SIMPLE LANGUAGE • DEEP ANALYSIS • REAL CASES • OFFICIAL IRS LINKS
By Sid Peddinti, Esq.
Each section contains: (1) a simple explanation, (2) real-life examples, (3) landmark cases, and (4) direct IRS or government links.
IRC §61 – Gross Income Definition
Simple Explanation:
Gross income means everything the IRS thinks is income. Unless a specific rule says it’s excluded, it’s income.
Real Examples:
• Salary from a job
• Crypto you receive or sell
• Rent you collect
• Bartering (fixing someone’s car in exchange for landscaping)
• Illegal income (yes, even drug dealers owe tax)
• Debt that gets forgiven
• Interest, dividends, royalties, side gigs, contractor work
Case Example:
Commissioner v. Glenshaw Glass Co. (1955)
The Supreme Court confirmed that “accessions to wealth” count as income—even punitive damages.
Official Link:
IRS Code Text (Cornell’s official mirror of Federal law):
https://www.law.cornell.edu/uscode/text/26/61
IRC §11 – C-Corporation Tax Rate
Simple Explanation:
C-Corporations pay their own income tax. Owners pay tax again if they take dividends.
Why It Matters:
C-Corps are powerful for reinvesting profits, funding R&D, building AI companies, and creating fringe-benefit strategies.
Real Example:
A business makes $500,000.
C-Corp pays 21% tax.
The owner leaves the money in the corporation—no second tax until a dividend is paid.
Case Example:
Moline Properties v. Commissioner (1943)
The Supreme Court held that a corporation is a separate taxable entity—even if one person owns it entirely.
Official Link:
IRS C-Corp page:
https://www.irs.gov/businesses/small-businesses-self-employed/c-corporations
IRC §1401 – Self-Employment Tax
Simple Explanation:
If you work for yourself, you pay both halves of Social Security and Medicare taxes.
Who Pays It:
• Freelancers
• Consultants
• Single-member LLCs (default)
• Multi-member LLC members
• Gig workers
• Side hustles
Example:
You earn $100,000 from a consulting business.
You owe:
• 12.4% Social Security (up to the annual limit)
• 2.9% Medicare
Total = 15.3% before income tax.
Case Example:
Renkemeyer v. Commissioner (2011)
Partners in a law firm were taxed on their income as self-employment income because it came from their labor.
Official Link:
IRS Self-Employment Tax:
https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes
IRC §§2031–2042 – Estate Inclusion Tests
Simple Explanation:
The IRS includes assets in your taxable estate if:
(1) You owned them,
(2) You controlled them, or
(3) You could benefit from them.
What Gets Pulled Into Your Estate:
• Real estate
• LLC interests
• Business ownership
• Stocks, crypto, gold
• Life insurance (if you controlled the policy)
• Trust assets (if you retained control)
Key Cases:
• Estate of Strangi (2003) — FLP assets pulled back into estate due to retained control.
• Estate of Powell (2017) — Even indirect control can cause inclusion.
• Estate of Becker (1982) — Owning insurance = inclusion under §2042.
Official Link:
IRS Estate & Gift Tax Page:
https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes
IRC §2042 – Insurance Ownership Trap
Simple Explanation:
Life insurance is not estate-tax-free if:
• you own the policy,
• you control the policy,
• you can change beneficiaries, or
• you pay premiums directly.
Real Example:
A $3M policy owned by the insured results in a $3M inclusion in the estate.
Case Example:
Estate of Kurihara (2022)
Even indirect control through a trust triggered estate inclusion.
Official Link:
§2042 text:
https://www.law.cornell.edu/uscode/text/26/2042
IRC §§2036 & 2038 – Retained Control & Enjoyment
Simple Explanation:
If you “give away” an asset but still control or benefit from it, the IRS pretends you never gave it away. It returns to your taxable estate.
Common Triggers:
• Living in a home after “gifting” it
• Using trust assets you “gave away”
• Controlling a business after transferring shares
• Acting as trustee of your own irrevocable trust
Case Examples:
• Estate of Strangi (2003) – Classic retained control case.
