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Seton Hall Unversity School of Law
Kaye, Tracy A.

Federal Income Tax
Prof. Tracy Kaye – Fall 2013
FLLS: Chapters 1 (Orientation) and 2 (Gross Income) up to page 49, 52-53
Problems: page 54:1-5
1)      Chapter 1: Orientation
Congressional Tax Powers
i)        Power to Tax
(1)   Origination Clause
(a)    All tax bills must originate in the House of Representatives
(b)   However, IRS can create regulations to interpret tax laws
(2)   Rule of Apportionment: {does not apply to federal income tax}
(a)    Problems with rule of apportionment
(i)     Unequal distribution of tax
(ii)   Unequal distribution of burdens on citizens from states with a small population
(3)   Rule of Uniformity [new rule] (a)    Stems from the rule of apportionment, which is considered no longer considered a viable way to collect tax
(b)   Source of Rule of Uniformity:
(i)     Article 1 §8 cl.1: “but all duties, imposts, and excises shall be uniform through the US”
(ii)   16th Amendment: “The Congress shall have power to lay and collect taxes n incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration”
1.      Effectively subjects federal income tax to the rule of uniformity
2.      The constitution only requires geographic uniformity with respect to federal income
(iii) Examples:
1.      ALLOWED: Both A and B have $10,000 of income but A is taxed on her salary income and B is not taxed on his municipal bond interest = may be uniform so long as the tax is distributed evenly geographically
a.       “All states must play by the same rules”
b.      AKA categories of income of OK so long as they are defined the same in every state
2.      ALLOWED: A and B live in different states, and are taxed at different rates. This is constitutional if different income levels and graduated rate tables are the driving factors rather than merely living in different places
a.       Every state is taxed at the same rate on the same amount fo money, regardless of what state they live in
b.      AKA graduated rate tables are universally applied 
Sources of Law
(4)   Regulations are applicable in Tax Court and are binding authority and are treated like any other agency ruling – Mayo v. US (2011)
(a)    Test for whether regulation stands as written i.e. binding
(i)     Has the issue been address by Congress?; and
(ii)   Is the ruling arbitrary and capricious or manifestly contrary to the statute?
(5)   Revenue Rulings
(a)    Not given the same weight as a regulation
(b)   Issued under the same statutory authority as a regulation
(c)    Essentially it is the answer by the treasury department to a specific question raised by a tax payer concerning the taxpayer’s liability
(d)   Reflects the current policies of the IRS and may be cited and relied on
(e)    Sources: International Revenue Bulletin and Semi Annual Cumulative Bulletin
(6)   Action on Decisions (AOD’s)
(a)    IRS issue statement with its position when it has lost a TAX Court case
(i)     “An Action on Decision (AOD) is a formal memorandum prepared by the IRS Office of Chief Counsel that announces the future litigation position the IRS will take with regard to the court decision addressed by the AOD.” – IRS Website
(ii)   IRS “bitchy reaction” to cases they lost explaining what they really meant when they implement a regulation
(b)   Acquiescence, Acquiescence in result only, or Non-acquiescence?
(i)     The recommendation, which is published in the Internal Revenue Bulletin, is characterized as an acquiescence, a non-acquiescence, or an acquiescence in result only.
1.      Acquiescence = neither approval nor disapproval of reasons assigned by the court
2.      Acquiescence in result only = disagreement or concern with some or all of the Court’s reasons for its conclusion.
a.       Both “acquiescence” and “acquiescence in result only” mean that the Service accepts the holding of the court in a case and that the Service will follow it in disposing of cases with the same controlling facts.
3.      Non-acquiescence = the IRS disagrees with the adverse decision in a case and will ONLY follow the decision for that specific taxpayer whose case resulted in the adverse ruling.
