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

Federal Income Tax
Fall 2014
11/12, Final Class
7 parts of course:
1.      Intro
2.      Add- (To items of gross income and things we exclude from gross income)
3.      Deductions  (What we subtract)(business expenses, Personal expenses that are deductible- charitable and casualty losses-, and Business with repairs and depreciation and amortization)
4.      Timing (when is something income, when is it deductible
5.      Structural considerations
6.      Final deductions – (Medical Expense Deduction)
7.      Multiply – capital gains, capital losses
(1) INTRO:
Hierarchy of authority: (The pecking order of different authorities)
1.      US Constitution: top dog b/c it has the supremacy clause (means the constitution is supreme to all other law)
2.      Statute (Internal Revenue Code): powerful b/c enacted by congress, those we elect and statutes signed off by the president
3.      Controversy on Next Most Important:  Case Law OR Legislative History OR Regulations (controversial which one it is)
a.       Case law: we know all about
b.      Legislative History: would think that is very power b/c that is what congress intended it to mean, HOWEVER courts interpret legislative history so might think courts are more powerful than the legislative history
c.       REGUATLIONS: also very power on the same level, b/c they are promulgated through the administrative procedures act, and they generally go through notice and comment.  They do NOT need any congressional action.  Regulations that are more recent are more powerful than older regulations.
4.      The Revenue Ruling: bottom of the hierarchy of authority. Its the opinion of the IRS (the opinion of one party to a potential lawsuit) they do not go thru the notice and comment period like regulations, so they are just the opinion of the IRS.
Forum Shopping: when there is a tax dispute.  Taxpayer will have choice btw 3 TC’s
Ø  Tax courts: judges are tax experts.  Need NOT pay the deficiency asserted by the IRS before you file your petition in the Tax Court (you can go to the tax court w/o paying).  The Tax court travels around (Goes to all major cities in the US).  NO JURY.  Judge is finder of fact.
Ø  Court of Claims: does NOT travel around, sits in DC.  No jury.  Judges generally are not tax experts most dockets filled with non tax cases.
Ø  Local US District Courts:  Judges clearly NOT tax experts.  Dockets will with all other things, other than tax cases.  Only TC where you get a jury for a tax case, which makes this venue appealing to a tax payer.
Chronology of a Tax Dispute:
Ø  Starts with the tax payer filing a return (Might say this isseen as an offer from the tax payer)
Ø  If IRS wants to challenge then they can Audit the tax-return (3 different types)
o   Field Audit, Office Audit, or a Correspondence Audit
Ø  If you don’t like what the IRS tells you at the end of an audit, you have an option for an administrative appeal
o   You can appeal the revenue agents report to the IRS field office and get a fresh look from a different IRS employee.
o   If you don’t like what the IRS appeals officer tells you then you can go to trial. 
o   And if you cant pay the asserted deficiency the only trial court you can go to is the tax court, BUT if you can the asserted deficiency file a claim for refund and if the IRS denies it then you can go “forum shopping” (can go to tax court still, court of claims, or us district court)
Statutes of Limitations:
Ø  General Rule: 3 years from the filing of the return OR the Due date of the return IF LATER..    
o   In other words, if you file your tax return on March 10th, 2015 for the 2014 tax year (meaning your going go be a little early and you don’t want until April 15).  Intuitively you would think the SoL would run from 3 years since you filed being March 10th 2018 BUT that would be wrong, if you file early, the SoL is 3 years from the due date SO the IRS would have until April 15 of 2018 to start the audit/file the statutory notice of deficiency.
o   So again, its 3 years from filing or the due date of the return if later.
Ø  How many years does the IRS have if you omit more than 25% of your gross income from your tax return? 6 years
Ø  Also, the SoL never runs if you commit fraud on the tax return you file or if you fail to file a return.
Choices in Designing a Tax System:
Ø  Flat Tax System: higher income tax payers pay more in tax, but all income is taxed at the same rate
Ø  Progressive Rate: tax payers who earn more income pay a higher rate on that higher income, so they would have a higher marginal and average tax rate.
US constitutional (16th amendment- adopted in 1913) says congress can lay and collect taxes on income from what-ever source derived
Ø  Tells us we cannot have a gross receipt tax, we have do allow tax payers a deduction for the expenses they incur in generating their income (But constitution does not tell us very much)
What tells us much more is IRC §61:
Ø  Glenshaw Glass Case: tells us that in §61 congress chose to exercise the full extend of its taxing power under the constitution
o   §61 says gross income incude income from what ever source derived including 15 specific items, but it does not give us guidance on what else is income.  As a result the courts have tried to give us definitions of income. (U.S. Supreme courts definition of income, 1920, in Isner v. Mcumner)
Ø  Isner v. Mcumber: told us that income is gain derived from capital from labor or both.  In this particular case, that test de

ction, Respect, or Like Impluses
2.      Ex. Oprah’s TV show awards a car to everyone in their audience.  Is it a tax free gift??
a.       Method of analysis we look toward the transferor’s intent (Which would be either Pontiac or the Opera Show) – Did they make that transfer with the CAARL Factors??
                                                                                                                                                   i.      Speculated it was done for some economic benefit and an advertising scheme. SO it is likely it was not motivated by the CAARL factors.  So the studio audience was taxable on the value of the car.
b.      102-c: employer cannot make a gift to an employee (So transfer from an employer to an employee are taxable) UNLESS the transfer is substantially attributable to a familiar relationship (That’s Regulation 1.102-1-f-2
                                                                           i.      SO, if your sister is a sole proprietor and your working for your sister and every year for the last 20 years she has been giving you $100 as a birthday present, even though your working for her and she is your employer, when she gives you $100 on your birthday that s probably tax free.
                                                                         ii.      ON THE OTHER HAND, if your working for your sister and she never pays you any wages and on your birthday she pays you $50,000, that 50,000 is probably taxable because that money is not substantially attributable familiar to your familial relationship and is probably substantially related to the work you provided.
3.      BEQUESTS: Code Section 102-a
a.       Code 120-a: Says if you receive it from a decedent (unless it’s a retirement plan or something like that) its TAX FREE.
b.      Great debate about the practical nurse who was taking care of Aunt Tilly.  Aunt Tilly left her $30,000 in her will.  Newman (book author) indicates that should be taxable under the same circumstances as Duberstein, but DRENNAN prefers to argue based on the statutory language of Bequests and that it should be tax-free.
                                                                           i.      As far as we know there are no cases on Bequests.