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Federal Income Tax
South Texas College of Law Houston
Yamamoto, Kevin M.

FEDERAL INCOME TAX

YAMAMOTO

FALL 2013

§ Introduction

· The income tax and the United States Constitution

¨ Article 1:

▪ Section 8, clause 1: gives federal government power to tax

▪ Section 2, clause 3 & section 9, clause 4: require that “direct” taxes be apportioned among the several states in accordance with their respective populations

¨ 16th Amendment: provides that income taxes shall not be subject to the rule of apportionment regardless of the sources from which the taxed income is derived

· Vocabulary

¨ Tax: compulsory exaction by a government by exercising its sovereign power to provide revenue for general government

¨ §1(a) gives the rates of taxation against the taxable income [Tax Liability = rate(§1) x base(taxable income)]

¨ Progressive taxation: the more you make the more tax you pay (used in the US)

¨ Regressive taxation: poor pay proportionally more than the rich (TX is more of this because of the sales tax)

¨ Marginal tax rate: tax on the last dollar taxed. This is different than the average or effective rate of tax (which is a tax on all the dollars)

▪ HYPO:

○ 15% ($22.1K) = $3,315

○ 28% ($31.4K) = $8,792

○ 31% ($46.5K) = $14,415

▫ Total = $26,522 à the marginal rate of tax here is 31%

¨ Direct tax: tax demanded from the very person who is intended to pay it

▪ i.e. tax at a flat rate on all persons

¨ Indirect tax: tax paid primarily by a person who can shift the burden of the tax to someone else or who at least is under no legal compulsion to pay the tax

▪ i.e. sales tax because it is imposed on the seller who may shift it to the purchaser (a person may avoid an indirect tax by not buying the article subject to the tax

· Sources of Tax law & History

¨ Tax Code

▪ Title 26 Subtitle A (Income Tax)

▪ § Section, subsection, paragraph, subparagraph, clause, subclause

¨ Case Law: courts of original jurisdiction

▪ Tax court:

○ Article I court

○ Primary place where tax litigation occurs

○ No jury trials

○ Don’t have to pay deficiency before able to litigate

○ Non-refund tribunal

▪ Federal & District court:

○ Allows a person to file in this court as well WHEN the person pays the deficiency and files an administrative claim for a refund and he is denied

○ Jury trials are available to determine fact issues (upon demand)

○ Refund tribunal courts

▪ Court of Federal Claims decisions:

○ Article I forum

○ Refund tribunal

○ Composed of 16 judges sitting nationwide

○ No jury trial is available

¨ Administrative:

▪ IRS:

○ Interpretive regulation: tell you how to read something in the code (allowed by code §7805(a))

○ Legislative regulation: Congress grants to Treasury the power to make/enact rules and regulations

○ Regulations: (located in the back of the tax code) Reg. §___.___-___

◊ 1 = income

◊ 20 = estate

◊ 25 = gift

◊ 26 = GST

◊ 301 = PRO

◊ 601 = IRS FRU

○ Revenue Rulings: private letter ruling that service sees as being important enough to put into the IRS bulletin

○ Private Letter Rulings: tax payer will write to service with a certain situation and request info on a tax question

¨ Legislative History

▪ Bills:

○ The formal beginning of the tax legislative process is the introduction of a bill in the House of Representatives

▪ Hearings

▪ Committee Reports

○ Report seeks to explain to the other House members just what the bill is designed to do

○ These reports are the most important part of the so-called “legislative history” of a statute

○ Before such a bill can go to the President, the disagreeing votes of the two houses must be reconciled

· Overview of Course:

GI [§61]

– [§62] ß above the line deductions

AGI

– [I/D or S/D] ß itemized or standard deductions §63a or 63b

– [P/E] ß personal exemptions §151

T.I ß Taxable Income

x §1 ß tax rate for individuals

T.L. ß Tax liability

[credits]

T.D. ß Tax due

· Definitions:

¨ §61 Gross Income Defined: Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items [list of 15 items in book]

¨ §62 Adjusted Gross Income Defined: For purposes of this subtitle, the term “adjusted gross income” means, in the case of an individual, gross income minus the following deductions [lists some deductions]

▪ Applies only to individuals

▪ Above the line deductions

¨ §63 Taxable Income Defined:

▪ (a) Except as provided in this subsection (b), for purposes of this subtitle, the term “taxable income” means gross income minus the deductions allowed by this chapter (other than the standard deduction). [for itemized deductions]

▪ (b) [Individuals who do not itemize their deductions] In the case of an individual who does not elect to itemize his deductions for the taxable year, for purposes of this subtitle, the term “taxable income” means adjusted gross income, minus

○ (1) the standard deduction, and

○ (2) the deduction for personal exemptions provided in §151

Identification of Income Subject to Taxation (chapters 2-11)

Chapter 2: GI – The Scope of §61

§ §61 Gross Income (also Reg 1.61): Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items [list of 15 items in book]

§ Equivocal Receipt of Financial Benefit

¨ Cesarini v. United States

▪ Found money in piano case

▪ §61 states that all income from whatever source derived is included in GI unless specifically excluded

onths of rental that were “traded” are GI under § 61.

▪ Reg. §1.61-2(d)(1): if services are paid for other than in money, the FMV of the property or services taken in payment must be included in income

§ Notes:

· Unlawful as well as lawful gains are comprehended within the term GI

· We have a self-assessment tax system

Chapter 3: The Exclusion of Gifts and Inheritance

§ §102 Gifts

· §102(a): GI does NOT include the VALUE of property acquired by gift, bequest, devise, or inheritance

¨ “Property” includes property and services that are gifts

· §102(b): “exception” to the exclusion section [meaning you need to include this in GI]

¨ §102(b)(1): The INCOME from any property referred to in 102(a) shall NOT be excluded from GI

¨ §102(b)(2): Where the gift, bequest, devise, or inheritance is of INCOME from property, the amount of such income is GI and thus shall not be excluded from GI

· Reg. §1.102-1(b): INCOME from gifts, bequests, devise, or inheritance shall NOT be excluded from GI

¨ Commissioner v. Duberstein

▪ Test: look at the transferor’s intent

○ the most critical consideration is the transferor’s intent

▪ A gift in the statutory sense proceeds from a “detached and disinterested generosity” . . . “out of affection, respect, admiration, charity or like impulses”

▪ Gift is determined on a case by case basis

· GI includes the receipt of any financial benefit which is:

¨ Not a mere return OF capital; and

¨ Not accompanied by a contemporaneously acknowledged obligation to re-pay; and

¨ Not excluded by a specific statutory provision (§§101-137)

· §102 does not apply to:

¨ §71

¨ §72

¨ §74(c): Prizes and Awards

▪ Certain employee achievement awards are freed from tax

¨ §132(e): Fringe Benefits

▪ Certain traditional retirement gifts are treated as de minimis fringe benefits

§ §102(c) Employee Gifts

· §102(c)(1): §102 shall NOT exclude from GI any amount transferred by or for an employer to, or for the benefit of, an employee

· Reg. §1.102-1(f)(2): if employee can show that the transfer was not made in recognition of the employee’s employment, then taxpayer could exclude it from GI (i.e. familial relationship)

· §274(b)(1) generally limits deductible amount of business gifts to $25 per donee/per year