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Federal Income Tax
University of Iowa School of Law
Raymond, Margaret

RAYMOND: FEDERAL INCOME TAX SPRING ‘07
 
I.            THEORIES
                 A.            Different Types of Tax
                                          1.            Theory: $1 is worth more to a poor person than it is to a rich person.
                                          2.            Regressive Tax
                                                                   a.            Flat tax: everyone pays the same percentage
                                                                  b.            Hits poor people harder
                                          3.            Progressive Tax
                                                                   a.            Marginal rate (current tax system)
                                                                  b.            Taxes excess money greater than it does the first $15k or so
                                          4.            Head Tax: every person would pay the same fee (i.e. every resident must pay $1000)
                 B.            Taxation as a Vehicle of Social Reform
                                          1.            Theory: the tax system has built-in incentives that favor certain activities over others
                                                                   a.            whether intended or unintended (see pp. 57-59)
                                          2.            Concern: tax cuts or deductions are not always the best way to deal with certain problems (i.e. Bush’s Healthcare Plan)
                                          3.            Politics: there’s more than one way to skin a cat…
                                                                   a.            Example: Congress wants to encourage housing, what are their choices?
                                                                                             i.            cut home owner’s a check? à this will cause a huge political debate
                                                                                           ii.            give home owner’s a deduction à this is much easier to pass
                 C.            Policy Goals
                                          1.            Raise Revenue
                                                                   a.            With inflation rising, people pay more taxes on their investments (p. 12)
                                                                  b.            Do people have incentives to underreport? à are the penalties too small, considering the small likelihood of being audited? (p. 20)
                                          2.            Fairness?
                                                                   a.            “Vertical Equity:” ?
                                                                  b.            “Horizontal equity:” want to treat similarly situated persons the same (see Clark v. Commissioner, p. 121 à sometimes we are in a no win situation)
                                          3.            Administrative Practicality
                 D.            Taxpayer’s Interests
                                          1.            “A Penny Saved Is More Than a Penny Earned:” assuming a static rate, the taxpayer always wants to defer payment because money earns money
                  E.            Methods of Accounting
                                          1.            Cash Method (p. 25)
                                          2.            Accrual Method (p. 25)
                                          3.            Annual Accounting (see Burnet v. Sanford & Brooks Co., p. 126)
                                                                   a.            Rationale: a transactional approach would be administratively difficult
                                                                  b.            Carryovers/Carrybacks (§§ 172, 1212): blunt the harshness of the annual accounting system
                                                                         

        a.            Internal revenue code
                                                                  b.            Case law
                                                                   c.            Treasury regulations
                                                                  d.            Committee reports
                                                                   e.            Letter rulings
 
III.            WHEN IS INCOME
                 A.            Recognition of Gains and Losses from Investment in Property
                                          1.            General Rule: not recognized as income until sale or disposition – there must be a realization event (§ 1001)
                                                                   a.            Requirement: the properties exchanged must be “materially different” (see Cottage Savings, p. 217, quoting the Regs.)
                                                                  b.            Policy:
                                                                                             i.            valuation problems
                                                                                           ii.            fluctuation problems
                                                                                          iii.            liquidity problems:
(a)    taxpayer must sell the property to be able to pay taxes on appreciation (see Eisner v. Macomber, p. 199)
                                                                                         iv.            administration problems