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Individual Tax
University of Mississippi School of Law
Davis, Donna Raye

Income Tax IFall 2010
Introduction
I.            TYPES OF AUDITS
A.     Audit – FG finds people who owe more than what they paid, service focuses its attention on those who typically cheat
B.     Correspondence audit – done through the mail
                                                  i.      Letter wants tax itself, interest accrued, and penalties if any
C.     Field audit – agent comes to your home and moves in
                                                  i.      Interested in wide range to issues
                                                ii.      KIM: Burden of proof on TP usually
D.     Office audit – revenue agent’s office
                                                  i.      Tend to be more specific in wanting information
 
II.            KINDS OF COURTS
A.     Tax Court: Most important of the Three
                                                  i.      Taxpayer commences action in court for re-determination of a deficiency w/o first paying the asserted deficiency
                                                ii.      Most sophisticated on tax issues, only hears tax cases
                                              iii.      No jury and only one judge
B.     Federal District Court – Can have jury trials here
                                                  i.      Has jurisdiction in any case against US regardless of amount
                                                ii.      Rule: Have to first pay the amount owed to file suit
C.     United States Court of Federal Claims
                                                  i.      Jurisdiction over all federal tax claims regardless of amount
                                                ii.      No venue requirements, no juries
                                              iii.      No deficiency cases, only can hear refund cases
 
III.            SOURCES OF RULES
A.     Constitution: 16thA FG ability to tax income of citizens
B.     Congress: creates statutory provisions – Code §§’s
C.     Executive: Department of Treasury
                                                  i.      Regulations proposed and sent out for public notice and comment, respond and then go to admin process of issuing
D.     Revenue Procedures: IRS puts out certain procedures to follow
                                                  i.      Court treatment: Sometimes given persuasive weight b/c it may be a long standing interpretation OR NO weight at all
                                                ii.      IRS puts out a line in the sand, as a litigation tactic
E.      Private Letter rulings – IRS gives personal specific rulings to those who request information about taking certain tax action
                                                  i.      Decision is binding on TP – decision locks in the tax treatment
 
IV.            ACCOUNTING PRINCIPLES – WHAT YEARS DOES GI GET REPORTED
A.     Cash Method – work when paid
                                                  i.      IF you are a cash method TP, THEN the year of actual receipt
                                                ii.      Corollary: Constructive receipt – counts, used for anti-abuse
B.     Accrual Method – rolling billing
                                                  i.      IF you are an accrual method, when there is a right to receive
 
V.            TAX FORMULA
A.     GI
                                                  i.      Determine if amounts are included or entitled to exclusion
                                                ii.      Presumption that if item met income definition then included
B.     Above the Line Deductions
                                                  i.      Approved Deductions listed in §62, if not listed its BTL
1.      Most trade/business types are above the line
2.      Most personal are below the line
3.      Investments can go either way
                                                ii.      Deduction presumption work opposite way, unless you can find a specific deduction you cannot deduct the value
C.     Adjusted GI
                                                  i.      GI – ATL Deductions
D.     Below the Line Deductions/Standard Deduction
                                                  i.      §63 Standard Deduction
                                                ii.      §151 – all TP’s entitled to personal exemption
E.      Taxable Income
                                                  i.      AGI – BTL deductions
F.      Tax Rate
                                                  i.      Applied to Ordinary Income
                                                ii.      Applied to Capital Gains
 
Ch. 2 – Gross Income
I.            DEFINITION OF INCOME
A.     Defined abstractly, exclusions > specific provisions
B.     §61 General Rule: GI means all income from whatever source derived including (list of items, not exclusive list)
                                                  i.      Rule: Exclusions can include statutory, judicial, and administrative decisions
C.     Glenshaw Glass – punitive damages constituted GI
                                                  i.      Three prong test to determine GI
1.      Undeniable accession to wealth
2.      Clearly realized
a.       Issue: Look for realization event
3.      Dominion – TP has to have it
a.       No restrictions on its use
D.     Note: Statutory scheme: income from all sources is taxed unless the TP can point to an express exemption
 
II.            INCOME REALIZED IN ANY FORM
A.     Forms of GI – Reg. § 1.61-1(a): GI may be realized in any form, whether money, property, or services
                                                  i.      §1.61-2(a)(1): Compensation for services including fees, commissions, and similar items
B.     Barter Clubs – trade services amongst its members rather than engage in cash transactions
                                                  i.      H: Still GI even if you cut out the cash element of the transaction
C.     Fair Market Value of Property/Services: Reg. § 1.61-2(d)(1)
                                                  i.      IF services are paid for in property/services THEN the FMV of the property/services is the measure of compensation
                                                ii.      IF the services rendered at a stipulated price, such price will be presumed to be the FMV of the compensation received in the absence of evidence to the contrary
                                              iii.      §20.2031-1(b): FMV = price a willing buyer would pay a willing seller w/ neither a compulsion to buy or sell and both having knowledge of relevant facts
 
