Introduction to Federal Taxation Outline

Professor Stewart

Rutgers Camden School of Law

Introduction to Federal Income Tax

Fall 2011

16th amendment- tax

Present tax code 1986 (updated 1954 code)

Internal Revenue Code

Case Law- sometimes constitutional, sometimes tax law

Administration part of code- regulations

Tax Court moves around depending on cases

What’s includable in gross income?

Who’s income does the deduction belong to?

Credit or deduction?

Refundable or non refundable?

Filing Status

collection, examination, and criminal

Office of chief counsel- about 2000 attorney’s in various field offices.

Chapter 1

Amount realized=AR

General notes:

¨How do you deal with a tax problem?

1. Read the code

2. look for defined terms

3. look at interpretation (reg’s, committee reports, legislative history, revenue rulings)

¨Income Tax Formula: §63(a)

GROSS INCOME

>

=TAX LIABILITY

We’ll spend 2/3 of our time on Gross Income, 1/3 of our time on deductions

¨Concept of the taxable year: individuals=calendar year

¨How do you apply the tax rate? We have a graduated structure: not all income is taxed at the same rate. §1 IRC. $36,900 x .15=$5535 + 23,100x .28=6468 ….$12,003 28% “marginal tax bracket” p. 31-38 concept of progressivity: how fast you move up in the rate/bracket? Opposite of the flat tax.

1. Gross Income

A. IRC §61: Gross Income Defined: Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:

1. Compensation for services, including fees, commissions, fringe benefits, and similar items;

2. Gross income derived from business

3. Gains derived from dealings in property

4. Interest

5. Rents

6. Royalties

7. Dividends

8. Alimony and separate maintenance payments

9. Annuities

10. Income from life insurance and endowment contracts

11. Pensions

12. Income from discharge of indebtedness

13. Distributive share of partnership gross income

14. Income in respect of decedent

15. Income from an interest in an estate or trust

CROSS REFERENCES: SPECIFIC INCLUSIONS IN GI: §71

SPECIFIC EXCLUSIONS OF GI §101

Cesarini case: ($ in the piano)

¨We have a voluntary tax system b/c taxpayers self report by filing returns every year. Whether something is includable in income is diff question than whether it was actually reported. Burden of proof rests w/ taxpayer to show its not includable. Generally, IRS/T has only 3 years to make a claim for $. (SOL issue can sometimes be raised)

¨Musselman says the way the court handled this case is how we should do our analysis:

What is “income”?

1. court first looks at list of 15: if its on the list its included

2. court then looks at other inclusionary sections of IRC (§71, etc)

3. court then looks to exclusions in IRC

4. Look at Treasury Regs

§1.61-1(a) Regs: Gross income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. (ie: income from all sources is taxed unless the taxpayer can point to an express exemption, b/c of broad language of §61 IRC))

§1.61-14(a): “Treasure Trove, to the extent of its value in US currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession.”

“Reduced to undisputed possession” (ie: when title vests) is a state law question: here title rested when P actually found the $ in the piano. It’s a property law question, so we look to state law)

Old Colony case: (pymt of taxes by employer)

RULE: Obligations paid on your behalf by 3rd parties are included in gross income. If a 3rd party pays a personal liability of yours, you have to pay taxes on that payment to the 3rd party.

RULE: Substance Over Form: general theme of tax code. Trying to get $ to not pass through their hands, while still accepting value of the deal. Form not important; whole purpose of IRC is to tax substance of the transaction. In this case, the employee gained from the employer for services rendered. It was immaterial that the $ was paid directly to the gov’t (or to anyone else for that matter).

Glenshaw Glass case:

RULE: Regular, punitive & treble damage awards are includable in gross income.

RULE: Definition of Gross Income:

1. “accession to wealth”: ie increased your net worth

2. clearly realized:

“the Realization Principle”: fluctuations in value are not taken into consideration until profit is clearly realized by a “realizable event” like selling the property. Other realizable vents include: anything that causes you to no longer own the property. Other wise you’d have to account for flucuations in value every year in your taxes.

Reasons why we use the “Realization Principle”:

1. flucuations in value

2. liquidity

3. who’s going to determine the value (not practical to have appraiser come out & appraise everything you own every year)

3. over which the taxpayer has complete dominion and control

Our tax system is referred to as a “transactional system.” Some event must occur to create tax liability.

What makes something realized? “A notorious event occurred.” Where you receive something of value beyond what you had to confer to get it!

PROBLEMS (p. 69) GROSS INCOME

1. Would the results to the T in Cesarini be diff if instead of discovering $4467 in old currency in the piano, they discovered that the piano, a Steinway, was the 1st Steinway piano ever built and worth $500,000?

(This is a realization principle question. Diff. from land appreciation in that this piano was worth $500 when you bought it. Was the original purchase then a TA that made the accession taxable? Is purchase enough? Is this a notorious event that could constitute realization? Liquidity is a problem–you’d have to sell to be able to pay tax on $500,000. The Practical Problem though is the key: you’re not going to have everything