sec. 83 |
| Where a taxpayer is permitted to purchase property or services at a price below fair market value because the seller is compensating the purchaser for services, | the purchaser has gross income in the amount of the discount. 83 a |
| No income is realized by the transferee under sec. 83 | when the property is nontransferable and subject to a substantial risk of forfeiture at the time of the transfer |
| Sec. 83(c) (1) property is subject to a substantial risk of forfeiture if | full enjoyment of the property is conditioned upon the future performance of substantial services by an individual |
| Sec. 83 (b) | may elect to pay taxes on property subject to a substantial risk of forfeiture in the current year |
| Risk of a 83 (b) election | there is no offsetting deduction if the property is forfeited |
| Sec. 83(b) Election's Effect on the employer | Employer claims deduction in the year that the restrictions are lifted and the employee takes the income |
| Employee transfers sec. 83 property to anyone | Fair market value of the property is taxed as incomecf. reg. 1.61 (2) (d) |
| Timing of taxation of sec. 83 property | Income for taxation purposes Determined at the first time the person having rights in the property that are transferable and not subject to forfeiture |
| Sec. 83 property Basis is determine when | taxes are paid |
| Fringe benefits | taxed as gross income under § 61(a)(1) "compensation for services, including ... fringe benefits |
| How is a fringe benefit taxed? | The fair market value (plus any payment) of property transferred as compensation is gross income Sec. 83, Fair market value for the fringe benefits REG 1-61.2 D |
| Certain Fringe Benefits | Section 132 |
| Exclusion for No Additional Cost Service Sec. 132(b) | 1. Service is offered for sale to customers in the ordinary course of business of the employer and 2. The employer incurs no substantial additional cost |
| No additional cost services | does not include services where labor required |
| Sec. 132(c) excludes qualified employee discount if | qualified property or services to does not exceed (A) in the case of property, the gross profit percentage of the price at which the property is being offered by the employer to customers, or (B) in the case of services, 20 percent of the price at which t |
| How are employee discounts taxed when not excluded? | only tax the amount of the discount greater than the gross profit margin |
| Sec. 132(d) working condition fringe | any property or services provide to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 or 167 |
| Sec. 132(e) De Minimis Fringe exclusion | the value of the benefit is so small that accounting for it would be unreasonable and impracticable |
| §132 (a)(7) employers who maintain a qualified pension plan can | provide tax-free retirement planning services to their employees |
| Moving expenses exemption | sec.132(a)(6), sec. 132(g) excluded to the extent the employee could have deducted the expenses if paid directly under sec. 217 |
| Meals and lodging exclusion | Sec. 119 An employee may exclude from income " the value of any meals 1) furnished to him by his employer 2) for the convenience of the employer, 3) but only if the meals are furnished on the business premises of the employer" |
| Meals and lodging exclusion "The business premises test" | Is the purpose of the location to do business or is there a substantial amount of business done at the location? Functional rather than spatial test |
| Meals and Lodging "Convenience of Employer Test" | Meals are provided for the convenience of the employer only If there is a substantial noncompensatory purpose |
| Tuition discounts | Sec 117 (d) Employee of a university will not be taxed on tuition discounts |
| life insurance fringe exlcusion | Sec 79 excludes $50,000 of group term life insurance provided by the employer |
| health insurance | Sec 105 excludes Medical reimbursement and premiums for health insurance |
| Accident and health plans | Sec 106 excludes employer contributions to accident and health plans from the gross income of employees |
| Clergy housing | Sec 107 excludes ministers housing |
| Cafeteria plan | Sec 125 ? |
| Education expense assistance | Sec 127 excludes Education compensation Up to $5,250 a year Includes tuition, fees, and books but does not include living expenses |
| Dependant care | Sec 129 excludes Daycare for the children of the employee Limited to $5,000 a year |
| Adoption assistance | sec 137 Maximum amount excludible is $10,000, phased out for AGI exceeding $150,000, not available when AGI is more than $190,000, Includes adoption fees, attorney fees, and court fees |
| Military housing | sec. 134 No taxation of the rental value of military housing |
| Retirement benefits | §401-404 and 410-416 |
| Gifts and bequests Sec. 102. | Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance. |
| Bequest | property, other than real estate, left to a beneficiary in a will |
| Devise | real estate left to a beneficiary in a will |
