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Federal Income Tax
Southern Illinois University School of Law
Drennan, William A.

FEDERAL INCOME TAX
 
GENERAL INFORMATION
Skeleton of an Income Tax Return
i.                     Identify TAXPAYER and TAXABLE YEAR
ii.                   Calculate GROSS INCOME
a.       Wages
b.       Interest
c.       Dividends
d.       Gains from Dealings in Property
e.       Other Income
iii.                  Minus ABOVE THE LINE DEDUCTIONS
a.       Trade and Business Expenses
b.       Alimony
iv.                 Equals ADJUSTED GROSS INCOME
v.                   Minus ITEMIZED DEDUCTIONS (or STANDARD DEDUCTION $5000 if single)
a.       Charitable Contributions
b.       Real Estate Taxes
c.       Casualty Losses
d.       Medical Expenses
e.       Income Tax
vi.                 Minus PERSONAL EXEMPTION $3200 (dependents $3200)
vii.                Equals TAXABLE INCOME
viii.              Multiplied by TAX RATE
ix.                 Subtract TAX CREDITS
x.                   Equals TAX DUE
 
Hierarchy of Tax Authorities
·         US Constitution (16th Amendment)
·         Internal Revenue Code (Title 26 of US Code)
·         Legislative History (debatable)
·         Cases
·         Regulations (passed by administrative agency instead of congress)
·         IRS Public Rulings
·         IRS Private Letter Rulings
a.       TP initiated…tells facts, rule& how think they apply
b.       Public info but can’t be cited as precedent…but does show was IRS was thinking
·         Notices, Announcements (Volunteer guidance or done to stop a transaction)
·         Forms, Instructions, Publications
 
3 Separate Trial Courts in a Tax Case
i. TAX COURTS:
·         Created by the Constitution
·         Don’t have to pay the tax…only have to pay a $60 filing fee to get in
·         Judges are experts @ this level
·         Predictable
·         No jury trial
ii. DISTRICT COURT:
·         Can get a jury trial
·         Must pay what IRS says you owe, then sue for a refund
·         Not predictable
·         Judges are not experts
iii. COURT OF CLAIMS
·         No jury trial
·         Must pay what IRS says you owe, then sue for a refund
·         Attractive b/c can take strange positions
·         ½ predictable, ½ expert judges (they do other cases too)
 
How an Audit Works
i. STEP 1: Correspondence
1.   IRS has 3 years to dispute a tax return §6501
a.   6 years if more than 25% of what you owe
b.   Forever if you don’t file a return or you file a false return
2.   Office Audit
a.   IRS makes you come in & bring all your documents
3.   Field Audit
a.   IRS goes to the company
4.   Revenue Agents Report (RAR)
a.   Basically says where the agent thinks you made a “boo-boo.”
b.   You have 30 DAYS TO RESPOND
i. Can “Protest” – Basically saying you still disagree
ii. STEP 2: IRS Appeal
         1.   IRS gives you a 2nd chance to prove they were wrong
2.       90% of cases settle
3.       Appeal w/ IRS officer not the court
4.       He may make you a better deal
                                    iii. Trial Court
1.      If you don’t agree w/ IRS officer, he will issue a statutory notice of deficiency (90 day letter) to petition to the court
2.      NO EXTENTIONS –if you let it pass, then you lost your opportunity and must pay
                                    iv. US Court of Appeals
                                     v. US Supreme Court
                                    vi. Bill – IRS Collection Division (bill collector)
 

me, unless they are specifically exempted from by the statute.
 
3 PART INCOME TEST (Glenshaw Glass)
1.       Accession to Wealth
2.       Clearly Realized (Bring into concrete existence)
3.       Complete Dominion/Control
 
Gains (Income) from Dealings with Property – 61(a)(3)
                                    Realization
§1001: Determination of amount of and Recognition of Gain or Loss
a.   §1001(a): Computation of gain or Loss
The gain/loss from the sale or other disposition of property shall be the amount realized over the adjusted basis.
A/R – A/B= Gain/Loss
b.   §1001(b): Amount Realized
Amount realized from sale or other disposition of property shall be the sum of any $ received plus the fair market value of the property (other than money) received.
$ received + FMV of property
 
   Basis
§1012 – Basis is the cost of the Property
 
Commissioner v. Glenshaw Glass Company
·         Are punitive damages income from whatever source derived within the meaning of IRC § 61?
·         Yes: Congress intended a broad reading of §61, and windfalls flowing from culpable conduct are within the language
 
                   Analysis for Test
·         Section 61 (If its in the list, it is gross income. If not, is it included in catch all?)
·         Glenshaw glass test
·         Regulation if there is one
·         Policy Arguments