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Income Taxation
University of Iowa School of Law
Jones, Carolyn C.

Jones_Basic Federal Income Tax_Spring_2014
       I.            Definitions:
a.       Marginal tax rate – the tax rate on the last $ you earn
b.      Effective tax rate – tax rate per $
c.       Progressive tax rate – more income you have, the higher marginal tax rate
                                                              i.      United States has a progressive federal income tax rate
    II.            Income Tax Regulations (back portion of supplement)
a.       [Regulation type]. [Code section being interpreted] – [arbitrary #]                                                               i.      Ex) 1.61-4
1.      “1” is Income Tax Regulation
 III.            Court system
a.       U.S. District Ct. & Court of Fed Claims – required to pay tax for such court to have jurisdiction
                                                              i.      After paying tax, you would sue for the refund
                                                            ii.      Ct. of Federal Claims – No juries
b.      Tax Ct. – NOT required to pay tax for court to have jurisdiction
                                                              i.      Most cases filed here for such reason
1.      Accountants can represent their clients
                                                            ii.      Tax Court has no juries either
                                                          iii.      Tax Ct. has Golsen rule:
1.      “Even though Tax Ct. may have a different rule, the Tax Ct. will apply law of its respective U.S. Court of Appeal”
 IV.            How to Calculate Federal Income Tax (Form 1040 on p. 16-17)
a.       Step 1 – Add Lines 7-22 to arrive at “Gross Income”
b.      Step 2 – Subtract certain business expenses & certain individual deductions (the “above-the-line” deductions) to arrive at “Adjusted Gross Income” (§62 à refers to allowable “above-the-line” deductions)
                                                              i.      These “above-the-line deductions” are on lines 23-36 of Form 1040
                                                            ii.      §62(a)(1) – Allows “above-the-line” deductions for most ordinary and necessary business expenses which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee
c.       Step 3 – Subtract eligible personal exemptions (§151)
                                                              i.      Ex) If you have dependents
1.      2013 personal exemption amount = $3,900
d.      Step 4 – Two-part choice to then arrive at “taxable income:”
                                                              i.      (1) Can subtract the standard deduction (§63(c)), or
1.      Since interest on mortgage payments is the most typical expense eligible for an itemized deduction, most people that don’t own a home would elect the standard deduction
2.      This is a figure that is already provided for us
                                                            ii.      (2) Can subtract the eligible itemized deductions (§63(d))
1.      (More info on “Personal Deductions” Section of Outline on p. 28)
e.       Step 5 – Apply tax rate
f.       Step 6 – Subtract tax credits (Lines 47-53)
g.      Step 7 – Arrive at Final Tax liability
    V.            IRC Income Tax Subchapters Overview
a.       §61-§70 – Definition of Gross Income, AGI, Taxable Income, Etc.
                                                              i.      §61 – Gross Income defined
                                                            ii.      §62 – Adjusted gross income defined
1.      AGI = Gross Income (§61(a)) – “above-the-line” deductions” (§62(a))
                                                          iii.      §63 – Taxable Income defined
1.      Taxable Income = AGI – Personal Exemptions (§151) – [Standard Deduction (§63(c)) or Itemized Deductions (§63(d))] b.      §71-§86 – Items Specifically Included in Gross Income
c.       §101-§139A – Items Specifically Excluded from Gross Income
d.      §151 – Deductions for Personal Exemptions
e.       §161-§199 – Itemized Deductions for Individuals and Corporations
f.       §211-§223 – Additional Itemized Deductions for Individuals
g.      §241-§249 – Special Deductions for Corporations
h.      §261-§280G – Items Not Deductible
§61. Gross Income defined
·         NOTE – §61(a)(3) – Capital gains (both long-term & short-term) included in GI
·         NOTE – §62(a)(3) & §165(f) – Capital losses (both short-term & long-term) are included as “above-the-line deductions” up to the total amount of capital gains + $3K (§1211(b)) and whatever gains are in §1231 “hotchpot”
§101-§139A à Exclusions from gross income
       I.            A. Scope of Gross Income (p.71)
a.       (1) Generally, Source of Cash Receipt does NOT matter (p. 71)
                                                              i.      Glenshaw Glass (p. 71):
1.      Source of income does not matter
2.      Jones à This case stands as a “large sweep of §61”
                                                            ii.      Cesarini (p. 75):
1.      Money found in piano not investment, and windfalls as such fall under income
b.      (2) BUT, Tax-Free Recovery of “Capital” is Allowed (p. 78)
                                                              i.      Capital gains example:
