out5andprop - Introduction to Federal Taxation Chapter 5 14...

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Introduction to Federal Taxation Chapter 5, 14, 16 GROSS INCOME Spring 2006 Kulsrud
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2 CHAPTER 5 I. First component of the tax formula: income 1. Income in general: what is it? [Sec. 61] 1.1. Economic concept: an all inclusive approach to the definition 1.1.1 Consumption + change in net worth, measured using fair market values. Ending net worth Beginning net worth Change in net worth + Consumption expenditures = Income 1.1.2. Imputed income would be included, e.g., value of goods or services produced or consumed by taxpayer. 1.2. Accounting concept 1.2.1. Realization principle adopted 1.2.2. GAAP not necessarily reflected; often causes differences between taxable income and GAAP income 1.3. Judicial concept 1.3.1. Glenshaw Glass : Supreme Court holds that punitive damages awarded under antitrust laws were income and creates all inclusive concept of income concept 1.3.2. Income is any increase in wealth that has been realized. All-inclusive concept. 1.4. Even though the taxpayer has realized income, it still may not be taxable. 1.4.1. Excluded income: income that is realized could be specifically exempt from taxation under one of the many exclusion provisions in the Code. 1.4.2. Accounting methods: income that is realized may be deferred to a subsequent period due to some particular method of accounting (e.g., home builders may use the completed contract method). 1.4.3. Nontaxable exchanges: income realized on a sale or exchange may be deferred under a special nonrecognition rule (e.g., like-kind exchange, sale of a personal residence, involuntary conversion). II. Refinements of the income definition 2. Form of benefit 2.1. Form of income is irrelevant. 2.2. Noncash benefits are taxed under the cash equivalent doctrine: "Gross income includes income realized in any form, whether in money, property or services." (Reg. § 1.61-1(a)).
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3 3. Return of capital 3.1. Taxpayer is allowed a tax-free return of capital before gain is realized. 3.2. Examples of nontaxable returns of capital 3.2.1. Loan 3.2.2. Sale (see property transactions outline following this outline) 3.2.3. Awards for personal injury nontaxable; compensatory damages nontaxable; punitive damages are taxable even if related to personal injury or sickness 3.2.4. Recoveries for injuries to business: determine whether return of capital or substitution of income 4. Indirect economic benefits--employer provided benefits 4.1. Under "convenience of the employer" theory, benefits not intended as compensation but rather provided to serve needs of the employer are excludable (e.g., small tools which serve to get the job done). 4.2. Current test Patterson v. Thomas: exclusion if demonstrate that it served a business purpose of the employer other than to compensate the employee. III.
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out5andprop - Introduction to Federal Taxation Chapter 5 14...

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