Select Page

Federal Income Tax
South Texas College of Law Houston
Seigal, Mark R.

Federal Income Tax Outline

I. Authority
a. Administrative materials
i. Regulations
1. Help interpret the rules
2. Put out by IRS and department of treasury
a. Administrative authority
ii. Revenue Rulings
iii. Acquiescence
1. service says that it will not continue to contest the point if it arises in other cases
b. Judicial Materials
i. Case Law
1. Tax Court Decisions
2. District Court Decisions
3. Court of Federal Claims Decisions
c. Legislative Authority
i. Senate Finance Committee hearings
ii. House Ways and Means hearings
1. joint commission on taxation
iii. Code (ours is 1986 with revisions)
1. Income Tax is located in the US Code
2. Title 26, subtitle A, Chapter 1
iv. Constitution
1. Article I, Section 8, clause 1
a. “uniform throughout the US”
i. just means geographically
2. 16th Amendment
a. income taxes not be subject to the rule of apportionment
II. Defined
a. Tax
i. The compulsory action by the government, state or local, exercising its sovereign right to tax
1. provide revenue for general government
b. Direct Tax
i. A tax demanded from every person who is intended to pay it
1.
c. Indirect Tax
i. A 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
III. Courts
a. Power
i. Interpret statutes and regulations
ii. State court decisions aren’t binding on federal courts unless it is the highest court of the state
b. Lower Courts
i. US District Courts
1. jury
2. refund court
a. pay, then file suit
ii. US Claims Court
1. non-jury
2. refund court
iii. US Tax Court
1. non-jury
2. non-refund tribunal
3. deficiency
a. don’t pay
i. the federal court is coming after you
b. procedure
i. 30-day letter
1. have 30 days to petition or pay
2. options
a. protest with Appeals office
b. ignore
i. then they’ll send you a 90 day letter
c. pay the difference
ii. 90-day letter
1. have 90 days to file petition or pay
2. options
a. no payment, but petition the tax court
b. do nothing – you may lose your rights
c. pay tax and file for refund
c. Appellate Courts
i. US Claims Court
1. US Court of Appeals Federal Circuit
ii. US District Court
1. Circuit Court of Appeal
iii. US Tax Court
1. Circuit Court of Appeals
iv. Supreme Court
IV. Administrative Power
a. Executive Branch
i. Handles administrative issues through the IRS and the department of treasury
1. Commission Everson
V. Economist Formula:
a. Haig-Simons
i. Income is the sum plus increase in net worth over a period of time and consumption over that period
1. differs from tax lawyer’s formula which says that the accession to wealth must be clearly realized
2. both rely on net worth = assets – liabilities
VI. Taxing formula
a. Unlike Haig-Simons theory, increase in net worth isn’t necessarily an income inclusion item
b. Creates ability to decrease your tax liability
i. Deductions are removed from gross income
1. above the line
ii. Exemptions
iii. Credits reduce your amount of tax
1. more than a deduction
2. below the line
c. Tax rates
i. Those with a higher tax base pay proportionally more as your income goes up
1. progressive/graduated tax rate
a. marginal tax rate is in Section 1
i. provides the rate of taxation on the last dollar taxed
b. bedrock principles of our taxation system
2. Regressive taxation
a. Texas is an example
i. Flat tax
ii. Poor people pay more than the rich
1. sales tax
d. See Supplement for the formula
VII. Gross Income
a. Defined by code
i. Section 61
1. Defined as all income from whatever source derived
ii. Important in determining taxable income
1. gross income minus the deduction allowed in this chapter
iii. Includes the receipt of any financial benefit which is not:
1. a mere return of capital
2. not accompanied by a contemporaneously acknowledged obligation to repay and
3. not excluded by a specific statutory provision
b. Defined by Regs
i. Section of Regs: 1.61-1a
1. All income from whatever source derived unless excluded by law
ii. Example:
1. Cesarini
a. Gross income is income from whatever source derived, unless excluded by law
i. Includes money, property, services, etc.
ii. the statute said including but not limited to
1. therefore included the money found in the piano
2. 1.61-14 Reg includes treasure troves in gross income
c. Defined by case law
i. Glenshaw Glass
1. gross income is
a. undeniable accession to wealth, clearly realized and over which the taxpayer has complete dominion
i. clearly realized:
1. easiest way to clearly realize is to sell it
2. without this, all assets, whether liquid or not, would be included in gross income
ii. accession to wealth
1. not a loan
a. unless a buyer h

utrix for a will probate is compensation
a. but the family member can waive the right to fee
v. Illegal activities
1. James v. US
a. Illegal gain is income despite a legal obligation to make restitution
i. Also in 1.61-14a
b. I.e.: taking out a loan with no intention to repay the loan
vi. Rental property improvements/rent
1. 61a5 – included in gross income
2. 1.61-8 Reg:
a. if a lessee places improvements on real estate which constitutes, in whole or in part, a substitute for rent, such improvements constitute rental income to the lessor
i. improvements = rent substitute
3. also compensation paid for other than cash
a. 1.61-2d1
vii. Frequent Flyer Miles
1. Charley v. Commissioner
a. Sold frequent flyer miles that he received from business trip
i. If they are assignable and you use them, they have been realized and are gross income
2. what about miles for personal trips
a. depends on if they are nonassignable or assignable
i. if nonassignable, then they are not gross income when you earn them
1. but are when you use them
a. they’re the fair market value of the ticket
viii. Automobile Rebates
1. 76-96
a. rebates by car manufacturers to customers who buy new cars are business expenses of the manufacturer
i. they are not included in gross income
2. Rebates present a reduction from the cost of the car, taxable under 1012 of the Code
a. Leases represent a reduction in rental fee
3. not treated as gross income, but as a deduction in the price of the car
ix. Bartered Income
1. Rev. Ruling 79-24
a. Regs 1.61-2d says that if services are paid for other than in money, the FMV of the property or services taken in payment must include the income
b. Swapping services
i. Doctor offers physical to attorney if attorney will write his will
1. the cost of the will is includable in the doctor’s gross income
2. the cost of the physical examination is includable in the attorney’s gross income