FEDERAL INCOME TAXATION
-It all stems from the 16th amendment of the constitution, in 1913. This amendment provides ‘The Congress shall have the 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.”
-In 1920 only about five and a half million Americans were taxable, although almost 63 million Americans were 20 years old or older.
A family making 10k a year (a lot back then) would pay 558$ in income tax.
By 1928, that same family would only pay 40$
-Come WW2, the government needs cash. Only 14.7 million tax returns filed in 1940, but 49.8 million tax returns were filed in 1945.
-The withholding process is genius. This process mandates that employers withhold a certain amount of money from employees, and then pays that money to the government at particular times.
-FIT system allocates the cost of public goods and services among Americans on an ability-to-pay basis. It accomplishes this through a progressive rate structure whereby high income taxpayers pay a larger fraction than lower income taxpayers.
-§163 of the Code allows taxpayers to deduct home mortgage interest. This is, according to congress, to incentivize home ownership.
-§170 is the charitable deduction provision.
(These are ways to effect social change with taxation)
-§168 is designed to stimulate the economy by allowing businesses to depreciate certain tangible property rapidly, thereby encouraging businesses to invest in new equipment.
-Congress also will create tax breaks in certain geographical areas to alter behavior
Resolution of tax issues in the law
-If the IRS reports that somebody hasn’t paid, that person can either refuse to pay and petition the tax court for a redetermination of the deficiency or they can pay it and file an administrative claim for a refund and when denied, they can sue for refund in federal district court or the US court of federal claims.
-Three courts have original jurisdiction in federal taxation: Tax court, US Dist. Cts, and the US court of federal claims.
àThe Tax Court: The “Poor person’s court,” where one goes without having paid the deficiency. The tax court ONLY hears tax cases, it has 19 members. The tax court gained constitutional status in 1969 and now can issue writs to enforce decrees and hold people in contempt. There are no juries and judges write opinions for review.
àFederal district court: You must first pay the amount owed and then sue for a refund, here you can have a jury but you must be either in your residence or the businesses PPB
àUS Court of Federal Claims: No juries. You must pay first and then sue for refund.
-You may appeal your tax claim to a federal court of appeals.
-Forum selection: Generally people want the tax court because you don’t have to pay the deficiency first. However, people sometimes pick the district court if they want a jury or have some interest in the precedent of that court regarding their case.
-Some questions regarding income taxation:
1. What items of economic income or gain are includable in “gross income?”
2. What items of expense are considered “deductions?”
3. When is an amount included in come, when can the taxpayer be entitled to a deduction for an amount that is clearly deductible?
4. Who is the taxpayer, who will be taxed?
5. What is the character of the items of income or the deductions?
– The internal revenue code: The primary source of federal tax law is the IRC of 1986 as amended. This replaced the 1954 code, which replaced the 1939 code.
-Also keep in mind legislative history and the regulations which are promulgated by the dept of treasury. Keep in mind that the courts tend to give deference to the treasury
-Revenue rulings are not considered the law but they are persuas
do NOT equal GI.
àThe Realization Requirement: We do not tax appreciation of property.
-Something is “realized” when it is sold for cash or exchanged for something materially different. (Eisner v. Macomber)
àImputed Income is NOT taxed. Ex: If you could choose between buying a 250k house and renting it for 25k/year for 10 years or investing the 250k and getting 10% interest/year, you should BUY THE HOUSE!!!
-Bargain Purchases: Impracticable to determine FMV of everything you buy. But, sometimes this can be taxed. If your employer gives you 500$ of stock for 100$, you have just earned 400$. This is changed when within a family.
àCommissioner vs. Glenshaw Glass: $ Received as punitive damages is taxable. Just because something comes from the illegality of another does not change your income. “Accession to wealth with complete dominion” test.
-Cesarini v. USA: Husband/Wife bought piano for 15$, and found 4.5k inside. Tax it! It was realized when it was exchanged. They might not have “complete dominion” but they have “found property,” in successive years, if someone comes and gets it later
-Difference between Marginal and Effective Tax Rates. The phrase “tentative to tax liability” means tax before credits.
-The most common tax credit is the wage withholding credits, wherein you reduce your TOTAL tax liability by your WITHHELD $.
àDeductions reduce your income and thus rate, credits are a $/$ reduction in total tax liability
-Deduction x MTR (Marginal Tax Rate) = $ Saved by taxpayer
-Example: Taxpayer with 10k GI.