What is Income?
- Instances of undeniable accessions to wealth,
- Clearly Realized,
- Over which the taxpayers have complete dominion
What is the Statute of Limitations for general tax audits?
3 years
What is the Statute of Limitations for unfiled tax returns review?
No Statute of Limitations
What is the Statute of Limitations for instances of Fraud?
No Statute of Limitations
What is the Statute of Limitations for severly under reporting taxes?
6 years
What is “income” as defined in § 61(a)?
Income from whatever sourced derived….except as otherwise provided in this subtitle
What is imputed income?
Non-cash income, income in kind. Any gain, benefit or satisfaction from a non-market transaction or event
- Use and enjoyment of one’s house
- Self produced goods, consumed or used by them
- Services performed by others or himself for his own benefit
Is imputed income taxable?
Conceptually yes, practically no.
- Administrative and compliance issues
- Not universally believed to be taxable (income)
What are Examples of Imputed Income?
- Consumption of self produced goods
- Non-cash income
- Services performed by others or by himself on his own behalf
- Benefit of the use and enjoyment of one’s own property.
What are the Four requirements needed to exclude a prize or award?
- It was given in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement
- The recipient did not take any action to enter the contest or proceeding
- The recipient is not required to provide future services as a condition of the prize or award
- The recipient assigns the prize or award to a governmental or tax exempt charity. Assignment must be made before the recipient uses the award or prize.
What is a Fringe Benefit (§132)?
A benefit provide by an employer to an employee that is beyond wages and basic benefits.
What are “Allowable” Fringe benefits (§132(a)) that are excludable from Income?
- No-additional cash service
- Qualified employee discount
- Working condition fringe
- de minimus fringe
- Qualified Transportation Fringe
- Qualified moving expense reimbursement (modified after 2018)
- Qualified retirement planning service
What are Examples of Non-Cash Benefits?
- Meals and Lodging (§119), Business
- Fringe Benefits (§132)
- Dependent Care Assistance (§129), Reimbursement
- Medical Expenses (§105, §106), Accident/Health Insurance
- Group Term Life Insurance (§79), up to $50,000
- Minister’s Lodging (§107)
What is the definition of a gift (§102)?
Something given with detached and disinterested generosity. Admiration, charity and like impulses.
Duberstein
What is the rule from Old Colony?
- The discharge of an obligation by a third person equals income.
What are the steps for determining income?
- Is it income?
- Income, minus
- Exclusions, equals
- Gross Income
- How much
- Fair Market Value, minus
- Basis
- When realized
What are the Three categories for “Compensation for Services”?
- Cash and Unrestricted Property
- Non-Cash Benefits
- Property subject ot a substantial risk of forfeiture
What are Cash and Unrestricted Property?
- Wages, tips and salary
- Stock
- Property that the employee takes immediate ownership of (realization)
Where does the Income Taxing power come from?
16th Amendment
The Congress shall heave the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration
Where are the Tax Statute located
Title 26
What is adjusted gross income, AGI ?
Gross income (§61) minus any “above the line” deductions (§62)
What is Taxable Income?
Adjusted Gross Income minus “below the line” deductions and person exemptions
What is an exclusion?
An item that does not have to be included in gross income (§61).
- Gifts (§102(a))
- Bequeths (§)
- Life Insurance payouts upon death (§101)
- Some proceeds from litigation
What are deductions?
Costs incurred by the taxpayer than can be subtracted from (in whole or in part) gross income
- Above the line - subtracted from gross income to net AGI
- Below the line - substracted from AGI to net taxable income
What are examples of “above the line deductions”?
- 401K contributions
How may deductions be taken?
- Itemized
- Individual items tallied to determine total deductions
- Mortage interest
- Property/State Income taxes
- Charitable contributions
- Individual items tallied to determine total deductions
- Standard Deduction
- A fixed amount established by statute that eleminated the need for itemization
- Up to 2017 (10,000 married filing jointly)
- 2018 to 2026 (24,500 married filing jointly)
- A fixed amount established by statute that eleminated the need for itemization
What is “personal exemption”?
A below the line deduction for each individual, that phases out as AGI increases. This deduction is removed after 2018 in lieue of a larger standard deduction
What is a Credit?
An amount that is subtracted from a taxpayers tax liability (taxes).
