Federal Income Tax Richmond Fall 2016
Federal Income Tax Chapter 1, Chapter 2, and Appendix 1
Appendix 1 Researching the Tax Law
1954 Code = the 1986 Code à continuity in the codes
Cases decided under the 1954 code can be used as authority for interpretation/application of the 1986 code
Ambiguous Language/Application of the Code
Legislative History: American Taxpayer Relief Act of 2012 and Vol 3 of U.S. Code Congressional and Administrative News (1954)
Regulations issued by the Treasury –have the force of law. §7805(a) gives the Secretary of the Treasury general authority to prescribe all necessary rules and regulation for the enforcement of the Code. The most important administrative interpretation of the provisions.
Treasury promulgates regulations under the Administrative Procedure Act published in Fed Register à this gives the public an opportunity to comment à proposed regulation can also be published as temporary regulation effective immediately à at the expiration of the comment period/changes made Treasury publishes regulation as Treasury Decision (this is its final form) § 1 –# tax code regulation is referring to
3 flavors: final, temporary, proposed
Official Rulings Issued by the IRS à found weekly in Internal Revenue Bulletin and semiannually in Cumulative Bulletin
Revenue Rulings –result of (a) TP’s request for advice w/ respect to proposed course of conduct or (b) IRS’ position on issues arising from audit of TP’s return or fed crt decisions.
Can be relied upon if TP’s circumstance are substantially the same
Cited as precedent supporting a position
Revenue Procedures –statements of the IRS regarding internal management operations
Represent interpretations of statutory language
Interpretations by the Tax Crt, U.S. Fed Dis. Crts, Fed Crt of Appeals, and U.S. Fed Claims
Regular Decisions –published in Tax Crt Reports (TC) and usually involve unresolved important issues
Memorandum decisions –unpublished and can be found in RIA Tax Crt Reported and Commerce Clearing House
TC Summary Opinions –small case division
IRS will issue “Action on Decision” –a notice of acquiescence or of non-acquiescence –when crts rule against IRS when the IRS finds that it would be helpful. DOES NOT mean IRS accepts crts’ reasoning, DOES mean IRS accepts crts’ conclusion
Before relying upon a case consult Shepard’s Federal Tax Citations to determine if other authorities have superseded or modified the ruling. DO NOT simply rely upon the crt’s interpretation
Tax Notes and Tax Management Portfolio = helpful in explanations and planning pointers
Going to tax crt ≠ require the plaintiff to pay 1st
if P loses… they must pay the taxes + interest
District crt/crt of fed claims paying $ 1st, then suing to get $ back
“commissioner” in the case name tells you the case was filed in tax crt
tax crt decision is similar to a declaratory action
Chapter 1 Introduction to Federal Income Taxation
8/23/16
Focus is on I tax –gains, losses, deductions
D = pro-tax payer, reduce I from GI to TI
Personal Expenses ≠ D
§ 215 on exam!!!
Bottom line question –is this set of facts going to result in my client paying more tax OR less tax????
By virtue of this event did my client become wealthier?
Yes? Worry is C paying more tax
Does this C have income?
§ 1 -% for TAXABLE I. –CH. 31 deals w/ Capitial gains and lossess. Will come back to § 1
à when client says is this “taxable” they are referring to GI
à expect as otherwise provided wherein this subtitle
à do not need to itemize. § 62 = a definition section * come back and look @ what is defined as ATL D.
I ≠ defined. It is I unless state otherwise as an exception
List in § 61 ≠ exclusive, even if item is not listed it does not mean it is I and even if item is listed, it does not mean it is I.
*the tax code prefers business tax payers more than individual tax payers. Business tax code is only 1 section
bifurcated definition in § 63 –Ds only when you itemize
8/25/16
When is I GI? 2 accounting methods:
(1) Accrual Method -include the A/R and checks. The TP reports I when the I is earned
§ 448 prevents publicly traded companies from using the Cash Method for reporting.
(2) Cash Method –the TP reports I when the I is received
§ 448 limits the Cash Method
in this course, for our purposes, all TPs = Cash Method
the norm for individuals
2 kinds of received :
(1) Actual Receipts and
(2) Constructive Receipt: set aside w/o exception, but TP has not actually taken yet.
To Whom is it I? sometimes the person who receives the I ≠ the person it is I to.
