Income Tax

Exclusion

Income that would be gross income but the code says it' won’t be taxed for some reason.

Commissioner v. Duberstein

F - Cadillac for passing on business case.

I - Whether the Cadillac was a gift or “compensation for services.”

R - A gift must come from “generosity of the heart,” and from detached and disinterested generosity.

C - Cadillac is compensation.

Gift

Excluded from Gross Income under Sec. 102(a). Must come from detached and disinterested generosity (Duberstein).

Estate Tax

A tax levied on the estate of a deceased individual. 15mm or 30mm for couples exempted.

Generation Skipping Tax (GST)

A tax designed to ensure that taxes aren’t avoided by wealthy individuals “leap frogging” generations and thus lessening the number of taxable events. Little to no revenue generated by these.

Exception to the Gift Tax

While there is no dollar limit on gifts, federal transfer taxes may apply. These are taxes imposed on transfers between people (up to 19k for the gift tax).

What does the gift exclusion apply to?

Bequests: Personal Property (will)

Devise: Real Property

Inheritances (without will)

Most common issue regarding the gift exclusion?

Is it disguised compensation for services?

Wolder v. Commissioner

F - Lady contracts with attorney for legal services for life if she leaves him something in her will. She does and the lawyer wants to avoid tax on the “gift.”

I - Whether this is a gift or compensation for services.

R - While this is a bequest, it is also compensation for services.

102(b)(1) Gift exclusion exception

The gift exclusion shall not exclude the income from any property referred to in (a).

Ex. A father gifts a rental property to his daughter. While the daughter does not owe taxes on the property, she owes taxes on the income received from the property. It cannot be argued that the income stream is a gift.

102(b)(2) Gift Exclusion

The 102(b)(1) clarification that income from a gift cannot be excluded also applies when the income is separated from the property.

Ex. Father places a property in a trust, granting the daughter the rental income and the son has a retainer on the underlying property. The rental income is taxed but the gift of the property itself is not.

Employee Benefits and the Gift Exclusion

Generally, employee benefits are benefits provided based on the employee/employer relationship so the benefits are gross income.

Sec. 132 exception

Allows certain employee fringe (de minimis) benefits to be excluded from Gross Income. Generally > 75-100 dollars

De minimis just means too small to keep track of/too administratively difficult to keep an eye on.

Employee Discounts

Excluded from GI despite being an accession to wealth that the employee realizes in connection with the employee/employer benefit.

Prizes and Awards

Expressly are included as GI under section 74. 74(a), unless excepted here or at Sec. 117 (scholarships). Prizes and awards are gross income.

Sec. 74(b) Prizes & Awards Exception

Prizes and awards for certain achievements excluded:

(b)(1) - if TP didn’t enter

(b)(2) - no further work is expected

(b)(3) - And the compensation is DONATED to a charitable organization

Tax Reform Act of 1986

“high point of the American tax system”

Revenue neutral by lowering tax percentage and raising the base (50% down to 28% w/ lower at 15% (just the two brackets)).

History of Tax Brackets

From the TRA ‘86, we’ve landed on 37, 35, 32, 24, 22, 12, 10 and the OBBA made these permanent. The rates have climbed back up and the base is still broad.

Exceptions to Prizes and Awards Rule: Sec. 74(2) and (74(3)

Minor awards for length of service or safety achievements excluded ($ limit, though).

Exceptions to prizes and awards rule: 74(d)(1)

Olympic medals and compensation from the committee excluded. 74(d)(2) this doesn’t apply if AGI is >1m.

Where do exceptions live in the code?

Sec. 101-139

Sec. 117 (Qualified Scholarship Exemption)

Historically, scholarships were seen as prizes/awards.

They are excluded if any individual is a candidate for a degree at a degree granting institution.

Still applies to qualified portion of scholarship (as in, the relevant portion of a scholarship may be excluded if some portion is not qualified (meaning it’s for room and board)).

Rev. Rul. 77-263 (Athletic Scholarship Ruling)

If

1 - university expects but doesn’t require participation in a sport

2 - Expects nothing in lieu of the sport

3 - can’t take the scholarship away if the student doesn’t participate.

Then the scholarship is exempted.

117(d)(1) (Qualified Tuition Reduction)

Qualified Tuition Reductions should not be included in gross income.

What is Gain?

1001(a) Gain from sale and other disposition of property = Amount Realized - Adjusted Basis.

What is loss?

Adjusted basis - Amount Realized

Sec. 1001(b) (relating to gain calculation)

This is a realization event including the sum of any money received + any property + any services.

Adjusted Basis (Sec. 1011(a))

This is the nexus for pointing where to look for how to determine basis.

1012(a) Basis

Basis of the property = the cost of such property.

Cost = amount paid (Reg. Sec. 1012-1)(a))

Ex. Buy land for 100k. Basis=100k. Buy stock for 3k. Basis=3k. Value may change but basis does not!

Gain Formula 1001(a)

Gain = Amount realized (1001(b)) - adjusted basis (1011)

Amount Realized 1001(b)

What you got from the realization event. Amount received = cash + value of any property recieved.

Adjusted Basis 1011

1011(a) - the way station for basis

Basis in property acquired by purchase (cash)

Section 1012 cost basis (amount paid in cash - Reg. sec. 1.012(a))

Basis in property acquired in an exchange (Property for Property) (Philadelphia Park Amusement)

Basis of acquired property pursuant to the holding in Philadelphia Park Amusement:

(1) FMV of acquired property

(2) FMV of property given up

(3) in rare and extraordinary cases, basis of property given up becomes the basis of acquired property

Basis in property acquired by gift

1015(a)

(1) Transferred basis

(2) If basis is greater than FMV of property at the time of the gift and property is subsequently sold for less than that FMV, then the basis is that FMV.

(3) If basis is greater than FMV of property at the time of the gift and property is subsequently sold for an amount between that FMV and that basis, then no gain or loss (Reg. Sec. 1.1015-1(a)(2).

Basis in property acquired in a part-gift/part-sale transaction.

Basis is greater of:

1. Amount paid by the transferee or

2. Transferor’s adjusted basis in the property (Reg. sec. 1.1015-4(a)(1)).

Basis in transfer of property between spouses:

transferred basis (Section 1041(b)(2))

Basis in property acquired on the decedent’s death

Basis of acquired property is its FMV at the date of the decedent’s death (Section 1014(a)(1)).

Realization

Objective event creating an appropriate time to tax

Recognition

Means something is included in gross income.

Basis and loans

Basis is the amount you paid—it doesn’t matter if you paid in cash, debt, property, or services.

Section 1016 (basis)

Adjustments to property in basis based on additional investments made (improvements). Think “how much do you have invested in the land?”

1016(a)(2) Basis

Basis can be decreased.

1019 Basis

Don’t touch the basis based on improvements made by lessee.

Tax Cost Basis

Property acquired in a transaction in which it’s FMV is included in GI. Meaning basis in acquired property is the amount you included under your gross income.

Policy - if not and basis is 0, then TP would be double taxed.