• Estate of Powell (2017) – Control through voting rights = inclusion.
• Estate of Linton (2012) – Paper-only gifts were ignored.
Official Link:
§2036 text:
https://www.law.cornell.edu/uscode/text/26/2036
IRC §§704 & 731 – Partnership Basis Adjustments
Simple Explanation:
Partnerships don’t pay income tax.
Partners do – based on their basis, which goes up or down with:
• contributions
• income
• losses
• distributions
• debt allocations
Basis determines:
(1) how much loss you can deduct
(2) how much tax you pay on distributions
(3) how much gain you pay when selling your interest
Real Example:
Partner invests $50K.
Partnership borrows $200K.
Partner’s basis = $50K + share of debt.
This allows loss deductions and tax-free distributions — until basis runs out.
Case Example:
Otey v. Commissioner (1976)
The court held that certain partnership contributions created basis even if funded through borrowing.
Official Link:
IRS Publication on Partnership Basis:
https://www.irs.gov/publications/p541
Form 709 – Gift Tax Reporting
Simple Explanation:
Form 709 is the required filing for gifts over the annual exclusion ($18,000 in 2024).
It doesn’t mean you owe tax — it tracks lifetime exemptions.
Examples of When You MUST File:
• Giving more than $18K to one person
• Gifting part of an LLC/FLP
• Funding an irrevocable trust
• Paying premiums for someone else’s life insurance
• Transferring real estate to kids
• Forgiving a loan to family
Case Example:
Church & Giselman Cases — IRS taxed gifts because Form 709 was never filed.
Official Link:
Form 709:
https://www.irs.gov/forms-pubs/about-form-709
QBI Deduction – IRC §199A
Simple Explanation:
Small business owners may deduct up to 20% of qualified business income.
Eligible:
• S-Corps
• Partnerships
• Sole proprietors
• Some LLCs
Not Eligible:
• W-2 wages
• C-Corporations
• “Specified Service Trades” above income thresholds (law, accounting, consulting, etc.)
Example:
Business earns $300K.
QBI deduction could be up to $60K – if income limits are not exceeded.
Official Link:
IRS QBI Page:
https://www.irs.gov/newsroom/qualified-business-income-deduction-faqs
Augusta Rule – IRC §280A(g)
Simple Explanation:
You can rent your home to your business (or another business) for 14 days a year and not report the income – if properly documented.
Requirements:
• Must be a fair rental value
• Must be a real business purpose
• Must have minutes, invoice, agenda, and proof
Example:
Your business rents your home for meetings at $1,000 per day for 14 days.
Business deducts $14,000.
You report $0 income.
Case Example:
Roy v. United States (1984)
Court confirmed legitimacy of short-term rental deductions when documentation existed.
Official Link:
§280A text:
https://www.law.cornell.edu/uscode/text/26/280A
Cost Segregation – Accelerated Depreciation
Simple Explanation:
Cost segregation separates a building into parts with shorter lives (5, 7, 15 years) to increase depreciation deductions.
Real Example:
A $1M rental property could produce $200K+ in first-year bonus depreciation.
Risk:
IRS audits target aggressive studies with poor engineering reports or inflated asset categories.
Case Example:
Hospital Corp. of America v. Commissioner (1997)
Court confirmed the legitimacy of segregating building components.
Official Link:
IRS Cost Segregation Audit Guide:
https://www.irs.gov/pub/irs-utl/cost_segregation_atg.pdf
Installment Sale – IRC §453
Simple Explanation:
You can spread capital gains over multiple years when selling a business, property, or other asset – if payments are received over time.
Example:
Sell a property for $1M but receive payments over 10 years.
You pay tax only on each year’s principal received.
Case Example:
Burnet v. Logan (1931)
Established the principle that income is recognized as payments are received when value is uncertain.
Official Link:
§453 text:
https://www.law.cornell.edu/uscode/text/26/453
Substance Over Form Doctrine
Simple Explanation:
The IRS looks at what actually happened – not what the paperwork says.