III.            REALIZATION, IMPUTED INCOME, BARGAIN PURCHASES
A.     Realization Events: Matter of Timing
                                                  i.      Unrealized total gain may fluctuate from time to time as the property’s value changes, but that total will be treated as income only on realization
                                                ii.      General Rule: We do not tax mere accession to wealth when it is appreciation of property value
1.      §1.1001-1(a): In property cases, realization requires a conversion into cash or other property…a Disposition
B.     Imputed Income
                                                  i.      Self performing services for self or family/friends
                                                ii.      General Rule: Imputed income is not taxed although the Code contains no specific exclusion to that effect
                                              iii.      Two categories: imputed income from services and imputed income from property
1.      Performing services for one’s family => Not treated as income
2.      Performing services for self => not treated as income
3.      Living in self-owned property => Not treated as income
                                              iv.      Note: Tax policy of favoring home ownership
1.      163 Interest, §164 Property tax deduction, 121 Exclusion of Gain on Sale of Principal Residence
2.      BUT, §1.61-8(a): Rents and Royalties are GI
C.     Bargain Purchase
                                                  i.      Purchased product for less than FMV
                                                ii.      Policy – unworkable to have IRS look behind every deal to see if there was a taxable bargain
                                              iii.      BUT, IF property transferred as compensation for services in an amount less than FMV, THEN FMV – Amount Paid = GI. Reg. § 1.61-2(d)(2)(i)
1.      Usually relation to employment compensation for services rendered is a clue but fringe benefits complicates the issue
                                              iv.      Note: DO Not confuse realization requirement w/ compensatory bargain purchases. Reg. § 1.61-2(d)(2)(i)
1.      Its GI not now, but when she realizes it by selling it later
                                                v.      Test: When value is known and purchase for less than FMV
 
IV.            CASES APPLYING GI
A.     Roco –
                                                  i.      TP had a qui tam payment from FG; GI
                                                ii.      Rule: no specific § for exclusion means TP cannot exclude it
                                              iii.      §6662 – Penalty: TP substantially understates income by 20%
                                              iv.      Could be excused in GF shown, there was none here
B.     Cesarini:
                                                  i.      TP’s found money in used piano; filed seeking a refund
                                                ii.      §1.61-14 governs this, treasure trove is reportable
                                              iii.      Issue: Accession to wealth took place – When money was found
C.     McCann:
                                                  i.      Employer paid for employee to go on seminar
                                                ii.      Issue: Whether the services rendered are GI
                                              iii.      TP: Attended training se

hat he is not entitled to retain the money and even though he may still be adjusted liable to restore its equivalent
C.     Indianapolis Power & Light
                                                  i.      Issue: advance payment?
                                                ii.      Test: whether the TP has some guarantee that he will be allowed to keep the money
1.      Depends on the parties’ rights and obligation at the time the payments are made
2.      Does the TP have the right to exercise how the payment will be used
                                              iii.      No unfettered dominion over the money at the time of receipt b/c of obligation to repay the money when service ended, the security deposits are not income
D.     Westpac Foods
                                                  i.      Issue: Advance Trade discounts
                                                ii.      Advance trade discounts are not income b/c TP here has to pay the money back if the volume commitments are not met, it is not an accession to wealth
E.      Millenbach
                                                  i.      Bad drafting by lawyer lead to a loan which had an initial obligation to repay based on a contingency that never arose, so it was not income b/c of status as a loan at forefront
                                                ii.      But on appeal: not the right answer there was a discharge of indebtedness and includable as GI
                                              iii.      Repayment based on contingencies, GI in this case
 
Ch. 4 – Gains Derived from Dealings in Property
I.            INTRODUCTION
A.     Gain
                                                  i.      § 61(a)(3): GI includes “gains derived from dealings in property.”
B.     Note
                                                  i.       No realization while property is being held
                                                ii.      Realization event is the sale or transfer of property
C.     §1.61-6(a): Gain = Amount Realized – Un-recovered Cost/Other Basis for the Property Sold/Exchanged
                                                  i.      §1001(a): Gain = Amount Realized – Adjusted Basis
                                                ii.      §1001(b): Amount Realized = Sum of $$$ received + FMV of the property received
                                              iii.      §1011 Adjusted Basis shall be §1012 Cost adjusted by §1016
                                              iv.      §1012 Cost Basis: Basis of property = Cost of Property
1.      Cost of real property shall not include any amount w/r to real property taxes, which are imposed on TP
                                                v.      §1016 Requires TP to adjust basis in property to reflect any recovery of TP investment or any additional investment made in the property
1.      Ex: Increasing adjusted basis in property
a.       Paying additional money for add-on to house
2.      Ex: Lowering Adjusted basis in property
a.       Using insurance proceeds from damage to house to not repair home but go on vacation
D.     Recovery of Capital Concept
                                                  i.      TP has right to recover tax-free investment (capital) in property before being charged w/ income from a disposition in property
                                                ii.      §1012 Cost basis and §1016 Adjusted Basis provide a measure of the capital TP is entitled to recover Tax-free
                                              iii.      Basis is critical to determining the gain/loss realized by TP on disposition of the property
E.      Note
                                                  i.      §61(a)(7): Dividends are GI
                                                ii.      Just like rent and interest earned – earnings on or profit from one’s investment
                                              iii.      Basis not adjusted to reflect payment of dividend
 
II.            TAX COST BASIS
A.     When property is given over as payment