Tax Outline

Chapter 1- Introduction & Key Concepts
 
Basic Tax Formula
 
Income from all sources
Less: exclusions
Gross Income
Less: For AGI deductions
Adjusted Gross Income
Less: Greater of Standard Deduction or Itemized Deductions
Less: Personal Exemptions
Taxable Income
 
–          exclusions: not included on the tax return- this includes things like gifts, child support, interest on state bonds
–          gross income: this is the first number included on the tax return; this would include items like income, dividends, business income, etc…
–          for AGI deductions: these are deductions that everyone gets to take; includes things like business expenses, interest expense for student loans, etc…; also referred to as above the line deductions
–          standard deduction: every tp is entitled to this; the amount is set by Congress; this amount of money is deducted from gross income and is therefore not taxed; people who itemize cannot use this deduction
–          personal exemptions: each tp is entitled to one; ex. a family that consists of a mother, father and 2 dependent children get to take 4 personal exemptions on their tax return
–          taxable income: this is the amount that is multiplied by the tax rate to determine how much is owed or refunded
 
Where does tax law come from?
–          internal revenue code: highest legislative authority
–          treasury regulations: interpretations of the tax code by Treasury Dept.; legislative regs have a higher authority than interpretative regs
–          IRS rulings: issued by IRS to interpret law, do not have same authority as treasury regs; include letter rulings, rev procs, technical advice memos
–          Case law: note- a trial ct must abide by the precedents set by the ct of appeals in that jurisdiction
 
Type of tax system:
–          the individual income tax is a progressive system
–          this means that as taxable income rises, the rate of tax on the next increment of taxable income increases
 
Tax Procedure and Administration
–          all tax returns are initially checked for mathematical accuracy & items that are clearly erroneous
–          Selection for Audits: the IRS uses a computer program to classify returns that are selected for audit
–          Types of Audits:
o       Office audit: individual is asked to substantiate a particular deduction, credit or income item
o       Field audit: often used for corps; conducted at the tp’s place of business
–          Statute of Limitations:
o       Generally the SOL runs 3 years from the later of the date the return was filed or its due date
o       SOL is 6 years if the tp omits items of gross income > 25% of gross income reported on the return
o       SOL never runs if a fraudulent return is filed OR if no return is filed
–          Audit Procedure:
o       After the audit, the IRS will issue a 30-day letter- allows the tp 30 days to appeal to the administrative appeal officer
o       If tp does nothing, IRS will then issue a 90-day letter- this gives tp 90 days to appeal the tax deficiency to the tax court
o       if you don’t appeal to tax court in 90 days à your option is to pay the tax deficiency, file for a refund with the IRS; IRS will reject that; then you can sue in Federal Dist Ct or the US Federal Ct of Claims based on the wrongful rejection of your refund request
 
Primary Tax PolicyConcepts
–          tax policy: body of norms used to evaluate and shape tax legislation and administration
–          Revenues: the tax must be adequate as a revenue source
–          Taxes should be fair- the burden of the tax should be offset by the benefits received from the tax
Vertical equity: notion of imposing proportionately or progressively higher taxes on those with greater incomes on the theory that they have a greater ability to pay and the sacrifice of paying taxes is less
Horizontal equity: people who are in similar economic situations should pay the same amt of taxes and benefit from equivalent tax breaks
–          Tax should be certain, convenient and economical to collect
–          Tax rules should be clear (transparent)
–          Tax should be free of interpretive doubt and have obvious meanings and purposes
–          Should be compatible with a free mkt
not play a role in the decision-making of individuals
–          Should be consistent with macroeconomic values
Tax shouldn’t stimulate inflation or invite a recession
 
 
 
Chapter 2- Gross Income
 
Concept of Income
–          Haig-Simons definition of income:
Consumption + Increase in net worth = Gross income
This is the most commonly used economists’ definition of gross income
–          Tax concept of income: In general there must be 3 conditions met for amounts to be taxable
Must be an economic benefit
Income must be realized
Generally this occurs when the earning process is complete and a transaction with another party takes place that permits an objective measure of income
Income must be recognized
** The IRS also takes into consideration the idea of administrative convenience when determining what is gross income.
 
–          §61(a) provides the general definition of gross income:
o       gross income means all income (unless otherwise excluded) from whatever source derived, including (but not limited to) these times: compensation for services, business income, gains from dealings in property, interest, rents, royalties, dividends, alimony, annuities, income from life insurance, pensions, income from discharge of indebtedness, distributive share of p/s gross income, ird
–          in general, if a tp benefits from an item, it is taxable
 
Interpreting the Tax Code
–          Reenactment doctrine: when a code section is reenacted, the judicial and administrative interpretations of the section were implicitly incorporated in the new law
–          Statutory Construction:
o       Textualist: objective; limited to what an ordinary person could reasonably understand the text of a statute to mean at the time it was enacted; only look to legislative history as a last resort
o       Intentionalist: more subjective; consider legislative history
o       Purposivist: most subjective; try to discern the purpose from an overall reading of the statute or from legislative history
 
Concept of Basis & Return of Capital
–          basis: this is the owner’s tax investment
o       the purpose of identifying the basis is that when a sale/exchange occurs, you are only taxed on the income- that is the amount in excess of your basis
–          Example: You buy something for $100,000. Later, you sell it for $150,000.
o       The basis is $100,000.
o       Your income on the sale is $50,000- that is the amount you are taxed on
§         The other portion of the sell price is considered a return of capital and is not taxed
–          Misc. Ideas Concerning Basis:
o       Reg. 1.61-2(d): if you are paid in king à the value of the property received is gross income
§         Also, the fmv of the property received for services becomes its basis
o       §1012: the basis of property is generally its cost
 
 
Misc. Stuff about Gross Income
–          income from illegal sources is taxable
–          Treasure trove: finder has gross income to the extent of its value in the tax year where it is undisputed that it is in your possession
–          TP may have income as a result of reducing its perso