Select Page

Federal Income Tax
Drexel University School of Law
Brennan, Thomas J.

“Taxes are what we pay for a civilized society” – J Holmes

Fed Tax Outline

o INTRO TO TAX LAW
Ø Massive receipts–$2.2T total. Individuals = 50%, Corporations = 10%. Employment taxes = 32% → imposes burden on lower income earners.
Ø Not a pure income tax, but it has consumption tax elements to it. Most accurately referred to as a hybrid income tax. Not a perfect income tax—in some cases, the tax base is quite narrow.
Ø Citations—Enacted as Title 26 in US Code, but codified as the Internal Revenue Code. No need to cite directly to US Code except in very formal cases (Section 170 of the IR Code of 1986, as amended; Code Section 170; Section 170)
Ø Purpose of Income Tax—There are many; some are hidden and confusing, however tax system is distorting—it affects the way people behave (micro = individuals; macro = groups). Economically inefficient. All this contributes to complexity of tax law; not all due to legislation, but much of it is geared toward micro effects.
Ø Outcomes—Most favorable outcome = exemption. Deferral Rate conversion—change from higher income rate to lower rate

o DEFINITION OF “INCOME” –Compensation for Services & Work-Related Fringe Benefits
Ø Statutory imposition of tax.
§ Internal Revenue Code (“Code”) §§ 1(a)-(c) (introductory language only),
Ø Gross Income
§ General.
· Sixteenth Amendment to the Constitution—The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.
· Two broad categories of income:
¨ Financial Accounting Income: income as defined by an accountant for the purpose of providing the financial position of a person or business.
¨ Economic Income (Hague Simons Income): concept intended to try and define income in a way that identifies shifts in a taxpayer’s economic status (wealth). Very important in understanding US Tax law.
Ø Personal income may be defined as the algebraic sum of (1) the

§§ 1.161-1(a),1.161-2(d)(1), 1.119-1)
Ø Reg. 1.61-1(a):Gross income includes income realized in any form, whether in money , property, or services
Ø Reg. 1.161-2(d)(1): If services are paid for in property, the fair market value of the property taken in payment must be included in income as compensation
Ø § 61 à defines Gross Income
§ Except as otherwise provided in this subtitle, gross income means all income from what ever source derived, including but not limited to:
· Compensation for services, including fees, commissions, fringe benefits, and similar items;
· Gross income from business
· Gains derived from dealings in property
· Interest
· Rents
· Royalties
· Dividends
· Alimony
· Annuities
· Income from life insurance
· Pensions
Income from discharge of indebtedness