· 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
· 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
· 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
§ 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
§ 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
§ 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.
§ 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