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Tax and Financial Planning
University of Kentucky School of Law
Vasek, Stephen J.

Tax I Outline

Chapter 1: Introduction and Some Key Concepts

Economic and Fiscal Importance of the Federal Income Tax

a. revenue—whole point of the income tax
b. taxpayers

i. § 7701—a “person” is an individual, trust, estate, association, corporation, etc

c. economic, social, and fiscal ramifications

Where Is “the Tax Law?”

d. IRC
e. Treasury Regs

i. interpretive—1
ii. estate—20
iii. gift—24
iv. procedural—301
v. all regs must be reasonable to be considered tax law; court defer to longstanding regs
vi. best source for understanding IRC

f. revenue rulings—order to IRS field officers on how to treat a specific tax situation; can be cited as binding precedent
g. IRS memoranda (TMs, AODs, Private Letter Rulings)—some published, PLRs available under FOIA; cannot be cited as precedent but can be persuasive authority
h. legislative history—House Ways & Means, Senate Finance Reports

i. only relevant when the IRC § is ambiguous

i. case law—on same precedental level as Regs

i. IRS only follows appellate decisions in the Circuit they apply

The Tax Base: Taxable Income

j. how tax is computed

i. gross income (GI) – business deductions = adjusted gross income (AGI)
ii. AGI – itemized deductions – deductions for personal exemptions = taxable income (TI)
iii. (TI * tax rate) – tax credits = tax payable

The Graduated Rate Structure

k. § 1—graduated (progressive) tax rates according to income
l. recent changes—p. 845 text

Tax Procedure and Administration

m. selection of returns for audit—computer kicks out suspect returns or math errors, reviewed by an IRS agent

i. informal audit—agent reviews, determines OK
ii. office audit—TP brings books/records to local IRS office
iii. field audit—IRS agent goes to place of business
iv. auditor—can be a revenue agent, CID agent, or DOJ tax division investigator (last 2 bad, get an atty)

n. § 6501—statutes of limitation

i. gen’y—for civil cases, 3 years (IRS cannot issues an assessment after the later of 1. the due date for the filing of the return, or 2. the date actually filed) (§ 6501)
ii. no return filed—no SOL (§ 6501(c)(2))
iii. TP omits 25%+ of income; TP commits civil fraud—no SOL (§ 6501(c)(3))
iv. TP commits criminal fraud—6 year SOL (difference between civil and criminal fraud a matter of degree) (§ 6531(4))
v. TP’s time limit to file for a refund—3 years from time return filed, or 2 years from time taxes due are paid, whichever is later (§ 6511)
vi. TP’s time to sue if refund is denied—2 years

o. post-audit procedure

i. if a tax deficiency is found, the revenue agent issues a “30 day letter” giving TP that long to get an IRS administrative appeal (where IRS weighs expense of litigation to amount involved in deciding whether to settle)
ii. if TP doesn’t get an administrative appeal or if it is denied, IRS issues a “90 day letter” notice of deficiency, giving TP that long to appeal to the Tax Court (TC)

1. time limit starts with the mailing of the 90 day letter
2. appeal must be mailed (USPS) or received (FedEx, UPS) within 90 days (§ 6513(a))
3. a 90 day letter is sufficient if mailed to TP’s last known address (§ 6512(b)(1))

Judicial Jurisdiction and Review of Tax Cases

p. typical appellate option for TPs is the Tax Court (tax professionals who ride circuit)

i. TC Small Claims Division—less than $50k, pro se TPs, more informal, no appeals, cannot be cited as precedent

q. if TP elects not to appeal to TC, TP must pay tax
r. if TP pays tax (ie, no TC appeal), files for refund, and has refund denied, TP can sue in either Federal District Court or the Court of Federal Claims
s. choice of court

i. law may be different in TC, DC, or CFC
ii. no juries in TC and CFC
iii. TC judges very knowledgeable and tend to strictly interpret the IRC; DC and CFC judges less knowledgeable (will do whatever their clerk says)
iv. relaxed rules of evidence in TC

t. appeals

i. TC and DC go to the Circuit Court for the circuit the court sat in
ii. FC goes to the Court of Appeals for the Federal Circuit
iii. from there, all cases can go to the Supreme Court (only takes about 3 tax cases/year, and always screws them up)

u. attorney’s fees

i. Burke v. Comm’r (1997)—TP can only get § 7430 attorney’s fees upon winning a tax case if they have exhausted their administrative appeals

Primary Tax Policy Concepts

v. must raise enough revenue
w. must be “fair”

i. differing conceptions of fairness—progressive or proportionate?
ii. vertical equity—fairness taking into account greater ability to pay
iii. horizontal equity—fairness treating alike people similarly situated
iv. top five ways to be rich—inheritance; marriage; winnings; illegal activity; hard work and lots of luck

x. administrability—feasible to administer; not overly burdensome for TP or IRS
y. transparency—clarity
z. simplicity—to TP
aa. neutrality—does not conflict with the free market
bb. macroeconomic considerations
cc. empirically based—never true, as tax law is inherently political

Alternative Systems

dd. Rawls’ veil of ignorance
ee. tax law has always been used to achieve social, economic, and political obje

omm’r (1939)—taxes refunded by an atty who screwed up TP’s return is a return of capital, not TI

e. illegal income and selected nontaxable items

i. Reg § 1.61-14—illegal income is still TI

Economist’s Definition of Income

f. Haig-Simons definition
g. consumption – increase in net worth (or + decrease in net worth) = GI

i. FMV of assets – liabilities = net worth

Other Selected Types of Gross Income

h. treasure trove

i. Reg. § 1.61-14—treasure trove is TI (rem Glenshaw Glass definition)
ii. must have undisputed possession (question of state property law) to be treasure trove; essentially a realization requirement

i. income for the discharge of indebtedness

i. § 61(a)(12)—cancellation/discharge of indebtedness is TI
ii. the debt must not be contested, if it is then the cancellation is the ending of a dispute and not discharge of a debt (Zarin v. Comm’r) (§ 108)

j. original issue discount

i. § 61(a)(4)—interest income is taxable
ii. original issue discount—instead of an investment giving an interest rate return, its initial price is lowered
iii. example—a 10 year $1k bond bought for $670—$330 of OID income, reported at $33/year for 10 years

k. purchase price adjustments and bargain purchases

i. not TI unless the reduction was intended to be compensatory (hidden income)
ii. price adjustments must be made by the seller, otherwise it is CODI

l. income from bartering

i. the FMV of professional services traded is TI as an exchange of services
ii. FMV of services—what a willing buyer would pay a willing seller, each under knowledge of all the facts, and neither under compulsion

m. taxation of reimbursements

i. § 79—employer-paid group term life ins (ie, employer pays premiums) is only TI to employee in excess of $50k
ii. § 101—receipt of life ins proceeds not TI
iii. § 132—several other employer-provided fringe benefits that aren’t TI
iv. § 62—employer reimbursement of employee expenses that are deductible is generally not TI to the employee

n. frequent flier mileage

i. no hard ruling either way