Income Taxation Outline
– Factors in Auditing:
o 1) Level of Income
o 2) Type of Income
o 3) Special projects (ex. giving car to charity)
o 4) Referrals (someone turns someone in)
o 5) Tax preparers who have made past errors
– Code is complex
o Special words to look out for when reading: “qualified”= refer only to definition of that word provided in that code section; “to treat” = we know its not this, but are going to treat it like this for this purpose.
o Has to be complex b/c it applies to so many people, is putting mathematical concepts into words, want to do favors for certain constituents, have to be precise to try to avoid existence of loopholes.
– Major theme in taxation – horizontal equality: people w/ same amount of wealth should be taxed the same (regardless of the source of the income)
I. What is Income?
a. IRC § 61(a): (Gross income defined) Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:
i. (1) Compensation for services, 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) income from life insurance and endowment contracts (11) pensions (12 Income from discharge of indebtedness (13) distributive share of partnership gross income (14) income in respect of a decedent; and (15) income from an interest in an estate or trust.
b. IRC 6501 (statute of limitations): Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed w/in 3 years after the return was filed
c. Useful checklist: Gross income includes the receipt of any financial benefit which is:
i. Not a mere return of capital
ii. Not accompanied by a contemporaneously acknowledged obligation to repay, and
iii. Not excluded by a specific statutory provision.
Receipt of Economic Benefits
Cesarini v. United States (DC, 1969): T’s randomly found money in their old piano. Don’t think that money should be included in their gross income.
i. Holding: yes, the money found in piano is part of gross income and thus taxable, even though found money is not specifically stated in list found in § 61.
ii. Rule: Under § 61 All income is taxable unless it is specifically excluded.
iii. Note: T’s claim statute of
able it would create incentive for law suits.
Charley v. Commissioner (9th cir, 1996): T traveled for business. Would charge for 1st class flight. Then would use his own frequent flyer miles to upgrade to first class and have difference b/w coach and 1st class ticket put in his personal travel account.
i. Holding: Yes, travel credits converted into cash through a personal travel account do constitute gross income and are taxable. The travel credits/frequent flyer miles are given by the company and are thus compensation.
Rule, Illegal income: income derived through illegal means is taxable. There is no statute of limitations on intentional tax fraud. It is often easier to get a criminal through tax fraud than for other crimes.
(owning a rental) Helvering v. Independent Life Ins. Co. (US, 1934)
i. Holding: T does not have to pay tax on a rental building T owns and occupies
ii. Rule: the rental value of a property the owner is using is not taxable. (though some economists feel otherwise)