U.S. tax system is a tax on income, not wealth or consumption
Economic reality counts. If it seems to good to be true, it probably is.
Context matters. Different rules apply for different situations.
Ex. § 102 does not apply in ER-EE relationship, but §§ 132 & 119 only apply in ER-EE relationship.
Tax is not a penalty. It is a transaction cost based on the measurement of ability to pay.
We are in the compliance business. Our job is not to help clients avoid tax; it is to tell them what the law is and how much they are required to pay.
Equity (both horizontal & vertical) is important for compliance purposes, especially in a self-reporting system
Tax expenditures are when Congress makes a policy exception to a structural rule. Upside down effect with progressive tax system.
No de minimus rule for income (except 132)
Illegal income is taxed – to not tax would be to reward stealing
Tax-free recovery of capital is because we only tax the “net accession to wealth.” Allow to recoup investment
You want to accelerate deductions and defer income (especially if it will end up in a lower bracket)
Taxpayer must have enough money for deferring income to be a possibility.
Shift deductions up to a higher tax bracket
Make items of expense generally deductible
Ex. Argue that something is a trade/business expense whenever possible
Exclusions are better than deductions
Goal of the taxpayer is to minimize additional and unnecessary federal tax
Decrease refund ® when you are awarded a refund it’s because you’ve given the government a short-term, interest-free loan on that money
Do this by claiming exemptions on your W-4: this is the taxpayer’s chance to approximate his tax liability for the coming year
How to Attack a Question (needs to be fleshed out?)
Identify the relevant taxpayer (could be more than one)
Identify the relevant 12-month period
What, if anything, is the taxpayer receiving?
Is it income?
Do you have an exclusion?
What is the taxpayer spending?
Is it a deduction?
If trigger event, then characterize as capital or ordinary
If you have mixed use property, you have to 1) allocate basis; 2) limit depreciation to the business section; 3) allocate amount realized
I. INTRODUCTION TO WHAT, HOW, AND WHEN WE TAX
A. Taxable Income Defined
B. The Progressive Rate System
1. In a progressive rate schedule, marginal tax rates increase as income increases. Makes higher income individuals pay a higher tax
C. Exclusions from income
1. Forced consumption – When legitimate, predominate corporate purpose is an inducement to buy and there is incidental gain. Look at intention of payor. US v. Gotcher (p. 115) (paid trip to VW in Germany)
D. Social policy/economic policies – when congress chooses to not tax something, it’s as if they are spending and the money is foregone revenue Other than measuring ability to pay, Congress also tries to encourage other behavior. For example, charitable gift deductions, mortgage interest deductions, and pre-tax employer paid health care.
II. WHAT is Income – Detailed Study
A. In General
1. IRC § 61 – gross income is “all income from whatever source derived”
2. S. Ct.: Definition of “income” should be broadly construed in the absence of a specific Congressional directive to the contrary
a. List under § 61 is illustrative, not exhaustive
b. See Regs. § 1.61-14(a) (treasure trove provision)
3. Glenshaw Glass standard: net accession to wealth, clearly realized, over which the taxpayer exercises dominion and control
a. Congress exerts the full measure of its taxing power under § 61 to tax “all income from whatever source derived.”
i. No untaxable miracles – Cesarini v. US (p. 149) (taxpayers incur tax liability for found money – cash found in piano that they purchased). Regs. § 1.61-14(a) (treasure trove provision)
ii. Tax paid by a third party is income – Old Colony Trust
iii. Charitable deduction for textbooks – Haverly v. US (p. 151)
A. This is important because you can’t claim a deduction for something that wasn’t income in the first case
4. REPORTING RULE: if Haverly had just donated the books, he wouldn’t have incurred tax liability; administratively, the IRS doesn’t want to know about the transaction unless you are claiming a deduction as a result of it. The receipt of books would be considered income and you would have a charitable deduction, but IRS says don’t bother reporting
5. There is no general “de minimis” exception, except where explicitly authorized by the statute
6. Certain Exclusions and Deductions Allowed Despite Broad Nature of § 61:
a. Structural – relating to ability to pay
b. Social/Economic Policy
rs no substantial cost, services is of the same type ordinarily sold to the public in the line of business, service is provided to dependents or current or retired employees, and nondiscrimination requirements are met
B. Employee discount – retail discount, because you have to wear the clothes
1. Cannot exceed ER’s gross profit percentage (property) (See IRC §132(c)(2)) or 20% of the selling price (services)
2. Must be of the type ordinarily sold in the line of business
3. Nondiscrimination requirements are met 132(j)
a. Addresses vertical equity problems
C. Working condition fringe – Kicks into deduction analysis
1. Exclusion analysis that puts you into deduction analysis
2. Can exclude if you could have deducted it under §162 or §167
D. De minimus fringe – so small as to make accounting for it administratively impracticable; ex. free cup of coffee, ticket to ball game
E. Qualified transportation fringe – transportation in a vehicle, transit passes (worth $100/month), qualified parking (worth $175/month, adjusted for inflation), and includes cash reimbursement. Extra parking costs may not be considered de minimus fringes
F. Qualified moving expense reimbursement, qualified retirement planning services, and qualified military base realignment and closure
iii. §119 – Meals and lodging for the convenience of the employer. Not cash reimbursements. Employer must have a “substantial non-compensatory purpose,” furnished on the business premises, and in kind (no cash). If forced consumption and TP has no functional choice, more likely will be excludable
A. Meals are furnished on business premises or
1. NJ troopers cannot count reimbursement for meals eaten on highway (Kowalski)
2. 8th Cir allowed state troopers to deduct, but not exclude (itemized, below-the-line) (Christey)
Employee is required to accept lodging as a condition
Taxable income (§63(a)) = Gross income (§61) – Certain deductions (§63)