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Tax
University of California, Hastings School of Law
Field, Heather M.

Federal Income Taxation – Field – Spring 2013
 
 
A.    Legislative Materials
a.       The Code: IRC of 1986
                                                              i.      26 USC
b.      Treasury Regulations
                                                              i.      Published by IRS: official interpretation of the IRC
                                                            ii.      In Title 26 of Fed Regs  
                                                          iii.      §1.61-1: regulation type §1 under §61 of the code
c.       Revenue Rulings: opinion abt what the law as applied to specific set of facts
                                                              i.      Not much deference, not thru the entire process
                                                            ii.      2001-43 = 43rd issued in 2001
d.      Revenue Procedure: describe procedures re rights and duties of payers
                                                              i.      2001-43 = 43rd issued in 2001
e.       Private Letter Rulings: individual payers abt individual situations
                                                              i.      IRS will inform if proposed action is ok: only relied upon by targeted payer
                                                            ii.      Yr, wk, #: 89-50-001 = 1st ruling, 50th wk, of 1989
B.     How bill = law
a.       Committee
b.      HoR votes
c.       Senate votes
d.      Reconcile the bill
e.       Presidential signature/veto
f.       Becomes law
C.     Administrative Materials
a.       Treasure Regulations: most important substantive laws outside the code
b.      Treasury Dept promulgates rules to interpret the statutes
c.       IRS = bureau w/in Treasury
D.    Judicial Materials
a.       Judiciary interprets the code
                                                              i.      Determines whether regulations that are promulgated by admin agency conform to the statutes
                                                            ii.      Very deferential to TRegs (Mayo)
b.      Chevron Std
                                                              i.      Congress directly addressed the precise Q @ issue
1.      If yes, reg given effect to unambiguously express intent of Congress
a.       If reg fails to do so, invalid
2.      If no, do the regs reflect a permissible construction of the statute?
a.       If yes, ct defers to regs
                                                                                                                                      i.      Even if ct would interpret differently
b.      If no, invalidate the reg
c.       Proposed/temporary regulations do not receive Chevron deference, only final regs
d.      Chevron applies in tax context (Mayo)
E.     Statutory Interpretation
a.       Intentionalism: ct determines what the leg intended to say @ time enactment
                                                              i.      Perspective: legislature
b.      Purposivism: determine purpose of statute @ enactment, not intended effects
                                                              i.      Perspective: Rzbly intelligent prsn reading statute
c.       Textualism: intent is irrelevant, look to plain language of the statute w/out outside resources, no leg history
                                                              i.      Consider cannons, not intent
d.      Practical: holistic, broad range of evidence, what statute ought to mean today
F.      Cannons of Construction: judicial maxims to read statutes
a.       Explicit exptns are exclusive: mention of 1 excludes others
b.      Words given common meaning, unless technical or art
c.       Identical terms given same meaning
d.      Every word has meaning
e.       Where specific language followed by general term, include things similar to the specified
f.       Titles/headings do not control meaning
g.      Statute read to avoid internal inconsistency
h.      Statutes referring to the same topic shall be construed together
i.        Grammar, punctuation relevant
 
A.    Structure of Tax Ct System
a.       TC (3):
                                                              i.      [1] US Tax Ct: deficiencies (don’t pay enough)
1.      No jury
2.      Appeal: Cir (in which payer resides)
                                                            ii.      [2] US District Ct: refunds (overpaid and sue for refund)
1.      Jury permitted
2.      Appeal: Cir
                                                          iii.      [3] US Ct of Federal Claims: refunds
1.      No jury
2.      Appeal: US Ct Fed Claims
a.       Regardless of residence
b.      Appeal the Appeal:
                                                              i.      SCOTUS
 
I.i.  Terms Defined
A.    Progressive Rate Structure: as income increases, rate increases
B.     Rate Bracket: distinct tiers in which new rates apply
C.     Marginal Tax Rate: tax rate applied to last $ of TI earned, not an avg rate
D.    Effective (Avg) Rate: the avg rate paid; effective always lower than marginal
E.     FMV: price @ which item changes hands btwn willing buyer/seller—no compulsion
I.ii.  Tax Brackets 2013
A.    10%
B.     15%
C.     25%
D.    28%
E.     33%
F.      35%
G.    39.6% [new 2012: American Taxpayer Relief Act] a.       Brackets indexed for inflation
b.      W/out: ppl would enter higher brackets w/out being any wealthier
 
II.  WHAT is Taxable
 
Taxable income § 63:
        Gross income (GI) [§ 61]                   —  § 62 Deductions
=  Aggregate Gross Income (AGI)
—  The larger: itemized deductions
           vs.  standard deduction
—  Personal exemptions (PE)
            =  Taxable Income [§63]  
A.    §62 Deductions
a.       Above/Below the line
b.      Above: all get deductions
                                                              i.      Employer/Owner: above
c.       Below: only benefitted if itemize
                                                              i.      Employee: below
d.      Rationale: employers spend $ and greater degree of importance in running a bis
B.     Itemized vs. Std Deduction
a.       Pick whichever >
b.      Further limitations on itemized deductions
                                                              i.      Floors on itemized deductions
                                                            ii.      If above the line deds, lowers AGI, lowers threshold for itemized
 
