Tax Outline

Fall 2007
Professor Mullane
Intro to Federal Income Tax

PART I – INTRODUCTION

I. Sources of Tax Law
a. Constitution à Power to tax comes from Art. 1, Section 8, Clause 1: “The Congress shall have power to lay and collect taxes, duties, imposts and excises…”
i. Sixteenth Amendment à “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.”
b. Legislative – Statutory
i. Internal Revenue Code – 26 USC… à The primary source of federal tax law.
c. Administrative à Can move faster than congress. Doesn’t have force of law, but can come out quicker.
i. Treasury Regulations – Promulgation à Regulations are promulgated by the Department of the Treasury (IRS is a part of this). Section 7805(a) of the IRC gives secretary of treasury general authority to prescribe all necessary rules and regulations for enforcement of the code. Regulations are promulgated under the Administrative Procedure Act and are initially in the Federal Register.
1. Legislative Regulations à Congress tells IRS to get best people to come up with the rules they need
2. Interpretive Regulations à Congress asks IRS to interpret rules
ii. Revenue Rulings à Responsive to a particular taxpayer’s request for advice on tax consequences of a specific transaction. Revenue rulings may be relied on by any taxpayer with a similar issue.
iii. Revenue Procedures à Statements by the Service regarding its internal management operations.
iv. Private Letter Rulings
d. Judicial à Usually begins with deficiency, and one can either pay it (game over), not pay it or pay and then sue for refund
i. Tax Court à “Golson Rule” states Tax Court must accept binding precedent in circuit in which case is appealable to
ii. Ruling against Commissioner à He will issue a notice of acquiescence or nonacquiescence in the Tax Court decision. An acquiescence indicates the IRS accepts the conclusion. Otherwise, it does not accepts conclusion and will continue to challenge taxpayers.

Five Basic Questions Addressed by Income Tax System (Entire Semester)
– What items of income or economic gain will be includable in gross income?
– What items of expense will be allowable as deductions?
– When is an amount includable in income; when is the taxpayer entitled to claim a deduction
– Who includes the item in their income or takes the deduction?
o Sometimes need to deal with assignment of income—not always clear who taxpayer is.
– What is the character of the item of income or deduction?
o Ordinary income? Capital income? Etcetera.

PART II – GROSS INCOME

Ch. 2 – Gross Income: Concepts and Limitations
I. The Search for a Definition of Income
a. Basic Structure of Federal Income Tax à TAX = TAX RATE x TAX BASE
i. Tax Base à Whatever government chooses to tax. EX/ Income tax.
1. Tax Base = Taxable Income

b. Sixteenth Amendment à Congress shall have power to lay and collect taxes on incomes, from whatever source derived…

c. Section 61 à Except as otherwise provided in this subtitle, gross income means all income from whatever source derived including, but not limited to [nonexclusive]:
i. Compensation from services
ii. Gains derived from dealings in property and from business
iii. Interest
iv. Rents
v. Royalties
vi. Dividends
vii. Alimony/separate maintenance payments
viii. Annuities
ix. Income from life insurances and endowment contracts
x. Pensions
xi. Income from discharge of indebtedness
xii. Income from estates/trusts

Treasury Regulations
– Reg. 1.61-1(a) à Gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as in cash
– Reg. 1.61-14 à GI also includes: (1) punitive damages and (2) treasure trove
o EX/ Barry Bonds no. 756…?
§ Cesarini v. US à Money found as a “treasure trove” is taxable as gross income. It is “all income from whatever source derived.”

d. Commissioner v. Glenshaw Glass (1955)à Congress, in defining “gross income,” intended to exert “the full measure of its taxing power.” Emphasized Macomber “was not meant to provide a touchstone to all future gross income questions.”
i. Court à Decided whether money received as exemplary damages must be reported as gross income. These punitive damages defendant received were “gains or profits and income derived from any source.” This is “an undeniable accession to wealth, clearly realizedand over which the taxpayers have complete dominion.”
1. In response to Eisner, Glenshaw states its predecessor was useful for stock dividends, but it was not meant to be the touchstone for which all else should apply.

Cases Leading to Glenshaw Glass (NO LONGER GOOD LAW)
– Eisner v. Macomber (1920) à S.Ct. held a dividend is NOT income, holdingincome as “the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets.”
o Because the dividend took nothing from the property of the corporation and added nothing to the interest of the shareholders in any way…nothing was realized.
– Hawkins v. Commissioner (1927) àSince the income tax is primarily an application of the idea of measuring taxes by financial ability to pay…there may be cases in which taxable income will be judicially found although outside the precise scope of the description already given.”
– *Old Colony Trust (1929) àThe payment of the tax by employers is in consideration of the services rendered by the employee and was gain derived by the employee from his labor—form of the payment makes no difference
o Under § 61(a)(1), today, amount of take-home pay is irrelevant to GI.
o Note: This cannot be argued a gift, nor can one argue a pyramid effect of multiple taxation. Three important notes:
§ Form of income makes no difference
§ Gross income can include discharge of taxpayer’s obligation to a third party
§ Discharge is an obligation in the contex