Select Page

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

I.                   Introduction
a.       Tax: a compulsory exaction by a government exercising its sovereign power to provide revenue for the general government
b.      1913 was the start of the first income tax after the adoption of the 16th amendment
c.       16th amendment
                                                              i.      allowed for the adoption of the present day income tax and got over the direct tax issue
                                                            ii.      Emphasis on 16th amendment’s “from whatever source derived” statement
                                                          iii.      Art. I, Sec. 8, Cl. 1 grants Congress the power to collect taxes but it must impose direct taxes by apportionment and indirect by rule of uniformity
1.      direct: a tax demanded from the very person who is intended to pay it
2.      indirect: a tax paid by a person who can shift the burden
3.      apportionment: congress sets out a max $ needed, then divides it among the states with regard to each state’s population
4.      uniformity: same to all states, regardless of population
d.      Four primary sources for income tax law
                                                              i.      Internal Revenue Code
1.      Part of USC
2.      Broken down by titles
a.       Title, Sub-title, chapter, sub-chapter, part, sub-part, section, sub-section, paragraph, sub-paragraph, clause, sub-clause
b.      IRC: Title 26, Subtitle A, Ch. 1, Sub-Chapter a, b, o, p
                                                            ii.      Cases
1.      Courts do two things:
a.       Interpret statutes/regulations
b.      Create judicial doctrines
2.      Three courts of original jurisdiction
a.       US Tax Court: Non-refund tribunal, no jury trial, Art. I. ct.
b.      Federal District Court: Refund tribunal, Art III. Ct
c.       Court of Federal Claims: Refund tribunal, no jury trial, Art. I ct.
3.      Appeals Courts
a.       Federal Court of Appeals
b.      Supreme Court
                                                          iii.      Administrative Branch
1.      IRS: part of department of treasury
a.       Secretary of Treasury: Henry Paulsen
2.      Duties of IRS
a.       Promulgate regulations
                                                                                                                                      i.      2 types of regulations
1.      Legislative: as good as the code
2.      Interpretive: how secretary feels the code should be interpreted
b.      Also put out rulings, which get information out to the public about how certain transactions are dealt with
                                                          iv.      Treaties
e.       Rates
                                                              i.      §1(a): how to compute tax liability of a tax payer
1.      tax liability on the taxable income
2.      table gives us the rates
3.      base (taxable income) x rate = tax liability
                                                            ii.      Progressive tax system (US)
1.      as taxable income increases, rates increase
                                                          iii.      marginal rate: last dollar taxes
                                                          iv.      average: rate on all dollars
                                                            v.      tax liability / taxable income = average rate
                                                          vi.      calendar year: fiscal year
1.      taxable income is based on 1 year
f.       Taxable Income
                                                              i.      §63: taxable income = gross income – deductions allowed
                                                            ii.      §63(a) applies if you elect to itemize, otherwise (b)
                                                          iii.      Taxable income = adjusted gross income
– (1) basic standard deduction
 (2) additional standard deduction
II.                Gross Income
a.       §61: gross income: all income, from whatever source derived
                                                              i.      Language comes from 16th amend.
b.      §62: adjusted gross income: (only applies to individuals) à deductions are taken from gross income to compute adjusted gross income
c.       §162-165: deductions sections: deductions in §62 have to be allowed somewhere else, this section does not permit any deductions
d.      When attacking gross income questions, ask:
                                                              i.      Is it gross income? §61(a)
                                                            ii.      How much?
                                                          iii.      When? (don’t really get to this)
e.       Definition of income: (Glenshaw Glass)
                                                              i.      Accession to wealth
                                                            ii.      Clearly realized (taxpayers position has to change, ex. a sale)
                                                          iii.      Over which taxpayers have complete dominion
f.       Just because it’s income, doesn’t necessarily mean it’s gross income
                                                              i.      Need to look for exclusions
g.      Old Colony: The discharge by a third party of an obligation to him is equivalent to receipt by the person taxed
h.      If you receive property for services, still treated as income
i.        Loans are not income or gross income:
                                                              i.      Not an accession to wealth
j.        Steps:
                                                              i.      Look to see if it is income (according to GG definition)
                                                            ii.      See if an exclusion applies, if not à gross income
k.      Income without receipt of cash or property
                                                              i.      This applies when the taxpayer is using their own property or doing their own service
                                                            ii.      Rule: imputed income is NOT income (so not gross income)
                                                          iii.      Value of living in own house is not taxable because it would be equivalent to laying a direct tax (Helvering v. Independent Life).
                                                          iv.      Corporation’s living abode, corporation is a separate tax payer (Dean v. Commissioner)
l.        From this section (CH. 2):
                                                              i.      Gross income: all income from whatever source derived
                                                            ii.      Definition of income
III.             Exclusion of Gifts and Inheritances
a.       Rules of Inclusion and Exclusion
                                                              i.      Now looking at exclusions sections: income, but excluded for a certain reason
b.      Gifts
                                                              i.      §102: excludes gifts and inheritances
1.      applies to property and services
                                                            ii.      reasons for excluding gifts:
1.      administratively difficult to compute income from gifts
2.      people don’t think of gifts as income, important that the tax system is fair because it’s a self-assessment system
                                                          iii.      §102(b)(1): income from property (interest) is not excluded
1.      not an inclusion section, excludes from exclusion à §61(a) is for inclusions
                                                          iv.      Duberstein: For gifts, need to look at donor’s intent
1.      Detached and disinterested generosity is required for something to be a gift
c.       Employee Gifts
                                                              i.      §102(c): exclusion to exclusion: Employer/Employee Relationships
1.      exceptions to §102(c)(1): §74(c), §132(e)
                                                            ii.      another exception to §102(c) à Reg. 1.102-1(f)(2): Two requirements for f(2) to apply:
1.      EE shows transfer was not made in recognition of EE’s employment (show it was attributed to familial relationship)
2.      extraordinary transfer to natural objects of ER’s bounty
d.      Bequests, Devises, and Inheritances
                                                              i.      Definitions:
1.      Bequests: personal property b will
2.      Devises: disposition of land by will
3.      Inheritances: disposition of prop/land without a will
                                                            ii.      Settlement of a will still treated as inheritance and excluded from GI (Lyeth v. Hoey)
                                                          iii.      If the inheritance is in compensation for services then not excludable (Wolder)
1.      to decide look at motivation à “long and devoted service” usually not considered actual service and excluded from GI
IV.             Employee Benefits
a.       Exclusions for Fringe Benefits
                                                              i.      Fringe benefits are income
                                                            ii.      §132: fringe benefits are excluded
1.      if in this section, not covered in any other section (except e & g)
a.       Valuation of fringe benefit: 1.61-21(b)
                                                          iii.      §132(a)(1): exclusion for no additional cost service
1.      §132(b): definition of no additional cost service: 2 elements:
a.       Line of business requirement
b.      No substantial additional cost
                                                          iv.      §132(j)(1): if employee is not highly compensated does not apply
                                                            v.      ** if under (a)(1) or (2), has to be non-discriminatory
                                                          vi.      §132(a)(4): de minimis fringe benefit
1.      can still exclude if highly compensated because that requirement only applies