| Inheritance | - property received when the decedent dies intestate |
| Commissioner v. Duberstein: | What is a "Gift"?- a transfer made out of detached and disinterested generosity, out of affection, respect, admiration, charity or like impulses." the most important consideration is the intention of the transferor. Cf. Gotcher |
| Any transfer made as an incentive for future benefit or out of a moral obligation | is not a gift |
| Tips | taxable income. See reg. sec. 1.61-2(a) |
| Political contributions in RR 68-512, 1968-2 C.D. 41, | are not taxable if they are used for expenses of a political campaign. |
| Family support - | IRS has never taxed it |
| Welfare | not taxed, unemployment, social security, state aid to the blind |
| Prizes and awards | generally taxable even if it was gratuitous. See regulation 1.102-1(a) |
| Under section 74 prizes are excludable if | 1)they are not retained by the recipient 2)award in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement and 3) recipient must have taken no effort to enter the contest |
| Employee achievement awards - | gold watch awards §274(j)(3) not taxed if under the limit of $400 Section 74c |
| Scholarships and Fellowships | §117 Not taxed as income if used by degree candidates for qualified tuition and related expenses |
| Scholarship and fellowship "Qualified expenses" | tuition and fees for enrollment or attendance by a student enrolled in a school and fees, books, supplies, and equipment required for the course of study (no room and board) |
| Scholarship received for teaching, research, or other services required as a condition for receiving the scholarship is | not excludable 117 (c ): compensation |
| Athletic scholarship | - only if it is not conditional upon playing a particular sport and does not cancel if they stop playing |
| Student Loans | not taxed, but paid back in after tax dollars |
| Cancellation of indebtedness | is income 108(f) |
| Gain or loss | = amount realized - adjusted basis: Section 1001(a) |
| Disposition of a portion of property | Reasonable allocation and divide the basis among the parts, Equitable division: Reg. sec. 1.61-6(a) |
| Amount realized | = (1) cash + (2) FMV of other property received: Section 1001(b) |
| Determining basis | Section 1011 (a): in general, adjusted basis = basis determined under section1012, adjusted as provided in sec 1016 |
| basis (generally)= | cost, Sec 1012 |
| Tax cost basis | create the basis as the amount you paid taxes on: otherwise you would be taxed twice on the same amount |
| Cost basis | you paid tax on the income you used to purchase the investment, paying taxes on the realized gain (with the cost basis) would be double taxation |
| Adjustments to basis | Section 1016: prescribes adjustments to basis, i.e., for capital losses, expenditures, receipts, depreciation, etc. Generally, capital expenditures increase basis, while deductable losses and depreciation reduce basis |
| Capital expenditures | permanent improvements to your property |
| Basis of property acquired from a decedent | Section 1014 (a) in general basis -FMV on date of death "Stepped up basis" (e) appreciated property acquired by decedent by gift within one year of death will have a basis equal to the basis at the time of the death |
| Death bed: we will give you property and you bequeath it to us | resets the basis at the time of the death, which can largely eliminate the tax burden of low basis property with large gains |
| Basis of property acquired by gift | Section 1015 basis of donee = basis in hands of donor (i.e., a "carryover basis"). Exception: For determining a loss, the basis is the lesser of the FMV or the donor's basis on the date or the gift. If the sale donee's disposition price is between the FMV |
| Hort v. Commissioner | When computing the net gain or loss for income tax purposes, a taxpayer cannot offset the value of the canceled lease against the consideration received by him for cancellation. A lease is not part of the basis. |
| Realization | property is not taxed unless and until the income has been realized, Implicit in the tax law, § 1001(a) refers to a realization event, Reflected in Glenshaw Glass definition of income: "clearly realized" |
| Cesarini v. United States | Tres reg §1.61-14 In addition to the items enumerated in section 61 a, there are many other kinds of gross income. Treasure trove, to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is reduced t |
| Haverly v. United States | "Claiming a charitable deduction does manifest an intent to accept the property as one's own": realization event |
| Eisner v. Macomber | A stock dividend is capital not income but payment in more stock |
| Cottage savings Ass'n v. Commissioner | There has been a disposition of properties only if the properties are materially different: different legal entitlements |
| Annuity Taxation | sec. 72 The annuitant has income to the extent he receives more than he paid for the annuity |
