Federal Income Tax Outline
Siegel Fall 2006
D – Defendant
Õ – Plaintiff
AB – Adjusted Basis
AR – Amount Realized
COMM, COM- Commissioner
ER/PR/DR – Employer/payer/donor
GI – Gross Income
GR – Gain Realized
+/-R – Recognized (-R=not recognized; +R=recognized)
ROC – Return of capital
SOL – Statute of Limitation
SP – social policy (public policy, policy)
TP – Taxpayer
A. Authorities (taken from another outline)
i. Administrative materials
1. Help interpret the rules
2. Put out by IRS and department of treasury
– Administrative authority
b. Revenue Rulings
– Service says that it will not continue to contest the point if it arises in other cases
ii. Judicial Materials
a. Case Law
1. Tax Court Decisions
2. District Court Decisions
3. Court of Federal Claims Decisions
iii. Legislative Authority
a. Senate Finance Committee hearings
b. House Ways and Means hearings
1. Joint commission on taxation
c. Code (ours is 1986 with revisions)
1. Income Tax is located in the US Code
2. Title 26, subtitle A, Chapter 1
1. Article I, Section 8, clause 1. Allows Congress to collect tax based on apportionment (depended on state population).
– “uniform throughout the US” means geographically
2. 16th Amendment
– Income taxes not subject to the rule of apportionment under of Article I.
i. File refund with commissioner.
ii. If that fails, can seek refund in either US DC court or US Claims Court if amount paid already.
iii. If amount not paid, can file in US Tax Court.
iv. Can appeal to AC.
v.Can go to SC if granted certiorari.
C. Income – any compensation or economic benefit received by the taxpayer during the tax year.
i. GROSS INCOME
a. IRC §61: GI means all income from whatever source derived.
1. Can be in the form of cash, services, or property.
2. GI includes income from both legal and illegal means.
b. Glenshaw Glass: The undeniable accession to wealth, clearly realized and over which the taxpayer has complete dominion.
c. Generally, any economic benefit is GI unless excluded by statute.
ii. Adjusted Gross Income = GI – over-the-line deductions (§62)
a. Above the line are generally deductions related to business and trade.
iii. Taxable Income = AGI – Exemptions – greater of standard/itemized deductions.
iv. Exclusion – not included in income.
i. Cash-method taxpayer: keeps receipt and apply to next year’s taxes.
a. Bill gets carpet cleaned on December 20, 2006 and immediately gets bill. He pays for Bill on January 2, 2007, so the tax deduction applies to the 2007 tax year.
ii. Fair Market Value (FMV) – willing buyer, willing seller.
iii. Basis – actual or constructive cost of an asset to the taxpayer.
iv. Adjusted Basis – § 1011 – amount of basis adjusted upwards or downwards.
v.AR – sum of any money received + the FMV of any property received.
vi. Gain – Income from sale or disposition (exchange) of an asset. Excess of amount realized over adjusted basis. GR = AR – AB.
a. Anytime there is a GR or LR, we have to determine the character of it.
b. By character, determine if it’s OI or CA (§ 1221). If CA, then examine
1. if there is a sale or exchange and
2. whether it is LT (more than a year) or ST (less than or equal a year).
vii. Realize – derive tangible economic benefit from transaction.
a. Stocks that appreciate in value, there is no realization b/c TP has not gained any benefit.
b. Stocks that appreciate in value and then sold results in a realization of profit amount.
viii. Recognize (+R) – included in GI for the tax year. § 1001-(c).
ix.Return of Capital(ROC)- Part of sale that matches AB.
a. $100 AB/ $150 FMV. Buyer pays $120. The first $100 of the $120 is ROC.
/t FMV and what EE paid is GI.
v. § 1.61-(14)(a). Illegal gain is GI. Treasure trove is GI for year of undisputed possession.
D. Haig-Simon approach
i. The appreciation of property would be considered gross income and not required to be sold.
ii. That is, there does not have to be any realization.
E. AB – § 1011 – adjusted basis. The AB for determining gain or loss from the sale or disposition of property, whenever acquired; determined under § 1012 and adjusted under § 1016.
i. § 1012 – Basis shall be the cost of the property.
a. § 1.1012-1(a). Can be paid in cash or other property.
ii. § 1016 – Adjustment to basis.
F. AR – § 1001-(b) – amount realized. The AR from the sale or other disposition of property shall be the sum of any money received plus the FMV of the property (other than money) received.
G. Recognized – § 1001(c) – Entire amount of gain or loss on the sale or exchange of property shall be recognized.
i. Recognized in 2006 means GI has been increased in 2006.
H. Allowed and Allowable
i. Allowable is what the amount the code provides.
ii. Allowed is up to and including the amount the code provides what you can get away with.
iii. E.g. if allowable is $40K, and $35K is allowed. $35K is allowed if you can get away with it even if wrong, i.e., the govt doesn’t catch it or doesn’t get around to it.
Rule: the greater of the 2 numbers is amount to reduce AB.