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Tax 3300 Ch 1- 5 Notes

Federal Income Taxation (Baruch College CUNY)

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Chapter 1: Taxes are what we pay for civilized society.

1. Types of taxes:
a. Income: Levied by the fed government. Imposed on Individuals, Corporations,
and certain estates and trusts (Fiduciaries)
i. Pay-As-You go procedures with withholding requirements
b. Sales Tax: Multitude transactions.
c. Employment Taxes: Imposed on employers and employees.
i. FICA:
1. Social Security 6.2
2. Medicare Tax 1.45
ii. FUTA: Paid entirely by employer
1. Federal
2. Unemployment
d. Use Tax: Owed on property purchased outside the state but used in state.
e. Property Taxes: Ad Valorem Taxes:
i. Based on value, capital. Estate Taxes. Realty
f. Excise: Tobacco, fuel, gasoline, air travel, Alcohol.
i. Gift Tax: taxed over the fair market value of a gift.
g. Transaction Taxes: Imposed at manufacturer, wholesaler, retailer levels
h. Severance Taxes: transaction taxes based on the notion that the state has an
interest in its natural resources (oil, gas, coal iron ore) imposed when extracted.
i. Estate Tax: Levied on the estate of the decedent (tax on the right to pass
property at death)
i. To prevent large concentrations of wealth from being kept in a family for
many generations.
j. Inheritance Tax: Levied on the person receiving the property. Right to receive
property from a decedent.
k. Franchise Tax: Right to do business in state
l. Occupational Fees: on various trades or business like liquor license, taxicab
permit, practice professions.
2. Who writes the laws: Nothing is certain, except death and taxes.
a. Congress
3. Who enforces and interpret laws
a. IRS and part of the Department of Treasury
4. Statute of limitations: Starts when you file (or april 15): only .6% is audited
individuals….9% of corporations and increases for higher-income taxpayers.
a. 3 years
b. 7 years
c. Ongoing if no return is filed or if a fraudulent return is filed.
5. Compliance: Ensure business files all tax returns and make all tax payments on time.
6. Planning: Help business apply favorable tax rules, income tax deferral and credits.
Minimizing tax liability. Time value of money concept is important, coordinating tax
planning to maximize earnings per share.
7. Financial reporting: Financial statements include a variety of tax information, found on
footnotes reporting various tax details including effective tax rate.
8. Controversy: interaction a taxpayer may have with a tax agency (IRS) who regularly
audit tax returns to verify taxes were properly computed and paid

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9. Cash Management: taxes must be paid on time to avoid penalties and interests.
Self-employment taxes must be estimated and paid quarterly.
10. Data Analysis
11. Tax is used to:
a. Control the economy
b. Encourage certain activities
c. Encourage certain industries
d. Encourage small business
Chapter 3
1. Tax formula: Tax Base * Tax Rate = Tax Liability
a. Income
b. Less: Exclusions
c. Equals: Gross Income
d. Less Deductions for AGI
e. Equals Adjusted Gross income
f. Less The greater between Standard or Itemized Deductions
g. Equals Taxable Income
2. Gross: total receipts
3. Medical exp%: Must exceed 7.5% of AGI (2020)
4. State, Local, etc maximum
a. Single (married filing separately): 5,000
b. Combined: 10,000
5. Contributions: Limit of 6,000
6. Mortgage: Limit of 750,000

7. Deductions

a.

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b.

c. Deductions for dependents: Earned Income + 350 or 1,100 which is greater

d. Or Basic Amount
8. Married Filing separately***: Single status

9. Who dependents are and qualifications

a. Qualifying Child (descendants up and down ladder)
i. Relationship
ii. End of tax year Age under 19 or Full Time under 24
iii. Residence Test: Living for more than 6 months. Temporary absences are
disregarded
iv. Cannot be self support (cannot provide more than half of living)
b. Qualifying Relative (left and right side)
i. Relationship, must be descendent, ancestor, aunts, uncles, siblings,
in-laws
ii. Live with you the entire year
iii. Gross income test: Dependent cannot exceed exemptions
1. 2019 -4,200
2. 2020 -4,300
iv. Only include what can be taxable in gross income
v. Multiple Support Agreement: Groups must support more than 50% and
10% per individual and only one person per group, in writing, can claim to
be dependent.
vi. Dependent cannot file a joint return with a spouse unless to claim a
refund for tax withheld.
vii. All about the last day of the year to determine filing status, picking what is
best to be in.
viii. Citizenship test: US Citizen, Resident, or resident of Canada or Mexico in
calendar year.
10. DEPENDENCY TEST
11. Gains will need to be held for a year to get special tax rates

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12. Losses are carried forward if maximum of 3,000 is used up

13. Exemptions: Deductions for exemptions are no longer allowed.
14. Proforma still valid of:
a. 4,300 in 2020…..
b. 4,200 in 2019…..
c. Personal Exemptions
d. Dependency Exemptions:
15. Individual must file a tax return if gross income equals or exceeds the applicable
standard deduction.

