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Seton Hall Unversity School of Law
Coverdale, John F.

Fall 2010
I.                   Introduction
a.       Goals of Income Tax
                                                              i.      Administrative feasibility
1.      Efficiency, cost effective
                                                            ii.      Fairness
1.      Horizontal equity – Those with equal income pay equal amounts
2.      Vertical equity – Those with differing incomes pay based on ability to pay
                                                          iii.      Avoid unintended economic effects
b.      16th amendment allows income tax
c.       Personal losses are not deductible
d.      Sources of laws
                                                              i.      Congressional statutes
                                                            ii.      Regulations
1.      The code
                                                          iii.      IRS publications
                                                          iv.      Revenue rulings
                                                            v.      Private letter rulings
                                                          vi.      Judicial interpretations
e.       Courts
                                                              i.      Tax
1.      File a claim within 90 days
2.      Claim for a deficiency
3.      Don’t pay tax first
4.      Appeals to the taxpayer circuit court
                                                            ii.      District
1.      Pay tax first
2.      File for a refund
3.      Can get a jury
4.      Appeals to the taxpayer circuit court
                                                          iii.      Federal Claim courts
1.      Pay tax first
2.      File for a refund
3.      appeals to the federal court of appeals for the federal circuits rather than the taxpayer circuit court
f.       Tax law progression
                                                              i.      Start in the house
                                                            ii.      Goes to the Senate
                                                          iii.      Goes to the president
                                                          iv.      Goes to IRS
g.      Process for determining taxable income
                                                              i.      Above the line – Before calculation of adjusted gross income
1.      Adjustments
a.       Payment of alimony
b.      Contributions to a regular IRA
2.      Business expenses
                                                            ii.      Below the line
1.      Standard deduction or
2.      Below the line deduction
                                                          iii.      Two difference
1.      Above the line deductions can be claimed even by taxpayers who choose the standard rather than the itemized deductions
2.      Casualty losses, healthcare, have ceilings for floors as a percentage of adjusted gross income
II.                Gross Income
a.       General
                                                              i.      If services are paid for in property, the fair market value of the property is the measure of compensation
1.      Fair market value – the price a willing buyer would pay a willing seller, with neither under a compulsion to buy or sell, and both having reasonable knowledge of relevant facts
                                                            ii.      If paid for in the form of services, the value of the services received is the amount of compensation
                                                          iii.      A taxpayer who accumulates frequent flyer miles as a result of business travel paid for by her employer is not required to report any gross income as a result of the receipt of the frequent flyer miles or her use of those miles for personal travel
                                                          iv.      Do not impute income from the ownership of assets
                                                            v.      Amount realized – adjusted basis = taxable gain or loss
1.      Basis is what you paid for it
2.      To change your basis
a.       Put more money in (renovate your building)
b.      Claim depreciation or amortization
3.      Income derived from property (most common)
                                                          vi.      Tax items
1.      Do not include at all (gift)
a.       Federal law for federal tax purposes
2.      Item is deferred
                                                        vii.      1040 type of form
b.      Types
                                                              i.      Above the line deductions
1.      Business
2.      Alimony
                                                            ii.      Below the line
c.       Gross Income [§ 61] – All income from whatever source derived
                                                              i.      Receipt of punitive damages is income (Glenshaw Glass)
                                                            ii.      Payment of employee’s taxes was income (Old Colony Trust)
d.      Adjusted Gross Income [§ 62] – Gross Income minus business deductions
                                                              i.      These are above the line deductions
                                                            ii.      Cost of earning profits gets deducted
e.       Taxable income [§ 63] – Gross income minus personal exemptions minus additional deductions (either standard deduction or itemized / below the line deductions)

                                                          iv.      Recourse liabilities of a seller, assumed by a purchaser, are included in the seller’s amount realized.
IV.             Gifts, bequests, and inheritances
a.       Nature of a gift [§ 102]                                                               i.      Gifts as well as property acquired from a decedent through bequest, devise, or inheritance is excluded from income
1.      Motive of the donor is critical in characterizing receipts as gifts
a.       Intent is an objective inquiry based on a rational person standard
b.      A gift proceeds from a detached and disinterested generosity out of affection, respect, admiration, charity, or like impulses
2.      When property received by an heir from the estate of an ancestor through a settlement agreement is excludable
                                                            ii.      Donee (person receiving gift) does not treat value as income, but the donor (person giving gift) cannot deduct the value of the gift from his income
1.      if donee excludes it, donor cannot deduct it
2.      donor can deduct if given for purposes of soliciting business (above line deduction), but then cannot be classified as gift (cannot be excluded by donee)
a.       Non-employer/employee context – Disallows a deduction for gifts made by businesses to individuals in excess of $25
b.      No gift status for transfers from employers to employees
                                                                                                                                      i.      De minimus fringes and certain achievement awards are excluded
1.      Less than $25
                                                                                                                                    ii.      Or the transfer wasn’t motivated by employer relationship, but as relationship as mother and daughter
                                                          iii.      Administrator of estate
1.      Anything the decedent gives him above his compensation is a gift
                                                          iv.      The income from property excluded as a gift, bequest, devise, and inheritance is not excluded