Three different courts for tax matters
1. Fed. Dist. Ct.
2. US Ct of Federal Claims
3. Tax Court
1 & 2 are for refund actions. 3 is for prepayment tax cases; jurisdiction if there‘s a
deficiency after an audit, review before you pay deficiency.
GI – Deductions = Taxable income
TI can be divided into Ordinary Income (ORD) and Capital Gains (CAP)
Section 61 defines GI as income, from whatever source.
Income is going to essentially be any accretion to wealth.
Amt realized – adjusted basis = gain/loss
CBp49 Caeserini- Family finds money in a piano. Is it taxable? There‘s a treasury
regulation right on point that says ―treasure troves‖ are taxable. Treasury regs are
entitled to more deference by courts than Revenue Rulings. Statute of limitations,
according to court, starts to run when you find the money. Title in found money vests in
accord with state property law.
For a gift there must be ―donative intent‖
Next case (55?): Company adopts a resolution to pay taxes for its executives (gross-up
clause). This counts as more income for the taxpayer.
Car $5000 Student Loans $50,000
House $200,000 Mortgage $150,000
Stocks $30,000 Total Assets: $235,000 Total Liabilities: $200,000
N.W. = $35,000
If this person finds $5k, we can see that his net worth is increased by 5k.
Similarly, if a benefactor pays off the student loan, N.W. is increased by 50K. This may
be excludable as a gift. However, if employer pays off the student loan, this would be
compensation and taxable.
Borrowing 10k creates an entry of 10k in cash on asset side and 10k on liability side. No
change in N.W. Discharge of indebtedness qualifies as GI.
Lost profits were stipulated as taxable. In cases on p57, parties were arguing about
exemplary damages. These are an accretion to wealth and thus taxable. (Some damages
may be excludable depending on the origin of the claim, more to come later)
Problems p. 65
1) No realization event
2) It‘s an accretion to wealth. It‘s not a gift, because the store wants people to come in.
3) In most cases, stock in a compensation package will be includable. There are special
rules for restricted stock; you may be able to defer. There does not have to be a
realization event, because there was no initial investment of money that had been
previously taxed. The value of the stock when given as compensation becomes your
basis moving forward.
For the car, it would probably be viewed as compensation to the husband and a
subsequent gift to the wife.
4) (a) Adjuster‘s kickbacks are gross income
(b) Even if it‘s illegal, it‘s still gross income.
5) (a) $1000 is clearly taxable. For the $3000 in improvements, it‘s either includable
now or when the lake house is sold.
What if T pays $4000 for rent, then L pays T $3000 for repairs. Materials cost T $500
for repairs. L should pay taxes on $4000. T should pay taxes on $2500
Helvering (p66)- You don‘t have income when you use your own property or perform services for yourself. This type of ―income‖ is not imputed for tax purposes.
Rev. Ruling 79-24: Fair market value of property or services taken in payment must be
included in income. Barter situation.
Dean (p67)- Couple occupied a house owned by a corporation. The rental value is
imputed income. You could also look at this as a dividend from the company.
Problems on p68
1a) Vegy harvest her own crops. No income unless sold. TR. 1.61-4(a)(1)
1b) Vegy and her family consume $100 worth of vegetables. Same result.
1c) Vegy sells $100 worth of crops. Income
1d) Vegy barters $100. Income
2a) Doctor and lawyer swap services. Both have income.
2b) Lawyer fills out her own tax return. No income.
Exclusion of Gifts and Inheritance
IRC ? 102(a) and (b)
At common law a gift is generally something given in the absence of a legal obligation to do so. Does a gift have the same meaning in the IRC?
Salesman gave Duberstein a car after Duberstein gave the salesman leads on business. Duberstein agrees to accept, reluctantly. Salesman deducted car as a business expense. Tax Court says Income; Court of Appeals reverses; Supreme Court reverses.
Stanton case decided with Duberstein. Stanton works for a church. Stanton decides to resign. The church board votes to give him a severance package, even though they had no obligation to do so. Court remands for further factual development. On remand, the district court found donative intent.
p74 ―A gift in the statutory sense … proceeds from a ‗detached and disinterested
Today, Stanton is essentially overruled by statute in 102(c), a transfer from employer to employee cannot be a gift.
1) Employer gives EEs $100 TVs. She gives son, who is an EE, a $500 TV.
If son can prove that the TV was intended as a normal gift from his mother, he can exclude it. Generally the IRS won‘t go to trouble of bifurcating into $100 and $400.
2) Louie gave tip to Maitre d‘ and croupier in Vegas. INC.
Lyeth v. Hoey- Will contest settlement. Descendant gets money. Is this an inheritance? IRS argues that heir received money by contract. Under state law, heir would have lost,
but Court viewed it as a federal question and decided that it was in fact an inheritance.
Court took the counterfactual position. If son won, he would have taken whole estate by
the laws of intestacy, which clearly would have been an inheritance. Accordingly, the
settlement proceeds should receive the same tax treatment.
Wolder v. Commissioner- lawyer gets bequest under the will. IRS argues that the bequest is compensation for preparing the will. Again, look to donative intent. Court
says that bequest was intended to satisfy Mrs. Boyce‘s obligation under her contract with
the lawyer for his services.
Today, Sup Ct leans toward strict construction of statutes, unlike the Wolder court.
Thomas recently cited the old 30‘s rule that tax statutes are strictly construed against the
government. As a lawyer, you need to consider how the court will view a statute in the
event that the transaction is challenged by the IRS.
Problems, p91, Exclusions under ? 102
1a) Father leaves daughter 20k in will. Excluded as a bequest.
1b) Same, but father dies intestate. Same.
1c) Will is contested and Daughter receives 20k in settlement. Excludable, look to nature
of underlying claim.
1d) Father leaves daughter 20k in will in appreciation for ―long and devoted service.‖
Probably just flowery language. Depends on facts.
1e) Father leaves daughter 20k in will pursuant to a written agreement in which D agreed
to care for Father as he wanes. Includable. Wolder
1f) Daughter successfully enforces above when Dad dies intestate. Money is taken of the
top of the estate. Includable.
1g) Same except settles for 10k. Same.
1h) Will provides that daughter will receive 20k for services as executrix. Includable.
1i) Father made 20k bequest in lieu of compensation as executrix. Under Merriam, this is
a bequest, although Wolder questions this logic.
2) Boyfriend agrees to leave everything to girlfriend. He dies intestate. She sues under a theory of quantum meruit. She settles. It should be included due to the underlying theory of the case. It would have been better to make a claim of common law marriage. Maybe in some states, an oral will would work.
? 132 Also see ? 61(a)(1); 79; 83; 112; 120; 125
? 132 (b) Parsed
2) provided by employer to employee
3) for use by the employee
(employee includes family sometimes, see (h))
4) service is provided by employer to customers
5) service is offered in the line of business in which the EE works
6) ER incurs no additional cost or loses no revenue
7) Without regard to any amount paid by EE
1) Must be for convenience of employer
2) EE must be required to accept
3) Lodging must be on premises
1) Furnished by ER for convenience of employer
2) On the business premises
Hatt Case- Majority owner lives on business premises. Issue: Was he required to accept
the lodgings as a condition of the employment? Ct says it‘s a fine exemption based on
the nature of the funeral home business. If he didn‘t live there, he would have had to pay