Week 4 You Decide Activity 1 TL
Memo
To: John & Jane Smith
From: Terrace Long
Date: 4/24/15
Re: Summary of various tax issues
(1) John Smith 's Tax Issues:
(a) How is the $300,000 treated for purposes of federal tax income?
Applicable Law & Analysis:
The issue is to determine how the $300,000 fee that John received is to be treated for Federal income purposes. Code Sec. 61(a)(1) of the Internal
Revenue Code ("IRC") states that the general definition of gross income is
"all income from whatever source derived, including (but not limited to) the following items: compensation for services, including fees, commissions, fringe benefits, and similar items." IRC section 451(a) states "the amount of any item of gross income shall be included for the taxable year in which received by the taxpayer, unless under the method of accounting use in computing taxable income, such amount is to be properly accounted for as of a different period.
Conclusion:
Since the $300,000 received a fee in the form of compensation, it is gross income as defined under Code Sec. 61(a)(1) and John must include the
$300,000 fee with his gross income for the current year while preparing his income taxes per Code Sec. 451(a). Since John did not know the amount of the settlement prior to receiving the fee, he would not have been able to use the accrual method of accounting in the prior year.
(b) How is the $25,000 treated for purposes of federal tax income?
Applicable Law & Analysis:
The issue is to determine how the reimbursement of expenses, in the amount of $25,000 should be treated for Federal income purposes. According to Code
Sec. 162 (a), all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business shall be deducted including the following: compensation for personal services actually rendered, any travel expenses, and rental or other payments for the trade or business.
Conclusion:
The $25,000 would be considered as gross income from Code Sec. 61 (a) (1) as
To: John & Jane Smith
From: Terrace Long
Date: 4/24/15
Re: Summary of various tax issues
(1) John Smith 's Tax Issues:
(a) How is the $300,000 treated for purposes of federal tax income?
Applicable Law & Analysis:
The issue is to determine how the $300,000 fee that John received is to be treated for Federal income purposes. Code Sec. 61(a)(1) of the Internal
Revenue Code ("IRC") states that the general definition of gross income is
"all income from whatever source derived, including (but not limited to) the following items: compensation for services, including fees, commissions, fringe benefits, and similar items." IRC section 451(a) states "the amount of any item of gross income shall be included for the taxable year in which received by the taxpayer, unless under the method of accounting use in computing taxable income, such amount is to be properly accounted for as of a different period.
Conclusion:
Since the $300,000 received a fee in the form of compensation, it is gross income as defined under Code Sec. 61(a)(1) and John must include the
$300,000 fee with his gross income for the current year while preparing his income taxes per Code Sec. 451(a). Since John did not know the amount of the settlement prior to receiving the fee, he would not have been able to use the accrual method of accounting in the prior year.
(b) How is the $25,000 treated for purposes of federal tax income?
Applicable Law & Analysis:
The issue is to determine how the reimbursement of expenses, in the amount of $25,000 should be treated for Federal income purposes. According to Code
Sec. 162 (a), all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business shall be deducted including the following: compensation for personal services actually rendered, any travel expenses, and rental or other payments for the trade or business.
Conclusion:
The $25,000 would be considered as gross income from Code Sec. 61 (a) (1) as
Cited: Smith, E., Harmelink, P., & Hasselback, J. (2014). CCH Federal Taxation: Comprehensive Topics 2015. [VitalSource Bookshelf version]. Retrieved from http://devry.vitalsource.com/books/9780808037972/epubcfi/6/44 http://www.law.cornell.edu/uscode/text/26