Examples:
• Calling a gift a “loan”
• Calling a salary “distribution”
• Creating an LLC but treating it like a personal bank account
• Putting assets in a trust but still controlling them
Case Example:
Gregory v. Helvering (1935)
The Supreme Court ruled that a transaction lacking economic substance is taxable based on reality, not labels.
Official Link:
IRS Economic Substance Doctrine:
https://www.irs.gov/businesses/corporations/economic-substance-doctrine
Step Transaction Doctrine
Simple Explanation:
If multiple steps are really one transaction, the IRS collapses them.
Example:
Owner gifts business to spouse → spouse gifts to trust → trust sells business.
IRS treats it as: owner sold business directly.
Case Example:
Piedmont Cotton Mills v. Commissioner (1950)
Court collapsed multiple steps into one taxable event.
Official Link:
Treasury explanation:
https://www.irs.gov/irm/part4/irm_04-011-012
Assignment of Income Doctrine
Simple Explanation:
You cannot avoid tax by assigning income to someone else.
Example:
A musician signs all royalties to a child.
IRS still taxes the musician.
Case Example:
Holland v. Commissioner (1964)
Income must be taxed to the person who earned it.
Official Link:
IRM explanation:
https://www.irs.gov/irm/part4/irm_04-008-008
Economic Substance Doctrine
Simple Explanation:
A transaction must:
(1) change your economic position in a meaningful way, and
(2) have a real business purpose.
If not, the IRS can void the tax benefits.
Example:
A trust “sale” where no money changes hands.
A loan with no real expectation of repayment.
Case Example:
ACM Partnership v. Commissioner (1997)
Court struck down a tax shelter with no real economic effect.
Official Link:
IRS Economic Substance Doctrine:
https://www.irs.gov/businesses/corporations/economic-substance-doctrine
Probate Law and the Uniform Probate Code (UPC §§2-101, 3-101)
Real Case
Estate of Fick, 2019. Probate was required because title was not updated, causing delays and added taxation.
Official Link
https://www.uniformlaws.org/committees/community-home?CommunityKey=1c4637d1-b0db-4d7e-8d68-d6b3303a2411
Probate is the court process that transfers a person’s property after death. If an asset is titled in your name with no beneficiary and no trust, probate is required. The Uniform Probate Code provides the default rules that most states follow. Section 2-101 explains who inherits when there is no will. Section 3-101 explains that probate is required to legally transfer ownership. Many families assume their will avoids probate, but a will is a set of instructions TO the probate court, not a bypass around it.
Wills vs Trusts
Real Case
U.S. v. Estate of German (2000). A revocable trust did not remove assets from the taxable estate.
Official IRS Link
https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes
A will transfers property only after your death and always requires probate. A trust transfers property immediately when funded and avoids the probate process entirely. Wills are public documents and can be challenged, while trusts are private and operate throughout your lifetime and after death.
Double Probate (Spouse to Spouse)
Real Case
Estate of Braman (2012). Multiple state probates were required due to improper titling.
Official Reference
UPC §3-101 — Probate required to transfer ownership.
When spouses own assets in their own names, the first death triggers probate, and the second death triggers another probate. This double process is expensive, time consuming, and avoidable with a properly funded trust.
Pour Over Wills and Funding Problems
Real Case
Estate of Linton (2012). A trust existed, but unfunded assets triggered full probate.
Official Link
https://www.law.cornell.edu/wex/pour-over_will
A pour over will tells the court to transfer probate assets into a trust after death. This does not avoid probate. Funding mistakes happen when people create a trust but never move assets into it. Unfunded trusts are one of the most common estate planning failures.
Control Equals Inclusion
Real Case
Estate of Strangi (2003). Retained control pulled FLP assets into the estate.
Official IRS Link
https://www.law.cornell.edu/uscode/text/26/2036
When you keep control over property after transferring it, the IRS treats the transfer as incomplete. The property is pulled back into your estate under Sections 2036 and 2038. This applies to homes, businesses, LLCs, trusts, and life insurance.
