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Federal Income Tax
University of California, Hastings School of Law
Lathrop, Robert

I. The Basic Structure of the Federal Income Tax
1)    Part One
a)    Introduction
i)         Sources of Tax Law
(1)   IRC of 1986
(2)   Regulations put out by the IRS
(a) The first number tells you the tax number
(b) The second number tells you the code number that’s involved.
(c)   The last part tells you what regulations you’re dealing with.
(3)   IRS Pronouncements and Opinions
(a) Revenue Rulings (Rev. Rul. 89-42)
(i)       The first number is the year, the second number is the ruling number of that year.
(b) Revenue Procedures (Rev. Proc. 91-24)
(i)       The first number is the year, the second number is the ruling number of that year.
(ii)     These are supposed to be only procedures, but sometimes substance gets into them.
ii)       Court Structure for Tax Law
(1)   First Level
(a) US Tax Court
(i)       Jurisdiction over deficiencies.
(ii)     Only judges deciding issues.
(b) US District Court
(i)       Jurisdiction over refund suits.
(ii)     Juries decide issues.
(c)   Federal Claims
(i)       Jurisdiction over refund suits.
(2)   Appellate Level
(a) Court of Appeals
(i)       From US Tax Court or US District Court
(b) Federal Circuit
(i)       From Federal Claims
(c)   Supreme Court
(i)       From the Court of Appeals and the Federal Circuit
(3)   Court Functions
(a) Interpret the Statutes
(b) Make law by making judicially created doctrines.
iii)      Administrative
(1)   Department of Treasury heads the IRS.
2)    Identification of Income Subject to Taxation
a)    Gross Income: The Scope of Section 61
i)         Section 1
(1)   Section 1 taxes someone’s taxable income for an annual accounting period.
ii)       Taxable Income Accounting
(1)   The Cash Receipts Method
(a) The key events occur upon receipt of the income or payment of the deductions.
(2)   The Accrual Method
(a) The key events occur when the income is earned and when the liability arises.
iii)      Taxable Income
(1)   Taxable Income means gross income minus the deductions allowed by this chapter other than the standard deduction. (§63(a)) TI = GI – all deductions (not SD)
(2)   Taxable Income means adjusted gross income minus the standard deductions, and the deduction for personal exemptions provided in §151. (§63(b)) TI = AGI – (SD + PE). AGI = GI – §62 Deduction. TI = GI – §62 Deductions – (SD + PE).
(a) §62 Deductions
(i)       Trade and business deductions
(ii)     Losses from sale or exchange of property
(iii)    Retirement savings
(iv)    Alimony
(v)     Moving expenses
(vi)    Interest on education loans
(vii) Higher education expenses
(viii)Health savings accounts
(3)   Therefore there are two formulas for finding taxable income and the taxpayer gets a choice.
iv)      Gross Income
(1)   Rule: Gross income means all income from whatever source derived.
(2)   Rule: Gross income is determined by an objective fair market value, not whether the object that the person gained is worth something to that particular taxpayer.
(3)   Rule: Gross income during a fair market purchase is not realized until there is a gain on the sale, not on finding a good bargain.
(4)   Rule: Gross income from services goes to the person who performed the services, not to the person that the benefits are paid to.
(5)   Rule: There is no gross income from imputed income, income that comes from your own work or property going to you.
(6)   Rule: If property is transferred as compensation for services in an amount less than its fair market value, the difference between the fair market value and the amount paid is gross income. (Reg. §1.61-2(d)(2).)
(7)   Cesarini v. United States US District Court, Northern District of Ohio 1969
(a) People bought a piano, and years later, found money in the piano. They paid taxes on it, and then later asked for a refund.
(b) Rule: The statute of limitations is three years after the tax return for that year is due.
(c)   Rule: An income is realized when the taxpayer has dominion over the money.
(d) They owed taxes on the money found in the piano when they discovered it in the piano, not when they bought the piano.
(8)   Old Colony Trust v. Commissioner US Supreme Court 1929
(a) The company agreed to pay the officer’s tax liability for them. The government then tried to collect more taxes on the extra payments.
(b) Rule: If someone agrees to discharge obligations for them, those payments become extra income which will have to be taxed.
(c)   Rule: The form of receipt doesn’t matter.
(d) The officer had to pay the extra taxes when the company discharged the tax obligations.
(9)   Commissioner v. Glenshaw Glass Co. US Supreme Court 1955
(a) Two parties got punitive damages from court cases. They were then charged for taxes.
(b) Rule: It doesn’t matter if the taxpayer didn’t earn the money. They still owe taxes on it.
(c)   Rule: When there is an accession to wealth, clearly realized, and over which the taxpayer has complete dominion, there is income.
(d) The parties were liable for taxes on the punitive damages.
(10)      Charley v. Commissioner US 9th Circuit Court of Appeals 1996
(a) An employee would charge people for first class flights and then only use coach and collecting the flight miles.
(b) Rule: Miles gained from an employer during business flights are taxable.
(c)   The miles that the employee gained were taxable.
