Charley v. Commissioner Issue: Travel credits turned or exchanged them into cash are they considered gross income.

s. 1012: Airline 150X Ticket Frequent Flyer Miles The basis should be allocated between the ticket and the frequent flyer mile. s.1001: Exchanges that create income. The only proper way for the IRS to control the exchange of the frequent flyer miles would be to allocate some type of value to each frequent flyer mile. This would be a heavy burden on the administration and they would also have inconsistent results because each situation would be different. Glenshaw Glass Case Tax court said that they were both possible to the damages. There were everyday damages as well as compensatory. Treble damages are leveled against the perpetrator as a form of punishment. The compensatory damages compensate for lost profits. Exemplary damages are awarded to punish the defendant. How are they income to the recipient? Before Glenshaw they were not deemed to be income. The tax court held that the exemplary damages were not income, because the damages were for the purpose of punishment. 3 Supreme Court Cases There were three cases that showed that income was anything derived from capital, labor, or both. The Supreme Court is granting certiorari because they want to shift the definition of income. Windfalls, found money. Interference of relations between a husband and wife. These were inconsistent on the aspect of what was being taxed. These are both anti-trust and business cases. Had it been a defamation case, the court would probably not have granted certiorari. This was for the purpose of litigation. Issue: Are exemplary damages, in business litigation, are they considered gross income. We are currently using the 1986 version of the IRS Code as amended.

The Supreme court provided that following precedence, they distinguish this case from the other Supreme court cases dealing with the definition of income. They look at the case of Eisner v. Macomber. In Eisner v. Macomber consisted of a distribution where there was no income because all that occurred was an issuance of more paper. The stockholders of Eisner simply received more paper but all maintained the same proportion of interest in the company. The net worth of the stockholders had not changed. The Glenshaw case was distinguishable because in this case there was actual receipt of money while in Eisner there was just a change in the distribution of money but not of any additional income. In Glenshaw, there was actual additional income that incurred. The company had received their compensatory damages. However on top of those compensatory damages they also received the exemplary damages which was considered additional income. In Eisner, it was said that if a corporation was worth 100x and earned 30x, the company was therefore worth 130x. Nevertheless each stockholder still held the same proportion of ownership in the stock. The increase in the wealth occurred from what the corporation earned not from the new distribution of stock. Footnote 6: Strattons Independence and Doyle v. Mitchell. Income is derived from capital, labor, or both. It was repeated in Eisner. To distinguish the case, the Supreme Court said that the cases just addressed the concept of the change in income type. However, they did not use the cases as the touchstone for determining all gross income cases. It was only for some gross income cases that it applied not to all of them. In Eisner, there was no recognition. However in Glenshaw, there was recognition. Undeniable accession to wealth and therefore have realized (recognized) the wealth. Transformed the concept of income from the original definition. Lanaguge, from s.61 From whatever source derived, gives clear and open accession to wealth. There is no tax when there is a recovery of basis for property. However, when there is anything above basis there is a tax on that income.

Property Loss Value of Property Afterwards

200X (100X) 100X

The fact that the propertys value may raise back to 200X would not provide for income that would be taxed becuase there is just a recovery of basis. However, if the value of the property increases to 300X there would be a tax on that income once it is recognized. PROBLEMS Would the results to the taxpayers in the Cesarini case be different if, instead of discovering $4,467 in old currency in the piano, they discovered that the piano, a Steinway, was the first Steinway piano ever built and it is worth $500,000? There was a bargain purchase. It would be different. However, you dont have taxes until you recognize the gain until you sell the property. You have realized a raise in your net worth but no recognition. Winner attends the opening of a new department store. All persons attending are given free raffle tickets for a watch worth $200. Disregarding any possible application of I.R.C. s.74, must Winner include anything within gross income when she wins the watch in the raffle? Yes, because there is a clear accession of wealth. 20.2031(1)(b), has the definition of fair market value. Fair Market Value is the value between a willing buyer and willing seller and both having all information at hand. Employee has worked for Employers incorporated business for several years at a salary of $80,000 per year. Another company is attempting to hire Employee but Employer persuades Employee to agree to stay for at least two more years by giving Employee 2% of the companys stock, which is worth $100,000, and by buying Employees spouse a new car worth $30,000. How much income does Employee realize from these transactions? There are two issues. The first issue consist of who is the proper taxpayer whether it is the employee or the employees spouse and the second issue consists of whether there was income. Under s.102(c) an employee-employer relationship is not exempt and any gift is considered gross income. Looking at the substance over the form, it appears that even though the Employer was giving the Employees spouse a car it was in compensation for the Employees services. Therefore the employee will bear the cost of the 2% of the companys stock as well at the worth of the new car. Insurance Adjuster refers clients to an auto repair firm that gives Adjuster a kickback of 10% of billings on all referrals. a. Does Adjuster have gross income a. Yes, there is income because under Glenshaw Glass there is an accession of wealth under the control of the taxpayer. b. Even if the arrangement violates local law?

a. b. c. d.

