Fed Tax Outline
**the General Formula for tax liability is as follows:
Gross Income
– § 62 Deductions (above the line
________________________
= Adjusted Gross income
– Personal Exemption (§ 151 and 152)
– Either Standard Deduction or Itemized Deduction
______________________
= Taxable income
x Tax rate
______________________
= Tax liability
– Tax Credits
_______________________
= Tax due
1. Sources of Tax Law
a. Format
i. Controversy (dispute)
ii. IRS sends a letter giving 90 days to respond
iii. Taxpayer responds with protest letter
iv. Appeals conference – IRS can agree, disagree, or compromise
v. If disagree then go to litigation
1. Tax Court – you don’t pay tax in advance, judges are tax experts, no jury, only bound by precedent of appellate decision in that district
2. Federal Court – if you pay tax and sue government for refund, can get a jury, bound by circuit’s decision
b. Judicial sources of tax law
i. Tax Court cases
1. T.C. – decision about a point of law, frequently first impression
2. T.C. Memo – controversy over facts
ii. Federal cases
iii. Courts of Appeal
iv. Supreme Court
c. Administrative agency sources of law
i. Treasury – issues Treas. Reg. interpreting statute
1. IRS – part of Treasury
2. Courts give great deference to regulations
3. Taxpayer is in conflict with IRS over interpretation
4. Treasury issues interpretation
ii. IRS rulings we will focus on in this course
1. Rev. Rul.
a. Letter ruling can be issued more general if they think it will be a common question
b. Ruling binds to the particular taxpayer and all taxpayers with identical facts
c. Detailed analysis
2. Priv. Ltr. Rul.
a. Letter ruling can be issued only to the person who sent the letter
b. IRS is bound their decision, help plan for transaction
3. Rev. Proc. – Tell taxpayer how to do something
4. Another IRS ruling is Action on Decisions – IRS loses in every court until appeals exhausted, IRS either acquiesce (give up and agree) or nonacquiesce (keep litigating in other circuits)
2. Figuring Tax Due
a. Annual reporting period – gross income received for a calendar year (Jan 1 – Dec 31)
b. Self-reporting tax system
c. Formula –
Gross income (GI)
– Certain deductions
= Adjusted Gross Income (AGI – § 62)
– Certified Deduction or Standard Deduction (SD)
– Personal Exemptions (PE)
= Taxable Income (TI)
TI
x §1 Rate
= Tax
– Credit
trigger income
i. Triggering event is catching baseball
ii. Stocks go up from nothing you are doing
c. A loan is not gross income because it must be paid back – you are not better off, more cash but obligation to repay – no authority
d. Indirect and direct payments are income
e. Income
i. Cash
ii. Property
iii. Services
iv. Someone else making the payments
f. Return of capital is not income – no authority
ii. Income without receipt of cash or property
1. Revenue Ruling (Treasury Department’s Litigating Position) 79-24.
a. Meaning – If services are paid for other than in money, the fair market value of the property or services taken in payment must be included in income.
i. If bartering services it is the fair market value – reasonable value
1. Cannot say something is $10 when the reasonable value is $200
2. If you only know value of one side of the transaction and don’t know value of the other side then
IRS assumes it is an equal bargain
