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Federal Income Tax
University of California, Hastings School of Law
Martinez, Leo P.

FALL 2015
·         “Realized” Gain: sold or exchanged
o   + MUST also be “recognized” to be included in GI
§  General rule = realized gain is recognized and included in income [§1001(c)] o   NOT recognized if specific nonrecognition rule is applied
·         Amount Realized: amount TP receives on the sale or exchange
·         Adjusted Basis: Unrecovered investment in the property
·         Adjusted Gross Income: Gross Income – Deductions
·         Capitalized Expense: if expense creates asset that that will last beyond the year in which the expense is incurred, cannot be deducted in full in the year in which it is incurred – must be capitalized
·         Useful Life: the amount of years an income producing asset is expected to produce income
·         Capital Gain: gain from sale of capital asset
o   Short term CG: capital asset sold held by TP for year or less before sale
o   CG Rates – §1(h): depend on type of asset sold
o   Capital Asset = investment as opposed to asset used in operating business
Tax imposed on “taxable income” at “progressive” rates under which increasing rates are applicable to addtl increments of taxable income
·         Taxable Income [§63]: GI – All allowable deductions
o   Marginal Tax Rate: rate applicable to the last dollar of income earned by the TP
o   Effective Rate: tax liability for the year / TI for the year
·         4 Possible Filing Statuses:
o   (1) Married filing joint return
o   (2) Head of household
o   (3) Individual
o   (4) Married filing separately
·         Marriage Penalty: married couples with two income earners pay more tax than they would have if they were not married and each spouse were taxed individually because each of the two earners would have benefited from the progressivity of the rates
o   If only one earner pay less than they would if they weren’t married and taxed individually
·         Progressive Income Tax Rates
o   Provide strong incentive for TP to try to fragment income
§  Transfer some income to individ or entity in lowest bracket so reduce total amount owed
o   “Kiddie Tax”:child under 19 (24 if student) taxed on al unearned income at parent’s tax rate à nullifies advantage in assignment of income to minors
o   Curtail incentive to assign to entities by assigning them close to the highest tax rate
·         “Income Splitting” Provisions – available on elective basis to married TPs
o   If join return à combined TI taxed at rates in §1(a)
§  Twice the tax on ½ combined TI using 1(d) rates
§  Filing of joint return even were one spouse has all income, produces same tax as if income equally divided and each half taxed under 1(d)
o   If separately file à each taxed at rates in §1(d)
·         Helvering v. Horst – “Realization” does NOT occur until the income is paid
o   Realization = taxable event NOT the acquisition of the right to receive payment
o   Power to dispose of income = ownership of it à Exercise or that power to procure the payment of income to another is the enjoyment, and thus the realization, of the income by him who exercises it
o   NOT a gift! Income “realized” by assignor bc he, who owns or controls the source of the income, also controls the disposition of it
§  Could have received it himself but he divers payment from him to others
§  TP has enjoyed fruits of labor and obtained satisfaction desires whether he collects and uses the income to procure those satisfaction or whether he disposes of his right to collect it as a means of procuring them
§  Satisfaction achieved by the expenditure of money or property
§  Though never received money he derives moneys worth from the disposition of the coupons which he has used as money or moneys worth by expenditure
·         CORPORATIONS – treated as separate entities and taxed at progressive rates in §11
o   Special §1(h) capital gain rates don’t apply to corp TPs
·         TP may take either (1) itemized personal deduction OR (2) standard deduction
PERSONAL EXEMPTIONS [§63, §151, §152] I.       §63(b),(d): Personal exemptions are SUBTRACTED from TPs AGI
A.    May be taken IN ADDITION TO itemized deductions or standard deduction
B.     §151(b)-(c): TP receives DEPENDENT EXEMPTION for each dep
                                                            1.      Amount for each exemption = $2,000 but adj for inflation by §151(d)(4) ($3,950 in 2014)
II.    DEPENDENT EXEMPTION [§152] A.    “Dependent” [§152(a)]: qualifying child or relative
                                                            1.      Qualifying Child [§152(c)]:  person who (i) is the TPs child or sibling, or the descendant of TPs child/sibling, (ii) is 18 or younger (or 23 or younger if student), (iii) has “the same principal place of abode” as TP for more than half the year, and (iv) has not provided more than hald of his own support for the year
                                                            2.      Qualifying Relative [§152(d)]: a person…
a.      Who either (i) is the TPs child/childs descendant, parent or parent’s ancestor, sibling, aunt, uncle, niece, nephew, cousin or in law, OR (ii) has the “same principal place of abode as TP and is member of TPs household” AND
b.      Whose GI for the year is less than the §151 personal exemption amount ($3,950), +
c.       Who receives more than half of support from TP +
d.      Who is not qualifying child of TP
e.       ***Note: person who isn’t related to TP can be TPs qualifying relative if TP lives with and supports the person (like a spouse)
A.    §67(a) Miscellaneous Itemized deductions, subject to 2% floor (deductible only to the extent they exceed 2% of TPs AGI)
                                                            1.      §212 for production/collection of income
                                                            2.      Unreimbursed EE expenses: travel, lodging while away from home, business meals and entertainment, continuing education courses
                                                            3.      Expenses for activity deductible under §183
                                                            4.      Expenses for determination of tax allowable under §212(3)
B.     §67(b) Miscellaneous Itemized Deductions NOT Subject to 2%
                                                            1.      Personal deductions allowed under §151
                                                            2.      Charitable contributions
                                                            3.      Casualty/Theft Loss
                                                            4.      Interest (other than pe

ty or services taken in payment = income [§1.61-2(d)(1)] c.       If services rendered at stipulated price à price = FMV of compensation in absence of evidence to contrary
d.      TP resides in property belonging to Corp TP is an officer at à rental value = GI! (Dean)
                                                            2.      GI derived from business
                                                            3.      Gains derived from dealings in property
a.       Rental value of building used by owner does NOT constitute income w/i 16th Am (Helvering)
                                                            4.      Interest
                                                            5.      Rent
                                                            6.      Royalties
                                                            7.      Dividends
a.      §102(b)(1): if securities received produce dividends for TP, dividends treated as income
                                                            8.      Alimony and separate maintenance payments
                                                            9.      Annuities
                                                        10.      Income from life insurance and endowment contracts
                                                        11.      Pensions
                                                        12.      Income from discharge of indebtedness
                                                        13.      Distribute share of partnership gross income
                                                        14.      Income in respect of a decedent
                                                        15.      Income from an interest in an estate or trust
B.     Realized in ANY form, whether in money, property or services [TR 1.61-1(a)] C.     Services Paid for in Property = FMV of Property = Compensation included in income [§1.61-2(d)(1)] D.    Glenshaw Glass: Punitive Dmgs are taxable as GI; Ct said not “earned” but increased wealth to taxed
                                                            1.      Congress made no provision/given evidence of intent to exempt PD from taxation
                                                            2.      Legis history reveals Congress intends for statutory GI to be all-inclusive.
E.     Old Colony Trust: Payment by an ER of EEs income taxes = taxable gain to the EE (discharge of financial obligations; including rent, groceries, etc)
                                                            1.      In consideration of services rendered by EE + was gain derived by EE from his labor
Whether ER makes payment directly to EE or on behalf of EE to 3P is inconsequential.