II.i.  GROSS INCOME
A.    GI: all income from w/e source derived [§61] Form is irrelevant
a.       Compensation for services
                                                              i.      Fees, commissions, fringes
b.      GI from business
c.       Gains from dealings in property
d.      Interest
e.       Rents
f.       Royalties
g.      Dividends
h.      Alimony, maintenance
i.        Annuities
j.        Income from LI and endowment Ks
k.      Pensions
l.        Discharge of debt [Crane] m.    Distributive share of prtnrshp GI
n.      Income re decedent
o.      Income from interest in estate or trust
p.      Free stuff = GI
q.      $, property, services realized (TR 1.61)
r.        Employer paying employee’s income tax [Old Colony Trust] s.       Windfall, treasure trove [TR 1.61-14(a); Cesarini]                                                               i.      Income when found, reduced to undisputed possession (SOL not ran)
t.        Illegal gains [TR 1.61-14] u.      Windfall, punitive Damages [TR 1.61-14; Glenshaw Glass]  
B.     Receipt of Financial Benefit
a.       Income: “undeniable accession to wealth, clearly realized, and over which taxpayer has complete dominion” [Glenshaw Glass] b.      Loan ≠ accession to wealth, must pay it back!
C.     Compensation for Services
a.       All compensation for services = income [§61(a)(1)] b.      Pymt of tax by empor was in consideration of services rendered by empee, G derived by empee from labor
                                                              i.      Old Colony Trust Co: If empor pays empee’s tax = income
                                                            ii.      Cassarini: treasure trove = income (by statute)
c.       If both parties know of large discrepancy, considered compensation = income
 
·         Problem
o   Win watch in raffle—GI, received value of the watch
o   Objective valuation: Doesn’t matter if don’t want it
Glenshaw Glass Co.
·         Deficiency case in tax ct. Income includes windfalls (punitive damages)
·         P won punitive damages—Congress did not intend to exempt punitive

imination against low paid, benefitting high paid
d.      Expls
                                                              i.      Empee of nat’l hotel chain stays in another town rent-free on vaca. Hotel has several empty rooms
1.      Excluded as n-a-c service fringe
                                                            ii.      Empee of nat’l hotel stays @ another town rent free on vaca, desk clerk bounces paying guest for free empee stay
1.      Cannot be excluded as n-a-c service fringe
                                                          iii.      Maid service to empees renting rooms
1.      Excluded as n-a-c service fringe
C.    Written Reciprocal Agreements [§132(h)(3)(i)] a.       Any service provided by empor to empee of another empor, treated as if provided by his empor
                                                              i.      “same line of bis” req still applied
 
A.    Qualified Employee Discount
a.       Value of courtesy discounts on items puch’d by empee from empor = excluded
                                                              i.      From empee’s GI [§132(a)(2),(c)]                                                             ii.      Includes: purch of property & services
1.      Not loans to empees from fin institutions
                                                          iii.      Discount can be price reduction or rebate [TR§132-3(a)(4)] B.     Requirements
a.       Must be in same line of bis [§132(c)(4)] b.      Cannot discrim w/ re high-comp’d empees [§132(j)(i)] C.     Ceiling on Exclusion
a.       Services: exclusion cannot >20% price normally charged [§132(c)(1)(b)] b.      Property: exclusion cannot >GP% on all goods empor sells [§132(c)(1)(a)] Gross profit percentage =
aggregate sales price — cost
aggregate sales price
c.       Expl: empee buys $2k sofa from empor for $1k
                                                              i.      Store, prior yr: $1M sales, $600k COGS
Gross profit percentage =
$1,000,000 — $600,000
= 40%
$1,000,000
                                                            ii.      $2k * 40% = $800 excluded as qualified-discount
1.      $1k — $800 = $200 included in GI
 
A.    Working Condition Fringe
a.       Empee can exclude cost of prop/serv rec’d that would be deductible as bis exp/dep if empee had paid for it himself [§132(a)(3),(d)] b.      No anti-discrim clause
c.       Expl
                                                              i.      Use of co car/airplane for bis
1.      Empee bis convention, empor pays travel
                                                            ii.      Empor’s subscription to bis newspaper for empee
                                                          iii.      Bodyguard for empee security
                                                          iv.      On-the-job training provided by empor
 
A.    De Minimis Fringe
a.       Empee can exclude prop/serv whose value is so small that accting for it would be unrzbl or admin impractical [§132(a)(4),(e)] b.      Eating facilities: discounts @ empor-op’d cafeteria = de minimus, IF…
                                                              i.      Located on/near empor’s bis premises, AND
                                                            ii.      Revenue generated from operating normally =/exceeds oper costs [§132(e)(2)]*
c.       Must provide on same basis to low/high income