Basic Federal Income Taxation
Outline Fall 2006
Federal Government’s Right to Collect Income Taxes
16th Amendment of the Constitution
i. The Congress shall have power to lay and collect taxes on incomes from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration
Statutory Basis for the Federal Income Tax
Internal Revenue Code (IRC) at Title 26 of the US Code
i. Current body is based essentially on the Tax Reform Act of 1986 – generally revised every few years
ii. Constitution requires tax bills originate in the House (Ways and Means Committee) and then proposed litigation is reviewed by the Senate Finance Committee
What agency administers the IRC, and how?
The IRS – collects and makes sure everyone has paid his or her share
Treasury Regulations – some called by the Code specifically (carry the weight of a statute); others more interpretive and given a lot of weight by courts (but not bound by them)
Revenue Rulings: Statement by the IRS that interprets and applies the law to a specific set of facts (IRS is bound by these, but courts are not – though they are given a lot of weight)
Private Letter Rulings: Issued on request of individual TPs for a fee (binding on the IRS with respect to that particular TP); courts use them as evidence of how the IRS may respond to a given set of facts
Where can the TP turn if she and the IRS can’t agree?
If already paid taxes – US District Court or US Claims Court
If hasn’t paid – US Tax Court
i. Tax cases can be appealed from lower courts to a federal Circuit Court – then subject to certiorari by the Supreme Court
What is Income?
Measure of the TPs ability to pay his share of the costs of government
Any compensation or economic benefit received by the TP during the tax year
i. Can be in the form of cash, cash equivalents (i
What are “above-the-line” deductions?
Available to all individual taxpayers – both to those who take the standard deduction or chose the itemized.
Subtracted from GI to arrive at AGI
i. Include contributions to IRAs, student loan interest, moving expenses, and alimony.
What are “below-the-line” deductions?
Subtracted from AGI to arrive at TI
i. The TP may avail himself of the standard or itemized deductions, but he may not do both.
What is the Standard Deduction?
Fixed amount set by statute that the TP can deduct from AGI to arrive at TI.
May be taken in lieu of, not in addition to, itemized deductions
What are Itemized Deductions?
Class of deductions that can be subtracted from AGI as an alternate to the standard deduction.