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

Federal Income Tax — OUTLINE
 
Chapter 1 — Background
Background in Tax
Constitution — Article I, Section 2 Clause 3, Section 8 Clause 1, Section 9 Clause 4
16th Amendment
Thought to pass the Internal Revenue Code (IRC) instead that would stay good until you heard otherwise – 1st one 1939 – 2nd 1954 – Now 1986 with some changes
Sources of Tax Law
IRC – Statute
Treasury Regulations (If you don’t understand Section 62 go to the back and look at the Treasury regulation 1.62)
Different types of regulation
Interpretive Regulations and
Interpretive is what it means
Legislative Regulation
Give the right to regulate by the statute
What is the purpose of an Income Tax?
The government needs money – generally taxed on the amount of money you make – to use to get done what it needs to – military, social programs etc…
Influence Social Policy – you get a reduction if you contribute to charity, giving to charity is more private and personal compared to making money but Congress will give you a deduction as a social policy – by a house and get tax benefits, buy a hybrid and get bigger benefits
Spur economic policy
 
Courts – 3 year statute of limitations for an audit, unless you left out major things 6 years, fraud it’s longer
Tax Court
If you can’t afford to pay, you go to tax court
In Tax Court you don’t have to pay the deficiency
Judges are experts in Tax
Toll Statute of Limitations – it suspends it
Tax Court is bound by the rule of the Court you appeal to (the District Court)
District Court
Must Pay
Least tax expertise
Jury
No suspending SOL – continues to run
Court of Federal Claims
Must Pay
2nd best tax expertise
Judge
No suspending SOL – continues to run
On Appeal
Tax and District go to the Court of Appeals
Federal goes to the Federal Court of Appeals
Ask who came out with a more favorable opinion for my client
 
 
 
 
HOW TAXES ARE DONE:
Section 1 – Rates
What is the tax base? What is the taxable income?
Section 63 – Gross Income – the deductions allowed
63(b) – standard deductions
 
Gross Income – Section 61 – general definition, gross income means all income, provides a list 15 items but don’t be limited by the list
Deductions
Above the line deductions
Left with Adjusted Gross Income (AGI)
Below the line deductions
Adjusted Gross Income – Section 62 – In the case of an individual  
Gross income minus the following deductions (listed – above the line deductions)
62(a)(1) – trade and business deductions – 62(a)(2) for employees
Taxable Income – Section 63
AGI minus:
below the line deductions (come out after the AGI) and
personal exemptions
Or
Standard deduction
Personal exemption
In order to choose which method:
Compare your below the line deductions to your standard deductions
Below: Example, charitable deductions, mortgage and taxes on home, misc. itemized deductions
Lump deductions – add up and see if they are greater than standard
If not then use the standard deduction
 
Section 61 à Section 62 à Section 63
(Gross I)         (AGI)         (AGI – Below line deductions) à Then take credits off
Credits – tax credits, buying a hybrid car, children etc…
 
From Problems:
If you are paid any compensation for services (ex. consulting) à gross income
Business Expenses are deductions
The amount a stock fluctuates doesn’t matter until realization event
Charitable deductions – below the line
state and local general sales tax $3,000 – real property $3,800 – state income tax $8,000 – state liability $10,000: home is below the line deduction, real property tax – you have to choose between sales and income tax, choose the larger. Do you deduct the $8,000 paid or the $10,000 owed? Only can claim what has been paid
 
Flow Chart – in Book Cover
 
Deductions lessen the income
Credits lessen the amount of tax owed
 
Itemized v. Non-Itemized – Section 63(b)
Section 63(b) – need to know AGI
Section 63(a) – itemized below the lines depend on AGI
Need to know AGI to know if they can take the deduction – Even if you are itemizing you need to calculate your AGI – deductions are usually based on percentages of your AGI
 
Credit v. Deduction
Would rather have a credit
Deductions benefit higher income brackets than lower brackets
Credit is dollar for dollar the same
 
Schedules and 1040
·         Line 22 is your total income
·         Line 37 if you AGI
·         Line 43, 44,

re Gross Income
Situation 2 – Art work for rent – yes Gross Income – fair market value of the property
Fair market value of property and services
What if there is no negotiation?
If it’s a brother sister situation how can we tell it’s not a gift? – Depends on Court
 
Red Flags IRS – family context, business context, employment context, arms length deal
 
Realization/Conversion – converted property to money converted money to property
Inherent problems with not having a Realization requirement
Inherent problems with making people pay tax on something that they don’t realize
You probably don’t know what it is worth
Problems with Realization Rule
Lumping Problem
is it fair to make you pay tax all in one year? can bump you up a new tax bracket
Inflation Problem
§ Bought something in year 1 for $100, it’s not $115 – have to convert back to year one dollars and then it is actually a loss (economic real dollar loss)
§ Realization is not adjustable for inflation
 
Imputed Income
Things you do for yourself – services, self help, owning your own house
If you mow someone’s lawn and they pay you $20 then it goes into tax
All exchanges are taxable
If I mow my own lawn there are no taxes involved
If I mow my neighbors lawn and they mow my lawn then it’s taxable
If you do things for yourself it is NOT taxable
Housewife – not taxable (tax incentive for staying home)
 
Property aspect – using your own property v. someone else’s property
Taxpayers have $100,000 to do what they want
1 buys a house and they’re done (don’t pay yourself rent)
2 puts the money in the market – those bonds make them $10,000 interest and they only have $8,000 left over after tax but they owe $10,000 in rent
 
Bargain Purchases – What if I go to