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Tax
Temple University School of Law
Abreu, Alice G.

·         THE BASICS
o    Marginal rate – rate that applies to last dollar
o    Effective rate – average rate of tax imposed.
o    Taxable income – gross income minus deductions (§ 63)
o    Taxable income is tax base
o    Tax due = taxable income * tax rate
o    Tax credit = deductions on tax due
o    Tax deduction are more beneficial the higher the income
o    Tax credits are benefits those with lower tax
·         Statutory
·         No tax credit if you owe no taxes
·         Refundable tax credit – if credit is more than tax liability, you can get a check for the balance

o    Unit of taxation
·         § 1a – married individuals

o    Deductions
·         Standard – anyone can take it
·         Above the line – can take this and standard deduction
·         Itemized – have to choose between this and standard deduction.

o    Gift and inheritance is not income § 102

o    Tax policy
·         Equity
§ Vertical equity – those with higher incomes should pay more money
·         3 types of tax
·         Progressive – tax rate goes up with income
·         Proportional – tax rate stays the same.
·         Doesn’t really happen in practice because of zero bracket
·         Regressive – tax rate decreases as income increases
·         Sales tax – the tax paid is a smaller proportion of income as income increases.
§ Horizontal equity – similarly situated people should pay similar tax
·         Efficiency
§ Tax system should have as little impact on people’s actions as possible
§ Tax expenditures – deductions and credits that are totally inefficient, but are deliberately given to motivate certain behavior
·         e.g. home owner credit
·         Simplicty/administrability
§ Least of the concerns.

·         IDENTIFYING THE TAXPAYER
o    Unit of taxation – individuals as modified by marital status
·         Marriage – as defined by DOMA – between man and woman
·         Poe v. Seaborne – in community property states, income is split between couples
§ Congress applies this to non community property states too (bad horizontal equity)
§ Single people now disadvantaged. Challenged constitutionality lost
§ Congress modified so that single’s tax liability is never more than 120% married couples
§ Created marriage penalty
·         Tax for married couple is more than tax for 2 single people with half income
·         For married couples, second earner paid taxes at higher marginal rate.

·         Drucker v. Commissioner – couple wanted to file using single persons rates.
§ Court rejects their argument
§ Marriage penalty is not impediment to marriage and is non discriminatory
§ Was there to reduce single’s penalty
§ Getting rid of marriage penalty recreates single penalty problem.
§ Druckers divorced and stayed divorced
·         Rev. Ruling 76-255
·         Marital status is what status was on Dec 31
·         If you divorced at the end of the year and remarried the next year, you are considered married for that year
·         Got around the “sham divorce” issues.

·         Mueller
§ Homosexuals cannot file as married under DOMA
§ Single classification is a consequence of not marrying, not a cause. So not unconstitutional
§ Bad horizontal equity

·         ASSIGNMENT OF INCOME
o    Earl v. Lucas – Earl made a contract with his wife that gave her half his income
·         Motivation was probably not tax avoidance
§ Contract was made before income tax came into existence
§ Lived in non community property state
§ Didn’t want wealth do go through probate when he died and reveal to the court his wealth
·         Control over your income
§ Earl controlled his wife’s income
§ He was the tree, giving her the fruit.
§ Tax policy is to tax the earner, regardless of what he does with the income afterwards
§ Distinguished from Poe – income splitting was not a choice.

o    Blair v. Commissioner – Blair created a trust for his children
·         Kids are beneficiaries of trust
·         Blair no longer has any right to the trust property
·         Blair has given up future control in trust
·         Income from trust is not his.
·         Blair stands for the proposition that when you give EVERYTHING away, you also give away the tax liability

o    Helvering v. Horst – guy who gave the bond coupon to his son
·         Interest payment on the coupon was income to the Taxpayer
·         Bond gives you right of principle, AND right of interest
·         Dad retained right of principle
§ Dad retained the tree.
§ If Dad gave the bond away, he would have given away his tax liability too.
·         Horst tried to reduce his tax by shifting it to his kid. Congress reacted by instituting the Kiddie Tax

o    Kiddie tax
·         Unearned income of child taxed at parent’s rate
§ Unearned income = income from stocks and investments
§ Age of kid for Kiddie tax – under 18 and § 152(c)(3)
·         If over 18 and student, then under Kiddie tax till 23
·         If married, then no Kidde tax (§ 152(1)(E)
·         Congress tried to frame as closely as they could the type of person they wanted to get under the Kiddie tax
·         Stopping parents from just waiting till kid was 18 to give stocks to kids.
·         If kid earns more than parent, than taxed at kid’s marginal rate
·         Parent’s liability does not change. The kid still pays tax
·         Earned income is taxed at kid’s rate
·         Basically Congress made this to stop people from assigning stocks to their kids to reduce tax liabilty

o    Rev Ruling 74-581 (law clinic)
·         If you work for the law clinic, and turn over the income from the clinic to the law sch

 Incidental costs to primary service are ok (Regs 1.132-2)
§ If it costs employer something, it feels compensatory
·         Qualified employee discount – for services, 20% limit, for property (goods for sale) % gross profit of the price of item.
§ THESE TWO ARE SUBJECT TO NON DISCRIMINATORY RULES
§ Everything else, you can reserve for only high paid employees.
·         Spouses and children are “employee” for 132 purposes
§ Air transport worker’s parents are also included
§ Does not include domestic partners (same or opposite sex)
§ For other things, when parents get benefits, it is EMPLOYEE’S income.
·         Transportation- transit pass, commuter highway vehicle and parking subject to inflation adjustment
§ Biking subsidy is not
§ Parking lot can be near business premises.
·         Gym on premises operated by employer and used substantially by employee is not income
§ Other gyms are.
·         De minimis fringe – value of goods and services are so small that taking into account is impractical for accounting purposes.
§ Occasional meal money is de minimis fringe (Reg 1.132.6)
·         Working condition fringe – property or service that is provided by employer if it is deductible under § 162 (trade or business expense deduction)
§ Even if not practically possible, you still get working condition fringe.

o    US v. Gotcher – Guy who was paid by VW to go to Germany to check out their facilities
·         Case took place before 132 was enacted
§ Still would not have answer the question because Gotcher was not VW employee
·         If payment is made primarily for the purpose of the payer, it isn’t income to the tax payer
·         If payee does not have choice then it is not income
§ Choice is defined as what makes good economic sense
·         McDonnell Test – Employee was made to go on trip to Hawaii by employer to accompany contest winners
§ There must be economic benefit, which benefits the tax payer primarily
§ He didn’t have choice
·         Mrs. Gotcher – looked more like vacation, even though her opinion may have changed Gotcher’s mind

o    Oscar swag goodie bags – arguably falls under Gotcher

o    Benaglia v. Commissioner – Hotel manager who stayed in a huge room in hotel and ate hotel meals with his wife