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Federal Income Tax
University of Dayton School of Law
Searcy, E. Dale

University of Dayton School of LawProfessor Searcy – Spring 2009
Lesson 1: Interpreting Code Gross Income Provisions
Taxable Income- Is gross income less certain authorized deductions.
Section 61- Defines gross income as “all income from whatever source derived.”
1.61 – 14(a)- Miscellaneous types of gross income: In addition to the items enumerated in section 61(a), there are many other kinds of gross income. i.e., Punitive damages, another person’s payment of the taxpayer’s income taxes, illegal gains constitute gross income, treasure trove.
Hypo 4: What generic reservation does 61(a) through (1) contain which will entitle some receipts to avoid being included in gross income? Items such as gifts or inheritances won’t count as gross income.
Should it be presumed that a receipt which might be “gross income” but is not clearly “gross income” is includible in gross income (which would make it taxable) or is not includible in gross income (which would make it tax free)?
Glenshaw Glass p. 54
Issue- Whether money received as exemplary damages for fraud or as the punitive two-thirds portion of a treble-damage antitrust recovery must be reported by a taxpayer as gross income.
Facts- Glenshaw received $324,529 of punitive damages for fraud and antitrust violations in a lawsuit. Glenshaw did not report this money as income for the tax year involved. The Commissioner determined a deficiency claiming as taxable the entire sum less only deductible legal fees.
Holding and Rationale- There was an “undeniable accession to wealth, clearly realized, and over which the taxpayers have complete dominion. The mere fact that the payments were extracted from the wrongdoers as punishment for unlawful conduct cannot detract from their character as taxable income to the recipients”. “Certainly punitive damages cannot reasonably be classified as gifts, nor do they come under any other exemption provision in the Code”. 
Hypo 7: What exact words, i.e., what phraseology, does the Supreme Court employ in Glenshaw Glass to equate with the concept of income? Undeniable accessions to wealth clearly realized, and over which the taxpayer have complete dominion.
If Then Statements- The “if” portion of your proposition will be a description of the factual circumstances which the legal rule arises. The “then” portion of your proposition will be the legal consequences of those facts.
Hypo 8: Would the express rules of Reg. 1.61-14(a) have been helpful to the Government in making its case against the taxpayer in Glenshaw Glass. Yes, it would have helped the government make their case because it says that “punitive damages are gross income”.
Hypo 8b: Why do you suppose this Reg. was not cited by the Government in its brief in either of the consolidated Glenshaw cases? Because the Reg. hadn’t been written yet.
Receipts from Borrowed Money and Illegal Activities: p. 60-63
If the borrower has no intent to repay a “loan” and the lender is unaware of that fact, the “loan” is not a loan but an illegal appropriation of the would-be creditor’s property, which is income to the so-called borrower under Section 61.
i.                    A security deposit may be likened to a loan for tax purposes.
ii.                  Loans are not income because of the obligation to pay the money back.
Illegal Gains- In James v. U.S. the Supreme Court decided that illegal gains are income despite a legal obligation to make restitution.
i.                    Congress intended to tax both legal and illegal sources of income. i.e., income from ransom, bribes, graft, black market gains, illegal prize fight pictures, race track bookmaking.
It is imperative that the concept of gross income be kept completely separate from the concept of deductions. The statutory provisions regarding gross income are different from those regarding deductions. Whether receipt from a particular activity is or is not gross income has little to do with whether deductions related to that same activity are allowable.  
Hypo 9: Assume an individual “L” engages in the business of rendering legal advice as a sole practitioner, and receives from clients during year 1 an aggregate of $100,000 in legal fees paid in cash. During year 1 “L” pays office rent of $30K attributable to year 1, pays $3K in malpractice insurance premiums attributable to year 1, and pays his secretary $25K salary in year 1. The income tax laws allow “L” a year 1 deduction for a total of $58K in business deductions. Analyze “L’s” year 1 law practice gross. Answer the GI is the $100K because GI is not concerned with taxable income.
Hypo 10: Explain the difference, if any, between the increase in taxpayer’s wealth resulting from receipt of money via a conventional bank loan versus receipt of money via embezzlement. Explain whether “wealth” as used in the preceding sentence is a tax concept or a non-tax concept. Analyze the extent to which the tax laws do make a distinction between the two, and whether the tax laws ought to make such a distinction.
The term “wealth” is a tax concept because if there is an accension to wealth then it is a taxable event but if there isn’t an accension to wealth (like with a loan) then it isn’t taxed. The tax laws do differentiate between the two, and I believe they do so correctly. Money gotten from illegal means should be taxed and obviously loans should because the money will be returned.
 
