Luke-Tax Outline Spring 2014
CHAPTER 1: INTRODUCTION
· Gross Income – IRC § 61 – Gross Income Defined
o Determining gross income is the first step in computing taxable income.
o § 61 outlines 15 items that constitute gross income – but the list is not inclusive.
§ Each subsection outlined in § 61 has counterpart code sections that outline exclusions & exceptions
o Treas. Reg. § 1.61-1(a), § 1.61-2(d)(1): Gross income includes income realized in any form, whether in money, property, or services.
· Adjusted Gross Income – IRC § 62 – Adjusted Gross Income Defined
o Adjusted gross income is gross income minus certain deductions (outlined in § 62)
§ Two “Types”
· “above the line” – deductions a taxpayer considers in determining his adjusted gross income
o “above the line” refers to Form 1040
· “below the line” – deductions a taxpayer may make only AFTER the adjusted gross income has been determined
o these are the deductions one makes if they are going to itemize their deductions, and NOT take the personal deduction. Do not need until after determining AGI.
§ Deductions begin with IRC § 161, and are usually construed narrowly because courts consider these deductions to be “legislative grace”
§ Every time you have an expense you believe is deductible, you must find a specific Code provision authorizing the deduction.
· Taxable Income – IRC § 63 – Taxable Income Defined
o Adjusted Gross Income – below the line deductions (itemized deductions) OR the standard deduction.
§ (b) – Individuals who do not itemize their deductions: AGI – Standard Deduction – personal exemptions provided for in § 151
§ Individuals who itemize their deductions: subtract everything from Gross Income
· Unless they want to deduct charitable donations, then need to determine AGI (because charitable donations may be up to a percentage of your AGI)
o IRC § 67 – 2-Percent Floor on Miscellaneous Itemized Deductions
§ Certain itemized deductions may not be deducted except to the extent that, in the aggregate, such deductions exceed 2% of the taxpayer’s adjusted gross income.
o Personal Exemptions – IRC § 151 – Allowance of Deductions for Personal Exemptions
o Once you determine your taxable income, you are taxed a certain rate. The amount that results from being taxed at that rate à taxes you have to pay
o §§ 21- 53 outline credits that may be taken against the tax, but the most common is in § 31- Tax Withheld on Wages
o A credit is worth more than a deduction. Deductions only matter to the extent that you are still taxed. Thus, a $1 deduction is still taxed at whatever rate – so it may only be worth $0.40. A credit is a dollar-for-dollar amount.
· Resolution of Tax Issues through the Judicial Process:
o Trial Courts:
§ Tax Court
· “poor man’s court” – taxpayer commences an action in this court for re-determination of a deficiency without first paying the asserted deficiency.
· The most sophisticated trial court from the standpoint of tax expertise
· Used to be an independent agency of the executive, but is not a part of the judicial branch.
· Cases tried without jury by one judge, who submits the opinion to a chief judge for consideration; the chief judge either allows the decision to stand or refers it to the full tax court for review. Reviewed decisions will be accorded greater weight.
§ Federal District Courts
· Jurisdiction in any tax case against the United States seeking a refund of tax.
· Are tried before juries, and must be brought in the district in which the taxpayer resides or where it has its PPOB
· Must may the amount in dispute before commencing a refund action
§ United States Court of Federal Claims
· Created by the Federal Courts improvement Act of 1982
· Jurisdiction over all tax suits against the USA regardless of amount, but no jury trial
· Taxpayer must pay the deficiency (aka only refund suits)
o Appellate Courts
§ Tax Court Appeals à Federal Court of Appeals of the United States
§ United States Court of Federal Claims à United States Court of Appeals for the Federal Circuits
· The federal circuit’s decisions are reviewable by the Supreme Court
§ Federal District Courts à Appropriate Federal Court of Appeals
· The Three Branches’
ons) + Exemptions)] à Taxable Income
· Taxable Income x Tax Rate è Taxes Owed
· Taxes Owed – Credits
CHAPTER 2: BASIC GROSS INCOME CONCEPT
· § 61(a): Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: (list of 15)
o list is not exclusive, and means that if it falls within “income” under this section, you must find an exclusion, deduction or regulation that indicates there is an exception that makes it not includable.
· Treas. Reg. § 1.61-1(a) – General Definition
o Gross Income means all income from whatever source derived, unless excluded by law. Gross Income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as in cash. Section 61 lists the more common items of gross income for purposes of illustration….Gross income, however, is not limited to the items so enumerated.
§ AKA – not just cash, a very broad definition. Property and services need to be included in income, otherwise taxpayers would just barter to avoid tax consequences; also, taxpayers who receive services or property would receive an unwarranted tax advantage were gross income limited to cash receipts.
· Treas. Reg. § 1.61-2(d) – Compensation Paid Other Than in Cash
o (1) Except as provided in paragraph (d)(6)(i) of this section, if services are paid for in property, the fair market value of the property taken in payment must be included in income as compensation. If services are paid for in exchange for other services, the fair market value of such other services taken in payment must be included as income as compensation.