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Unformatted text preview: 1. CHAPTER 4 Comprehensive Deﬁnition of Gross Income a. Section 61: Deﬁnes Gross Income as “all income from whatever source derived.”
Includes 15 listed “types” of income (see pages 4-7 & 4-8). Encompassing,
however, Code provides several exclusions (Chapter 5) and special treatment for
return of capital (repayment of loan, adjusted basis etc.). b. DOCTRINES: Economic Beneﬁt “what” Constructive Recei t “when” Assignment of Income (“whom”) c. Compare Section 61 to “Economic Income” Compensation for Personal Services a. Include cash received + FMV of services received + FMV of property (but, some
exclusions — e. g. , fringe beneﬁts, see Chapter 5) If an Attorney performs services for a client and gets $50,000 plus 100 shares of the
client’s stock worth $100 a share. How much is her income? Why does she get taxed
on the shares (Economic Beneﬁt)? What is an argument for NOT taxing her on the
shares? b. Gift v. Income. Consider all facts and circumstances; intent (substance/FACT v.
form/label). . Jury Duty Pay, included Prizes & Awards. Generally included in the gross income (income = fmv of property).
But, exceptions for: a. Certain prizes/awards transferred to a charity before being used by the award winner;
b. Certain employee achievement awards; and c. Qualiﬁed scholarships (i.e., tuition and course related materials for a degree candidate) Gross Income Derived from Business (Note: We are not talking about Corporationsl).
Generally, Gross Sales — Cost of Goods Sold = Gross Income (does not = “net proﬁt”) BUT, notice that the Schedule C net proﬁt (or loss) hits PRE-AGI (i.e., line 12 of the 2009
Form 1040): http://www.irs.gov/pub/irs-pdf/fl 0403c.p_df
http://www.irs.gov/pub/irs-pdf/fl 040.pdf Partnerships and S-Corps. Owners are taxed on their propionate share of ﬁrm’s income,
whether or not it is distributed. Interest. Generally taxable. However, some exceptions: (i) state and local bonds and (ii)
accrued interest on Series EE US Savings Bonds to the extent proceeds are used to ﬁnance qualiﬁed higher education expenses for TP, spouse, or dependent (see page 5-7). Im uted interest on 0% or other below market rate loans I Lender treated as making gifts of “foregone interest” on personal loans or paying
salary or dividends of foregone interest on business loans (imputed salary would
trigger a deduction for the lender and imputed salary or dividend would trigger
income for the borrower) . I Borrower is treated like making (imputed) interest payments to the lender
(triggering a potential interest deduction for the borrower and potentially interest
income for the lender) I Imputed rate is tied to average rate on certain federal securities I BUT, generally no imputed interest if aggregate amount of the loans (i. e., the gift
loan or the loan between the BE & ER or Corp & SH) does not exceed $10K 8. Rents/Royalties. a. b. Rents — common;
Royalties (may be from books, other copyrights, patents, trademarks, etc.)
Include in income when received (even if in advanced of when due). Why is this? But,
tenant does NOT get deduction for paid amounts until they are due.
Expenses of landlord paid by tenant are “rent” to landlord; however, landlord may get
an offsetting deduction (for the proper portion of such expenses).
Security deposit tricks (basically, watch out for advanced rent and/or amounts not being
returned to tenant).
Assume T rents P from L and makes improvements to P worth $10,000 then leaves P
(under terms of the lease). 1. Would L have income from such improvements? 2. What if L asked T to make such improvements and agreed to reduce rent by
$1 0,000? 9. Dividends. a. b. Are dividends income or a “return of capital”? True dividends are from earning
accumulated after Feb. 28, 1913 (why this date?) From 2003-2010, “qualifying dividends” are taxed at lower (long-term capital gain)
rates (as opposed to ordinary income rates) (e.g., 15% v. 35%) Cash v. Stock dividends (note how stock dividends not included in income will involve ' a basis adjustments to the underlying stock — see pages 4-17 & 4-18) 10. Divorce and Separation. a. b. C. d. Two sets of rules
i. Pre—1985 Agreements (some individuals still covered by these rules)
ii. Post-1984 Agreement
Generally, alimony is deducted (for AGI) by the person paying it and gross income to the
person receiving it
For post-1984, generally:
i. Custodial parent entitled to exemption unless the right to claim is expressly waived
(written declaration may transfer exemption to non-custodial parent); &
ii. No gain/loss recognized for transfers between spouses during marriage, or former
spouses incident to a divorce (instead the ﬁrst spouse’s basis lives on).
Alimony v. transfers — does the government care? 11. Child Support. Generally no income or deduction 12. 13. 14. 15. Discharge of indebtedness. Generally, included in the gross income of debtor. However,
discharge can be excluded, if: Discharge = gift Discharge was in bankruptcy or when TP was insolvent (L>A) Discharge = shareholder forgiving corporate loan (treated as capital contribution)
Discharge of certain student loans (e. g., graduate works with poor/needy under a ﬁtting
program) e. Discharge (forgiveness) of certain mortgage debt 999‘?” Restricted Stock Plans. Generally, value of property (e.g., stock) transferred in connection with
services rendered is taxable as compensation.
a. However, the property needs to be “substantially vested” (e. g., NOT subject to a “substantial
risk of forfeiture”).
i. Thus, may be income when restrictions lapse (i.e., when the property “vests”)
ii. Discuss Section 83 (and the 83(b) election) Incentive Stock Option Plans. Generally, issued to employees in connection with their
employment and must remain employed from time of issuance until three months before it is
exercised (one year in the case of a disabled employee).
a. Many other requirements too (see page 4-28)
b. Often received and exercised with no income (but potentially income for AMT purposes)
0. To receive long-term capital gain treatment, employee must hold stock for more than: i. Two years after the option was GRANTED . . . AND ii. One year after the option was EXERCISED (i.e., stock itself held > 1 year) Employee Stock Purchase Plans. May allow employees to buy stock in a corporation at a discount
with a deferred tax (many requirements must be met) 16. Nonstatutory Stock Option Plans. While 1808 (and other statutory options) generally do NOT trigger a tax until the EB disposes of the stock, nonstatutory stock options may be
taxed at ordinary income rates when they are granted or exercised. ...
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This note was uploaded on 12/02/2011 for the course ACCOUNTING 4001 taught by Professor Nathanielbell during the Spring '11 term at FIU.
- Spring '11