FEDERAL INCOME TAX 1

sec. 1(c)
- Every individual OTHER THAN SURVIVING SPOUSES AND HEADS OF THE FAMILY
- Imposed on the taxable income
 Tax table in 1(c) no longer updated. Updated table is in sec 1(j)

Sec. 63(a) – TAXABLE INCOME

- Gross income minus deductions allowed (other than standard deductions)

GROSS INCOME – SEC. 61

- All income from whatever source derived INCLUDING BUT NOT LIMITED TO:
a. Compensation for services, fees, commissions, fringe benefits and similar items
b. Gains derived from dealings in property
c. Gross income derived from business
d. Interest
e. Rents
f. Royalties
g. Dividends…
And so on.

Under sec. 1.61-1(a)

- All income from whatever source derived, unless excluded by law
- Sec 61 lists the more common items of gross income for purposes of illustration
- For further illustration, refer to sec. 1.61-14 where there are miscellaneous items not
listed in sec. 61
- * GROSS INCOME IS NOT LIMITED TO THE ITEMS SO ENUMERATED

Sec. 1.61-14
- many other kinds of gross income
- ex. Punitive damages such as treble damages under the antitrust laws, exemplary
damages for fraud, illegal gains, treasure trove, another person’s payment of the
taxpayer’s income taxes constitutes gross income to the taxpayer unless excluded by
law

EXCLUSIONS FROM GROSS INCOME

a. sec. 127(a) -- Educational assistance to employee by employer

b. sec. 74(b) -- Prizes and awards in recognition of religious, charitable, scientific,
educational, artistic, literary or civic achievement
c. sec. 74(d) -- Value of medal awarded or prize money received from the US Olympic
Committee on account of competition in Olympic and Paralympic games – sec 74(d)

1
 d. sec. 119(a) – Meals and lodging furnished to employee, his spouse and his dependents
pursuant to employment
e. sec. 132(a) – Certain fringe benefits:
1. No additional cost service
2. Qualified employee discount
3. Working condition fringe
4. De minimis fringe
5. Qualified transportation fringe
6. Qualified moving expense reimbursement
7. Qualified retirement planning services
f. sec. 102 – value of property acquired by gift, bequest, devise or inheritance
g. sec. 121(a) – gain from the sale or exchange of property which is a principal place of
residence of the taxpayer
h. sec. 1041 – transfer between spouses or incident to divorce
i. sec. 101(a)(1) – amounts received under a life insurance contract paid by reason of
death of the insured
j. sec. 103 – Interest on state and local bonds

AUTHORITY OF SECRETARY OF TREASURY

a. Sec. 351(g)(4) – prescribe such regulations as may be necessary to carry out the purposes
b. Sec. 7805(a) – prescribe all needful rules and regulations for the enforcement of tax law

Old Colony Trust v. Commissioner

- William Wood was president of the American Woolen Company. The company instated
a policy wherein it would pay the taxes of the president. The Board of Tax Appeals held
that these amounts paid were income of Wood.
- Yes. Wood received a benefit in exchange for his services to the company. This was
clearly a taxable gain.
- The discharge of a taxpayer’s obligation by a third party is equivalent to direct receipt by
the taxpayer.

Commissioner v. Glenshaw Glass

- Glenshaw Glass was in litigation with Hartford Empire for exemplary damages for fraud
and treble damages for injury to its business for violation of antitrust laws.
- W/N money received as exemplary damages for fraud or as punitive damages of an
antitrust recovery must be considered gross income
- Yes, considered as gross income

CERTAIN FRINGE BENEFITS

No Additional Cost Service

 Any service provided by employer to employee if:

2
 a. Service is offered for sale to customers in the ordinary course of business of the
employer
- employee is also performing services in said line of business of the employer
AND
b. Employer does not incur substantial additional cost—including foregone revenue in
providing such service to employee

Qualified Employee Discount

 Any employee discount with respect to qualified property or services to the extent such
discount does not exceed:

PROPERTY Gross profit percentage of the price at

which the property is being offered by the
employer to customers
SERVICES 20% of the price at which the services is
being offered by the employer to
customers

Gross Profit Percentage

- all property offered to customers in the ordinary course of the line of business of the
employer in which the employee is performing the services.

Gross Profit Percentage = Gross Profit X 100%

Total Sales
Step 1: Note the total sales of the company

Step 2: Deduct COGS from the total sales to arrive at the gross profit

Step 3: Divide gross profit by the total sales

Step 4: Multiply to 100%

Example:

- Apple gave 80% discount to employee for purchase of Macbook Pro version 2019 worth
$2,300
- Total discount was $1,840
- Net sales of Macbook pro 2019 was $215,639, COGS is $131,376
- Profit is $84,363

Therefore,
84,363/215,639 x 100 = 39.12 or 39%

3
So, excluded from gross income is 39% of $2,300 = $897
= $943 is included in gross income of the employee

Qualified Property or Services

- Does not include real property and personal property of a kind held for investment

De Minimis Fringe
- Provided by employer to employee
- Property or service the value of which is so small as to make accounting for it
unreasonable or administratively impracticable

Eating Facilities provided by Employer (operation of eating facility for employees)

