Federal Income Tax Outline

 
Fed Tax
Prof. Wiseman
Fall 2015
 
Background
 
Power to Tax
–          Article 1, § 8, Clause 1
o   confers on Congress the power to tax
o   imposes a duty of uniformity in taxation
§  Tax cannot be determined based on local
 
Administrative Materials
–          IRS is part of the Treasury
–          Regulations (Treasury Regulations)
o   More weight than Rulings
–          Rulings
o    Private Letter Rulings (binding on just taxpayer);
o   Revenue Rulings (binding on all taxpayers w/ similar facts); and
o   Revenue Procedures (IRS issues opinions telling the taxpayer how and in what form to do something)
–          Actions on Decisions
o   Provides taxpayers guidance as to how the IRS will respond to the Tax Ct’s decisions
§  Will the IRS acquiesce or nonacquiesce
 
Legislative Process
–          Bills
–          Hearings
–          Committee Reports
o   House of Representatives – Ways and Means Committee
o   Senate – Finance Committee
Judicial Materials
–          Tax Ct. Decisions
o   Heard by 1 of 19 judges, usually an expert in tax law
o   After Tax Ct. appeals are fed back into a Federal Ct. of Appeals
o   Adheres to precedent of the Federal District of the taxpayer
–          Federal Dist. Ct.
o   Must already pay tax and then you’re in this ct. seeking a refund
o   Heard b/f judges who hear all kinds of cases (may have a jury trial if you desire)
o   The worse your case the more you want to be in Fed. Dist. Ct.
o   Adheres to precedent of the Federal District of the taxpayer
–          Ct. of Federal Claims Decisions
o   Resembles the Tax Ct. in organization and procedure, and resembles the Dist. Ct. in that it is a forum for refund claims
o   No jury trial is available though here
o   Follows the Federal Circuit’s Precedent
o   Located in Washington DC
–          Ct. of Appeals Decisions
–          Supreme Ct. Decisions
 
Tax Policy Considerations
–          No tax is neutral, it has a profound impact on what people do
–          Imposing a tax discourages something; Removing a tax encourages something
 
Types of Tax
–          Direct Tax
o   a tax demanded from the very person who is intended to pay it
–          Indirect Tax
o   a tax paid primarily by a person who can shift the burden of the tax to someone else or who at least is under no legal compulsion to pay the tax.
§  Ex. Sales Tax
 
Big Picture on Determining Tax:
–          Gross Income – Certain Deductions = Adjusted Gross Income (AGI)(§62)
–          AGI – Cert. Deductions or Standard Deductions – PE = Taxable income
–          Taxable Income x Rate (§1) = Tax – Credits = Tax Due
 
Two Big Principles
–          We are on an Annual Reporting System (Jan. 1 – Dec. 31)
–          We are on a Self Reporting System
–          You tell the Gov. what your income and deductions are
 
Methods of Accounting
–          § 446(c) Permissible methods of accounting include:
o   Cash Receipts (Cash Basis)
o   Accrual
–          § 446(d): T may use different methods if T for each T or B
–          Cash Basis
o   Measures tax liability by including an item in income or allowing a deduction at the time that cash or its equivalent is received or paid
o   Record and Deduct
o   Used by most sole proprietorships (Corp.’s usually can’t use)
§  If you have inventory you can’t use it.
o   Income statement matches cash you have in bank
o   May record or deduct if income is constructively received
o   Constructive Receipt
§  Unfettered Control
§  Credited to T’s account, set apart for him, made available so he may draw upon at any time, not subject to substantial limitations (Hornung v. Commissioner – not constructively received)
§  When the recipient has ready access to the money, he has constructively received it
·         Ex: holding onto checks but not depositing them—still counts as income because the money is available to him at any time
o   No doctrine of constructive payment—not an expense until the payee has the payment in his hand
§  Payor writes a check; wont be an expense until payee has the checj
o   Rev Rule: 78-38 – CC payments may be deducted in years in which the payment is made.
–          Accrual Method
o   Income is recorded at the time the T becomes entitled to it (when services were rendered)Allows deduction at the time a deductible obligation is fixed & certain
o   Income when you earn it regardless of when it is paid
o   Expenses are incurred when the obligation to pay is incurred, regardless of when it is actually paid
o   Two part test:
§  1. All Events Test
·         Can take deduction if T has liability to pay an amount
·         Must be able to ascertain w/ reasonable certainty amt. of liability
§  2. Economic Performance Test
·         T’s (who ever has being owed) have done what they’ve contracted to do
o   Services must have been rendered (retainer fee does not suffice)
§  ALL EVENTS TEST IS EXPENSE, NOT INCOME
o   Pre-payments of income
o   Deferral: If the payments received can be specifically related to services w/ fixed dates in the future, the payments received will be more likely to be deferred until services are rendered (Artnell Co. v. Commissioner)
§  Cer