Chapter 3 - Gross Income

Gross Income - Definition (Is it income issue)

Section 61 Eisner v. Macomber (gains from capital

or labor or both combined) generally not income: mere

appreciation, imputed income

Tax Accounting (when is it income issue) Taxable year accounting methods (tax acctg not

necessarily GAAP) - cash & accrual cash: constructive receipt (readily available);

cash equivalents - (checks, property) (notes-FMV)

Accrual: notes-face; if contested-inc when receive; deductions - all events test and economic performance (chap 5)

Hybrid; inventory (material income producing factor); IRS power

Exceptions to cash rules - constructive receipt v. negotiating not to receive; OID; E and EE bonds

Exceptions to accrual rules

Prepaid income (financial deferred liability) - prepaid services exception: (Rev. Proc. 71-21) / inventory exception: adv paym for goods-treated same tax&fin (election)

Types of Income & To Whom

Personal services (Lucas v. Earl) interest and dividends (allocation between

t/p’s)(stk-gen-to recholder) flow throughs (S corps, p’ships) trust and estates community property rules - important for MFS -

separate property, marital property, sep inc, pers serv inc, which states (9) (La, Tex, NM, Ariz, CA, WA, Idaho, Nev, Wis)

Gross Income-specific inclusions

Alimony: post 84 conditions, antifrontloading, v. child support (cash, paid under a divorce decree or separation agreement, and NOT identified as NOTalimony)

Imputed Interest - below market loans (low and no int)

model, AFR, imputations, exceptions (see later slides)

Annuities

Collection after start date - exclusion = investm/expec’d ret x annuity paym; early or late death

Simplified method (QRP’s): exclus = inves/# payms (from table), STG date after 11/18/96

Prizes and awards - inc unless: proper purp, proper transfer, no action, no services

group term life insurance (calculate inclusion, value of coverage >50,000)

unemployment compensation = inc

Step 1 - Social Security - no more than 1/2 taxable

1/2 (mod GI + 1/2SS - base) Step 1 bases: 32000, 0, 25000 Step 2 - Social Security - no more than .85

taxable .85 (mod GI + 1/2SS - base) & plus Step 2 bases: 44000, 0, 34000

Plus :lesser of Step 1 (limited to 1/2SS) or 4500 (6000MFJ)

Imputed Interest -

Below market loans (low and no int) (all hypothetical - Alice Through Looking Glass - With Real Tax Consequences)

AFR - MODELS (imputations) (demand loans) - All start with lender should have income

4 types - gift, compensation, corp/sh, tax avoidance

Gift Loan - F to D, 90000, no int, AFR 5%

F

1) int inc 4500

3) gift made 4500

D

2) int exp 4500

4) gift rec’d 4500

(2) Compensation Loan ER to EE, 90000, no int, AFR 5%

ER

1) int inc 4500

3) comp pd 4500

EE

2) int exp 4500

4) comp rec’d 4500

(3) Corp/Shareholder Loan-Corp to SH, 90000, no int, AFR 5%

CORP

1) int inc 4500

3) div paid 4500

SH

2) int exp 4500

4) div rec’d 4500

Exceptions

Loans 10,000: Gift loans - no imputation unless purchase inc producing prop

Loans 10,000: Comp, corp/sh loans - no imputation unless tax avoid purp - suspect by IRS - can be OK if not merely for tax purposes

Loans 100,000 only betw indivs (not corp/sh, comp)

impute int inc + exp borrower’s net investm inc unless <1000 net inves inc, imputation = 0;

or prin purp tax avoid, impute