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Income Taxation
University of Mississippi School of Law
Davis, Donna Raye

INCOME TAX i – dAVIS – fALL 2011
1. Introduction
A. Types of Taxes and Audits
·         Types:
o      Regressive
§  àSales Tax
o      Proportional
o      Progressive
§  àIncome tax
·         Audits –
§  Usually a 3-year SOL
ú  Never starts to run if you don’t file a return
ú  If you agree to extend the SOL, try to limit it – especially the scope
o      Correspondence Audit – done through the mail
§  Letter wants tax itself, interest accrued, and penalties if any
o      Office Audit – revenue agent’s office
§  Tend to be more specific in wanting information
§  Taxpayer takes books & records to IRS office
o      Field Audit – agent comes to your home and moves in
§  Interested in wide range of issues
§  Burden of proof on TP usually
o      àeither work out an agreement or get Tax Agent’s Report & 30-Day Letter (get 30 days to appealàofficial statutory notice of deficiency)
§  Appeal to Where?
ú  Might want to appeal within IRS if dispute is over an issue of law because higher up levels will have more specialized knowledgeàwant settlement (not so much if an issue of fact)
·         Plus, higher-up person can take into account the uncertainty/expense surrounding litigation
ú  Also might want to appeal within the agency if so unreasonable that you plan on asking for attorney fees later (must exhaust all available remedies first)
§  If NO appealà 90-Day Letter = Ticket to Tax Court
ú  Must either PAY or FILE AN APPEAL in Tax Court; if not, IRS is free to start seizing assets
B. Kinds of Courts
·         Tax Court: Most Important
o      Taxpayer commences action in court for re-determination of a deficiency w/o first paying the asserted deficiency
o      Most sophisticated on tax issues, only hears tax cases
§  Only court that can hear DEFICIENCY cases
o      No jury and only one judge
·         Federal District Court – Can have jury trials here
o      Has jurisdiction in any case against US, regardless of amount
o      R: Have to first pay the amount owed to file suit (only REFUND cases)
·         United States Court of Federal Claims – No venue requirements, no juries
o      Jurisdiction over all federal tax claims regardless of amount
o      No deficiency cases, can only hear refund cases
C. Sources of Rules
·         Constitution: 16th Amend. gave Fed Gov’t ability to tax income of citizens
o      Can have income tax WITHOUT apportionment according to population (meaning what?)
o      Prior to Income Tax… many Tariffsàdrove up costs of goods; unfair because rested very heavily on consumers
·         Congress: creates statutory provisions – Code §§’s
·         Executive: Department of Treasury
o      Treasury Regulations proposed and sent out for public notice and comment, respond and then they go to administrative process of issuing
§  Clearer wording; specifics that statute doesn’t cover; give examples
§  Binding on TPs – hard to overturn regs.
ú  Has Congress spoken specifically about the issue (“This is what we mean by the statute”)? If so, regulations must follow Congressional mandates or be overturned
ú  Can also be overturned if arbitrary, capricious in substance or manifestly contrary to statute
§  àRegulations can now overturn court cases! (??)
·         Revenue Procedures/Revenue Rulings: IRS puts out certain procedures to follow
o      NOT binding on TPs, but are on the IRS
o      Court treatment: Both ways – Sometimes given persuasive weight because it may be a long standing interpretation; others say courts are not bound and give minimal weight
o      IRS puts out a line in the sand, as a litigation tactic; also a tool IRS uses to disperse info
·         Private Letter Rulings (PLRs): IRS gives personal specific rulings to those who request information about taking certain tax action
o      By statute, PLRs have NO precedential weightàonly usable by the specific TP
o      Can withdraw request if PLR is negative (but must attach it to return)
o      Useful as a K Provision (i.e., that a K is contingent on a positive PLR)
o      CANNOT rely on them for statements of law
o      Expensive: look at prior PLRsàif IRS has ruled the same way in several similar cases, save the money and effort
D. Accounting Principles – what years does gross income get reported?
·         Cash Method: taxed in year of actual receipt
·         Accrual Method: taxed when right to receive the income
E. Tax Formula
·         Gross Income (§ 61)
o      Determine if amounts are included or entitled to exclusion
o      Presumption that if item met income definition then included
·         Above the Line Deductions
o      Approved Deductions listed in §62, if not listed its BTL
§  Most trade/business types are above the line
§  Most personal are below the line
§  Investments can go either way
o      Deduction presumption work opposite way, unless you can find a specific deduction you cannot deduct the value
·         Adjusted Gross Income (§ 62) – What is available to be taxed?
o      Gross income – ATL Deductions
·         Below the Line Deductions/Standard Deduction – What comes back out?
o      §63 Standard Deduction
o      §151 – all TP’s entitled to personal exemption
o      Amount of standard & personal deduction set forth in Rev. Proc. each yr.
§  2009:
ú  Personal exemption = $3,650
ú  Standard Deduction $5,700 ($9,350 MFJ)
·         Taxable Income
o      AGI – BTL de

liability – both on hook for omissions/overstatements
§  Exception: Innocent spouse provision
ú  Rarely granted when couple is still married & non-cheating spouse is still living lifestyle cheating allowed
·         § 151 – Personal Exemptions
·         § 152 – Dependents
2. Gross income
A. Definition of Income – defined abstractly, exclusions have specific & express provisions
·         §61 GR: Gross income means all income from whatever source derived
o      R: Exclusions can include statutory, judicial, and administrative decisions
§  ALWAYS stare with the statutory language – specifically excluded?
o      List in § 61 is illustrative but NOT exhaustive
§  If not in list, must fit w/in the language of “whatever source derived”
·         Glenshaw Glass – punitive damages constituted gross income
o      Court says it has a VERY BROAD definition
o      3-Prong Test to Determine Gross Income:
§  Undeniable Accession to Wealth
§  Clearly Realized
ú  I: Look for realization event
§  Dominion – TP has to have complete dominion
ú  No restrictions on its use
·         Eisner v. Macomber
o      Limited Holding: characterized income as “the gain derived from capital, from labor, or from both combined”
o      If Glenshaw Test had existedàNO Accession to Wealth, NO Complete Dominion (REVIEW FACTS)
§  Difference? In Glenshaw and Roco, there was NEW VALUE (some benefit that wasn’t there before)
B. Income Realized in Any Form
·         Forms of Gross income Reg. § 1.61-1(a) – gross income may be realized in any form, whether money, property, or services
·         Fair Market Value of Property/Services Reg. § 1.61-2(d)(1)
o      IF services are paid for in property/services THEN the FMV of the property/services is the measure of compensation
C. Realization, Imputed Income, Bargain Purchases
·         Idea of realization founded on administrative convenience
·         Realization Events: Matter of Timing
o      Cottage Savings Association: “An exchange of property gives rise to a realization event so long as the exchanged properties are “materially different” – that is, so long as they embody legally distinct entitlements.”