- Nonrefundable - Can reduce the tax liability to zero, no more
- Refundable - Can reduce the tax liability to a negative number, resulting in a refund to the taxpayer.
What is the difference between ordinary income and capital gains?
- Ordinary Income - ongoing income from any source (wages, tips, rental income, ordinary dividends, interest)
- Capital Gains - realized appreciation on capital investments
What is basis?
Basis is the actual or constructive cost of an asset to the taxpayer
What is the “basis” for a gift, bequeth, or spousal exchange (§102, )?
- Gift (1015(a))
- Donor’s basis
- Bequeth (1014(a))
- Market value at time of conveyance
- Spousal Exchange (1041(a))
- Spouse’s basis
What is a “gain” §1001
When a property is sold or otherwise disposed of and the amount realized (sale price) of an asset exceeds the adjusted basis. Taxable amount
What is depreciation?
The reduction in basis of an asset due to age, wear and tear, and general degradation of an asset’s useful life. Can be taken as a deduction by a taxpayer, does not apply to personal assets, only business assets.
What is realization?
The moment that property is “sold” or “disposed of”. Cash is realized the moment it is taken possesion by the taxpayer.
Cesarini
Were are public policy exceptions located in the code?
Section 162
What is a “loss” §1001?
When a property is sold or otherwise disposed of and the amount realized (sale price) is less than the adjusted basis.
What is “amount realized” §1001(b)?
Sum of all money received plus the fair market value of any non-cash property received, including being relieved of a liability (debt obligation, Crane).
Where is recognition of gain or loss found?
§1001 (c) - Unless the otherwise provided….the entire amount of gain/loss determined under this section (§1001) on the sale or exchange of property shall be recognized.
What is the adjusted basis when property is transferred/sold and the value of the transfer is uncertain?
The adjusted basis is assumed to be equal to value of the transferred/sold property (Philadelphia Amusement).
What is the rule for found property (treasure troves)?
Found property (treasure troves) constitute gross income for the taxable year in which it is reduced to undisputed possession.
§1.61-14 - Misc Items of Gross Income
What are the two forms of income not counted as Gross Income?
- Imputed income - To difficult manage
- Appreciation (Accretion) - Not realized
What are No-Additional Cost Services?
- Services provided by an employer for sale to customers and provided to employees.
- No substantial additional cost to employer to provide
- No forgone revenue to provide to employee
- Reciprocal Agreements between employers allowed
What is a Qualified Employee Discount?
- A discount provided to the employee for property or services the employer provides to customers
- The discount cannot exceed the gross margin % of the employer’s business
- Amount above gross margin % is taxable
- Services capped at 20%
- Employees limited to discounts within their business units.
What are de minimis fringe benefits?
- Property or services provided by an employer whose value is so small to make accounting for them unreasonable or adminstratively impracticable
- Free Coffee
- Occasional free lunches
*
What does the “Nondiscrimination” apply to?
If the granted benefit favors highly compensated employees, then the benefit is taxable to those employees.
What is the flow for “Gains from Dealings in Property”?
- §61(a)(3) - Gross Income
- §1001(a) - Amount Realized - Adjusted Basis
- §1001(b) - Amount Realized Defined
- §1011(a) - Adjusted Basis Defined
- §1012(a) - Cost Basis
- Phil Amuse - FMV = AB (transferred)
- Reg §1.61-2(d)(2)(i) - Tax Cost
What is the adjusted basis for property received from a decedent (§1014(a))?
- Adjusted basis equals the fair market value (FMV) of the property at the time of receipt.
What is the definition of “Fair Market Value”?
The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell or both having reasonable knowledge of relevant facts. Reg.§20.2031-1(b)
What is the rule for adjusted basis for community property (1014(b)(6))?
- Community Property States
- ½ share of community property belonging to decedent adjusted basis is FMV at time of death §1014(a)
- ½ share of the surviving spouse also FMV at time of death, treated as “acquired from decedent” §1014(b)(6)
- Non-community Property States
- ½ share of community property belonging to decedent adjusted basis is FMV at time of death §1014(a)
- ½ share of the surviving spouse treated as personal property subject to original basis
When is the “stepped up” basis (FMV) of a decedent’s property not allowed (§1014(e))?
- Property given to the decedent within 1 year of death,
- where the donor is the recipient of the property from the decedent,
- the appreciated value of the property is not used, but rather a transferred basis.
