Individual Income Tax Outline
The Sixteenth Amendment:
· The 16th Amendment provides that Congress shall have the power to lay and collect taxes on incomes, from whatever source derived
· Different levels of Audits:
Correspondence Audit – done by phone or mail
Field Audit – IRS conducts audit at TP’s home or office (only give records that are requested)
Office Audit – TP (or attorney/accountant) takes records to IRS’s office to conduct audit
· After audit is conducted, IRS will assert deficiency and Revenue Agent’s Report issued (aka 30 day letter b/c you have 30 days to decide whether you are going to appeal through the administrative process). TP can concede and pay or Appeal in IRS
· If TP goes through IRS Appeal, it will be cheaper than litigation. Also, doing this allows the TP to get the IRS’s theory of their case. If the IRS is unreasonable and without authority, the TP can collect attorney fees (but TP cannot collect attorney fees unless they go through this administrative appeal)
· There are times when the TP will not want to go to administrative appeal: If it is an issue of law, not fact, and an issue the Service is consistently litigating (this is a waste of time and effort and also lets the IRS know what you are going to argue)
· If TP goes through IRS appeal and does not reach an agreement or simply does not go to appeals, the TP will get a 90 day letter (TP’s ticket to tax court).
· TP has two options: File in Tax Court or Pay deficiency and file suit in District Court
o Tax Court proceedings do NOT have a jury trial but the judges are knowledgeable in tax law
o District Court only has jurisdiction over refund actions (i.e. TP must pay the tax). The judges do NOT have specific tax expertise, but you do get a jury trial
§ Note that the TP can take a deficiency action and turn it into a refund action by simply paying the tax and then amending his return asking for a refund
§ If TP not satisfied with result in either court, then can appeal and goes to Court of Appeals, if TP not satisfied with Court of Appeals decision then can file a writ of cert to get SCOTUS to decide case
Interpretation of Code
· Legislative history – Describes problem Congress was attempting to address and the intended outcome of the statute; particularly useful when there is not a regulation
· Judicial authority – Interpret ambiguous language and clarify terms of statute
· Administrative Sources:
o Treasury Regulations – The Dept of the Treasury has authority to draft regulations because Congress has granted general and specific authority to the Treasury. Regulations are binding on both the TP and the Government. The TP can challenge and overturn Regulations, but extremely difficult to prove unreasonable interpretation of the statute.
o Revenue Rulings and Procedures – The IRS drafts these and they are not binding authority except on the IRS. These are not binding on the TP. Courts differ on how persuasive Rev. Rulings are: (1) some state if the Rev. Ruling has been out a long time, and TPs acting in conformity with the Ruling, that the Ruling is persuasive; whereas (2) other courts will state they are not relevant.
o Private Letter Rulings – The IRS issues these when an individual TP requests. The IRS will respond with what they believe the tax consequences are. The Private Letter Ruling is significant to that TP b/c it grants him protection (TP is entitled to that tax treatment even if the IRS is wrong). However, the TP must make full disclosure of all material facts. If the TP does get a Private Letter Ruling, they are required by law to attach it to their return. By statute, the Private Letter Rulings provide no authority for other TPs (but, you can possibly use them to show the IRS is being inconsistent).
· § 61 provides that “except as otherwise provided, gross income includes income from whatever source derived, including but not limited to…”
· Glenshaw Glass:
· Accession to Wealth (TP be
, they are paid on her behalf due to Old Colony and § 61.
· Marcella receives a year end bonus of $5 k in recognition for the quality of her work
· Marcella must report as gross income $5 k. Bonuses are considered gross income under § 61 and the relevant regulations.
· The firm Marcella works for decides to renovate the office and sells an oak desk and chair to her for $50. The FMV of the desk and chair are $500.
· Marcella has $450 in gross income. She has accession of wealth, clearly realized, and she exercises dominion.
· The firm flew Marcella out to a popular ski resort. The firm scheduled a 3 day retreat as an opportunity for all of the partners and associates from across the country to get together to meet each other. Firm meeting were scheduled during the afternoons to allow the partners and associates time to ski during the morning. The firm paid all of Marcella’s transportation, meals and lodging expenses, which were approximately $2500. All firm partners and associates were required to attend the retreat.
· Marcella does NOT have to report gross income. The purpose of the trip was for business purposes and the attendees were not chosen based on performance criteria
· Marcella is given two round-trip, business class airline tickets to Italy which she received at no charge as a result of frequent flyer miles she had accumulated b/c of travel paid for in large part by her law firm. The value of the tickets is $5 k.
· Even though this is technically gross income, the IRS has stated they will not tax value of tickets in this case b/c of administrative difficulties.