Definitions
Wasting Asset- an asset that depreciates in value (like a car…but very few other things do)
Basics
Five taxable entities
Estates, trusts, partnerships, corporations and individuals
We have a voluntary compliance system- we fill out our own taxes
To ensure that we have compliance- we have a system of penalties (civil and criminal), and audits
Purposes
Raises funds for the fed. gov- 2/3 of the operating budget
To stimulate a slumping economy (can cut fed. interest rates, or by a tax cut or rebate)
To promote social policy- types of investments you make or don’t make (tax shelters are not really in favor), child care credit, business expenses, car leases, retirement plan, pollution taxes, school decisions, etc.
Encompass an earned income tax program- negative tax program
Promote political policy
Taxes- based on an ability to pay, i.e. what the gov says is your ability to pay- go back for the taxable year,
Individual taxpayers- calendar yr from Jan to Dec – return will be due 3 1/2 months after end of yr- April 15
Corporate- due by fiscal or calendar year, depending on the most applicable- returns are due 2 1/2 months after end of calendar year- March 12
Fiscal year- any 12 month period that does not begin on Jan 1- some businesses might use a fiscal year, depending on when company got started
To Interpret Tax Law
Statutes/code sections (absolute law)
Then Regulations
Promulgated by the Treasury dept, of which IRS is a branch)(in back of codebook, identified by and 1. Ex. Sec. 60.1.
Most code sections have corresponding regs.
Are given the presumption of law because Congress has deferred to treasury dept. – hard to challenge, courts will give great deference to the treasury dept.
Then Administrative Rulings- issued by the IRS, Several Types
Revenue Rulings- referred to as Rev. Rule- first two numbers correspond to the yr, and then the number of the ruling
Issued when IRS thinks public guidance would be helpful- it takes request for rulings, redacts identifying date and then gives facts, analysis, reasoning and conclusion of IRS
Falls under the Chevron analysis
Applies to everyone, less important than regs or code section, but still impt. – can cite these rulings as authority (can serve as an insurance policy to prove your case)
Private Letter Ruling- PLR- issued to individual taxpayers and cannot be discussed as precedent
Is your own insurance policy from the gov.
If it is someone-else’s PLR- it is better than nothing, but still not as good as if it was your PLR
Gov does not publish them, but can be released under FOIA, and can be found online, published by private publishers
Rulings in general are guidance gov. issues to taxpayers-
Then Cases
Ways that tax practice differs from reg. law
Tax cases differ from reg. cases- opponent (fed gov, usually the IRS) is always the same
There is an ability to forum shop- b/c there are three courts
Three courts
Federal district court-
Is a refund jurisdiction- you must have already paid the tax, need to have filed for a refund and either been denied or six months needs to have pased
It is a jury court, just as usual
Tax Court
Is a federal court, hears only tax cases, is a prepayment forum
Prepayment forum- can sue first, pay later forum
No jury here- either heard by a judge or panel
And rules of evidence are more relaxed than in the fed. district court
Do not need to be an attn. to represent someone- you do need to be certified by a tax court (enrolled agents and accountants can be certified, attns are automatically certified)
Tax Court judge- have greater expertise than fed. court judges
Based in Washington, DC but has branches in every major city, judges travel around the country
Appeals are to the fed. app. court to the local fed. app. court.
US Court of Federal Claims
Has refund jurisdiction- pay first, sue later
No right to a jury trial
Appeals go to court of claims for the fed. circuit and then to the SC
All of these cases are ultimately appealable to SC
Acquiescence – Commissioner often publishes acquiescence (likes result and will follow it) or non acquiescence (notated asq or non asq)- which means that the case will or will not be followed in that circuit (until overturned by a higher ct)
(Like a ruling for other jurisdictions)
To Figure out taxes
So BOTTOM LINE
Gross income minus deductions= taxable income multiplied by rate= tentative tax liability minus tax credits= tax due
So figure out gross income, then subtract deductions= taxable income
Deductions- all taxpayers get standard deductions given by gov.,
To get over standard deductions, most people have other deductions, like home mortgage interest
Exemption- usually one per taxpayer, one per dependent, one if you are over 65, one if you are legally blind, although it depends
Taxable income (net income) multiplied by tax rate for you= tenative tax liability
Rate- determined by status (married, single, etc.) and your level of taxable income
Tentative tax liability- tax credits (sub tractable dollar by dollar against your tax liability) = amount of tax due
Tax credits= like the amount withheld from your paycheck by your employer. If you have overpaid, when you file your taxes you can ask for the overpayment back
April 15- you must FILE the return, not necessarily pay the tax
(if you do not file, the penalty is ten times when you fail to pay)
Usually employer will withhold and then you won’t really owe the gov that much- look to your W2
If you don’t file a return, gov will reconstruct your income for you (as in Dougherty)- the gov doesn’t care about the benefits, deductions, etc.
Net Worth method- look at everything from end of year minus beginning of year worth
Gross Income (Sect. 61)
a. Gross income includes all income from whatever source deriv
Statute of Limitations will run – three years either from the due date of the return or the time filed (whatever is later)
a. Return is considered filed when received by gov.
iii. Money is considered yours and taxable when “reduced to undisputed possession” (piano buyers say it was when they bought the piano)
1. No fed law, so state law, no state law, so English law-which says
a. Found money is yours when it is yours against all but the true owner
b. So, the money was only yours when you FOUND it (w/i SoL)
f. Realization vs. Recognition
i. Realization- The point at which the taxpayer’s net worth increases/economic benefit is seen…when is the appropriate time to tax the taxpayer
1. Definition of realization- a realization is an undeniable accession to wealth, clearly realized, and over which the taxpayers have complete dominion (Commissioner v. Glenshaw Glass)
2. E.G. if you buy coke stock at x then three years later it is 3x, and then 1 year later at -x= you won’t be taxed until you have a realization event- through a sale or a swap
3. If you buy a piano at x and later find out it is worth 5x- can’t be taxed until you sell it (otherwise gov would have to force appraisals)
4. Realization event- Any event which changes your expectation in connection with that asset usually a sale
ii. Recognized- whether or not something is designated if income under Sect. 61, it is recognized unless there is a specific provision that includes it- Recognition – Whether a specific, generally statutory “nonrecognition” rule applies to mandate disregard of the realization event.
1. If realized and recognized= taxable
g. Different Definitions/Theories of gross income
i. Glenshaw Glass definition of gross income- economic benefit that is an undeniable accession to wealth, clearly realized over which taxpayer has dominion
ii. Doesn’t matter what form
1. Cash, property, services, etc.
2. No problem with cash, but with property and services you must figure out the value of the item
iii. Old Colony Trust- if someone frees you of a legal obligation that involves paying money- it makes you richer because you have acceded to wealth -UNLESS taxpayer can point an exclusion