| "Exclusion ratio" | = principal / expected return -> the portion of each payment excluded from income, the difference being taxable income 72 (b)(1) Ratio calculated at the annuity starting date |
| Deferred annuities | interest accrues, but is not taxed until payments are maid under sec. 72(b) |
| Annuity for life | Aggregate amount is determined by the person's life expectancy under sec. 72(c) (3), Taxable Mortality gain when the person outlives the life expectancy under sec. 72(b)(2), mortality losses are deductable when the person does not live to the life expecta |
| Amounts paid under a life insurance contract by reason of the death of the insured are | not subject to income tax regardless of the amount of gain that actually many be involved sec. 101(a) |
| Proceeds received upon the termination of a cash value of a life insurance policy through surrender, rather than death | are taxable to the extent that they exceed the total cost of the policy |
| total Cost of a life insurance policy | cost of pure insurance + loading fee + the savings portion of the premiums paid up the the surrender date |
| Mortality gains and losses in life insurance | Ignored for taxation purposes |
| Helvering v. Le Gierse | Life insurance policy and life annuity for a single premium. Court ruled that the policy eliminated any risk to the insurer of premature death. "risk shifting are risk distributing are at the heart of insurance The policy was not life insurance under sec. |
| Taxation of loans: Borrower | No income when the loan proceeds are received, No change in net wealth because there is an offsetting obligation. No deduction when principal payments are made |
| Taxation of loans: Lender | No deduction when making loan. No income on repayment of the loan principal - recovery of capital. Interest is income |
| Cancellation of debt (COD) | is income to a third party under Old Colony Trust |
| James v. United States | all unlawful gains are taxable |
| Distinguishing loans from unlawful taxable gains | Loans are identified by the mutual agreement of the parties to make a loan, which will be repaid in the future |
| Gilbert | the taxpayer used funds without permission but had expected permission would be granted by his company, and he secured his "loan" immediately, showing he had the means and intention to pay back the loan |
| Kirby lumber co. | held that a corporation had taxable discharge of indebtedness income when it repurchased in the market at less than par bands that had been issued earlier in the year at par. Cf. sec. 61(a)(12) taxation of the discharge of an obligation as income |
| Sec 108 contains a number of exclusions for discharge of debt income | Discharges in bankruptcy under chapter 11, When taxpayer is insolvent,Qualified farm indebtedness, Qualified real property business indebtedness 108(c), Qualified principal residence indebtedness, student loan forgiveness program |
| 108(d)(3) what is insolvency | Liabilities exceed the FMV of assets immediately before the discharge, 108(a)(3) the insolvency exemption shall not exceed the amount by which the taxpayer is insolvent |
| Qualified farm indebtedness | From a qualified person: unrelated person; Must be a farmer: in the business of farming and half of gross receipts came from farming |
| Qualified real property business indebtedness 108(c) | Acquisition debt only, Required to reduce your basis |
| Qualified principal residence indebtedness | discharged before Jan 1 2013 |
| Recourse debt | borrower is personally liable for the repayment of the debt |
| Nonrecourse debt | where the borrower is not personally liable and the lender can look only to the assets that secure the debt for repayment |
| COD's effect on basis | The amount realized from a sale or other disposition of property includes the amount of liability from which the transforeror is discharged as a result for the sale or disposition |
| Damages to business interests | The tax consequences of a compensatory damages award or reimbursement depend on the tax treatment of the item for which the reimbursement is intended to substitute. judicial doctrine |
| Compensation for the loss of property | the compensation is amount realized and the AR less Basis is taxable gain |
| Compensation for lost profits | is taxable, since the expenses would be deducted and the foregone profits would have been taxed |
| Punitive damages are | taxable Glenshaw Glass |
| Taxation of law suit Settlements | What she is being compensated for must be determined, No amount will be attributed to punitive damages if the taxpayer can prove that the actual damages are more than the award |
| Sec. 104(a)(2) excludes from income the amount of any damages | (other than punitive damages) received (weather by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or illness |
| Damages for Lost wages | excludable under sec. 104 |
| Interest paid on damages | taxable |
| Interest is generally | taxable under sec. 61 (a) (4) |
| Sec 103 excludes from income interest | on state and local obligations. |
Created by:
parnakuma