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Federal Income Tax
SUNY Buffalo Law School
Wooten, James A.

I. INTRODUCTION TO FEDERAL INCOME TAX 1
II. GROSS INCOME.. 2
– bargain vs. compensation
III. EFFECT OF AN OBLIGATION TO REPAY® LOANS AND PREPAYMENTS 8
IV. GAINS FROM DEALINGS IN PROPERTY.. 13
V. GIFTS. 15
VI. DISCHARGE OF INDEBTEDNESS 20
VII. FRINGE BENEFITS. 25
VIII. BUSINESS & PROFIT-SEEKING EXPENSES. 31
IX. CAPITAL EXPENDITURES 38
X. DEPRECIATION.. 41
XI. TRAVEL EXPENSES. 45
XII. INTEREST DEDUCTION.. 51
XIII. CASH-METHOD ACCOUNTING 53
XIV. ACCRUAL METHOD ACCOUNTING 57
XV. ANNUAL ACCOUNTING 60
XVI. CAPITAL GAINS. 62
XVII. QUASI-CAPITAL ASSETS 70
XVIII. RECAPTURE OF DEPRECIATION–§1245. 72
XIX. ASSIGNMENT OF INCOME.. 73
XX. TAX CONSEQUENCES OF DIVORCE.. 75
XXI. LIKE-KIND EXCHANGES 82

I. INTRODUCTION TO FEDERAL INCOME TAX(chap 1, pp1-20)

Tax Courts overview
1. Tax Court – do not need to pay deficiency – article I Court (always Judges) (toll SOL)
-Golson case allows judges to make different rulings based on the jurisdiction they are in
2. District Court – must pay first to go to court (Jury) (SOL Runs)
Ø Goes to circuit court of appeals
3. Court of Federal Claims – must pay (2nd best tax expertise Judge) (SOL Runs)
Ø If appeals goes to federal court of appeals

a. PROCEDURE to go thru when analyzing INCOME QUESTION:

Overall
1.Is it gross income? 2. Are the above-the-line deductions> What is Adjusted gross income? 3. Are there any below-the-line deductions? 4. What is taxable income? Any Exemption? 5. Tax Rate?
a. Is it income? ® Will be included unless you can think of an exclusion
b. If income, what is it’s characterization? Ordinary income or capital gains? ® The money will be taxed differently depending on its characterization.
c. If not income, then may it be deducted? ® Must be able to find a specific deduction section

b. TAX FORMULA: ([Gross Income – §62 Deductions= AGI] – § 63 Deductions) = Taxable Income ß apply rates to taxable income à the result is someone’s tax

c. INCLUSIONS:

a. § 71 ff: things that are explicitly included. This was basically passed to clarify questions that people had.
b. § 101 ff: things that are explicitly excluded
c. Income is something that comes in that makes me better off. It is income unless I can find statutory, judicial, or common law exclusion. If you can’t think of reason that it’s excluded, then it will be included in someone’s income. Err on the side of inclusion.

d. DEDUCTIONS:

a. § 161 : lists what is deductible.
b. § 261 : lists what is not deductible.

II. GROSS INCOME (chap 2, pp21-46)

1. Theories of Income

a. Sources View (Eisner v. Macomber) ® NARROW DEFINITION OF INCOME

1. “Income may be defined as gain derived from capital, from labor, or from both combined.”
2. According to the Eisner definition, dividends are derived from capital.
3. In Eisner v. Macomber, the Supreme Court sa

tituted income to the employee.

No exclusion applies ® therefore income. A payment by a 3rd party is income unless there is an express exclusion.

You’re better off if someone pays your bills!—therefore, it should count as income.

Cesarini v. United States ® PIANO CASE

According to Reg. § 1.61-14, treasure, or found money, is taxable for the year in which the finder has undisputed possession of it. The finder has undisputed possession only when he actually has found the money and not when he merely bought something with money hidden in it, without finding the money.

Income from all sources is taxed unless the taxpayer can point to an express exemption.

Found money must be included in the year it’s found. Found goods will also be included in the year they are found, regardless of whether the gain from the goods was realized.

Compare to Pellar which wouldn’t tax bargain purchases® 1) if IRS taxed every bargain purchase, the IRS would have to check up on everybody’s great bargains! 2) The money found in the piano was separate from the piano itself; whereas in Pellar, it was the house itself that was worth more than FMV.