Select Page

Tax
Seton Hall Unversity School of Law
Coverdale, John F.

Tax OutlineI. Introductiona. Rates i. Base x Rate1. Base = Taxable Income2. Ratea. Progressive  i. As the base rises, the rate rises as wellb. Proportional  i. Flat Rate c. Regressive Tax  i. As the base rises, the rate decreases b. Design and Evaluation Criteria i. Horizontal Equity1. Treat equally situated taxpayers equally ii. Vertical Equity1. Treat unequally situated taxpayers justly. c. Overview of Computation of Federal Income Tax i. Gross Income – Deductions ii. Select the appropriate rate schedule from S. 1 and fit the taxable income into the schedule iii. Apply Statutory Credits1. Definitiona. Subtracted directly from the tax dueb. Has the same dollar-value for all taxpayers entitled to use it. d. Sources of Tax Law i. Internal Revenue Code1. Passed by Congress  ii. Legislative History iii. Regulations of the Treasury  iv. Revenue Rulings and Procedures 1. Typesa. Revenue Rulingsb. Letter Rulings2. Difference from Regulationsa. Not published in proposed formb. No opportunity for commentc. Not approved by the Secretary of Treasury  v. Case Law1. Regular Opinions2. Memorandum: Unpublished Gross IncomeI. Gross Income and Its Limitationsa. Gross Income Defined: S. 61(a) i. Gross income is all income from whatever source derived. 1. (1) Provides that fringe benefits not specifically excluded are includable in gross income. 2. Unemployment compensation is included (S. 85)3. Social Security must reported at a certain income level (S.86) ii. Income as the gain derived from capital, from labor, or from both combined, provided it is understood to include profit gained through a sale or conversion of capital assets. iii. Reg. S. 1.61-2(d)(1)1. If services are paid for in property, the fair market value of the property is the measure of compensation; if paid for in the form of services, the value of the services received is the amount of compensation. b. Realization Requirement  i. We do not tax mere appreciation in value of property ii. Reg. S. 1.1001-1(a)1. Gain or loss as being realized from the conversion or property into cash or from the exchange of property for other property differing materially either in kind or in extent.  iii. S. 10011. An exchange of property gives rise to a realization event so long as the exchanged properties are materially different.c. Imputed Income i. Definition1. One has income from self-help activities2. It is not taxed. ii. Examples 1. Owning and using one’s own property a. Homeowner v. renter 2. Economic benefit from providing services for oneself, one’s family and others. d. Bargain Purchases i. Bargain purchases generally do not constitute gross income.  ii. Reg. S. 1.61-2(d)(2)(i)1. If property is transferred as compensation for services in an amount less than its fair market value, the difference between the fair market value and the amount paid is gross income. iii. NOTE1. Be careful not to misapply the realization requirement in connection with a compensatory bargain purchase that constitutes gross income.e. Punitive Damages i. Cannot reasonable be classified as gifts…nor do they come under any other exemption provision in the Code. f. Bargain Compensation  i. S. 1.61-2(d)(1) ii. Provides that if services are paid for other than in money, the fair market value of the property or services taken in payment must be included in income. g. Capital Investments i. Income is gain derived from capital, from labor, or from both combined, but it does not include enrichment through increase in value of capital investments. h. CH.2 PROBLEMS i. Haig-Simmons Income1. Income may be defined as the sum of a. The market value of rights exercised in consumption and b. The change in the value of the store of property rights…” Since the consumption potential of non-monetary goods, such as leisure, cannot be measured, monetary income may be thought of as a proxy for full incomeII. Gains From Dealing in Propertya. Recovery of Capital Investment i. Measurement of gain or loss on the sale of property1. Cost – Amount Realized 2. Timing is at the center of choosing a cost recovery system  ii. Section 1016 requires a taxpayer to adjust her basis in property to reflect any of her investment or any additional investment made in the property.1. Adjusted basis reflects the impact events occurring subsequent to one’s acquisition of property may have on the amount o

umber the property and the taxpayer pays cash for the property. h. CH. 4 PROBLEMS: NOTES i. The basis is the full purchase price, wherever the money comes from.  ii. Additional indebtedness not affecting the property does not affect the basis.   iii. Interest does not affect your basis. 1. Someone else’s taken care of your debt is treated as if you received cash.  iv. FORMULA1. Amount realized – adjusted basis = gain/lossII. Gifts, Bequests, and Inheritances a. Overview i. Code S. 102(a) 1. Excludes gifts and bequests from the gross income of the donee or heir  ii. Gains and Losses Realization by Whom?1. S. 102(a) excludes the receipt and in effect permits family wealth to be transferred from older to younger, or richer or poorer, or dead to living, without the imposition of an income tax on the grateful recipient. 2. Lifetime Giftsa. S. 1015(a) provides that for the purpose of determining gain on the sale of property acquired by gift, the donee’s basis ins the same as the basis of the property in the hands of the donor. b. Loss i. The donee’s basis is the donor’s basis or the market value of the property at the date of the gift, whichever is lower. 1. Carry over the donor’s basis to the donee. c. S. 102(a) permanently excludes from the donee’s income no more than the original cost of the property. d. If the donee’s tax rate is lower than the donor’s the property can be transferred in kind and then sold by the donee at a lower tax cost than the donor would incur. e. If the donor’s tax rate is lower than the donee’s, the property can be sold in advance of the gift and the cash proceeds transferred net of tax. f. S. 1015(a) provides that for purposes of calculating loss on the sale of property acquired by gift, the