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16. Pay-As-You-Go: requires payment of all or part of the taxpayer’s income tax liability
during the year. Form a Federal Income Tax Withheld.

TAX RATE AND CALCULATIONS (Amount - Over)* Rate % + # under “Tax is”

Chapter 4
1. Gross Income: Means all income from whatever source derived. From the Sixteenth
Amendment to the Constitution. All income is taxable unless IRS state it isn't
a. Does not have income until recovering any amount of capital that might have
been invested in the item sold. (Recovery of Capital Doctrine) preventing income
from being taxed more than once.
2. Types of Income
a. Economic Income: Sum of the value of goods and services consumed during the
period and the change in the value of net assets from the beginning of the period.
b. Using market values to determine income creates liquidity problems
c. Accounting Income: Realization principle. Not recognized until it is realized.
When an exchange of goods or services takes place between an accounting
entity and some independent external party. Accounting entities receive in the
exchange assets are capable of being objectively valued.
d. Taxable Income: Relies heavily on realization principle. To capture taxpayers’
relative abilities to pay tax. Impacted by several things:
e. Financial accounting is hospitable to estimates and undervalue while tax isn’t.
f. Gross Income: Includes income realized in any form (money, property or
services) meals, accommodations, stock or other property,
g. Unearned income: Advance payments, for tax purposes, taxed in the year of
receipt. But may defer through special election, for goods and services ONLY.
h. Agent: Income received by a taxpayer’s agent is received by the taxpayer.
i. Alimony, Loans, annuities, prizes and awards, unemployment compensation, SS
Benefits and foreign bank accounts.
j. Annuities: paying a fixed amount to receive a future stream of payments.
k. Alimony: having legal obligation to support the other spouse. Agreement entered
after Dec 31,2018 are EXCLUDED in gross income.
i. If payments are in cash, must state alimony, payer and payee not the
same household, no liability after death of payee.

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l.
Prizes and Awards: includes fair market value of any prizes and awards received
by taxpayers.
m. Permits Prize or Award be Excluded from Gross Income if ALL are satisfied:
i. Prize or award is received in recognition of religious, charitable, scientific,
educational, artistic, literary or civic achievement.
ii. Recipient transfers the prize or aware to a qualified governmental unit or
nonprofit organization
iii. Recipient was selected without action on his or her part to enter contest
or proceeding
iv. Recipient is not required to render substantial future services as condition
for receiving the prize or award.
1. Ceiling excludable amount for employees is $400 per year if tax
qualified plan it is $1,600.
n. CHILD SUPPORT IS NOT TREATED AS INCOME : Money for child’s benefit
3. Conservatism: Not to overstate income
a. Taxable year: Annual Accounting Period. Fiscal year is not available to
partnerships, S corps, and personal service corps.
b. Progressive Rate System: Taxpayer’s marginal tax rate changes year to year
c. Congress may change tax rates
PRIOR 2019
Payor Recipient

Alimony Deduction from gross income Included in gross

Alimony Recapture Included in gross of the 3rd yr Deducted from gross of 3rd yr

Child Support Not deductible Not includible in gross

Property Settlement No income or deduction No income or deduction

4. Effective and Efficient revenue

5. Life Insurance is a form of income**: Receiver is taxed based on circumstances. If
benefit or to reimburse loss, it is exempt.
6. Don’t pay taxes with tuition, books, supplies
a. Transfer of property other than cash through divorce is not taxable
7. Methods:
a. Cash Receipt Method: Recognized in the year of actual or constructive receipt by
the taxpayer or taxpayer’s agent. Need not receive cash to recognize, but
anything with fair market value or cash equivalent is taxable. Distorts taxable
income
b. Accrual Method: Item is included the year in which it is earned.When all events
have occurred that fix the right to receive such income. The amount to be
received can be determined with reasonable accuracy. When title to property
passes to buyer or services are performed for customer or client.
c. Claim of Right Doctrine: Requires taxpayer to recognize income in the year of
receipt
d. Hybrid Method: Combination of Accrual and Cash.

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8. Constructive Receipt Doctrine: Whether income is readily available and whether

substantial limitations or restrictions exist necessitates a factual inquiry.
a. Readily available is recognized the year it is.
9. Fruit and Tree Metaphor: Income (fruit) attributed to the tree. Assignment of income does
not shift liability for tax. Taxable to the person performing the services.
10. Income can be shifted to a payer in a lower tax bracket.
11. Unemployment Comp: Sponsored and operated by the states and federal government.
Eventually became taxable
12. Tax Planning: To minimize income included in gross income.
a. Deferral of taxes is a primary goal of the tax planner.
b. Shifting Income to other taxpayers through gifts of income-producing property

