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Federal Income Tax
University of Kansas School of Law
Dickinson, Martin B.

Tax Law Outline
I. United States Income Tax System
     
Code Provisions
SOURCES OF TAX LAW
            7805(a)
 
RATE STRUCTURE
            1(a) – §1(e), (f)(1-6), (i)
 
      a. History
            -power to tax began largely with the 16th Amendment passed in 1913…
·         “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.”
            -Code was used as a tool of social policy
Brushaber: USSC found that “from whatever source derived” language empowered Congress to tax each source in the manner they deemed fit
      b. Tax Procedure
            -when Tax Commissioner claims a deficiency exists, taxpayer has two options
                        (1) Refuse to Pay and Petition Tax Court, or
                        (2) Pay and then File Administrative Claim, and if Denied Sue in Federal Court
            -have one appeal from lower courts to Federal Circuit Court as a matter of right
            -Tax Court is generally regarded as the preferred court
      c. Sources of Tax Law
            -the Internal Revenue Code, which is constantly revised, is the primary source of tax law
                        -Code is supplemented by the Regulations
                        -other sources include revenue procedures, cumulative bulletins, and cases
-according to §7805, Treasury Secretary has authority to “prescribe all needful rules and regulations” in absence of authority given to others
      d. Rate Structure
            -Code is Progressive, that is it rises as income rises; embodied in §1(a) – (e)
-there is a distinction between overall effective rate (what economists care about) and marginal rate (determined by the income bracket of the taxpayer)
-Ex. marginal rate of 25%; $100 more or less in income would result in a $25 increase or decrease in the amount of tax paid
      e. Sunsetting
            -provisions in §1(i) will “sunset” at end of 2010 unless renewed; return to 2001 rates
      f. Tax Expenditures
            1. The Big Picture
                        -pg. 37 of the supplemental materials
-deals with finding tax that a family of four must pay; no miscellaneous deductions under §67 or phaseout under §68, so take full itemized
 
II. GROSS INCOME
 
Code Provisions
OBLIGATION TO REPAY                       
            §61(a)
 
PROPERTY DISPOSITIONS
§61(a)(3)
            §1001(a) – 1001(b)
            §1011(a)
            §1012
            §1015(a)
            §1014(a)(1)
            §1016(a)(1)
 
GIFT AND DEATH TRANSFERS                      
            §102(a), (c)(1)
                  §1014(b)(1), (f)
 
SALE OF RESIDENCE
            §121(a) – 121(c), (d)(1), (f)
 
SCHOLARSHIPS AND PRIZES
            §74(a) – (b)
            §117(a) – (b), (c)(1)
 
LIFE INSURANCE
            §101(a)
            §264(a)(1)
 
QUALIFIED PLANS
                  §219(a), (b)(1-4), (5)(A-B &D), (c), (d)(1), (e), (f)(1-2), (g)
                  §401(c)(2)
                  §408(m)(1-2), (o)(1-2)
                  §408A(a) – (c), (d)(1-2)
                  §62(a)(7)
                  §25B(a) – (c), (d)(1)(A)
                  §152(f)(2)
 
DAMAGES
            §104(a)
                  §79(a)
                  §104(d)
                  §105(a) – (c)
                  §106(a)
                  §213(a), (d)(1)
                  §262(a)
                        §119(a) – (b)
 
FRINGE BENEFITS
            §61(a)(1)
            §79(a)
            §106(a)
            §125(a), (d)(1), (f)
            §132(a) – (f), (i), (j)(4), (l) – (m)
 
MUNICIPAL BONDS
            §103
            §141(a), (b)(1-2 &6), (c), (e)
            §142(a)
            §144(a)(1-2), (4)(A-B), (12)              
 
      a. Gross Income
            -sources of GI according to §61(a) include (list not comprehensive)…
                        (1) business
                        (2) property
                        (3) interest
                        (4) rents
                        (5) royalties
                        (6) dividends
                        (7) alimony
            -key is the language from 16th Amendment (“from whatever source derived”)
            -exclusions are a matter of legislative grace, not of right
            Hawkins: although not all forms of income had been conceived, taxing power plenary
            -also can take any form (does not have to be cash)
                        -there is, however, a Realization Requirement before stocks are taxed (Eisner)
                        -imputed income is also not taxed (ex. homeowner vs. renter; latter taxed)
                              -another example of imputed income is buying a car at less than MSRP
            Morri

012) à the most common example
      (2) Transferred Basis of Asset Acquired by Gift (§1015(a))
      (3) Fair Market Value at Death, if Acquired by Reason of Death (§1014(a)(1))
      (4) Compensation for Services (not addressed in Code)
-rules apply for the disposition of assets of any kind
-also must distinguish here between capital and ordinary gain/loss
-capital gain/loss is gain/loss arising from the sale or exchange of a “capital asset” under §1221, which generally includes any item other than of the type which the taxpayer frequently buys or sells
      -an important distinction to make because of the different tax rates
      -remember too that the distinction only applies to rates; amount will remain same
      d. Gift and Death Transfers; Exclusion
-although almost always certainly an “accession to wealth,” gifts are not always includible in gross income; largely for administrative reasons
-§102 generally allows for the exclusion, but the motive of the donor is key
Commissioner v. Duberstein – giving away a Cadillac based on a good tip
      -Court said that the Cadillac should have been included in GI; not a true gift
      -gifts must “proceed from detached or disinterested generosity”
      -here, the giving of the Cadillac motivated primarily by economics
-decision provides the basis for why transferor’s intent is so important
-under §102(c), transfers from an employer to an employee cannot be excludable gifts
-also, under §274(b) certain business gifts over $25 may not be excluded
-rule makes it so each of these exclusions must be examined on case-by-case basis 
            1. Gift and Death Transfers; Basis
-the general rule for death tranfers under §1014(a)(1) is that basis is fmv at time of decedent’s death
-differs from the general rule for gifts, which states that the basis will be the basis of the transferor, unless that basis is greater than the fmv at time of gift (§1015(a))