Problems
-Would the results to the taxpayers in the Cesarini case be different if, instead of discovering $4,467 in old currency in the piano, they discovered that the piano, a Steinway, was the first Steinway piano ever built and it is worth $500,000? Yes, because the purchase is presumed to be done at market prices, and they would just be taxed on the ascension of worth when they sold the piano.
-Winner attends the opening of a new department store. All persons attending are given free raffle tickets for a digital watch worth $200. Disregarding any possible application of I.R.C. §74, must Winner include anything within gross income when she wins the watch in the raffle? Yes, once Winner has dominion over the watch, he must include it in gross income.
-Employee has worked for Employer’s incorporated business for several years at a salary of $40,000 per year. Another company is attempting to hire Employee but Employer persuades Employee to agree to stay for at least two more years by giving Employee 2% of the company’s stock, which is worth $20,000, and by buying Employee’s spouse a new car worth $15,000. How much income does Employee realize from these transactions? $40,000 from salary, $20,000 from stock, and $15,000 from the car, totaling $75,000 in gross income.
-Insurance Adjuster refers clients to an auto repair firm that gives Adjuster a kickback of 10% of billings on all referrals. (a) Does Adjuster have gross income? (b) Even if the arrangement violates local law? Adjuster does have gross income from this arrangement, even if it violates local law. (See James v. US)
-Flyer receives frequent flyer mileage credits in the following situations. Does Flyer have gross income? (a) Flyer receives the mileage credits as part of a purchase of ticket for a personal trip. The credits are assignable. Flyer does not have gross income here because it is simply an exchange of goods and services for their price. 
(b) Flyer receives credits from Employer for business flights Flyer takes for Employer. The credits are assignable. Flyer does have gross income here under Charley v. Commissioner.
(c) Flyer receives the credits under the circumstances of (b), but they are nonassignable. Flyer still has gross income here. He simply must determine the fair market value as if they were assignable to determine the gross income.
-Doctor needs to have his income tax return prepared. Lawyer would like a general physical check up.  Doctor would normally charge $200 for the physical and Lawyer would normally charge $200 for the income tax return preparation. (a) What tax consequences to each if they simply swap services without any money changing hands? They each gain $200 in income
(b) Does Lawyer realize any income when she fills out her own tax return? No, because you can’t pay yourself.
v)       Exclusion for Fringe Benefits
(1)   Rule: Excluding an item is not necessarily the same as getting income and then paying for the item, because the item might be excludable

dopts a resolution authorizing its president on a discretionary basis to reimburse employees for educational expenses incurred in sending their children to private elementary or secondary school. E receives $5,000 this year for reimbursed educational expenses. What difference would it make if E were a professor at Apricot University and E’s child, Allison, is permitted to attend Apricot without paying the University’s $17,500 per year tuition? In the first question, the $5,000 is gross income per §117(d). In the second question, the $17,500 is not gross income so long as it’s not a discriminatory policy.
(6)   Other Fringe Benefits
(a) §132(a)(1) – No-additional-cost service – Services given to employees at a discount that don’t add much cost for employers are excludable, so long as it is non-discriminatory and for sale to customers in the regular line of business. Also see §132(b).
(b) §132(a)(2) – Qualified employee discount – Employee discounts are excludable so long as the discount isn’t larger than 20% for services or the profit margin for goods, and so long as the things being bought are ordinary business items. The discount must also be non-discriminatory. Also see §132(c).
(c)   §132(a)(3) – Working condition fringe – If the employee gets a deductible benefit from an employer, it’s excludable. Also see §132(d).
(d) §132(a)(4) – De minimis fringe – Small benefits to employees are excludable, along with retirement gifts to long time employees. Also see §132(e).
(e) §132(a)(5) – Qualified transportation fringe – Transportation and parking benefits are excludable up to $100 for transit and $175 for parking, adjusted for inflation. Also see §132(f).
(f)    §132(a)(6) – Qualified moving expense reimbursement – When an employer pays for an employee to move for work, it is excludable. Also see §132(g).
(g) §132(a)(7) – Qualified retirement planning services – Retirement planning services are excludable, so long as it is non-discriminatory. Also see §132(m).
(h) §132(i) – If companies have reciprocal agreements to use each other’s benefits, they are still excludable.
(i)    §132(j)(3) – Car use for car dealers is excludable.
(j)    §132(j)(4) – Gym access is excludable.
(k)   When an employee chooses between a salary and a fringe benefit, the fringe is still deductible.
Problems
-In the situations described below, consider whether the property, services or facilities furnished by the employer to the employee are includible in the employee’s gross income and, if so, at what value.
(a) Madison is an executive of an advertising agency. When he was promoted to Vice President, his employer redecorated his office with comfortable furniture, thick pile carpeting and original modern art works. This is not includible in gross income unless Madison takes the stuff with him when he leaves.
(b) Bev is an associate in a prominent San Francisco law firm. The firm, which is located in the Embarcadero Center Complex, provides associates with free parking the building. The normal monthly charge for a reserved space is $150. Nonprofessional employees do not receive free parking. This is excludible under §132(a)(5). §132(a)(5) benefits are not subject to the discrimination clause, so the exclusion is still allowed even though other employees don’t get it.
(c) Hugh is a secretary in Bev’s law firm. The fi