Problems & Examples Flashcards
Would the results to the T in Cesarini be diff if instead of discovering $4467 in old currency in the piano, they discovered that the piano, a Steinway, was the 1st Steinway piano ever built and worth $500,000?
(This is a realization principle question. Diff. from land appreciation in that this piano was worth $500 when you bought it. Was the original purchase then a TA that made the accession taxable? Is purchase enough? Is this a notorious event that could constitute realization? Liquidity is a problem–you’d have to sell to be able to pay tax on $500,000. The Practical Problem though is the key: you’re not going to have everything you buy appraised every time you buy. ACQUISITION OF PROPERTY IS NOT THE REALIZABLE EVENT AT ARM’S LENGTH. (not a taxable event)
Winner attends the opening of a new department store. All persons attending are given free raffle tickets for a digital watch worth $200. Disregarding any possible application of IRC §74, must Winner include anything within gross income when she wins the watch in the raffle?
(Is winning the watch in a raffle a realizable event? The problems with it: How do we determine the value of the watch?
Liquidity issue: gotta sell to be able to pay tax liability. PRESUMPTION is that when you win something, you have an immediate increase in your wealth! You paid nothing for it really. IRS then says we don’t care about liquidity–pay the tax!)
What if T in Steinway problem had bought the piano from his employer w/both T & employer knowing it was a Steinway?
This is a notorious event–not at arm’s length! No presumtion that mkt value was paid–so its included in gross income.
Note IRC §74: an exclusionary section that says that prizes and awards are includable as income, with exceptions of certain achievement awards (charitable, employee, etc). Note that §61’s broad language picks up prizes and awards.
Employee has worker for Employer’s incorporated business for several years at a salary of $40,000 per year. Another company is attempting to hire Employee but Employer persuades Employee to agree to stay for at least 2 more years by giving Employee 2% of the company’s stock, which is worth $20,000, and by buying Employee’s spouse a new car worth $15,000. How much income does Employee realize from these TA’s?
Per Glenshaw Glass case def: 1). T has accession to wealth, 2), which is clearly realized (b/c a notorious event has occurred). We do have a liquidity problem, but too bad, T has to find $ to pay tax on it! Burden is on T to prove the value. Thus T must show $35,000 in gross income
Insurance Adjuster refers clients to an auto repair firm that gives Adjuster a kickback of 10% of billings on all referrals. Does adjuster have gross income? Even if the arrangement violates local law?
Makes no dif if gain is made by illegal means.
- Owner agrees to rent Tenant her lake house for the summer for $4000.
- How much income does Owner realize if she agrees to charge only $1000 if Tenant makes $3000 worth of improvements to the house?
- Is there a diff in result to if Tenant effects exactly the same improvements but does all the labor himself and incurs a total cost of only$500?
- Are there any tax consequences to Tenant in part (b) above?
- (§61(a): rental income is includable in your gross income. Here T received $3000 in value in lieu of rent $. We don’t care if T has a liquidity problem b/c of not receiving cash.
- This is a substance over form problem:substance is same as if she had received $3000 and then hired someone else. T entered into a TA! LOOK AT THE SUBSTANCE OF THE TA! Look at HOW the property was acquired–this is the key! We enforce a transactional system–what is the nature of the TA?
- IRC §109: excludes from gross income any improvements not made in substitution of rent.
- The tenant’s tax consequences: Always ask: What would be the theory under which we would tax the tenant at all? What does Glenshaw Glass tell us? Accession to wealth: $2500 realized in rent credits. Look for value of benefit. Income from services rendered is gross income. SUBSTANCE v. FORM!!
Mr. Taxpayer is a financial consultant who owns and operates a business. He and his wife, a law student, use the cash method of accounting and report their income on a calendar year basis.
Mr. T received $25,000 in cash and $120,000 in checks as consulting fees from clients during the year.
[§ 61(a)(1) & (2), compensation for services, including fees, commissions, and fringe benefits, and similar items; gross income derived from business.
Mr. Taxpayer is a financial consultant who owns and operates a business. He and his wife, a law student, use the cash method of accounting and report their income on a calendar year basis.
A client paid for $1,000 of consulting services by painting the house of Mr. T’s mother.
[§ 61(a)(1) and § 1.61-1(a)]
Policy: we don’t want people to be able to avoid taxes by bartering for services, we also want to avoid shifting and assigning of income
Mr. Taxpayer is a financial consultant who owns and operates a business. He and his wife, a law student, use the cash method of accounting and report their income on a calendar year basis.
Mr. T was owed $15,000 at the end of the year from clients.
Not income b/c Mr. T is a cash basis taxpayer, SO he has not actually received the money
Caveat: constructive receipt doctrine says that you cannot arbitrarily move income to another year; SO if someone offers to pay you and you try to defer it until next year, it will be included under the doctrine of constructive receipt as income for this year
Caveat: accrual method accounting reports income when you fully perform the services, whereas with cash method you report it when it is received.
Mr. Taxpayer is a financial consultant who owns and operates a business. He and his wife, a law student, use the cash method of accounting and report their income on a calendar year basis.
Mr. T purchased stock two years ago for $5,000. At the end of last year, the stock had a fair market value of $8,000. This year, Mr. T sold the stock for $10,000.
Realization: tax the stock when it is sold rather than when it goes up in value; when it is sold a capital gain is realized; later we will see that we characterize it as a capital gain b/c capital gains get a lower tax rate
§ 61(a)(3): gains derived from dealings in property
Looking at the net gain in this case ($10,000-$5,000); whereas in all other areas of gross income we are looking at gross receipts
Mr. Taxpayer is a financial consultant who owns and operates a business. He and his wife, a law student, use the cash method of accounting and report their income on a calendar year basis.
Mr. and Mrs. T own the home in which they live with their two children. They could rent the home for $500/month.
Imputed income: tax code does not tax people for imputed income (e.g., value of their own labor in mowing the lawn)
Policy for NOT taxing imputed income:
- Tough to administer such a system
- Would be extremely unpopular among taxpayers
Gross Income ($151,000)
Deductions ATL (§ 62(a)) ($25,000)
Standardized Deductions or Itemized Deductions ($8,620)
Personal Exemptions (§151) ($8,000)
AGI = ______
Taxable Income = _________
Gross Income ($151,000)
- Deductions ATL (§ 62(a)) ($25,000)
AGI = ($126,000)
- Standardized Deductions or Itemized Deductions (Itemized Deductions = those not listed in § 62(a), otherwise known as below the line deductions) ($8,620)
- Personal Exemptions (§151) ($8,000)
Taxable Income = ($109,380)
Credit v. Deduction (which is better for the taxpayer)
Credit is better b/c it reduces your tax dollar for dollar, whereas a deduction reduces your tax by a percentage of the dollar.
Example: Assume you have $21,000 of income, the tax is 15%. Compare a $1,000 deduction to a $1,000 dollar tax credit.
The tax on $21,000 at 15% = $3,150
Deduction of $1,000: 15% tax on $20,000 = $3,000
Credit of $1,000: 15% tax on $21,000 = $3,150 - $1,000 credit = $2,150
SO, with the deduction, the taxpayer only saves $150 whereas with the credit the taxpayer saves $1,000.
