Ch.4 Notes ...Enjoy

A. Gifts - The major reason for excluding gifts from income is to prevent the tax laws from interfering with an individual’s decision to make gifts, especially gifts to family members
• Definition – Gift = The courts look to the reasons for making the payment or transferring the property
o Was the payment made out of “Love, Affection, or Generosity?”
o The answer to the question requires an analysis of the facts to determine the donor’s intent.
• Past Services
o If payment is made to the estate, the employer is not indicating a desire to benefit a particular person.
o If there is an obligation to make the payment, there can be no gift.
• Contractual Obligation
o In Robertson v. US
A “prize” case which proceeded section 74, the court found that a cash award offered for the best musical composition was taxable.
• ¨Business Association
o The taxpayer will generally have a difficult task of proving a gift if the amount is received from one who conducts business with the taxpayer.
• Employee
o A Payment by an employer to an employee cannot be treated as a gift
• Burden of Proof
o Generally the person who excludes the payments from income must carry the burden of proof as to the donor’s intent.
B. Life Insurance Proceeds
• Proceeds payable to the beneficiary by reason of the death of the insured are excludible from gross income
o Exceptions to exclusions treatment
• Exclusion does not apply if an individual cashes in his or her own policy or if there has been a prior transfer for valuable consideration
o Buy – Sell agreements
• The law allows for non-taxable transfer in circumstance to facilitate buy-sell and stock redemption agreements
 These agreements are frequently used by closely held corporations to assume a market for the stock when a shareholder dies
 The agreements also assume that the remaining shareholder will not be forced to deal with an heir or another purchaser of stock
o Exception for accelerated death benefits
• Terminally ill taxpayers definition is satisfied if a medical doctor certifies the individual as having an illness that is reasonably expected to cause death within 24 months
• Chronically ill taxpayer – definition is satisfied if being unable to perform without assistance certain activities of daily living.
C. Scholarships
• Service whether the payments are excludable, depends on why the payments are being made. (similar to gift analysis)
o 1. If the payments of an exchange for services rendered to the payor, rather than to merely aid the recipient the income cannot be excluded
o 2. Labeling the payment as a “Scholarship” doesn’t control the outcome.
• The excludible items tuition and related expenses (such as books and supplies and equipment for conclusion of the course
• Room and Board –
o Value of room and board cannot be excluded under the scholarship rule
• Candidate for a degree.
o The recipient must be a candidate for a degree at an accredited educational institution.
• Timing.
o The amount eligible for exclusion may not be known at the time the money is received, therefore the transaction is held open until the educational expenses are paid.
• Disguised Compensation
o If the scholarship is only available to the children of the employees, then the amount paid is included in the gross income of the parent employee.
D. Compensation for Injuries and Sickness
• Damages are intended to restore the person to his or her their former position before the unfortunate event occurred, and thus receipt of the damage award does not result in economic gain.
o A. Amounts received from Property Losses
• Amounts received to restore for a loss of property are generally treated as proceeds from the sale of property
o B. Goodwill
• Usually Taxable
o C. Loss of Income
• Payments for the loss of income are taxed the same as the income replaced
o D. Workers Compensation Benefits
• Excludible from gross income
o E. Personal Injury
• Such damages must be in the nature of compensation damages
• Compensation damages awarded in account of emotional distress are not received in account of physical injuries or physical sickness and thus cannot be excluded.
o F. Punitive Damages
• Always taxable
• These are amounts the person who caused the harm must pay to the victim as punishment for outrageous conduct.
E. Employee
• Sponsored accident and Health Plans
o If the individual carrier insurance for costs and losses associate with physical injuries and health problems, collection on this policy are exempt.