Federal Income Taxation Outline, Coverdale, fall 2011, Seton Hall Law
I. Introduction: Tax = Base x Rate
a. Base à Income
i. Other types of taxes using different basis:
1. Sales Tax – consumption tax
2. Property Tax – Real Property (mostly state/local gov’t use this)
3. Excise Tax – Vices
4. Head Tax – tax
b. Rate à Progressive (marginal rates): As base increases, rate applied to base increases, but in steps. (You pay a lower % on lower amounts; higher % on higher amounts).
i. Other Types:
1. Flat/Proportional à Everyone pays same percentage
2. Regressive (ex. SS (you only pay on first 80K of salary, no matter how much your income is); sales tax (b/c people with lower income spend greater portion of their income on taxable things)
c. Policy Considerations: Efficiency + Fairness
i. Efficiency:
1. Does tax raise enough money?
2. Least amt of Distortion: goal is for tax system to be the least likely to distort the decisions people make
3. Administratively Efficient: without excessive cost/ least amt of invasion of privacy / not too burdensome on individuals
ii. Fairness
1. Is Base selected a fair way to collect tax?
2. Getting what you pay for? (Payment based on use/benefit.)
3. Ability to pay
a. Pay for common burdens
b. Redistribute wealth
4. Horizontal Equity: People similarly situated should pay the same.
a. * Fed. Income Tax System assumes that a person’s “situation” = income
5. Vertical Equity: Best justification for Progressive system since the Progressive system imposes a proportional rate rather than a flat rate.
d. SOURCES OF TAX LAW
i. CODE – (IRC)
ii. Regulations: Made pusuant (1) delegated power to enforce/interpret CODE or (2) specific grant of authority from Congress.
iii. Revenue Rulings: IRS’s view
iv. S.Ct à case law
e. Computing
II. Income → an accession to wealth, clearly realized, over which the taxpayer has complete dominion
a. What is income?
i. ECONOMIC INCOME THEORY: Haig – Simons: income = consumption (Market value of products consumed + change in value of property owned)
1. Consumption includes Imputed Income: monetary value of goods and services which you produce and consume w/in the family unit or monetary value of using property you own.
a. Helvering v. Ind. Life Ins. Co. à imputed income not inc. in taxable income.
2. All accretion in value is income under Haig – Simons; contra Fed Income Tax system requires realization.
ii. TAX LAW INCOME à § 61: “[A]ll income from whatever source derived.”
1. Includible in gross income
a. Compensation for services, including fees, commissions, fringe benefits, and similar items
b. Gross income derived from business
c. Gains derived from dealings in property
d. Interest
e. Rent
f. Royalties
g. Dividends
h. Alimony and separate maintenance payments
i. Annuities
j. Income from life insurance and endowment contracts
k. Pensions
l. Income from discharge of indebtedness
m. Distributive share of partnership gross income
n. Income in respect of a decedent
o. Income from an interest in an estate or trust
2. Eisner v. Macomber (US 1920) 25, 28 à Gain from labor or capital
a. D owned stock in Standard Oil & received 50% stock dividend.
b. No gain, no income. Therefore taxing stock dividend is unconstitutional.
c. Since all stock holders got a dividend based on the % of stock they already owned, the % of ownership each stockholder remained the same.
d. Critiqued Holding: Although correct outcome, limiting income to be “gain from labor or capital or both” was too narrow an interpretation. Subsequently limited by Glenshaw Glass
3. COMM. v. GLENSHAW GLASS (1955) 33 à Any accession to wealth is income
a. D claiming that treble damages not income since not labor or capital under Eisner.
b. The breadth of the language used by Congress implies that Congress meant to exert the full measure of its taxing power.
c. “Gross income includes income realized in any form, whether in money, property or services.” Form in which we get income doesn’t matter. See § 1.61-1(a)
d. “All gains except those specifically exempted.”
e. An “accession to wealth, clearly realized, and over which the taxpayers have complete dominion.”
i. Accession to wealth
1. Defined by tax code as anything of value
2. Technically scholarship would apply, but congress had made exceptions
ii. Clearly realized
1. Defined as some change in situation
2. Not simply some change in value of items held before
3. Technical term
iii. Over which taxpayers have complete dominion
1. Control over
2. May have a right to income without dominion
3. Not considered income until given control
4. Form Doesn’t Matter
a. Old Colony Trust (1929) 38 à 3rd Party payment of TP’s debts = income
i. TP’s employer paid his income taxes.
ii. The discharge by a third person of an obligation to him is equivalent to receipt by the person taxed.
iii. Payment of tax was like compensation and thus should be taxed like income.
b. McCann v. US 42 à Vacation paid by employer = income
i. Employer paid expenses for TP & wife to go on “Seminar.” Minimal business meetings; for the most part, schedule consisted of touring, drinking & dancing. Also, seminar was only available as a type of reward to certain employees.
ii. Where an employer pays an employee’s expenses on a trip that is a reward for services rendered by the employee, and such expenses paid are obvious economic benefit, the value of the reward must be re
by flights to airline employees.
b. Qualified Employee Discounts – An exclusion from gross income is provided for the amount of a qualified employee discount which is the employee discount with respect to qualified property or services. This includes services or property (other than real property or investment property) which is offered for sale by the employer to the nonemployee customers in the ordinary course of the employer’s line of business in which the employee works. An employee discount is the difference in the price of property or services which are provided to employees, and the price at which the same property or services are offered to nonemployee customers. SECTION 132(c)(3)-(4).
c. Working Condition Fringe Benefits – Gross income doesn’t include the value of any property or services provided to an employee by her employer to the extent that, if the employee paid for the property or services herself, she would be entitled to a deduction under 162 or 167. SECTION 132(d).
i. I.e. Security or firm providing employee with magazines for free
d. De Minimis Fringe Benefits – Any property or service which is so small as to make accounting for it unreasonable or impracticable. Determining whether this applies, consideration is given to the frequency with which similar benefits are provided to employees. SECTION 132(e)(1)-(2).
i. I.e. Supper-money, night-time taxi fare, company picnics, tickets
e. Qualified Transportation Fringe Benefits – A taxpayer may exclude up to $100 per month for employer-provided transportation in a “commuter highway vehicle” or for any “transit pass.” Parking provided to an employee on or near the employer’s business premises can be excluded from the employee’s gross income up to a value of $175 per month. If the employer offers employees a choice between a qualified transportation fringe or cash (up to the value of excludible qualified transportation fringe) an employee has gross income only if she chooses the cash. SECTION 132(f)(1)-(5).
7. Fringe benefits which do not qualify for exclusion are now includable in gross income under Section 61 unless specifically excluded by some other Code provision.
a. I.e. Group-term life insurance for employees (79(a)) and contributions by employers to accident/health plans & exclusions for employer-paid health insurance premiums (106), and employer provided housing (119).
