Select Page

Tax
Seton Hall Unversity School of Law
Kaye, Tracy A.

Tax Outline
 
Overview of Fed Income Tax System
 
Goals for income tax system
 
1.      equity (fairness)
a.       horizontal equity – similarly situated people should be taxed similarly
a.(i.e. people with the same income should pay the same amount of tax)
b.      vertical equity – amount of tax should be proportionate to income; poor people not over taxed; rich not under-taxed
i.        Code is based on the ability to pay
ii.      progressive tax structure – as income rises, proportion of income one pays in taxes rises ($1 is worth less to rich that it is to poor)
2.      economic effects
a.       policy is to ensure no unintended, perverse effects (but they happen anyway)
b.      increased reliance on income tax to provide incentives for various activities and investments (i.e. tax benefit of home mortgage – want to encourage home ownership)
3.      administrative feasibility
a.       cost of gov’t enforcement and taxpayer compliance should be as minimal as possible
4.      objectivity
a.       rely on objective information rather than subjective features
a.(i.e. no tax on forgone revenue)
 
v taxes are key source of revenue (half of fed revenue)
v fed income tax used as disincentive in some cases – discourage people from activities:
v(1) tax on cigarettes; (2) tax on alcohol, (3) tax on gas to cut down on driving
 
Tax Terminology
 
Taxable income
            [Gross income] – [Above the line deductions] = Adjusted Gross Income (AGI)
            AGI – [personal exemptions] – [itemized deductions] = Taxable income
 
                                                                                    *(offset tax with credits)
Gross income
(§61) = All income from whatever source derived; except as otherwise provided by statute
*includes: wages, salaries, tips; excludes things like child-support
 
Above the line deductions – deductions for earning income, gross receipts – cost of earning income
(§62) = Adjustments à deductions for the cost of earning income
-above the line ensures that everyone can use deduction (don’t need to itemize deductions to use it)
 
Adjusted Gross Income (AGI)  – many deductions are based on adjusted gross income
            (i.e. medical expense deduction – deduction only to extent that med expenses exceed 7.5% of AGI)
 
Gross income –[minus] Above thee line deductions = AGI
 
Personal exemptions – can be for self, spouse, children; phased out for wealthy – protects ppl with low salaries
Itemized (or standard) Deductions – take the deduction that is higher
Taxable income – amount used to apply tax; marginal tax rate is % at which the last dollar of income is taxed
 
AGI – [minus] personal exemptions – [minus] itemized deductions = taxable income
 
*credits are dollar for dollar reduction
*deductions and exclusions aren’t dollar for dollar – they are based on marginal rate of tax
 
*upside-down subsidy à the more wealthy you are, the more your contribution is being subsidized
(odd bc the people who need it the most are the poor)
 
Current rate structure: marginal tax rates
 
0%
10%
15%
25%
28%
33%
35%
 
 
 –progressive tax structure
 –brackets change every year – indexed for inflation
 –top tax bracket is most controversial – how high/low should it be
 
Tax Accounting
 
            Cash method = amounts are treated as income when cash is received; deductible when paid
                        *limitations – capital costs, constructive receipt, cash equivalence, economic benefit        
                        –this was is simple; used with individuals
            Accrual method = items included into gross income when earned, regardless of payment received
                        –more accurately reflect economic realities; used by businesses
**Hypo: A performs service for B in 12/00. B doesn’t pay until 1/01.
Cash method – A has income and B has expense in 2001. Accrual – A has income and L has expense in 2000.
Realization and Recognition
 
Realization – gain or loss realized when some change in circumstance such that gain or loss might be taken into account for tax purposes
Recognition- gain or loss recognized when change in circumstances is such that gain/loss is accounted for
*must have realization, but not necessary to have recognition.
If there is recognition, there MUST have been realization (can’t have realization without recognition)
 
*Accelerate Deductions
                *Defer Recognition of Income
Exclusions better than Deductions
Alternative Tax Systems: based on (1) income; (2) consumption; (3) wealth
*all deal with the $ handled by individual, but the key = time frame for evaluating ability to pay
*income as basis fo

ts of congress’ intent of legislation
o   Staff of Joint Committee on Taxation – blue book compilation of various committee reports and new materials
§ this is post-legislation à thus although cited by IRS and courts, still debate over authority of it; consensus is that it has some authority, but less than committee reports
o   Treasury Regulations
§ §7805 of Code authorizes Secretary of Treasury to give “all needful rules and regs for enforcement”
 
v Executive
o   IRS and Treasury
§ write regs interpreting tax bill – have explanations, definitions, examples, language
o   2 Types of Regulations
1. interpretiveàinterpretation of statute;legislative history focus
      *look below for 3 types of interpretive regs (proposal, temporary, final)
2. legislative àCongress delegates rule-making authority to IRS. More authoritative than interpretive regs
o   3 Stages of Interpretive Regs (put out by chief counsel’s office, but issued by treas. dept.)
1. Proposal regulations
            *solicit public written comments; not entitled to same deference as final regs; time-guided regs
                  2. Temporary regulations
                        *given less deference than permanent regs; temporary for 3 years
                  3. Final regulations
*entitled to great weight – given deference; supercedes proposed and temporary regs; IRS is bound by these rules, but taxpayers and courts can challenge regs
*the longer the reg has been around, the harder it is to challenge (bc it has support)
o   Administrative authorities by IRS
o   revenue rulings – published conclusion of IRS where apply tax law to specific set of facts
o   private letter ruling – specific issues – binds individual taxpayer, not to all
o   technical advice memorandums – similar to private letter rulings – issued during audit; are made public
o   Chief Counsel’s office writes treasury regulations (TLC)