Are gifts excluded from Gross Income?
- Donor - has no income due to having no Amount Realized
- Donee - has no income (excluded) due to §102(a)
What is the transfered basis exception for gifts?
- If, at the time of exchange, the donor’s transferred basis is greater than the FMV of the property, then
- for loss calculations use the FMV as the transferred basis
- if the amount realized lies between the lower FMV and higher donor basis (twilight) and produces a loss in Donor and a gain in FMV, then
- the amount recorded for tax purposes is zero Reg.§1.1015-1(a)(2)
What is the effect of gift tax?
- Gift tax paid by the donor raises the adjusted basis of the property (§1015).
How is the gift tax portion of adjusted basis calculated?
- The amount of adjusted basis is equal to the amount of gift tax paid multiplied by the % appreciation, where
- the % appreciation is the difference in FMV and donor’s basis divided by the FMV
In a part Gift/Sale exchange, what is the Donor’s tax liability (Reg. 1001-1(e)(1)?
- If the AR > AB then,
- Donor has a taxable gain
- If the AR < AB then,
- Donor cannot take a loss for tax purposes
In a part Gift/Sale exchange what is the Donee’s adjusted basis?
Donee’s basis is the larger of either,
- Price Paid
- Donor’s Basis
- Plus gift tax adjustments
In the case of later transfer and loss calculations the donee’s basis is,
- FMV of property at time of purchase
What is the adjusted basis for subdivided property (Reg.1.61-6(a))?
When property is subdivided, the original basis is apportioned equally to the divided portions.
Can the adjusted basis be reduced (§1016(a)(2))?
The basis can be reduced by allowable (taken in each year allowed, not accumulated);
- Depreciation
- Amortization, or
- Depletion
How is the amount realized split between property’s lumped together?
Apportioned according to the relative fair market values of the items being sold.
Are prizes included in gross income (§74(a))?
Yes
- FMV of goods or services received
- Exceptions
- Qualified Scholarships, §117
- Prizes/Awards transferred to charity, §74(b)
- Employee Achievement Awards, §74(c)
- Exceptions
What are the requirements to exclude and award from gross income?
- Made primarily in recognition of religious, charitable, scientific, literary, or civic achievement,
- transferred directly by the payor to a charity or governemental unit
- Selected through no action on the part of the recipient, and
- Requires no additional service on the part of the recipient.
What is required for Life Insurance proceeds to be excluded from gross income §101(a)(1)?
- Paid under a “Life Insurance Contract”
- Paid by “reason of death of the insured”
- or prematurely for terminally ill policy holders, or
- viatical settlement payments
What is “principle residence” exclusion from gross income?
If a homeowner sells their principle residence, they can exclude up to 250,000 (Single), or 500,000 (Married Filing Jointly) of gain from the sale, provided:
- The exclusion was not used within the last two years
- The residence was the principle residence
What are the exceptions to the “two year” rule for principle residence sales?
If a homeowner sells their property due to job relocation, health issues, or other unforeseen circumstances, then
- A portion of the exclusion can be applied
- The smaller of the ratio of time spent in the home over the last 5 years, or
- the ratio of the time between use of the exclusion
What are the principle residence “use” requirements.
- Used as principle residence for an aggregate period of 2 years over the last five years from date of sale.
- Second home (vacation) is only the portion (%) of time used as principle residence, since 2008
- Rental is only the portion (%) of time used as principle residence, since 2008
Who is the proper taxpayer?
- Services
- The person who performs the services and is compensated
- “You earn it, you owe it”
- The person who performs the services and is compensated
- Property
- The person who owns the property that generates the income
What is the general rule for deductions §62
Deductions are normally not allowed unless provided by a deduction section.
What are the 5 Elements of Business Deductions §162
- Ordinary (INDOPCO)
- Necessary (Welch)
- An expense (not capital §263)
- Paid or Incurred
- Carrying On Business (Morton Frank)
What does § 2016 provide for?
Adjustments to Basis
- Expenditures, receipts, losses, or other items chargeable to capital
- Exhaustion, wear and tear, obsolesence, amortization, depletion
*
What “Damages” are included in gross income?
“In lieu of what” were damages awarded (Raytheon)?
- Lost profits - automatically included in GI
- Goodwill - Only included after business sold
To whom should the tax liability be applied?
