FEDERAL INCOME TAXATION PROFESSOR MAZZA
1. SOURCES FOR FEDERAL TAX LAW.
A) U.S. constitution plays a minor role Art 1& 8 reinforced by the 16th amendment.
Congress can enact almost any type of federal tax, without problems
B) Legislative Process Code Title 26 of the US Code.
Subtitle A – Income taxes
k) The President starts most tax legislation by proposing new tax law through his
budget. Amending and making new, as part of state of the union Address. Then legislation tries to enact it.
b) The constitution requires tax bills to begin in the House of Representatives, so new
taxes will often begin with a member of the Congress.
c) House, ways and means committee, will hold a set of hearings. They
are published in the Federal Register. Testify about the bill.
Secretary of the treasury department. There may also be other types of lobbying groups. Ways and means takes all info and then re-drafts the bills. These hearings are published. The house makes a house report. Explains existing law, changes proposed, and why they are making the changes. Good source of legislative history. Members of house hold a debate on the floor of the house.
d) The Bill goes from the House to the Senate. The senate finance committee. will also hold hearings, and draft a senate report.
e) Typically the two versions above will differ. These two differing bills go to a Conference committee to work out the differences. The bill goes back to
both houses to be voted on and then to the President for signature if approved.
All of the debates get published. These publishing are later used to decipher legislative Intent.
C) How code is interpreted and administered.
a) It is a Topic of administrative law. Government agencies are involved and derive power from congress to interpret the statutes.
b) Ex. EPA, issues regulations by environmental regulation. IRS, gov. agency
c) US operates under a self-assessment system. Fill out return and send it off to the govt.
There is a lot of leeway, like not filing, which will eventually lead to federal fine.
d) The Treasure Department which umbrellas over the IRS is the primary government
agency for tax law.
I.) IRS Pronouncements to help people figure out how to pay taxes, and how it applies.
II.) Treasury Regulations: Are formal, authoritative interpretations of the statute. examples of how the law should be applied. They carry the same force and effect as a law. If you write a brief you could cite to a regulation just like a statute.
If you don’t like regulation then try to get it declared void. But you would have to prove to the court that reg. is inconsistent with what congress intended in the original bill. This rarely happens.
i) Two types of regulations, must read the statute to determine which type it is
a) Interpretive Regulation: § 7805 of the code grants the Treasury Dept who grants the IRS to issue all needful rules and regulations
for interpreting the federal tax code. TP can get one overturned
if she proves it is contrary to congressional intent.
b) Legislative Regulations: Are issued by a specific grant of authority
in the code itself. Given more deference by courts than interpretive regulations b/c Congress has specifically granted
authority to interpret the Code section to the Treasury.
III) Revenue rulings, are also put out by the IRS, it is application of the code to a specific fact pattern. Not as authoritative as regulations but tax payer may rely on it if fact pattern is very similar. Kind of like a case, when writing a memo or brief.
IRS will typically follow revenue ruling. TP can argue against a revenue ruling claiming
that the IRS has misinterpreted the law. Occurs more often with revenue rulings than with
The above regulations. Revenue rulings are normally issued after a sequence of private
letter rulings.
IV) Revenue procedure. Procedural in nature, lays out the steps for requesting the information. Numbered by the year which they are issued. (2000-x)
V) Private Letter Rule (P.L.R.) letter from IRS, that responds to a tax payer’s question.
Precedential weight only good for the person who wrote the letter. Nevertheless
these letters and responses are published by the IRS. A T.P. must requested for a transaction not reported on a return. Usually prospective in nature asking how will I
file in the future. Like proposed transactions. IRS charges for letter rulings. Typical $750, but also pay your lawyer for his/her charges. usually pretty expensive.
Once you get the matter back you are then bound by it.
D. Judicial structure of the federal Tax System.
1) Primarily statute, or code based.
2) Resolve problems administratively without trying to litigate the matter. Most tax disputes are usually settled. But if you cant settle, then you have to file suit.
Hypo: old lady medical bills, can’t deduct certain medical bills.
3 different forums to resolve problems.
HYPO: tax payer’s X 9th cir. and Y in 10th cir.
