Hoyt – Federal Taxation – Fall 2011
I. History / Tax Policy
a. History
i. Tax Policy
1. Income tax first used during civil war
2. Before Civil War almost all federal revenue came from excise taxes
3. 16th Amendment amended the constitution to allow income tax
a. Prior to this constitution required that people be taxed proportionate to census
4. Gift Tax and Estate Tax were created in the early 1900s
ii. Tax Code
1. Form 1040 first used in revenue act of 1913
2. Tax Laws were first codified in 1939
a. Re-codified about once every 20 years – Last done in 1986
b. Amended every year
c. Currently we are working with the 1986 code as amended to 2011
3. Codified in Title 26 of the USC
b. Procedural Issues
i. Tax bills must begin in the house of representatives
1. Because Representatives are voted on more quickly and can be more responsive to needs of people
ii. Ways & Means committee in the house starts nearly everything
1. The senate finance committee modifies as the committee desires
2. Joint committee then meets and creates the final bill
c. Goals of Tax Law
i. Economic Efficiency
1. Tax law shouldn’t interfere with the optimal allocation of resources
ii. Equity / Fairness
1. Horizontal – 2 people in same economic situation should pay same taxes
2. Vertical – Marginal tax rates. Rich people can afford to pay more taxes.
iii. Simplicity
1. Favor taxes that are easily collected, to reduce administration costs
2. More complex, less respect for the tax system
iv. Economic or Social Objectives
1. Can be used to promote social objectives
2. Example: Tax credit for child care, home mortgage interest deduction, etc.
II. Structure
a. Generally
i. AGI – Adjusted Gross Income
ii. Deductions –
1. Standard Deduction – $ 5,700 if single
2. Itemized Deduction – whatever is more is what people take
iii. Personal Exemption
1. Get one for you, spouse (if filing jointly) , and dependents – $3,650
iv. If you make less than $9,350 don’t have to pay income taxes
b. Filing Status
i. Single – High Rates
ii. Married Joint – Lowest Rates
iii. Married Separately – Highest Rates
1. Hardly ever used because the tax rates are higher
a. Usually occurs when divorce and untrusting spouse (liability)
2. You are liable for the tax returns of your spouse if filing jointly
iv. Head of Household – Middle Rates
1. Requirements
a. Unmarried
i. Possible to be married if you are an abandoned spouse
1. Abandoned Spouse – Spouse must be out of the house for the last 6 months.
2. Here the dependent must be a child.
b. Maintain Household
i. Pay more than ½ the expenses
c. Live with a dependent
i. Except if the dependent is a parent
ii. Example: Elderly mother lives in nursing home, not at your house.
v. Surviving Spouse / Qualified Widower
1. Must have a dependent qualifying child
a. Can file joint the year the spouse dies, and two years afterwards
b. Then must file Head of Household
2. Except if taxpayer is over 80, then can only file joint the year the spouse dies
c. Types of Dependencies
i. Qualifying Child
1. If you have a Qualifying Child can receive
a. $3750 Deduction
b. Tax credits for income, child tax, and child care expenses
2. Requirements
a. Relationship Test
i. Includes siblings, your children, and sibling’s children
b. Abode Test
i. Must live with filing person for more than half the year
c. Age Test
i. Must be under 19 unless a full time student and then under 24
d. Support Test
i. The qualifying child cannot be self-supporting
ii. Example: NOT Justin Bieber
3. Tie Breaker Rules – Only if there is a fight
a. Parents preferred
b. Parent with longer period of residency preferred
c. Parent with higher AGI preferred
d. If no parents person with highest AGI
ii. Qualifying Relative
1. Receive a $3750 Deduction
2. Requirements
a. Relationship
i. Lineal antecedents, collateral ascendants, certain in laws, and unrelated parties who are members of same household
b. Support
i. Person claiming them as dependent must provide more than ½ the support
ii. Multiple Support Agreements – If there are multiple support providers they can agree that one person can take the exception
1. Example: 3 children taking care of mother, children can agree that one of the children take the exception.
c. Gross Income
i. Must be less than the exemption amount.
iii. Other Requirements for each qualifying Child and Relative
1. The qualifying person cannot be married
2. Qualifying person must be a US citizen, US Resident or Canada or Mexico resident
d. Kiddy Tax
i. Unearned income greater than $1900 it will be taxed at the parents tax rate
1. Less than $1900 will not be taxed
2. Unearned income –
i. Must actually receive the services for you to take the deduction
iv. Pre-Paid Expenses
1. Always allocate
a. Exception for recurring items –
b. Exception for Worker’s Compensation Tort
i. Performance occurs when damages payment made
ii. Basically on the cash method
1. Example: if you agree to a structured settlement you must allocate when payment is made
V. IRS Procedures
a. Regulations
i. Legislative – Where the legislature says we want regulations issued
ii. Interpretative – When an agency interprets a statute without being asked to do it
iii. Standards – Used to be legislative regulations were more respected, but now treated the same
b. Court Rulings
i. Decisions / Memos
1. Decisions – Where new tax law or a new interpretation occurs
2. Memos – No new law or interpretation
c. Action on Decisions
i. IRS document that comes out after the IRS has lost a case
ii. Explains whether there future legal strategy on the issue
iii. Gholson Doctrine
1. When IRS loses and still think there argument was correct, IRS will accept the ruling in the circuit the ruling came in, but still argue the issue in other circuits
2. When there is a split in circuits the Supreme Court, usually will step in
d. Private Letter Ruling
i. Pay $8,000 to the IRS and make sure you are doing the right thing
1. Only used when important issues exist
ii. Not supposed to be cited as precedent, but many people use it including the supreme court
iii. Like an insurance policy
iv. One level of review
e. Revenue Ruling
i. Official policy of the IRS
ii. Greater review than a private letter ruling
iii. Near bullet proof
f. Statutory Construction
i. Example: 461(h)(2)(a)(ii)
1. 461 – section
2. (h) – subsection
3. (2) – Paragraph
