Tax

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Gross Income- §61(a)

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“Gross income means all income from whatever source derived, including (but not limited to) the following items

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Eisner v. Macomber

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61(a)(7) dividends constitute gross income, BUT there is still the realization req. This case was incomplete, expanded on by sect. 61.

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Commissioner v. Glenshaw Glass

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Court held that money received as punitive damages must be included as gross income – it is an undeniable accession to wealth. Emphasized that Congress intended to exert “the full measure of its taxing power.” Eisner definition is still good law – Court just expands it here. Tax payer realized accession in wealth and has dominion and control of those proceeds. Apply this to Eisner and still same outcome bc don’t have realization event.

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Cesarini v. United States

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Found money in piano. Reported it (morons) then amended filing. $ was taxable income b/c statute says "all income from whatever source.' (sect. 61)

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Reg. § 1.61-14 – Treasure trove

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constitutes gross income for the taxable year in which it is reduced to undisputed possession. This is to the extent of its value in US currency. It does not need to be cash.

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Old Colony Trust Co. v. Commissioner

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Пs taxes were paid by his company. Commissioner argued that this was additional income to Wood and thus taxable. Court held that the payment by an employer of the income taxes assessed against him constituted additional taxable income; they were in consideration of the servs rendered by the employee and was a gain derived by the employee for his labor. The payment is not a gift with employment and employee relationship.

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McCann v. United States

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all-expense paid trip as a reward for wife’s job performance, but they did not include the value of the trip in their gross income. Two business meetings but mostly pleasure. Court held that the reward was clearly compensation for her services and was taxable as gross income (FMV of the trip was to be reported). Under 1.61-1(a) and 1.61-2(a), said mrs. Mccann had gross income = FMV of trip. Just her
Note – if this was done to mostly benefit the employer then CL exception to gross income.

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Roco v. Commissioner

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Court held that the qui tam payment was includable in gross income and that  did not act in good faith in claiming the payment was non taxable.

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Reg. § 1.61-14(a)

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Another person’s payment of the taxpayer’s income taxes constitutes gross income to the taxpayer unless excluded by law.

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Reg. § 1.61-1(a) Gross Income

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explicitly provides that gross income may be realized in any form, whether money, property, or services

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Reg. § 1.61-2(d)(1) Compensation paid other than in cash

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If services are paid for in property, the FMV of the property is the measure of compensation
b. If services are paid for in the form of services, the value of the services rendered is the amount of compensation.
-if services rendered at a stipulated price, the price is presumed FMV in the absence of evidence to the contrary

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Reg. § 20.2031-1(b) – FMV

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is the price a willing buyer would pay a willing seller, with neither under a compulsion to buy or sell, and both having reasonable knowledge of relevant facts

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Revenue Ruling 79-24: (barter club)

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a. Lawyer’s services were exchanged for a house painter’s services – FMV of the services received by the lawyer and the housepainter are includable in gross income.
b. Work of art exchanged for an artist’s use of an apartment rent-free – FMV of the art and the fair rental value of the apartment are includible in gross income.

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Announcement 2002-18, 2002-1 C.B. 621 frequent fler miles

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a. Taxpayer who accumulates frequent flyer miles as result of business travel paid for by her employer is not required to report any gross income.

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Realization requirement policy

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a. Measuring the appreciation in all of the property of every TP every year would present enormous administrative problems for TPs and the IRS.
b. It would be fundamentally unfair to treat unrealized gains as income because TPs might well lack the cash to pay resulting taxes and might thus be forced to sell assets – perhaps at artificially low prices, given the need for cash – to pay the tax.

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RR caselaw

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Eisner v. Macomber – (Old View) SCOTUS held that no gain and no income had been realized by reason of the stock dividend and Congress had no power to tax it under the Constitution. Congress cannot tax unrealized gain.

Helvering v. Horst – SCOTUS suggested in dicta that the realization requirement was merely a rule of “administrative convenience.”

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Cottage Savings Ass’n v. Commissioner

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SCOTUS affirmed realization is founded on administrative convenience and held an exchange of property gives rise to a realization event as long as the exchanged properties are “materially different” (i.e. they embody legally distinct entitlements).
a. Here, because the loans were made to different obligors and secured by diff homes, the exchanged interests did embody legally distinct entitlements and therefore Cottage realized its losses at the point of the exchange.

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Pellar v. Commissioner

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- s purchased a house at below FMV and did not pay taxes on the difference between FMV and purchase price. Court held the purchase of property at below FMV value does not give rise to taxable income – realization arises and is taxed upon sale or other disposition of the property.

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Imputed income

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NOT taxed, even though the Code contains no specific exclusion to that effect

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Imputed Income from Services

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the economic benefit arising from self-help, i.e. from performing services for oneself or one’s family (save $ by not paying someone)

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Imputed income from Property

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i. Illustrated by a homeowner-versus-renter example: Ex. A uses $250,000 to buy a house he lives in w/ rental value of $25,000/yr. B invests $250,000 paying 10%- $25,000/yr. Mary rents a house identical to John’s for $25,000/yr.
a) Each has a $250,000 asset which derives $25,000/yr. but Mary’s return on her investment is taxed and John’s isn’t.

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imputed income cases

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Morris v. Commissioner- value of farm products consumed by the owner was not income.

Commissioner v. Minzner- insurance agent could be taxed on the commissions he received on life insurance he purchased on his own life.

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Bargain Purchases

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ex. when your purchase an asset as a bargain price= fair mkt value of the asset is greater than the price you pay for it (generally doesn’t constitute gross income—too speculative measure or minimal enough to ignore).

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Bargain Purchases (employment caveat)

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cannot be ignored in the employment setting. Reg. 1.61-2(d)(2)(i) – if property is transferred as compensation for services in an amount less than the FMV, the difference between the FMV and the amount paid is gross income. (ex. give stock worth $400 for pmt of $100= $300 gross income)

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Gains from dealings in property

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-§ 61(a)(3) – gross income includes “gains derived from dealings in property”
a. what is gain, dealings and property?
-Reg. § 1.61-6(a) – “gain is the excess of the amount realized over the un-recovered cost or other basis for the property sold or exchanged.”

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Subdivided Property

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if property is subdivided then the basis of the entire prop shall be equitably apportioned among the parts and gain realized/loss sustained on the part of the entire prop sold is difference btwn sale price and basis of each part.
i. Treat each sale as a separate transaction for gain/loss purposes
ii. Property includes tangible items such as a building and intangible items, such as goodwill

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§ 1001(a)

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The gain from the sale or other disposition of property shall be the excess of the amount realized over the adjusted basis provided in § 1011
i. Excess of AR over AB means Amount realized – Adjusted basis

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§ 1001(b)

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Amount Realized – equals the sum of any money received plus the FMV of any other property received

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§ 1001(c)

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says you recognize that gain when you realize it (include in gross income) unless there is an exception.

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§ 1011

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The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis (determined under section 1012) adjusted as provided in 1016.
i. Ex. Purchase painting for 2k. The initial basis will be the cost of the property when paying for it in cash.

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§ 1012

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Basis equals cost “except as otherwise provided…”
i. Cost= your investment in the property

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§ 1016 – Adjusted Basis

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requires a TP to adjust her basis in property to reflect 1) any recovery of her investment or 2) any additional investment made in the property.

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Gain

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GAIN = AMOUNT REALIZED – ADJUSTED BASIS