FEDERAL INCOME TAXATION
SPRING 2012
I. INTRODUCTION
1. Tax Law
a. Code: Title 26 of USC.
i. The Tax code is federal law and trumps regulations.
ii. In the tax code there are 5 taxable entities, all of which can be taxed under income tax:
aa. Individuals
bb. Corporations
cc. Trusts
dd. Estates
ee. Partnerships
b. Regulations: help fill gaps & ambiguities in code but never contravene code. IRS has the right to promulgate regulations. Although they are not law. They are the next best thing.
i. Code > Regulations
c. Administrative Ruling: Ruling handed down by the IRS.
i. Revenue Ruling: General ruling issued by the IRS on a particular tax issue and applies to everybody. You can cite it as authority unless it has been modified or revoked.
ii. Private Letter Ruling: A ruling that is issued to an individual taxpayer. you are putting together a transaction and you don’t know how the taxes work you can make a request to the IRS for a ruling. If you get a favorable ruling it is like an insurance policy. This only applies to the individual but the IRS has a duty of consistency.
d. Three forums for tax cases:
i. Federal District Court:
aa. “Refund Jurisdiction.”
bb. Pay tax first, then file claim for refund with service. If denied or no response then may file complaint with federal district court. Usually heard by jury.
cc. More favorable to T.
ii. US Tax Court:
aa. “Prepayment.” Sue first, pay later.
bb. Do not have to pay tax first before going to the tax court. “Poor-man’s court” (a misnomer). Case heard by tax court judge and no jury. Own rules and procedures, usually less formal than Fed. Dis. Court.
cc. Court is based in D.C., and you can go there, but most major cities have a tax court and the judges will travel around country to hear cases.
dd. Less favorable to T.
iii. US court of federal claim:
aa. refund jurisdiction.
bb. No right to jury trial, case heard by claims court judge.
cc. Based in DC where you have to go to be heard.
II. INCLUSIONS IN GROSS INCOME
1. § 61: Gross income defined: Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to):
(1) Compensation for service, including fees, commissions, fringe benefits, and similar items
(2) Gross income derived from business
(3) Gains derived from dealings in property
(4) Interest
(5) Rents
(6) Royalties
(7) Dividends
(8) Alimony and separate maintenance payments
(9) Annuities
(10) Pension
(12) Income from discharge of indebtedness
(13) Distributive share of partnership gross income
(14) Income in respect of decedent; and
(15) Income from an interest in an estate or trust
a. From gross income we subtract deductions. There are two types of deductions:
i. Above the line: section 62. They are not limited. They affect the adjusted gross income (AGI) by lowering it. From the AGI you go with a standard or itemized deduction.
aa. Standard Deduction: You take this deduction regardless. Everybody gets it. It is usually about $3k per individual. Here there are also personal exemptions.
ii. Itemized Deductions: section 63 (d) and (e). In order to take these they must add up to more than the standard deduction. You cannot take both. From here you can also take personal exemptions.
b. Once we get AGI and then subtract out the deductions and exemptions we then get taxable income. You then multiply that by your tax rate. this gives you your tentative tax.
c. You then get to subtract credits. They reduce your tax liability dollar by dollar (deductions decrease taxable income). section 21 et. seq. Section 31 is the credit representing the tax withheld from paycheck.
d. This final number is the tax liability or the tax owed.
e. Any economic benefit is included in gross income. Some things are excluded like gifts.
2. There is a presumption of includability and it is up to the taxpayer to show with a provision that it is excluded.
company’s stock, which is worth $20k, and by buying Employees spouse a new car worth $15k. How much income does Employee realize from these transactions?
aa. 40k – salary – 61(a)(1) – compensation.
bb. 15k – car – §1.61-2(b)(2).
1. NOTE: The car is given to the spouse and not to him.
2. It is considered taxable for employee because it was in consideration, then it is considered a gift for the spouse.
3. It was the employer fulfilling employee’s legal obligation like in Old Colony Trust.
cc. 20k – stock – 61(a)(1) – compensation.
1. No difference from straight cash and receiving a comparable amount of property
e. Illegal Kickbacks – Income does not have to be lawful to be taxable. Insurance adjuster getting 10% of billings on all referrals is receiving economic benefit, thus gross income, even if violates local law.
i. This is to keep the Service from treating crooks better than honest people.
f. Capital Improvements Rendered in Lieu of Rent
i. If rent abated: If parties agree rent will be abated to take into account capital improvement provided by tenant (add on deck then it’s included as income as rent. and will increase LL’s basis in property.
aa. Reg. 1.61-2(d) – FMV of services taken in payment must be included in the income as compensation. So if tenant builds $2000 deck, but only incurs cost of $500, LL still includes $2,000 in gross income (and add to basis).
bb. Tenant’s Tax Consequences: Rent abatement – cost of services = income. So if tenant received $2000 rent abatement, spent $500 on building deck, then got a $1,500 enrichment, which is considered income.
