July 8, 2014

Tax Research Assignment 2 2

Preparer:Name

Reviewer:Jennifer Smith

Facts:Michael Lee wants to prepare his currently on extension 2013 taxreturns. Last December, He appeared on the show “The Right Price,”a popular television game where contestants play a variety of games,most of which involve guessing how much an item is worth. Michael wona brand new 2014 Lexus LS, valued at $70, 895. However, during aninterview on his 2013 income and expenses, Michael omits to mentionof his gifted car on the ignorance of whether gifted items -the carin this case- are taxable.

Issue:Is the value of the car taxable to Michael?

Authorities:U.SCode: Title 26 – Internal Revenue Code, Subtitle A. – IncomeTaxes (2001-2801)

U.SCode (USC): Title 26 – Internal Revenue Code, Subtitle A. –IncomeTaxes 161-249.

Conclusion:Michael’s new car falls under his full ownership, a fact that makesit his property whereas the tax laws demands a tax on interests inreal property. Michael having had won a car made him extraimprovement, extra improvement, and hence, extra income. At this, itis Michael’s new responsibility, and hence, its value is taxable tohim.

Analysis:It is, of course that property tax is in most occasions applied tobusiness property and real estate. However, the main query of matterhere is, specifically which are the taxable properties? Or hence, isMichael’s new asset taxable to him? Under the property taxes in the26 IRC subtitle A of income taxes, all real properties, includingbuildings, land, and improvements are taxable. For Michael’s case,an automobile he earned was a “permanent improvement” which callsfor levied taxation.

Onthe same context, on Title 26 USC of the IRC 161-249, it is veryclear that the gross taxable income includes “all income fromwhatever source.” Such a fact does not exclude extra earning suchas Michael’s new car. Still, one may want to treat the casescenario to consider that Michael’s new car is one that is going toface depreciation over time and hence wonder of the nature of levyand taxation that he is supposed to pay. However, the Income Tax Act(u/s 50 r.w.s 50C) comes into aid of the matter. On June 27th,2014, the judiciary named a new case law regarding the taxation ofdepreciable assets such as a car. In the ruling, it was decided thatdepreciable assets, held for a period more than three years are toface taxation rates equivalent to those applied on long-term capitalgain. Considering that Michael’s new car was a life-longimprovement, the taxable value that Michael is to pay should becalculated using the long-term capital gain tax rates.

Similarly,Michael’s car does not qualify as a prize nor an award. Instead, itmatches the income tax criteria for personal-use capital assets.Accordibg to Penniman (1980)

Thisfact is based on the realization principle used to recognize thegross income for an individual. The principle states that an asset isincluded in gross income for taxation if the taxpayer engrossed in atransaction or an irrevocable trust with another party, and thistransaction results to quantifiable change in rights to the asset. Atthis, ownership rights are all transferred to the new taxpayer andhence, assignment of income during tax returns is made to the newowner of the asset. The same applies to Michael, him having had won acar shifted the ownership rights, and this automatically made theasset a taxable income to the new taxpayer Michael.

Reference

Penniman,C. (1980). State income taxation. 1st ed. Baltimore: JohnsHopkins University Press.