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Chapter 3 - Gross Income

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

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Chapter 3 - Gross Income

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  1. 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

  2. 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)

  3. Hybrid; inventory (material income producing factor); IRS power • Exceptions to cash rules - constructive receipt v. negotiating not to receive; OID; E and EE bonds

  4. 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)

  5. 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)

  6. 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)

  7. 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

  8. 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

  9. 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

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

  11. 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 shouldhave income • 4 types - gift, compensation, corp/sh, tax avoidance

  12. F 1) int inc 4500 3) gift made 4500 D 2) int exp 4500 4) gift rec’d 4500 Gift Loan - F to D, 90000, no int, AFR 5%

  13. ER 1) int inc 4500 3) comp pd 4500 EE 2) int exp 4500 4) comp rec’d 4500 (2) Compensation Loan ER to EE, 90000, no int, AFR 5%

  14. CORP 1) int inc 4500 3) div paid 4500 SH 2) int exp 4500 4) div rec’d 4500 (3) Corp/Shareholder Loan-Corp to SH, 90000, no int, AFR 5%

  15. 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

  16. 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

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