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Federal Income Tax
University of Kansas School of Law
Mazza, Stephen W.

 
Mazza Federal Income Tax Fall 2015
 
 
“Don’t feel like you have to write out the law. You can use code sections as shorthand to cite.”
 
“Good intro to an answer: This exchange is a potential like-kind exchange.”
 
 
Be looking for 1231 Property…
 
 
Unit 1: Sources of Tax Law
 
1.      Code
2.      Regs
3.      Revenue Rulings
4.      Revenue Proclamation
5.      Private Letter Rulings – only precedent to requesting person
 
 
Unit 2: Tax Policy
Three Criteria:
 
1. Equity –
 
Vertical Equity – people with greater amounts of income should pay greater amounts in tax.
 
Horizontal Equity – people with the same income should pay the same amount in tax
 
2. Efficiency – the tax interferes as little as possible with people’s economic behavior.
 
3. Simplicity – complexity is inequitable, because the rich are usually more sophisticated
 
Compliance Complexity – what one encounters complying with the law: appropriate forms, etc
 
Transactional Complexity – when someone tries to organize their affairs to minimize taxes. E.g., clarifying differenve between debt and equity, or a sale and a lease
Why Progressive Tax Rates? See Page 31 of Unit 2 printed readings.
Also,
Ability to pay theory – as income rises, less marginal income is spent on just living
Benefits theory – wealthy people benefit more from roads, defense, etc. – they have more to lose!
 
 
Unit 3: Tax Calculation
 
On final: Just be able to characterize the deductions
 
162 – Above the line deductions – Trade or Business Expenses –  these are generally deductible in full.
 
            (a) “Ordinary and Necessary expenses for carrying on any trade or business”
 
            Includes
(1)   Reasonable salaries, wages
(2)   Traveling expenses
(3)   Rentals
Office supplies
Depreciation
State and Local Property Taxes – 164(a)(2)   (164: Taxes)
Can deduct EITHER state and local income taxes, or state and local sales taxes. Choose one – 164(b)(5)
“But you do get CREDIT for any federal income taxes paid”
 
**UNDER 162, NO DEDUCTION FOR **
 
CAPITAL EXPENDITURES – 263
(e.g., new building, new equipment) – 1.263(a)-2(a)
But you can capitalize and depreciate such expenditures – 168
Depreciation for wear and tear – 167(a)
 
COMMUTING – considered a non-deductible personal expense – Reg 1.162-2(e) and 1.262-1(b)(5)
 
STOCK MANAGEMENT FEE – 162(a)
But is deductible as investment activity (below the line) – 212
 
MORTGAGE PRINCIPAL PAYMENTS – 262
But could be “qualified residence interest”
 
PERSONAL INTEREST – 163
 
 
63(d) – Below-the-line deductions are deductible in part (63 – taxable income defined)
 
152 –Dependents: You provide more than ½ their support
(a)(1) – qualifying child, or
(a)(2) – qualifying relative
 
4 Filing Statuses
1.      Single
2.      Single + Dependent (Head of Household)
3.      Married (Joint)
4.      Married (Separate Returns)
 
Higher tax brackets – only the marginal amounts above the threshold are taxed at the higher rate (e.g., only the amount above $75K, is taxed at the higher rate)
 
Dollar Value of Deduction = Deduction Amount * Taxpayers Marginal Tax Rate
(assume 39.6% for the final)
 
Upside-down subsidy problem – the higher the income bracket you’re in, the more a deduction is worth to you.
 
Credit – dollar-for-dollar reduction
 
 
61 – Gross Income
 
Gross income is ALL income realized in any form (money, services, property)
– Reg 1.

.      Charitable contributions – 170
5.      Medical, dental – 213
6.      Worker’s comp
7.      Etc (pg 59 of statute book)
                                                            ii.      If NOT listed, it’s a miscellaneous itemized deduction, and the aggregate of these must add up to 2% of AGI to be taken.
1.      212 – Production of income expenses
4.      Apply 2% floor if applicable
5.      Compare to standard deduction, and pick whichever is greater
 
 
 
 
151 – Personal Exemptions
Can take personal exemptions in addition to standard deduction
 
 
1(h) – Capital Gains – subtract capital gains and dividend income from taxable income, and tax under capital gains rate
 
 
 
Unit 4: Gross Income
 
If it is a TRUE gift, it avoids being characterized as income! (See Unit 8)
 
Income is taxed when it is realized (that year).
 
“Income is gain derived from capital or labor or both combined” – Eisner
 
Income is an “undeniable accession to wealth, clearly realized, and over which the taxpayer has complete dominion” – Glenshaw Glass
 
When an employer pays income tax for the employee as a service or as additional compensation, that becomes gross income for the employee (form of payment doesn’t matter) – Old Colony
 
Discharge of corporate debt for amount less than face value is income. (becomes a contribution of capital from him) – Kirby Lumber