Chapter 5
1. Exclusions (things you don’t pay taxes on. Not part of your gross income)
2. Statutory Authority is required to exclude an item from gross income.
a. Intended as tax relief measures (exclusion of gain from sale of principal
residence
b. Encourage and support certain activities such as higher education
c. Damages received for physical injury are excluded: The idea of restoring damage
to one’s body and not increasing personal wealth
d. Gifts made during the life of the doner (inter vivos gifts) and transfers that take
effect upon the death of the donor (bequests and inheritances)
e. When income-producing property is gifted, the recipient is subject to tax on the
income subsequently earned from the property.
f. Gift: a voluntary transfer of property by one to another without adequate
(valuable) consideration or compensation therefrom.
i. If “gift” is intended to be for services rendered, it is not a gift.
ii. Payment must be made out of affection, respect, or admiration, charity or
like impulses.
3. Presumption is income between Employer and Employee: Any property received by an
employee, transfers from an employer to an employee cannot be excluded as a gift.
a. Death Benefits are gifts if ALL of the following is true as an “Act of Affection or
Charity”:
i. Payment made to surviving spouse/child and not employee estate
ii. Employer derived no benefit from the payments
iii. Surviving spouse and children performed no services for the employer
iv. Decedent had been fully compensated for services rendered
v. Payments made due to decision of board of director and follows general
company policy of providing payments for families of deceased
employees
b. Can still be a gift if payment is made in light of the survivors’ financial needs
c. Income Not Received by employee prior to death: Income in respect of a
decedent” generally taxable income
4. General Rule:
a. Life Insurance Proceeds: Paid to beneficiaries because of the death of the
insured are excluded from gross income.

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i. Family Members: Life insurance serves same purpose as a nontaxable

inheritance
ii. Business: Proceeds replace an economic loss suffered by the business
b. Payments received by a student:
i. Compensation for Services: (Stipend, taxable compensation)
1. Receive for Housing, cost of living, etc is not excluded. Only for
Books and Supplies)
2. Transaction held open until educational expenses are paid
ii. Gift
iii. Scholarship: Nontaxable if expected but not required. To be excluded:
1. Must be used for qualified tuition and related expenses (books and
supplies)
2. Recipient must be a candidate for a degree at an educational
institution
5. Meals and Lodging (preventing abuse) *Specific categories under this* Can deduct 50%
of cost of meals provided from 2018 to 2025. Lodging: employee is required to accept as
a condition of employment. (5-7A)
a. Furnished by Employer (cash meal allowance was ineligible for exclusion)
b. On Business Premises** (applicable to both meals and lodging)
c. For convenience of the employer: Focused on employer’s motivation for
furnishing meals and lodging. To enable employees to perform his or her duties
properly.
d. Required as a condition of Employment Test: ONLY TO LODGING.
6. Damages: Suffers harm caused by another is entitled to compensatory damages
a. May seek recovery for:
i. Loss of Income (taxed the same as income replaced)
ii. Expenses Incurred (not income unless expense was deducted, taxable
under the tax benefit rule)
iii. Property Destroyed (treated as an amount received in a sale or exchange
of the property - realize gain if damages received exceed property’s
basis)
iv. Personal Injury: “whole as before the injury”
1. Claiming damages beyond physical injury or sickness amount
must be included in gross income.
2. Punitive Damages are included in gross income
v. Compensatory Damages: Received for physical personal injury or
physical sickness can be excluded from gross income.
1. Received for loss of income associated with the physical damage
2. Emotional distress or age discrimination or injury to one’s
reputation cannot be excluded.
3. Punitive Damages: amount paid by the person who caused the
harm as punishment for bad conduct. (not intended to
compensate)
7. Workers’ Compensation: Requires employer to pay fixed amounts for specific job-related
injuries. Allow employees to recover damages without suing the employer.
a. Congress specifically excluded benefits from gross income.
8. Accident and Health Insurance Benefits:

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a. Purchased by Taxpayer: Excludible

b. Purchased by Employer:
i. Premiums deductible by employer
ii. Excluded from employees income
iii. 105(a) Employee has includible income when he/she collects insurance
benefits
iv. 105(b) excludes payments received for medical care for the employee,
spouse, and dependents. If expenses, they are included in gross income
v. 105(c) excludes payments for permanent loss or the loss of the use of a
function of the body or permanent disfigurement of employee, spouse,
dependent.
Taxation of:
1. Breach of Contract: Taxable
2. Property Damage: Gain exceeding basis. Loss is deductible for business property and
investment property to the extent of basis over amount realized.
3. Personal Injury: All amounts are excluded unless deducted (medical expenses) Punitive
damages received is included.
4. NonPhysical: Are included in gross income

(5-8) Employee Fringe Benefits: Compensation or benefits other than wages and salary
provided to employees by the employer.
(5-8d) Employers can provide many forms and types of economic benefits to employees.
1. All-Inclusive Concept of income, benefits are taxable unless the Code specifically
excludes the item from gross income. Fair Market Value

Gross income Exclusions:

1. No-Additional-Cost Services (receives services as opposed to property. Not incur
substantial additional cost.Services offered to customers in ordinary course of business)
2. Qualified employee discounts
3. Working condition fringes
4. De Minimis fringes: benefits are so small that accounting for them is impractical
5. Qualified transportation fringes: with annual limits
6. Qualified moving expenses reimbursements
7. Qualified retirement planning services
8. Qualified military base realignment and closure fringers

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