Federal Income Tax Outline

Class Outline:

McClendon_Fed_Tax_One_Spring_2011

Stetson Univ. College of Law

(43 pages)

Chapter 1 – Intro to Federal Income Taxation

General Impressions

1. Federal tax law discriminates (don’t recognize same-sex marriages, domestic partners) – a lot of inequality

2. Principles of timing run through most transactions

· Timing is very important

· Pay sooner or later? Getting a refund? then sooner

o Usually want to defer to a later date (let it invest a little longer

3. Match income w/ deduction in same tax year

· Have income when you actually and constructively receive income

o actual? when you receive the paycheck, money

o constructively? could have had it if you wanted to have it – when you receive the check, not when you cash it

· Cash & disbursement TP – get deductions when pay for expenses

o In theory, your ability to pay

Introduction

o What is Federal Income Tax?

· Tax people on income – generates income to pay for government

· Financing comes from individual taxation (salaries, capital gains, ect.)

· Other forms of tax:

§ Head Tax – if did a head system (ex: $5k/person), its regressive because not based on income

§ Sales Tax – applies regardless of income or ability to pay

· regressive and progressive

§ Value-Added Tax – tax different stages of production of an item (in Europe)

§ Property Tax – set at relative FMV

· problem w/ taxing ppl at a national level? Non-property owners – would encourage people not to won property.

· Tangible property (real property) & Intangible property (stocks)

o Valuation & liquidation issues with both

· US went with an income tax system:

§ Gross income – deductions = adjusted gross income

§ Issues – how do we define income & exclusions/deductions?

o §61 Gross Income Defined (p. 67)

· support obligations to children end at age of majority

· parent’s $ to kids, support during school considered a gift, not income to kid

§ detached and disinterested generosity (objective test)

o §102 Gifts & Inheritances (p. 106)

· No tax liability (primary tax liability) to recipient

· intervivos – during lifetime

Sources of Federal Tax Law

o Internal Revenue Code – “The Code” – The law – look at the index

o Treasury Regulations – Treasury’s interpretation of the law

o Internal Revenue Service Rulings, Etc. – IRS’s interpretation of the law & regulations

· Appendix 1 – p. 1079

· IRS does various things – www.IRS.gov

· Can issue various rulings

§ revenue issues

§ revenue procedure

§ issue letter rulings to individual TP

§ issue IRS buillitins, publications

§ Assume Congress knows & allows the IRS to interpret

o Court Decisions

· Tax Court (only 1 you don’t have to pay deficiency upfront)

§ have 90 days from notice to file in tax court

§ if you win, don’t owe taxes

§ Interest & penalties keep accruing

§ IRS wins the vast majority of the time (don’t want to lose)

§ In Washington, D.C., but travel throughout the US

· Fed District Courts

· Court of Federal Claims

§ for refund suits

§ have to pay deficiency & then file a refund suit

§ In Washington, D.C.

§ Judges are presumed to know the tax code better than a district judge

· presumed to be experts in tax law, but not always

· Golson rule – if the US CofA rules in a certain way, then the tax court will rule in that way

o §1 For Individual Federal Incomes

· Tax rates show how it is progressive (marginal – based on income)

· p. 21 – (2)(at bottom) – Bush Tax Cuts

§ @35% until 2012, then go back to 39.6% (over $250k income)

o Treasury Regs

· will base exam questions from them

· §1.61-1 (p. 94)

· Lost of omissions (***) are examples

· CCH tax law (on-line)

· Interpret the code

· 3 types of treasury regulations:

1. Legislative regulations – greatest level of deference)

2. Interpretive regulations

3. Procedural regulations – tell you about the procedure, how to do it

· §1221 (p. 634) defines capital assets

· not taxed at ordinary tax rates – taxed at capital gain tax rates (lower %)

· (b)(4) – almost carry the weight of the law

o great deference given

· §7805 – Authorizes interpretive regulations

· Afforded less deference

· If a long-standing interpretive regulation, then prob. will be upheld

· Regs are not the law, but are given varying level sof deference

Functions of the Federal Income Tax System

o Raise revenue (through the payment of taxes)

o Tool of social policy – tax expenditures

· encourage personal behavior (home ownership, business investment)

· § 163 – Interest (p. 160)

§ (a) interest paid is deductible BUT (h) says a disallowance on personal debt (credit cards) BUT (h)(3) allows qualified home mortgage interest

§ encourages home ownership v. renting

· § 164 – Taxes

§ allows an itemized deduction for real property

· Business incentives – above-the-line

§ § 179 – Election to expense certain depreciable business assets (p. 217)

· Businesses can deduct expenses you normally cannot deduct

· Encourages businesses to invest (in trucks, etc.)

· 400 sections – encourage employers to invest

o Implement economic policy

· Stimulate economy behavior

Questions Addressed by Income Tax System

· What items included in gross income (gains & losses)

o 3 Prongs:

i. Realization

ii.