Federal Income Taxation Outline
Fall 2007, Mazza
I. Sources of Federal Tax Law
A. Constitution – 16th Amendment of the Constitution 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.
B. Internal Revenue Code (IRC) – primary source of federal tax law. Title 26 of the USC.
C. Legislative History
i. House Ways & Means Committee – Issues reports on the how, what, and why of tax legislation.
ii. Senate Finance Committee – is the counterpart in the senate to the house ways and means committee.
D. Treasury Regulations
i. Source – tax regulations are promulgated by the Department of the Treasury of which the IRS is a part. 26 USC §7805(a) gives the IRS authority to prescribe all necessary rules and regulations for the enforcement of the code.
ii. Format – Each regulation is identified by a prefix number and the particular code section which it interprets. For this course they will be “Reg. § 1.xx”.
iii. Validity – Taxpayers may challenge a regulation as being contrary to congressional intent, but courts give deference to the Treasury and seldom find invalid.
E. Revenue Rulings and Procedures
i. Revenue Rulings – represent the IRS position on given situations that are issued upon request of a taxpayer.
a. Location – Found in either the Internal Revenue Bulletin or the Cumulative Bulletin.
b. Format – Example: Revenue Ruling 2007-1 was the first rev. ruling in 2007.
c. Validity – Unless superseded, modified or revoked, revenue rulings can be relied upon by any taxpayer whose circumstances are substantially the same as those set out in the ruling.
ii. Private Letter Ruling – responsive to a particular taxpayer’s request for advice on the tax consequences (from the IRS’s standpoint) of a specific transaction. IRS does not consider itself bound by its letter rulings in dealings with other taxpayers.
F. Case Law
i. Appeals Division – internal IRS appeals process
ii. Tax Court
a. Memorandum v. Regular Decisions – regular decisions generally involve important issues in tax which may not have previously been resolved, while memorandum decisions generally involve the application of settled points of the tax law to particular facts.
b. Note: May go to Tax Court to appeal a decision by the appeals division. Don’t have to pay deficiency until after decision, but no jury trial.
c. Goalsen Rule – the tax court will follow a decision of the federal court to which an appeal from the Tax court decision would be made, if it was on point.
iii. Federal District Court – only place for a taxpayer to receive a jury trial.
a. Note: Must pay tax deficiency before going to District Court, then you sue for a refund.
iv. United States Court of Federal Claims
a. Jurisdiction – has over all tax suits against the US regardless of amount.
b. No Jury Trial.
c. Must pay deficiency, then refund suit.
II. Tax Policy (three goals)
A. Equity Criterion
i. Horizontal Equality – People with the same income should pay the same amount of tax regardless of the source and use of their income.
ii. Vertical Equality – People with greater income should pay greater amounts of tax regardless of the source and use of their income.
B. Efficiency Criterion
i. Definition – tax policies should be as neutral as possible. Almost all taxes have efficiency costs, aka non-neutral, because they will change the incentives to engage in various activities and this is likely to affect people’s behavior and thus the allocation of resources.
C. Simplicity Criterion
i. Definition – the tax system should be as simple as possible, however it is NOT!
III. Tax Calculation
A. Basic Calculation (chart on supp. pg. 37)
i. Gross Income (IRC §61) – includes “all income from whatever source derived” and specifically lists 15 types of income, but list is not exhaustive.
ii. Above-The-Line-Deductions (IRC §62) – specific deductions enumerated in §62, including trade and business, rents and royalties, IRAs, etc.
a. §62 does not authorize the deductions, you must find the a specific authorization in the code.
b. Above-The-Line-Deductions may be deducted in full from your gross income.
iii. Adjusted Gross Income (IRC § 62(a)) – is Gross Income minus any and all allowable deductions in §62.
iv. Personal and Dependency Exemptions (IRC §§151-152) – deduction from taxable income for children under 19 or students under 24 and dependant relatives.
v. Standard Deduction (IRC §63(c),(f)) – $3000 plus or minus.
vi. Itemized Deductions (IRC §63(d) & §67(a)) – §679(a) deductions are only allowed if over 2% of Adjusted Gross Income.
vii. Taxable Income (IRC §63(a),(b)) – equals adjusted gross income minus personal and dependency exemptions and the standard or itemized deductions.
viii. Tax Rate
uired to accept lodging as condition of employment. IRC § 119(a)(2)
B. Other Fringe IRC § 132
i. No-additional-Cost Service
1. Service must be one offered for sale to customers in the ordinary course of business. §132(b)(1)
2. The service being offered is in the line of business of the employer in which the employee is performing services. §132(b)(1)
3. The employer incur no substantial additional cost. §132(b)(2)
· The cost of services “merely incidental” to the primary service rendered are generally not “substantial”. Reg. §1.132-2(a)(5)(ii).
4. May not discriminate in favor of highly compensated employees. §132(j)(1). Highly compensated is defined in §414(q).
b. Performance of substantial services directly benefiting more than one line of business is treated as the performance of substantial services in all such lines of business. Reg. § 1.132-4(a)(1)(iv)
ii. Qualified Employee Discount §132(c)
a. The exclusion for employee discounts on services is limited to 20% of the price at which the services are being offered by the employer to customers.
b. The exclusion for employee discounts on property is limited to the employer’s gross profit percentage.
iii. Working Condition Fringe §132(d) – any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a trade or business expense under §162 or §167.
a. Cash Payments – not working condition fringe unless certain conditions are met. Reg. §1.132-5(a)(1)(v).
b. Vehicle Usage – apportionment rules under Reg. §1.132-5(b).
iv. De Minimis Fringe §132(e) property or service the value of which is so small as to make accounting for it unreasonable or administratively impracticable.
a. Frequency – emphasis is placed on frequency as a factor for determining whether a benefit is de minimis.
b. Meals or Meal Money – special rules under Reg. §1.132-6(d)(2).