1.      Ex) Under §61(a)(3), if you purchase land as an investment for $50K and then sell it for $80K.
a.       You will be taxed on the gain of $30K
b.      You will not be taxed on the $50K recovery of capital
c.       (3) Sources Matter When Congress Says Source Matters: Statutory Exclusions of Cash Receipts or Equivalents (p. 81)
                                                              i.      (a) Gifts and Bequests (p. 81)
1.      §274(b) (enacted post-Duberstein):
a.       Denies the transferor a business expense deduction for any business gift, to the extent the total value of gifts made by the taxpayer to the recipient during the year exceeds $25
2.      Duberstein (Stanton case in Duberstein too) (p. 81):
a.       RULE – Interpret gifts colloquially
b.      Instead of a strict rule interpreting gift, better to decide each case on a case-by-case basis “based ultimately on the application of the fact-finding tribunal’s experience.”
                                                                                                                                      i.      Duberstein FACTS: Mohawk gave Duberstein, a non-employee, a Cadillac for having helped Mohawk make some deals and deducted such as a “business expense;” Duberstein thought of Cadillac as gift. HELD: Not a gift
                                                                                                                                    ii.      Stanton FACTS: Church members give Stanton $20K & he gave up his pension and retirement benefits in exchange (which leads to thinking that tranx was not a gift). HELD: Remand to D.C.; D.C. later determined that it was a gift
3.      §102. Gifts and inheritances
a.       Generally, gifts & bequests are excluded from GI
b.      (c)(1) “Any amount transferred by or for an employer to, or for the benefit of, an employee” shall not be excluded from gross income
                                                                                                                                      i.      SUMMARY – Gifts of employers cannot be treated as gifts
                                                                                                                                    ii.      §102(c) was also enacted post-Duberstein as well
c.       Reg. §1.102-1(f)(2) – Employee must show that the transfer made was not in recognition of the employee’s employment to exclude such transfer from gross income

accept the vacation
a.       This ruling is in conflict w/ the doctrine of “constructive receipt,” which states that a taxpayer who had the right to receive a taxable item cannot avoid the tax by “deliberately turning his back upon income”
                                                          iii.      §119. Meals or lodging furnished for the convenience of the employer
1.      Gross income does not include value of meals and lodging furnished by an employer to an employee, if the meals and lodging are furnished on the employer’s business premises “for the convenience of the employer” (plus additional requirement below)
a.       2-part TEST:
                                                                                                                                      i.      For the “convenience of the employer,” and
1.      (1) If meals à meals furnished on business premises
2.      (2) If lodging à employee is required to accept such lodging on the business premises as a condition of his employment
                                                          iv.      §107. Rental value of parsonages (parsonage = church house provided to member of the clergy)
1.      The rental value of a “parsonage” furnished to a member of the clergy as part of his compensation is excluded from gross income
b.      (2) Two Great Non-Statutory Exclusions of Non-Cash Economic Benefits (All cash economic benefits à statutory exclusions; non-cash economic benefits à the following 2 non-statutory exclusions) (p. 116)
                                                              i.      (a) Imputed Income
1.      (i) Imputed Income from Services:
a.       Non-cash benefits you create for yourself are NOT taxable
b.      Exclusion from gross income is only available in the absence of an exchange.
                                                                                                                                      i.      If services are paid for in exchange for other services, the FMV of such other services taken in payment must be included in gross income (Rooney rule)
                                                                                                                                    ii.      EXCEPTION – Services to family members are not included in gross income
2.      (ii) Imputed Income from Property:
a.       Included in gross income at FMV, unless a statutory exception applies
                                                            ii.      (b) Unrealized Appreciation
1.      Unrealized appreciation is not included in gross income
2.      Like imputed income, the exclusion from gross income is only available in the absence of an exchange
3.      Tax is deferred until the taxpayer sells the asset
a.       EXCEPTION – Exclusion of unrealized appreciation will be permanent if the taxpayer holds the property until death and the property’s basis is stepped-up to FMV by §1014 (See §1014 – Property transferred at death on p. 22)
                                                                                                                                      i.      NOTE – Not necessarily a “step up” since it could be a “step down” as well if FMV goes down