FEDERAL INCOME TAX – Dickinson
I. Brief History of Tax Collections
A. 16th Amendment
“congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
• Prior to 16th Am. all direct taxes (including income tax) are not allowed. (i.e. tax on real property, tax on income from real property, tax on ownership of personal property, tax on income from personal property)
ii. Effect of 16th Am.
• 16th Am. is passed which allows US to levy a tax on “incomes” without apportionment. – empowers Congress to tax income from each source in the manner and at the rate deemed best by Congress.
**Problem: can govt tax vehicles over a certain weight? – there is a question like this on a past exam!!
II. Courts that Tax Issues are Raised
A. The Tax Court
• Does not have to pay deficiency before the case is heard
• No jury
• Apart of the judicial system
B. Federal Dist. Court
• Must pay tax and seek a refund of tax
• Can involve a jury
C. US Court of Federal Claims
• Must pay tax and seek a refund
• No jury
•Jurisdiction extends across the US, where one resides has no impact
• Appeals handled by the Fed. Court of Appeals – jrd determined by what district the tax payer resides.
I. Obligation To Repay
A. Gross Income
1. To be excluded from gross income, an item must be specifically excluded.
i. Loans: not income b/c it does not represent an “accession to wealth” or increase the taxpayer’s net worth.
ii. Negotiating a Lower Price: arms length deal that negotiates a lower price. The negotiated price is then the FMV.
iii. Lottery: (1.61-2(a)(2)(iii)) – lottery or winnings must be reported as income
iv. Claim of Right (treasure trove): Earnings under a claim of right and w/o restrictions as to its disposition are taxed b/c you have received income that you are not required to return. (§1.61-14) North American Oil p 56
v. Illegal Income: illegal receipts are within gross income. James v. US p 57.
– if illegal income gained in one year and then taken back in another, the taxpayer must still report the income in the year it was found and then take a loss/deduction for the year it was returned
vi. Deposits or Payment of Taxes: earnings under a claim of right & without restrictions as to its disposition is income even though it may still be claimed that he is not entitled to the money. North American Oil p 59. (employer pays taxes or pays off credit cards…that payment is still considered income)
vii. Compensation other than Cash: compensation using property is the same as cash §1.61(d)(1)
viii.Exchange of Services – technically, a plumber that exchanges services with a electrician for work is reportable as gross income as the FMV of the services received. Revenue Ruling 79-24
Compensation for Services: §1.61
Property Dispositions: §1001
Capital Gain / Loss: §1221
Gifts and Inheritances: §102
Sale of Principal Residence: §121
Scholarships & Prizes: §117 / ¶74
Life Insurance (Death Benefits): §101
Distribution from Retirement Accts
Compensation For Injury or Sickness: §104
Accident & Health Ins
Contributions from Emp’er: §106
Distributions from HSA: §221
Cafeteria Plans: §125
Services to Emp: §132
Emp. Discounts: §132
Moving Exp: §132(g)
Retirement Planning: §132(m)
On-Premise Gyms: §132(j)
Municipal Bond Interest: §103 — §141
Distributions from 529 Plans: §529
Social Security: §86
Personal, Living, & Family Exp: §262
Trade of Business
Charitable Contributions: §162(b)
Illegal Bribes / Kickbacks: §162(c)
Lobbying / Political Exp: §162(c)
Start-up Expenditures: §195(a)
Sale of Illegal Drugs: §1280E
Professional Exp: §1.162-6
Exp. for Production of Income: §212
Capital Expenditures: §263
Certain business Assets: §179
ided in §1016
a. Basis: §1012 = cost of such property (generally)
b. Adjustments: §1016(a)
(1) = expenditures, receipts, losses, or other items properly chargeable to capital account (i.e. making a $35k addition to home would add $35k to basis of property)
(2) = Depreciation for exhaustion, wear and tear, obsolescence, amortization, and depletion
c. Basis of Property from Gift or Death Transfer: §1014(a) – the basis of property in the hands of a person acquiring the property from a decedent shall be the (a) FMV of the property at the date of the decedent’s death
NOTE: §1014(f) – no “step-up” provision for decedents dying after 12/31/2009.
d. Basis of Property Acquired by Gift: §1015(a) – the basis shall be the same as it would be in the hands of the donor OR the last preceding owner by whom it was not acquired by gift. IF such basis > than FMV of property at time of gift, for purpose of determining loss, the basis shall be the FMV.
III. GIFTS AND INHERITANCES (EXCLUDED)
A. §102(a): GI does not include the value of property acquired by gift, bequest, devise, or inheritance.
a. Policy Reason: don’t want to tax assets twice.
b. Definition of a gift — Most important consideration is the intention of the gift giver. It must be from “detached and disinterested generosity out of affection, respect, admiration, charity or like impulses” Commissioner v. Duberstein p 98. (gift given as a result of a business contact is not a gift).
ii. Bequests or Inheritance
a. Policy Reason: Don’t want to tax assets twice.
b. Definition of a Bequest — Test is whether bequest is a bona fide gift or deferred compensation. Olk v. US pg 103. Lifetime of free legal service and then getting