3) Most disputes arise out of an IRS audit, and then the IRS declaring a deficiency
in the income tax. The TP has a couple of different options:
i) refuse to pay the tax and petition the Tax Court for a redetermination
of the deficiency
ii) pay the deficiency
iii) file an administrative claim for refund and upon denial of the claim sue
for a refund in the federal district court or US Claims court.
4) 3 courts which have original jux. in federal tax cases:
5) Tax court = poor man’s court. Handle’s deficiency cases. do not have to pre-pay Plus IRS usually states if prob. go to tax court. In D.C. judges will hold hearings in different places. KCMO twice a year. Here the judges have a lot of expertise. It also Has national jux. Appeals to federal circuit court of appeals. Should tax court look to old appellate cases? Golsen case/rule.= will follow the precedent of C/A if the Ct/Appeals has already spoken. Therefore TP’s may be treated differently in different circuits.
i) Judges hear and decide the case, there is no option for a jury.
ii) Golsen v. Commissioner – Where the tax court overruled itself and announced that it would follow a decision of the federal court to which an appeal from a Tax Court decision would be made, when the federal appeals court decision is squarely on point.
6) Federal District Courts// United states District court. = in District where tax payer resides. Circuit court of appeals, in same district. If you are a corporation must bring in district where you PPB is at. Only place where you can get a jury is in this court. This court has jux in any case against the US seeking a refund of tax, regardless of the amount involved. A TP can not litigate a tax action in the federal district court without first paying the amount in dispute and then commencing a refund action.
7) Court of federal Claims.// US Claims court = operate out of D.C. But their judges will travel around the country. Appeal in Washington D.C.
Its jux extends throughout the US and TP’s residence is irrelevant. A jury trial is not
available and it is a refund jux.
Federal Court of Appeals for the Federal Circuit has exclusive jux over an appeal from a
final decision of the US Claims court which are also review-able by the S/ct.
8) S/ct. pretty rare for them to take any tax cases.
ut narrows as
the form of income receipt alters how and when income is realized.
8/28/02 Determination of Individual income tax liability
Any receipt or economic benefit flowing to the taxpayer must be included unless there is a
deduction or credit which can be applied. What tax bracket does the TP fall into? (What is
the percentage rate are they taxed at?)
1) Gross Income -§61
Defined: “except as otherwise provided in this subtitle, gross income means all income
from whatever source derived, including but not limited to the following items.
Items (1) -(15)
Also defined in Hawkins v. Commissioner as any accession to wealth
a) Reg.§1.61(a) gross income includes income realized in any form whether in money, property, or services.
b) Reg. §1.61-2(d)(1) provides that if services are paid for in exchange for other services,
the fair market value of such other services taken in payment must be included in
income as compensation.
2) AGI Adjusted Gross Income §62
Defined: “gross income less certain deductions.” Section 62 is not a deduction granting
section. But in general only the deductions enumerated in §62 are taken into consideration
when trying to compute gross income. §161 states that the TP must find a specific code
section which authorizes the deduction TP wants to take.
There are two different categories for deductions:
a) Above the line deductions- ones that occur above the adjusted gross income
Usually trade, business, or IRA deductible contributions. These deductions
are coined “legislative grace,” and construed narrowly.
b) Below the line deductions- ones that occur after the gross income has been
determined. For deductible personal expenses which Congress approves through
the code. Ex. real property tax §164/a/2/ state income taxes §164/a/3/, and
§170 charitable deductions.
1) Standard Deductions: Instead of itemizing everything, a TP can
choose a blanket standard deduction. The standard below the line
deduction is a set amount determined by congress §63/c/2/A/ regardless
of what deductible personal expenses TP actually incurred.
Remember trade, business, and IRA are above the line deductions
and don’t have bearing on whether or not TP chooses a standard deduction. Standard Deductions were intended to eliminate only itemizing
countless small personal expenses. It is a set dollar amount (not percentage) and adjusted annually for inflation.
2) Itemized Deductions: TP whose deductions exceed the set amount
set forth by congress for standard deductions may wish to itemize their
deductions. This is done by listing each deduction backed up with
proof. §63/d/ but then phased out with §68
a) §67/a/ 2% floor rule: under 67/a/, certain types of itemized
deductions miscellaneous itemized deductions) are deductible
only to the extent they exceed 2% of TP’s AGI.
Ex. deductions for home mortgage interest, state income tax, real
property tax and charitable contributions are not subject to the 2% rule