 To be treated as De Minimis Fringe
a. Eating facility is located on or near the business premises of the employer AND
b. Revenue derived from such facility equals or exceeds the direct operating cost of
such facility

Reciprocal Agreements
 Service provided by employer to an employee of another employer
a. There is a written agreement between the employers
b. Neither employer incurs additional cost including foregone revenue in providing
such service
- Treated as provided by the employer of such employee

Regulations on Meals and lodging furnished for the convenience of employer

Meals Excluded from Gross Income: (TESTS)

1. Meals provided on the business premises of the employer
2. Meals are furnished for the convenience of the employer (with or without a charge)
 If the tests are met, the exclusion apply even if the employment agreement or statute
classifies such meals as compensation

When the meals are furnished for the convenience of the employer
WHEN MEALS ARE FURNISHED WITHOUT A CHARGE:
- Meals are furnished for a substantial non-compensatory business reason
Ex.
a. Meals furnished to the employee during working hours to have the employee
available for emergency call during his meal period
b. Meals furnished during working hours because the employer’s business is such that
the employee must be restricted to a short meal period such as 30 or 45 minutes
and the employee could not be expected to eat elsewhere
Ex. Peak work load hours occurs during the normal lunch hours
c. Employee cannot secure proper meals within a reasonable meal period

4
 d. Meals furnished to a restaurant employee or other food service employee in which
the employee works irrespective when furnished during, before or after working
hours
e. Meals furnished to employee immediately after working hours because his duties
prevented him from obtaining a meal during working hours

- Meals furnished to employee to promote morale or goodwill of employee or to attract

prospective employees

MEALS FURNISHED WITH A CHARGE

Employee may or may not purchase Not regarded as purchased for the
convenience of the employer
Employee is charged an unvarying amount Included in the gross income of employee
(as salary deduction) irrespective if he
accepts the meals or not

ILLUSTRATIONS:

1. Waitress who works from 7am-4pm is furnished two meals a day without charge
- Since the waitress is a food service employee, permitted to exclude the meals from gross
income.

2. Bank teller who works from 9am-5pm is furnished lunch without charge in a cafeteria
which the bank maintains on its premises. The bank furnished the meals to limit his
lunch period to 30 minutes since the bank’s peak workload occurs during the normal
lunch period.
- The bank teller may exclude from his gross income the value of such meals obtained in
the bank cafeteria

3. Civil service employee is required by his employer to be on-call duty. The employer
furnishes meals without charge. Under the state statute the meals are regarded as part
of the employee’s compensation.
- Employee entitled to exclude the value of such meals from his gross income

4. Employee given the choice of residing in company accommodation or receiving a cash

allowance and residing elsewhere.
- Value of the lodging included in the gross income because his lodging is not required in
order for him to properly perform the duties of his employment.

5. Waitress is allowed to have meals on the employer’s premises during her day off.
- Not permitted to exclude the value of such meals from gross income

5
 6. Construction worker is employed at a construction at a remote site. Due to the
inaccessibility of food facilities, the employer furnished meals at the camp site. There is
a salary deduction of $40 per week.
- The $40 is excluded from gross income of employee

7. A manufacturing company provides a cafeteria on its premises where employees can

purchase their lunch. There is no other eating facility located near the company’s
premises but the employee can bring his own lunch.
- The meals are not considered furnished for the convenience of the employer

8. A hospital maintains a cafeteria on its premises where all of its employees may obtain a
meal during their working hours. The hospital furnishes such meals in order to have
each of the employees available for any emergencies that may occur and it is shown
that each such employee is at times called upon to perform services during his meal
period.
- Excluded from gross income the value of such meals.

Sec. 61(a)(3) – Gains derived from dealings in property

GAINS Amount realized > adjusted basis

LOSS Amount realized < adjusted basis

Amount realized
- sum of any money received PLUS the FMV of the property other than money received
- includes the amount of liabilities from which the transferor is discharged as a result of
the sale or disposition

Adjusted basis
- cost of such property

Sec. 102 – Gifts and Inheritances

Gen. Rule - Property acquired by gifts, bequests, devise or inheritance - excluded from gross
income

Except:
a. income from property acquire by gift, bequests devise or inheritance
b. The gift is the income from property

Sec. 1014(a)(1) – Basis of property acquired from a decedent

By bequest
By devise
By inheritance

6
 - If the property is not sold, exchanged or disposed of before the death of the decedent
- FMV of the property at the time of the decedent’s death

Sec. 1015 – Basis of property acquired by gifts and transfers in trust

- Acquired after December 31, 1920
o The basis shall be the same as it would be in the hands of the donor
o If basis is higher than FMV of the property at the time of the gift – this is the basis
for purposes of determining the loss

Sec. 1041(a)-(c) – Transfers of property between spouses or incident to divorce

- No gain or loss to be recognized on transfers of property from an individual to:

a. Spouse
b. Former spouse as incident of divorce
c. Trustee for the benefit of a spouse (a) and (b) above

- Transfer treated as a gift and the basis of the transferee is the adjusted basis of the
transferor

Incident to Divorce
- Occurs within a year after the marriage ceases OR
- Related to the cessation of marriage