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Temple University School of Law
Monroe, Andrea

1. Structure of Income; Policy

Goals of Tax
1)      Raise Revenues
2)      Re-distribute Wealth
3)      Promote, effect economic activities
4)      Advance Societal Goals
5)      Prevent People from engaging in certain behaviors
Tax Equity
1)      Horizontal Equity – Same $, same Tax
2)      Vertical equity – Different $, Different Tax

Voluntary Compliance System
Simplicity/ Administrability
Efficiency: Inefficeint IF taxes effect peoples decision. In reality taxes are not neutral.
How well do gov’t subsidies work? How much $ gets to where its supposed to go.
Base x Rate = Liability
Traditional Definition of Income = How much you can spend and preserve your capital or standard of living.
Haig – Simons
·         Income = ∆ in wealth + consumption
·         ∆ in wealth = gain
·         Consumption = any outflow of cash (personal consumption) (If it is not final consumption it has not been consumed. EX: Investments)
·         Idea is based on ability to spend. All wealth is taxed ONCE.
Today we have a hybrid of income tax principles + consumption based principles.
Consumption Tax
–          Pros:   Just tax what we spend, simpler, less cheating, business friendly.
–          Cons: Regressive, unfair, hurts poor people.
TAXABLE INCOME = Gross Income (Covers and income) – Allowable deductions (real increases in wealth, typically business or investment related).
4 Reasons to deviate from Haig Simons
1)      Want consumption tax principles (ex: Roth IRA)
2)      Policy / Promoting Social policy (Mortgage income deductions)
3)      Administrability
4)      Abuse
2. Tax Rates

Tax Rate 3 Types
1)      Progressive (what we have)
2)      Regressive (Sales tax, SS Tax)
3)      Proportionate (Flat Tax)
Marginal Tax Rate à Tax rate applies to the next dollar I earn. 
–          Take the rate, then add it to the rate plus excess of the given #. 
Effective Tax Rate à Total Tax liability divided by taxable income
§ 1(a)-(d) , (f), (i).
Use Table 3 on P. IX in code.
EX: Tax = $49,000
–          Marginal Rate = 36%
–          Effective rate = 29%
$165,000 (income) =$ 16,750 (given in table) PLUS {($165,000 – $82, 250) x .28} = $49,000
Who Is the Taxpayer?
3. Assignment of Income – Income from Personal Services
Tax Base Shifting
Lucas v. Earl : Earl wrote contract , saying him and wife split everything.
–          Shifted tax liability between Earl and Wife
–          Income Splitting
–          Court makes tree analogy. 
–          Court cares about control, not motive.
–          Court said Earl maintained control and benefit, therefore he could not split income
–          Court said income went through Earl first.
3 Choices (Impossible to get all three)
1)      System is equitable to all
2)      All married folks should be treated equitably
3)      Protecting the graduated income tax system
Rule: You do not need cash for income, just some sort of benefit. Control is really important.
Teschner : If you shift a prize to someone, they must pay taxes on it. 
Rule: If you request your pay goes to a specific cause or charity, you may owe taxes on it. But if you say “do something good with my salary, it is likely not taxable”. 
4. Assignment of Income – Income from Property

Blair v. Commissioner
–          Blair transferred more than income to kids, transferred control. Kids must pay taxes
Helvering v. Horst
–          Holder of the bond pays the taxes, because he has retained control.
Blair – transfer fruit – Dad pays
Horst – transfer fruit and tree – Kids Pay
Rule: If you transfer ownership and control, you change the taxpayer
Harrison v. Schaffer
–          Every year she has a choice of whether to accept income from trust, so she

    In problems, be sure to always refer to gross income if required. Most problems will. 
Glenshaw Glass –“Income is anything and everything”
–          End to fruit and the tree analogy
–          Haig Simons based definition.
–          Code § 63(a) – Taxable Income = “Gross income minus deductions allowed in this chapter”
–          Income has 3 Components
o   Accession to Wealth
o   Clearly Realized
o   Over which taxpayer has dominion and control
Old Colony – Company tried to pay taxes for officer, Government said it was income.
–          Employer/ employee relationship is taxable when compensation is given to an employee.
–          Pyramiding Issue. 
Note: If you find $ or property you are liable for taxes when you realize the gain. Regs 1.61-14 Treasure Trove Regulation. If you receive unsolicited materials, then it is not income. If however you attempt to profit off the unsolicited materials (ex: deduction by giving books to charity), then materials become taxable gains. (Haverly). If you gave unsolicited materials away as a gift, likely no tax consequences.
-When determining fair market value it is subjective. Generally what a willing buyer and willing seller would agree to in normal market conditions, with neither compelled to buy or sell.
1) Determine whether they have gross income (accession to wealth, clearly realized, over which taxpayer has dominion and control).
2) Determine how much income they have (generally done by fair market standards).