Business Succession at Death (IRC §2031 Valuation)
Real Case
Estate of Giustina v. Commissioner (2016). IRS rejected valuation discounts and increased taxable value.
Official IRS Link
https://www.law.cornell.edu/uscode/text/26/2031
When a business owner dies, the business must be valued for estate tax. If there is no proper valuation or succession plan, the IRS can assign its own number. This often creates tax bills that the family must pay by selling the business.
Non Probate Transfers: TOD, POD, JTWROS
Real Case
Estate of Young v. Commissioner (2005). Joint tenancy caused unintended estate inclusion.
Official Link
https://www.consumerfinance.gov/rules-policy/regulations/transfer-on-death/
Some assets transfer automatically without probate. Transfer on Death and Payable on Death designations move assets directly to the named beneficiary. Joint Tenancy with Right of Survivorship also bypasses probate. However, these transfers can cause legal conflicts when they contradict the estate plan.
Gifting Strategies and Estate Freeze Tools
Real Case
Estate of Petter v. Commissioner (2009). Defined value clauses upheld in a gifting freeze strategy.
Official IRS Link
https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes
Gifts reduce the taxable estate and can shift growth to younger generations. Estate freeze strategies move appreciating assets out of the estate so that future growth escapes taxation. Tools include GRATs, SLATs, IDGTs, FLPs, and charitable techniques.
Step Up in Basis Gaps
Real Case
Estate of Elkins (2013). Large valuation errors caused major capital gains issues for heirs.
Official IRS Link
https://www.law.cornell.edu/uscode/text/26/1014
Inheritances receive a new tax basis equal to fair market value at death. If the family does not obtain a valuation, they lose the step up. This mistake forces heirs to pay more tax when selling property.
Incomplete Gifts and Retained Control
Real Case
Estate of Wheeler (2015). IRS ruled gifts were incomplete because control was retained.
Official IRS Link
https://www.law.cornell.edu/uscode/text/26/2038
Gifts must be fully released to be valid. If the donor keeps control, benefit, or access, the gift is incomplete and the asset is taxed in their estate. Many trust transfers fail this test.
Crypto and Digital Asset Inheritance
Real Case
IRS v. Coinbase (2016). IRS compelled crypto exchange records to enforce reporting.
Official IRS Link
https://www.irs.gov/pub/irs-drop/n-14-21.pdf
Crypto requires private keys, exchange access, and documented instructions. Without a plan, digital assets can disappear forever. Mounting case law confirms that digital property is part of the taxable estate.
Stock Portfolio Inclusion: Gift vs Inheritance Trap
Real Case
Estate of Littick (2012). Improper titling froze brokerage accounts for over a year.
Official IRS Link
https://www.law.cornell.edu/uscode/text/26/2031
Giving stocks during life removes the step up in basis. Inheriting stocks provides a step up. Poor timing can increase taxes for heirs by hundreds of thousands of dollars.
Life Insurance in the Estate and ILIT Failures
Real Case
Estate of Kurihara (2022). ILIT failed because insured retained control.
Official IRS Link
https://www.law.cornell.edu/uscode/text/26/2042
Life insurance is taxable in the estate if the insured owns or controls the policy. ILITs are used to keep insurance out of the estate, but they fail when the insured pays premiums personally, controls trustees, or transfers policies within three years of death.
Grantor Trust Rules
Real Case
Estate of German (2000). Grantor trust treatment triggered estate inclusion.
Official IRS Link
https://www.law.cornell.edu/uscode/text/26/671
A revocable trust is treated as the grantor for tax purposes. An irrevocable trust can be a grantor or non grantor trust based on powers retained. Grantor trust powers affect income tax but can also trigger estate inclusion.
Spousal Transfers and Limits of the Unlimited Deduction
Real Case
Estate of Fernandez (2001). Improper planning caused a large taxable estate at second death.
Official IRS Link
https://www.law.cornell.edu/uscode/text/26/2056
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