Federal Income Tax Outline
1) Introduction – basics of income tax
a) Constitutional creations:
i) Article 1:
(1) Section 8 = fed gov power to tax
(2) Section 2 = direct taxes must be apportioned
ii) 16th Amend à income taxes w/o apportionment; never determined that house appreciation should be “income”
b) Progressive tax à the more you make the more you pay; what we have.
c) Regressive tax à poor pay more than the rich (TX sort of like this because of the sales tax)
d) Courts of Original Jurisdiction
i) Tax court
ii) Federal and district court
e) Income Tax appeal procedure:
i) Preliminary notice at 30 days
ii) Protest or fail to respond à letter of deficiency, 90 days.
(1) If you fail to respond, they win automatically and you will owe the money, no more appeals or protests.
iii) Choices of action:
(1) Pay and request refund
(2) File the claim, pay to stop interest meter, and continue to litigate
(3) Do not pay and risk paying interest
iv) Jury trial at the district court level only.
f) Assessing your tax rate/amount owed
i) Progressive tax system = income goes up, marginal rate goes up.
(1) Proportionality à don’t just pay more, but proportionally more.
ii) Steps to calculate:
(1) Check the rate schedule to see where you fall.
(a) EXAMPLE: Made $75,000 à 15, 107.50 + [28% x (75,000-74,200 = 800)] (2) Calculate the Effective Rate = Tax Liability/taxable income
(3) Marginal rate à determines what you will owe with a dollar more or a dollar less of income.
(4) TAXING FORMULA:
– § 62 Deductions
Adjusted Gross Income (AGI)
-Standard deduction [§63](or itemized deductions, if greater in amount)
x Tax Rate
+ Additional taxes
Final Tax Liability
2) Gross Income: the scope of § 61
a) § 61(a) = all income from whatever source derived.
i) Cesarini à found money is GI in the year its found; Becomes GI when its in undisputed possession.
ii) Old Colony Trustà payment of taxes by employer is not a gift because it’s in a business setting. Its also income to be taxed, held as additional GI.
(1) Reg 1.61-14(a) = another person’s payment of the taxpayers income taxes constitutes GI to the taxpayer unless excluded by law.
iii) Glenshaw Glass à punitive/exemplary damages are included in GI, and will be taxed.
(1) GI is any è “undeniable accession to wealth, clearly realized, over which the taxpayer has dominion.”
(2) 3 elements:
(a) Undeniable accession to wealth
(b) Clearly realized
(c) Complete dominion and control by taxpayer.
iv) Wealth acquired by illegal means is GI under § 61.
v) Increase in NET WORTH à [Haigs Simmons] Assets – liabilities.
(1) Not a taxable event: its HAS NOT been clearly realized. (until sold)
[problems p. 63]
b) Imputed Income
i) “self help” type things to imputed income.
(1) Doing things yourself – taxes, moving, own services, etc.
(2) Helvering: Living in your own house is imputed income. Do not pay taxes on the FMV of rental value of the house you live in and own.
ii) Reg 1.61-2d2i à Property transferred to employee or independent contractor: if property is transferred by an employer to an employee or if property is transferred to an independent contractor AS COMPENSATION FOR SERVICES, for an amount LESS THAN FMV, then regardless of whether the transfer is in the form of sale or exchange, the DIFFERENCE BETWEEN THE AMOUNT PAID FOR THE PROPERTY AND THE AMOUNT OF ITS FMV AT THE TIME OF THE TRANSFER IS COMPENSATION AND SHALL BE INCLUDED IN the GI of the employee or contractor.
c) Bartering – income without receipt of cash/property
i) Reg 1.61-2a1, 2d1 = services provided for barter, FMV must be included as income.
3) Chap 3: Exclusion of Gifts and Inheritance
a) §102 (a)à GI doesn’t include value of property from (1) gift, (2) bequest [personal property], (3) Devise [real prop], or (4) inheritance.
i) “Detached and disinterested generosity” made out of respect/admiration
ii) Duberstein = Cadillac given by president of Mohawke Metal to Duberstein for customer references. H: Not a gift. R: It was done with intent to keep referrals coming, was not detached, in return for Duberstein’s services.
iii) Objective Test: Intention of the transferor
iv) Whether it was a gift is determined by the trier of fact (judge or the jury)
v) Walder : bequeath to attorney in lieu of lifetime pmts. H: taxable. It was made for services rendered, agreed to in advance that this would be his compensation.
b) §102(b)(1) à DOES NOT exclude gift of the income from the property.
i) Ex. Lenders have GI from income on loans, not the repayment of the capital. [interest]
c) § 102 (c)à employee gifts = not excludable, to or for the benefit of employee
i) Reg 1.102-1f2: if employee can show it WAS NOT made in recognition of employee’s work, it can be excluded as a gift. Also if employer is family and can show it wasn’t made in scope of employment, but as a family.
[problems p. 78 & 80 & 88]
rm of tangible personal property;
(b) Be awarded as part of a meaningful ceremony;
(c) Not be disguised as compensation;
(d) Relates to
(i) Length of Service; OR
1. the employee has been in the employer’s service for 5 years or more AND
2. has not received a length of service award for the current or any of the prior 4 years
1. made to person other than a manager, administrator, clerical employee or other professional employee AND
2. only if 10% or less of an employer’s qualified employees receive such awards during the year (so that it is discriminating and not just a part of the general pay scale)
– Exampleà Allen J. McDonell = trip paid by employer was deductible as an award. It was a sales competition with prize of Hawaii trip. Concluded it was a business trip because he had to spend most the time doing for the other people.
[problems p. 112]
b) Scholarships and Fellowships:
i) §117 Qualified Scholarships = used for qualified tuition and related expenses
(1) Reg 1.117-6(c)(2): qualified tuition and related expenses à no exclusion for amounts related to personal living expenses, such as meals and lodging, or for travel and research.
(a) Room and Board = incidental expenses, not covered by this exclusion.
(2) §117 (c) (1) à services required to be performed under the scholarships stipulations IS TAXABLE income (amounts received in exchange for services (teaching, research)
(3) (d) à tuition reductions not GI if given indiscriminately
(4) Related expenses = fees, books, supplies, necessary equipment.
ii) §127 Education Assistance Programs = employees can exclude up to $5250 from GI for amounts paid by employer for edu assistance.
(1) (excess try to exclude as working condition fringe under §132 (d)).
(2) Can not be discriminatory for higher level employees
(3) §132 (c)(1)(b) = NO EXLCUSION for assistance in course for sports, games, hobbies
(4) DOES NOT extend to spouses
[problems p. 112-113]
6) Chap 6: Gains from dealings in Property
a) Factors in determination of Gain: