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Federal Income Tax
University of California, Hastings School of Law
Morse, Susan C.

Federal Income Tax

Prof. Morse

Spring 2014

The 3 Branches of Government

1. Judicial à Article III

· Review of deference to Administrative decisions.

· Assures that the agencies stay within the authority given to them by Congress.

2. Executive à Article II

· Office of Information and Regulatory Affairs (OIRA) gives the executive office some control over agencies to ensure that they are properly carrying out their tasks.

3. Legislature à Article I

· Congress creates the administrative issues and gives them the authority to carry out specific tasks.

4. Article 2 §2

· Gives a glimmer of a 4th branch of government, administrative agencies which, are created by the legislature.

· IRS: and administrative agency

o Part of the treasury dept.

o Amendment 1 makes income tax possible.

The Legislative Process

Article 1 §7 à All bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other bills.

1. Individual Member Proposes

2. House Ways/Means (Committee)

3. House Passes text of bill

a. Floor Debate

b. Amendment

4. Senate passes text of bill

a. Floor Debate

b. Amendment

c. Filibuster: 60 votes are needed to close debate; if a senator is still debating then votes cannot close (not allowed for judicial and executive issues).

5. President signs

a. No Amendment allowed

6. Law

® PAYGO: a revenue bill needs to be revenue neutral, tax cuts and spending increases have to be offset by tax increases, and spending cuts.

Where to Look for Legislative History

® Eskridge: The last important decision is the most important report à Conference bill/JCT.

® Epstein: If there is a provision that goes all the way through and is described all the way through then that could be helpful.

® Schmalbeck: If the provision were only mentioned in the Joint Committee Bluebook report then you would use that.

Statutory Interpretations

Glenshaw Glass, US (1955)

§22: Gross Income = Gains or profits derived from any source whatever


Does §22 include punitive damages in its description of gross income?


Actual damages and Punitive damages are considered gross income under §22.


(1) Dictionary: income is a flow of cash/wages earned on a regular basis.

(2) Expressio unius est exclusion alterius: the terms listed in the statute are

not exclusive b/c of the last sentence which states “. . . derived from any

source whatever.”

(3) Rule of last antecedent: “. . . derived from any source whatever” modifies

only the items in the list immediately preceding it.

(4) Legislative Intent: It is as broad as it may constitutionally be. TF, as long as

it falls within Amendment 16 it is taxable. Congress did nto restrict it b/c

they wanted to be broad.

Now § 61

Administrative Process

Administrative Procedure Act

Governs the way in which administrative agencies of the federal government may propose and establish regulations.

Case-by-Case Adjudication à § 554

5 USC § 554

(c) Imposes certain procedural due process requirements on the agency.

(Goldberg v. Kelly)

(a) Lists situations where the agency does not have to follow section (c).

(1) IRS relies on this subsection in order to avoid due process

required by Goldberg.

Adjudicatory Methods within the IRS:



§ Audit/Settlement

§ Appeals

Rulemaking à § 553

5 USC § 553

® Notice and Comment Rule Making

1. Notice

§ Is given in the Federal Register

2. Comment:

§ Interested people get an opportunity to submit written data, views, or arguments.

§ Agency must consider these comments but are not required to incorporate them.

§ Final Regulation

· Treasury usually makes these

· IRS: a division of the treasury

IRS and Treasury Provide Guidance:

§ Notice/Comment Final Reg.

§ Temporary Reg.

§ Revenue Procedure

§ Revenue Ruling

§ General Counsel Memo

§ Press Release

IRS and § 553

§ § 553(b)(3)(A) interpretative rules do not need to follow “notice and comment” format.

§ IRS rules are given as they see fit.

Judicial Deference to Administrative Agencies

Skidmore v. Swift & Co.

Agency deference is important to the extent that it is not binding on the court. The court could make up its own mind on the statute.

includable in gross income? If so, is it due when purchased or when found?


(1) § 61: Gross income means all income from whatever source derived.

(2) IRS Revenue Rule: the finder of treasure trove is in receipt of taxable income, for Federal income tax purposes, to the extent of its value in the US currency, for the taxable year in which it is reduced to undisputed possession.

(2) Treasury Regulation: Treasure Trove, to the extent of its value in US currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession.

® Represents a typical treatment of a tax regulation by a court.

® DM is equivalent to Euros and upon discovery of them, it is = cash.

® Hypo: You find a baseball, rare book, or another currency. Is it gross income? When is it realized?

o All gross income. Prof. said unless the type of currency has been extinct for a long time, or is no longer convertible then it is also income.

® The Realization Doctrine: If you own something you do not recognize or realize the gain in it until you sell it or dispose of it.

Home Concrete

Stare Decisis cannot extended to other interpretations when statute is unambiguous


Taxpayers overstated the basis, which caused their gross income to be understated. According to stare decisis Colony has precedent on the question of whether § 6501(e)(1)(A) applies to taxpayer overstatements of basis.


Stare Decisis shows that § 6501(e)(1)(A) does not apply when taxpayer overstates his basis in property that he has sold, thereby understating the gain that he received from its sale.

® If the first courts decision (long standing or SC) is based on unambiguous language then subsequent agency interpretations will not beat Stare Decisis.