- Assigns earned income (fruit, not the tree - Horst)
- Tree
- Assigns income from trust (fruit, not his tree - Blair)
- Fruit
- Assignment for consideration (sold fruit - Stranahan)
- Fruit sale
- Negotiate sale and then transfer (conclude deal to sell fruit, transfer tree and fruit to another - Salvatore)
- Tree before transfer
What is the difference between capital and expense?
- Capital Reg.1.263-(a)-3(d)
- Benefits extending beyond 1 year
- Betterment to the unit of property
- Restoration of property
- Adaptation to a new or different use
- Expense
- Benefits that will yield benefits for 1 year or less
Is Goodwill deductible?
- Not allowed as a deduction, but can be amortized under §197
Are Capital expenditures deductible?
No - §263
Can an untaken deduction be taken at the sale of a business?
Yes - §195(B)(2)
What is depreciation?
The allocation of the cost of an asset over the asset’s useful life
What is depreciation applied to (§167)?
- Capital expenditures in a trade or business, or
- for the production of income (investment income)
- rentals
- investments
- For the exhaustion/wear and tear on the capital asset.
What is does §179 allow?
The expensing of certain capital expenditures (§179 property)
- Allowable amount = 1,000,000
- For total expenditures up to 2,500,000
- The deduction reduced by the amount above
- Zero at 3,500,000
- The deduction reduced by the amount above
What is the order for depreciation analysis?
- Can it be deducted as an expense under §179?
- Depreciation under §167
- Special Depreciation allowance under §168(k)
What is Kirby Lumber income?
Income (ordinary) from the discharge of indebtedness §61(a)(12).
What are the exceptions to including DOI in gross income?
- Bankruptcy
- Insolvency
- Partial Solvency
What is “ordinary” §162?
Of common or frequent occurrence (INDOPCO)
What is “necessary” §162?
Appropriate and helpful (Welch)
What does “carrying on” mean §162?
The continuing operation of a business or trade
- Starting a business or trade does not count
What does “ripening” mean (fruit)?
The transfer of income,
- Prior to ripening, no tax liability
- After ripens, taxed
What does “coterminus” interest refer to?
An interest that has the same bounds as another interest.
- To give away an interest it cannot be coterminus with your own interest.
- Can’t give it away and still maintain ownership!
- You can share (apportioned interests) and be liable for the tax on your share.
- You can give away the last potion and not be coterminus (no tax liability)
What two exchanges suggest a Sale/Gift exchange?
- Consideration Paid
- Debt (liability on the land) assumed
Can income from property be excluded from gross income if by gift, will or devise?
No, (102(b)(2))
Are business startup expenses deductible?
No, it is expected that those would be capitalized,
except the taxpayer may in the year of startup choose to
- deduct 5,000 or the startup expenses (whichever is smaller, and
- the remainder of startup expenses are ratably deducted over a 180 month (15 year period), beginning in the month the business begins
What is “Goodwill”?
Value of the business as a going concern.
Goodwill = (FMV of Business) - (FMV of Assets)
- Goodwill is indivisible, cannot be apportioned
Are payments received for sickness, accident included in gross income?
- No, 104(a)
- Workers Comp, DAS for personal injury or sickness, amounts received through insurance, etc.
- Yes, 105 (a) but
- If insurance paid by employer (not included in GI)
- No 105(b)
- If the proceeds are for reimbursement for medical care (TP, Spouse, family)
What are the steps to review if an expenditure is deductible?
- Is it income
- Is there a deduction section
- Are there additional limitations
- §62
- §67
- Compare to Standards
When is a transfer between spouses related to the cessation of marriage?
- When the transfer is pursuant to a divorce decree or separation instrument, and
- the transfer occurs not more than six years from the date the marriage ceases.
What are the factors for a Capital Gain/Loss?
- A Capital asset (§1221) or its equivalent (§1231)
- Sold or exchanged (§1222) or the equivalent (§166(d)(1(B))
- Held for more than 1 year or other requisite holding period
- Not disqualified from capital gain by common law
- Realized and not subject to a non-recognition section.
What is a Capital Asset §1221(a)?
Property other than:
- Stock in trade (inventory) or property held for sale to customers as part of the normal corse of business
- depreciable or real property used in a trade or business
- copyrights, patents, etc.
- supplies used in a trade or business