employer for educational assistance provided the educational assistance meets certain requirements
                                                      viii.      Athletic scholarships: if you have to play a sport to get a scholarship §117(c)(1) would apply and it would NOT be excluded, BUT:
1.      Rev. Ruling 77-263: 3 requirements
a.       Not required to play
b.      Requires no participation in sport
c.       Can’t cancel scholarship for not playing
VI.             Gain from Dealings in Property
a.       Factors in Determination of Gain
                                                              i.      Learning how to calculate gain and loss
                                                            ii.      Two concepts:
1.      basis
2.      amount realized
                                                          iii.      §1001:gains derived from dealings in property à included in gross income under §61(a)(3)
                                                          iv.      §1001(a): definition of gain
                                                            v.      When is it applied? After the sale or disposition of property
1.      this is a realization event that triggers computation of gain or loss
                                                          vi.      1.1001-1(a): 2 events:
1.      conversion of property into cash à sale of property
2.      exchange of property
                                                        vii.      Amount Realized – Adjusted Basis = Gain or Loss
                                                      viii.      §1001(b): amount realized defined
                                                          ix.      §1011: adjusted basis
                                                            x.      Steps?
1.      anytime there is a sale/disposition of property go to §1001(a) and figure out gain or loss
2.      Figure out basis à §1012 (or other applicable sections)
3.      §1016, adjustments can make it go up or down and make the adjusted basis (§1011)
4.      §1001(c): recognize gain or loss
5.      characterize
6.      include in GI
                                                          xi.      Philadelphia Park Amusement:
1.      court trying to figure out the tax consequences of an abandonment (loss)
2.      losses à §165
3.      §165(b): losses are limited to adjusted basis is
4.      to figure out the basis, need to look at the fair market value of property received
5.      assume arms length transaction, that the value of things exchanged are equal
                                                        xii.      Recourse vs. non-recourse (in reference to loans):
1.      recourse: lender has a recourse to go against borrower’s assests
2.      non-recourse: lender can only for the security for the loan
                                                      xiii.      §263(a): no deductions for new buildings or improvements
                                                      xiv.      §109: gross income does not include income (other than rent) derived by a lessor of real property on the termination of a lease, representing the value of such property attributable to buildings erected or other improvements made by the lessee
                                                        xv.      §1019: if section §109 applies do what §1019 says (its trumps §1016)
b.      Determination of Basis
                                                              i.      Cost as Basis
1.      1012: Basis of property – cost: the basis of property shall be the cost of such property
2.      1.61-2(d)(2)(1)(i): in computing gain/loss basis should be the amount paid for the property and the amount included in GI
                                                            ii.      Property Acquired by Gift
1.      §102: when you receive a gift, not included in GI
2.      detached and disinterested generosity of donor
3.      once you receive a gift, need to figure out basis
4.      §1015(a): transferred basis rule: donee’s basis is transferred from donor
5.      §1015(d)(1)(a): exception to general rule: increase basis by the amount of gift tax paid