What kind of I is it? (the character)
capital gain I is taxed at a lower rate than other I
investment
different sets of rules
How Much I?
exclusion is limited in amount
particular item may not be all GI
scholarship –if scholarship covers tuition, room, and board. Only the part of the scholarship that covers tuition is excluded
state and local gov’t bonds and interest paid by federal gov’t is not taxable § 103
example –lower interest rate but is tax exempt. The state/local gov’t can mess around w/ the market. IBM bond example, FL offers lower interest rate on a bond but the interest is tax exempt.
Is it Deductible? Is there a code that creates an exception?
Deductions separated into 2 types:
Investment: investment losses
Personal: interest(mortgage edu), state local taxes, personal clausality .
When is it deductible?
Which accounting method are you using? Accrual Method? Cash Method?
Expense vs Capital Expenditure
§ 162
expense = relatively short life
capital expenditure = greater life, 1 yr +
Capital expenditure, cannot deduct the entire cost in 1 yr. concept that allows you to recoup depreciation a little bit at a time as its useful life.
What is the Character of Outlays?
Limits the amount of loss that can be deducted if the sale of a capital asset is a loss
Credit = a dollar for dollar reduction in tax
Deduction = a dollar for dollar reduction in income
Evaluating Tax Liability
2 Qs: (1) what is the applicable tax rate? And (2) What is the tax base?
1. Gross Income –all income from whatever source derived. § 61
2. Adjusted Gross Income (AGI) –GI minus above-the-line deductions (ATL) § 62
many of Ds BTL (business, business expenses of employees, personal) are effected by 1+ formulas based on AGI.
One more important thing, but I missed it.
3. Deductions (D) –costs incurred in producing income and some expenditures. Start at § 161, § 262
4. Calculating Adjusted Gross Income
5. Taxable Income § 63
6. Tax Rates -§ 1
(p. 21-51) Chapter 2 Gross Income
Concepts and Limitations
Realized Income (RI) –payment received in the form of property or services.
§§ 1.61-1(a), 1.61-2(d)(1)
Fair M
constitutes taxable gain to the employee
The tax was paid in consideration of the services provided by the employee and the employee benefited… this = I
Agreement to provide services was w/ the express agreement that income taxes would be paid
Crt ≠ answer whether this is a tax upon a tax because it was never asked.
Note –Safe Harbor Water Power Co. a crt upheld the pyramiding of tax liability in appropriate cases.
(?) what about in closing agreements when sellers agrees to pay closing costs and taxes? That is a benefit to the buyer. Or does this already happen when they tax? If not then why not? It is part of the consideration.
Revenue Ruling 79-24
Per § 1.61-2(d)(1)
If services are received instead of $, the FMV = included I
If services are stipulated at a price, the price is presumed to be FMV of compensation when there is absent contrary evidence.
McCann v. U.S., U.S. Crt of Claims (1981)
Analogous to compensation § 61(a)(1)
Employer paid expenses for a trip is I subject to the FMV
McCann’s expenses were paid as a reward for her services
She was not required to attend
(?) is it different when the employee’s attendance is mandatory? –
in real world employer should be reporting interaction between employer and employee
brings another problem to light… how much?? § 1.62-2(d)(1) àFMV
employers cost is objectively verifiable
Pellar v. Commissioner, US Tax Crt (1955)
Bargain Purchase case
The purchase of property for less than its value does not, of itself, give rise to the realization of TI
The cost of the construction and FMV exceeded the agreed to price, the construction co did it out of goodwill
This is similar to lavish gifts
Roco v. Commissioner, US Tax Crt (2003)
1986 Code Case
Qui Tan Payment
GI includes rewards
Pp 135, 138-40 Scholarships & Prizes
Prizes = GI
S. 2650 –Olympic and Paralympic medals are excluded from GI
Awards based on religious, charitable, scientific, educational, artistic, literary, or civic achievements, provided the recipient was selected w/o any act on the part of the recipient and not required to render substantial future services ≠ GI
§ 74(a) introductory language get out of jail language in 74(b), (c), (d), and 117
Basically saying GI but there may be an exception
§ 74(b)(3) only applies when recipient gives up the prize, designates a gov’t unit or qualifying charity to which the payor transfers the prize, and the designation is made/carried out before the award is used
watch out for the exceptions under 74(b)(1)-(3)
74(b)(3) –can’t keep the award can’t benefit from it
Cannot also claim a charitable D because ≠ GI
§ 117 excludes scholarships and fellowships from GI
Generally, means money for tuition and related expenses