Hypo 12: Write out the Congressional re-enactment canon of statutory construction in your own words.  
 
Lesson 2: Gross Income
A.    Gross Income- Section 61(a) Taxable income is gross income less certain authorized deductions. “Income” is different than gross income.
i.                    De Minimis Rule- There is no de minimis rule for including an item in gross income. As a result, if a taxpayer received a single dollar which is includible in gross income, that dollar is required to be reported in the income tax.
ii.                  The small amount of the receipt is irrelevant in establishing the correct gross income for the year.  
B.     Income is an idea that has predated income tax. Income is not unique to the IRS. The constitution says that people from each state should pay the same amount of federal tax. The 16 amendment to the constitution says that Congress may tax people’s income without apportioning that income to each state.
C.     All income is NOT gross income. 61(a).
D.    It doesn’t matter how small the income is the law requires it to be reported.
Code Section 61 defines gross income as “all income from whatever source derived.”
i.                    Income-
ii.                  Embezzle

an asset.
A debtor’s obligation is a liability.
 
Hypo #1
1a) Year 1 gross income was not affected by the $30,000 loan.
1b) IB’s gross income would not be effected
 
THE SUBSTANCE OVER FORM DOCTRINE and the AS IF ANALOGY
Substance over form- Tax consequences are said to turn on the genuine nature of a transaction or event, rather than upon the appearance in which the transaction or event was cast by the taxpayer. Legal outcomes (including tax outcomes) should depend upon what “really” happened.
The substance over form doctrine calls for an analytical re-construction of the FACTS of the event. To aid in such a re-formulation, another analytical tool known as the “as-if” analogy is often very useful.
The as-if analogy is purely a factual analysis tool, and not a legal analysis tool.
Hypo #2
The corporation’s payment to the IRS did not cause his NW to change. 
Illegal Income- Extortion, robbery, drug dealing.
i.                    Ask yourself if there is an enrichment? Yes, there is.
a.       Loans- net worth is the best way to measure wealth. If you received a loan for $5K your assets increased by $5K but your liabilities also increased by $5K and therefore there is no increase in net worth.
b.      Intent to repay- a criminal has no intent to repay stolen property. Additionally, the likelihood of repayment isn’t very high.
ii.                  Illegal income is taxable.
As if Analogy- Steps
 
As if co. sent the money to the president.
 
Lesson 3:
INCOME RECEIVED IN KIND
Bartering can be for services rendered or the exchange of products.
The Exclusion of Gifts and Inheritances
I haven’t taken notes on the case on.  I plan to do that between classes tomorrow…
 
THE INCOME IN KIND RULE versus the CASH EQUIVALENT DOCTRINE
 
Cash equivalent doctrine- The dollar amount includible when GI is received in kind is the Fair Market Value of the property measured on the date of realization. The receipt of property is as if receiving cash for the fair market value.
Was the receipt of property a gift?
Donative intent- The mind of the transferor. The intent to convey must be voluntary. A person handing over their wallet to a mugger is not voluntary.
Delivery- What is needed to carry out delivery?
i.                    Ordinarily it is accomplished by handing physical possession to the recipient.
ii.                  For objects such as land there is symbolic delivery such as delivery of title.
Acceptance- The recipient may not want a gift for certain reasons. They cannot be forced to take the gift. Ex. A contaminated piece of real estate.
The internal revenue code is a statute.