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Federal Income Tax
South Texas College of Law Houston
Musselman, James L.

FEDERAL INCOME TAX
 
I. INTRO
– Fed Cts have the authority to interpret the Code
– The Income Tax Formula
                        Gross Income
            –           Deductions     
                        Taxable Income
            x          Tax Rates       
                        Tax Liability
            –           Tax Credits    
                        Tax Due
 
– Gross Income involved receipt of something, deductions is something you pay out.
– Taxable years are almost always calendar year.
 
II. TAX RATES GENERAL INFO
            1) §1- info on tax rates—head of households, married joint…etc.
                        * rates in § are always changing
            2) Graduated Tax Rate Structure- more you make, higher % you pay. This is          considered a progressive system.
            3) Bottom half of income earners only pay about 4% of total income tax collected.
 
III. GROSS INCOME
            1) Pertinent Codes
                        a) §61(a)- gross income means all income from whatever source derived,                             including but not limited to the 15 items specifically listed.
                        b) §1.61-1(a)- gross income includes income realized in any form, whether             in money, property, or services.
                                    * all inclusive language was used by Congress to exert the full                                             measure of its taxing power.
                        c) §1.61-14- finder of treasure trove is in receipt of taxable income, to the                           extent of its value in US currency, for the taxable year in which it is                           reduced to undisputed possession.
                                    * income from all sources is taxed unless taxpayer can point to an                                        express exemption.
            2) Definition of Gross Income- undeniable accessions to wealth, clearly realized,  and over which the taxpayers have complete dominion.
                        a) Accession to Wealth- increase in money, wealth, benefit or worth (ex.                             finding money, work paying your taxes…)
                        b) Clearly Realized- some kind of notorious action of event that                                          objectively reveals somebody has had an accession of wealth. (ex: finding                                 money is that event)
                                    * Property is hard to realize, usually need to do something with it                                        to get clear accession to wealth. (selling property is best example,                                            mere appreciation in value is not enough)
            3) Hierarchy of Interpretation
                        a) is it addressed by the Code itself?
                        b) if not, then we look to CL or state law
            4) Substance Rather than Form
                        – it is immaterial if taxes are directly paid to govt by employer. The                                     discharge by a 3rd person of an obligation to him is equivalent to receipt                                   by the person taxed. (business paying your taxes, that tax is considered                                income to you, this prevents a floodgate of people asking business to pay                                     bills—light, house, car- to where only what’s left is taxed.)
            5) Imputed Income- monetary value of goods and services that someone produces             and consumes within the immediate family unit. Using property somebody            already owns.
                        (Ex: Musselman doing his own tax return, otherwise he would have paid                            2k for someone to do it. Growing your own veggies and eating it. NOT                             TAXABLE)
                        * applies for yourself and your family only, not other people
                        * Dr. and Lawyer trading services, each must include value of service                                 received.
            6) Recovery of Capital Concept- A buys property for 1k. He later sells it for 3k.     The 1k he made back is recovery of capital he spent to buy it. The extra 2k is            taxable gross income.
                        * That 1k is called basis.
            7) Gross Income Checklist
                        a) Not a mere return of capital; AND
                        b) Not accompanied by an acknowledged obligation to repay; AND
                        c) Not excluded by a specific statutory provision
 
IV. GROSS INCOME EXCLUSIONS
            -Remember, always decide if gross income first, then worry about exclusions
            1) Gift §102(a)- proceeds from a detached and disinterested generosity, out of      affection, respect, admiration, charity, or like impulses. Most critical     consideration is transferor’s “intention.”
                        * this def not in statute itself, but it’s interpreted as such.
                        * There must an objective inquiry as to whether what is called a gift                                    amounts to it in reality. (Diff than CL donative intent)
                        a) Whether a transfer amts to a gift is one that must be reached on                                       consideration of all the factors.
                        b) Decision should be based ultimately on the application of the fact                                   finding tribunal’s experience with the mainsprings of human conduct to                              the totality of the facts of each case.
                        c) Quid pro quo- key factor, if you see benefits being exchanged, not                                  likely to be a gift.
                                    * existence of a k or agrmt evidence its compensation and not gift.
                        d) Employee Gifts 102(c)- Doesn’t exclude from gross income any amt                               transferred by or for employer to or for benefit of employee.
                                    * if employee is also a family member, must show transfer is                                                outside scope of employment.
                        e) Tips and Tokes- NOT gifts, quid pro quo, compensation for either good                          luck or a job well done.
 
            2) Bequests, Devises, and Inheritances
                        – Remember, transfers at death only, gifts are intervivos.
                        a) Same idea as gift, it’s a fact question of detached and disinterested                                generosity.
                        b) “Inheritance” as used in the statute is not solely applicable to cases of                             complete intestacy.
                                    * Compromise case, he got is money as a settlement, but the                                                substance of his claim was that he wa

                                     – Bargains at employer related eating facilities ok if located                                                  on or near premises and revenue exceeds or meets                                                                 operating costs
                                                – Frequency is important, also, is accounting for it                                                                 impractical? Is the value small? Is it hard to calculate? All                                                    factors to consider.
 
                                    v) (a)(5)- Qualified Transportation Fringe- 132(f) excludable value                          of benefits provided to an employee in the form of: transportation                                             in a commuter highway vehicle between an employee’s residence                                           and place of employment, transit pass…etc.
                                                – A cash option for commute expenses would be                                                                   includable in gross income.
                                                – Policy behind is to encourage bus, carpool…etc.
                                                – $175 max/month for qualified parking, defined 132(f)(c)
 
                                    vi) (a)(6)- Qualified Moving Expense Reimbursement
 
                                    vii) (j)(4)- Athletic Facilties- excludable value of use of facilities                                          on premises from employee or family members.
 
                        e) Employee as defined within this section includes spouse and dependent                          children.
                        f) Note on discrimination rule.  132(j)(1)
                                    i) only applied to a(1) and a(2)
                                    ii) only comes into consideration when a “Highly Compensated                                           Employee” (defined in 414(q)) is making the exclusion
                                    iii) Look to see if the discount creates classes of people
                                                1) is a reasonable classification?
                                                2) does it favor only highly compensated employees?
                                                Ex: discount to only warehouse workers, may be rsbl, and                                                    they are not highly compensated, so classification is okay.
 
            4) Life Insurance
                        a) §101(a)(1)- gross income does not include amounts received (whether                             in a single sum or otherwise) under a life insurance contract, if