(7)   Revenue Procedure
(a)    Statement of the treasury’s practice and procedure
(b)   Treated the same as a revenue ruling, thus given slightly less weight than a regulation
(c)    NOTE: different from a revenue ruling in that it is issued on the IRS’s own accord rather than in response to a taxpayer’s question of liability
(d)   Sources: Announcements and Notifications and Information Press Release
Executive Tax Power (IRC)
ii)      Treasury Department
(1)   Tax Legislation Committee and the IRS prepare regulations
(a)    Regulation often contain the same language, comments, and examples as committee reports
(2)   Legislative Regulation: If there is a very complex tax issue that must be resolved, Congress will delegate its power to the IRS to decide the issue because they have the expertise to solve the issue
(3)   Proposed Regulation
(4)   Temp. Regulation
(5)   Final Recommendations
iii)    Administrative Authority:
(1)   Revenue Ruling
(2)   Private Letter Rulings (PLR) – issued at the request of individual tax payer
(3)   Technical Advice Memorandum (TAM) – issued during audit at the request of examining agent
(a)    PLR and TAM’s carry NO authoritative weight (persuasive, NOT binding) – CAN cite to these authorities if citing the “reasoning” instead of the actual authority.
Judiciary Tax Power
iv)    If the facts of the case have not material changed, then Treasury will not retroactivity revoke a ruling so as to upset the expectations of the one to who the ruling was issued
(a)    Courts sits in division so 1 of 19 judges can hear the case
(b)   Decision may not be reported if it involved primarily a factual determination and the application only of settle legal principles
(c)    Some official reported decisions are reviewed by the entire Courts (En Banc Review)
v)      Levels of Review – 3 options for filing of initial claim
(a)   Federal Claims Court
(i)     Must pay the amount in dispute to the IRS before you file the claim
(ii)   Then you make a refund claim
(iii) If you want to avoid the underlying jurisdictional tax law entirely, you file your claim in the Federal Claims Court.
(b)   District Court
(i)     Must be the amount in dispute to the IRS before you file the claim
(ii)   Then you make a claim for refund
(iii) The District Court draws on the law from of the underlying jurisdiction
(iv) Can have a jury trial
(c)    Tax Court
(i)     You do not need to pay the amount in dispute to the IRS before you file the claim
(ii)   No j

owned by a corp. with TP as director.) The taxpayers valued occupation of the corporation’s real estate is taxable under gross income tax; Essentially the renters are receive compensation
5)      Fair Market Value of Services
a)      When you have an arms length transaction for services, the fair market value of one service is equal to the fair market value of the other service
Exclusions from GI:
Gifts of Real Property:
(d)   Inheritance (i.e. securities) = excluded; but income from the real property = NOT
Gift & Inheritance:
(2)   §102 – Gift or Inheritance is excluded from GI.
(a)    GI does NOT include the value of property acquired by gift, bequest, devise, or inheritance.
(b)   Still excluded even if the gift, bequest, or inheritance is given in installments
(3)   Employee Gifts – NOT excluded, unless (covered in detail later):
(i)     Employee Achievement Award [§74(c)]; OR
(ii)   De Minimis Fringe Benefit [§132(e)] (b)   Special Notes:
1.      Gifts from fellow employees = excluded
2.      If multiple entities contribute to employee gift = all entities must pass Duberstein test:
a.       [Factual determination] = Excluded if…      
i.        If the intent of the transfer is to reward (not compensate);
ii.      The employer does not have an interest in the transfer; AND
iii.    The employer contribution to the gift does not exceed $25?
3.      Gifts given to kin in employment setting = NOT excluded [Reg. § 1.102-1] 4.      Christmas bonus = NOT excluded [Reg. § 1.61-2] (c)    History of this code section:
(i)     Discrepancy between the two following cases caused the release of §102(c):
1.      Duberstein = received a car as a bonus for serving the company well on a particular deal = included in GI (i.e. NOT gift).
2.      Stanton = not taxable because it was gift for retirement and the company had no interest in receiving something after the gift was given
(4)   Substance v. Form Doctrine:
(a)    Substances trumps Form.
(b)   Just because the form of the document states that the transfer is a bequest, does not mean that the transfer /payment was actually a bequest. It could be compensation disguised as a bequest
(c)    Examples – Bequests Devise and Inheritance:
(i)     Lyeth v. Hoey: Inheritance received from any entity is not taxable (i.e. whether inheritance is received from an individual or corporation); If someone is an heir in fact, the exclusion applies.
(ii)   Wolder v. Comissioner: If one is compensated for past services through will, the amount is taxable because its compensation. Lawyer was put in will to receive full value of estate in exchange for legal services for the remainder of the individual’s life.