James v. United States Tax on both lawful and unlawful income s.163(c) & (d) Reg. 1.61-14

Owner agrees to rent Tenant her lake house for the summer for $4,000. a. How much income does Owner realize if she agrees to charge only $1,000 if Tenant makes $3,000 worth of improvements to the house? a. The owner would recognize $4,000 of income. Even though she received $1,000 in cash, she also received $3,000 in services provided by the tenant. b. Is there a different in result to owner in (a) above, if Tenant effects exactly the same improvements but does all the labor himself and incurs a total cost of only $500? a. The owner would still incur an income of $4,000 as stated above. b. c. Are there any tax consequences to Tenant in part (b), above? a. However, since the tenant only spent $500 in repairs, the tenant essentially earned $2,500 from the rent of the house. Therefore he would be taxed on $2,500. Flyer receives frequent flyer mileage credits in the following situations. Should Flyer have gross income? a. Flyer receives the mileage credits as a part of a purchase of ticket for a personal trip. The credits are assignable. a. Takes into account Announcment 2002-18, Reg. 76-96 Rebates, and Rev. Rul. 99201. b. Part of the cost basis should be allocated to the basis. b. Flyer receives credits from Employer for business flights Flyer takes for Employer. The credits are assignable. a. Glenshaw Glass i.Any income from any source derived ii.IRS 2002-18 cited at 2002-I CB 621. Announcement there are administrative issues. Timing of income, is very difficult. iii.IRS 2002-18 does not pursue taxation of frequent flyer miles. iv.However the argument can be made that income was received under Glenshaw. v.The revenue ruling excludes compensatory. Compensatory would be considered income under 2002-18. c. Flyer receives the credits under the circumstances of (b), above, but they are nonassignable. a. Credits are not assignable. Raise additional issue of valuation. however because of 2002-18 you dont have to worry. d. Same as (c), above, except Flyer uses the nonassignable Employer-provided credits to take a trip.

a. Under the general principle of 2002-18 the credits should not be included in gross income. i.Look at exceptions 1. Bonus as compensation 2. Frequent flyer miles can be used for taking a ticket for pleasure trip. (2002-18) b. Under Glenshaw it would be considered income. c. Charley would still be income becuase he converted to frequent flyer miles to receive income. DEAN V. COMMISSIONER . Notes. There were not enough collateral for the loans. At the insistence of he bank they made the transfer. Issue: Whether taxpayer has to include in income tax return the fair market value of the rental value. There are two taxpayers. There is a transaction between two different taxpayers. Barbara does not include the rental value. it is a type of input ed income that the IRS had never tried to tax. It is an inputed income not needed to be taxed. They could constitutionally, under s.61. Two taxpayers, there is a transaction. But the court attacked it that the husband and wife for the rent-free were given an inputed benefit. There was a difference in the tax rate. The interest of the loan would be deductible. Nemous will begin to depreciate the house. Therefore there is a loss in the business. However the Deans are in the maximum tax bracket. Therefore input the house on the Deans because they have a higher tax rate. The IRS can tax whoever they like. The exception to the inputed taxes would be the taxpayer in his own home. However, if there is two different taxpayers under the same home, there most likely would be an inputed rental value to one of the individuals to the other.

PROBLEMS Vegy grows vegetables in her garden. Does Vegy have gross income when: 1. Vegy harvest her crop? a. One can make the argument that harvesting crop is a recognition even b. 1.61-14(1) Regulating c. Type of inputed income. 2. Vegy and her family consume $100 worth of vegetables? a. Act of consumption triggers recognition b. Inputed income

3. Vegy sells vegetables for $100? a. There are two taxpayers b. $100 of income under s.61. Deduct certain expenses such as soil, water, sticks. 4. Vegy exchanges $100 worth of vegetables with Charlie for $100 worth of tuna which Charlie caught? a. Yes, there is income. b. Timing when it actually occurs. Doctor needs to have his income tax return prepared. Lawyer would like a general physical check up. Doctor would normally charge $200 for the physical and Lawyer would normally charge $200 for the income tax return preparation. 1. What tax consequences to each if they swap services without any money changing hands? 2. Does Lawyer realize any income when she fills out her own tax return.