Income Tax; Forman; Spring 2015 4/11/15 12:07 PM
I. APPLICABLE TAX RATES
A. Progressive Rates
-F.I.C. = “progressive”: as taxable income increases, so does rate of tax
· §1 exhibits tax rates for each filing status
-§1 provides basic table for tax rates
· PG 1916 has current tax rates
B. “Filing Status”: rates change via status under §1
(1) married filing jointly: married couples combining gross incomes
(2) surviving spouse: TP whose spouse died either of his 2 taxable years before the taxable year, AND who maintains a household which constitutes the principal place of abode of a dependent for the taxable year.
· Dependent = within §152- son, stepson, daughter, or stepdaughter of the TP whom the TP is entitled to a §151 deduction for
(3) head of household: if and only if the TP is NOT married at the close of the taxable year, is NOT a surviving spouse and either:
· (a) maintains a household for more than ½ of the taxable year as the principal place of abode of:
o (i) their qualifying child under §152 (ignore 152(e), but NOT:
§ if such child is married; is not a dependent of theirs under 152(b), (c)
o (ii) any other person who is a dependent of the TP so that they’re entitled to a deduction under §151.
· (b) or maintains a household for the taxable year as a principal place of abode for the father/mother of the TP—if deductible under §151.
(4) single (and NOT head of household: less generous b/c not supporting any1 like head of households
(5) married filing separately: self-explanatory, less favorable rate than joint
C. Liability for Tax and “Innocent Spouse Rules”
(1) Taxable income = gross income – deductions = AGI
· §611 Gross income; §62 AGI; §63(c) Standard Deduction; §151 Personal Exemptions
(2) Joint & Several Liability: §6013 & Cheshire mandates joint & several liability for any tax deficiencies if a married couple FILES JOINTLY
· 3 ways to avoid J&S Liability:
o (1) §6015(b) “Innocent Spouse” rule: relieve spouse from joint liability of it would be inequitable
§ (1) didn’t know; (2) no reason to know; (3) deficiency; (4) totality of circumstances makes it inequitable to hold liable; (5) rule invoked within 2 years of collection activities
o (2) §6015(c) divorced/separated: can limit one’s liability to the deficiency allocable to them. TP has BOP.
§ (a) must be unmarried, separated, and NOT cohabitating for 12 months before election of this rule
§ (b) no “actual knowledge” of any item giving rise to deficiency at time spouse signed return.
o (3) §6015(f): secretary may grant “equitable relief” given circumstances (a) if holding spouse liable would be unjust (b) and relief is unavailable under 6015(b) or (c).
§ issue: did the TP spouse “significant benefit”?
II. COMPUTING LIABILITY FOR TAX
(1) Gross income §61—minus §62 deductions = §62 AGI
(2) §62 AGI—minus §151 PE’s—minus §63(b) standard deduction OR §63(d) itemized deductions = TAXABLE INCOME under §63
A. Determining “Taxable Income”
(1) Start w/ §61(a): gross income means ALL income from w/e source: 15 items listed BUT NOT EXHAUSTIVE minus exemptions/deductions in CODE (NOT the standard deduction though)
· (a) Then, §62(a) AGI = gross income minus 1 or more of 18 deductions and personal exemptions
(2) §63(b): If an individual’s various deductions do NOT exceed standard deduction, thus NOT itemizing their deductions:
· TI = AGI minus
o (1) the standard deduction, AND;
o (2) personal exemptions in 151
(3) For TP’s taking “miscellaneous itemized deductions”: §67 provides a “2% haircut”: if not—just take the standard.
· §67(a): allowed only to extent they exceed 2% of an individuals AGI
· §67(b): “misc. itemized deductions” means ALL other than 12 listed
· §68 “Phase out”: if individual’s AGI is greater
djudged liable to restore its equivalent.” (if you get $ illegally you have to pay taxes, even if you can’t keep it under James)
B. COMPENSATION FOR SERVICES (§61(a)(1)
(1) Payments to 3d Parties/ (2) Meals & Lodging for Employees
(1) Old Colony Trust: compensatory payment include payments made to a 3d party, as opposed to directly to TP
· (a) payments to 3d party is equivalent to receipt by TP
o discharge of an obligation to 3d party = income
· (b) and NOT a gift b/c still compensatory in nature.
(2) McCann: §74(a) includes amounts received as prizes & awards
· 1.61-2(d)(1): determine FMV of “benefit” received = gross income
So if no exception for benefit—look to FMV of benefit under reg.
(3) Gotcher: if “primary purpose” of trip is business-oriented, expenses provide NOT included as gross income.
· §119 “Meals & Lodging”: excludes from GI the value of such furnished for the convenience of employer (minus expenses attributable if non-employees accompany employee TP)
o (a) Meals furnished ON PREMISES (not cash reimbursements)
o (b) lodging that employee is REQUIRED TO ACCEPT on the business premises of his employer as condition of job.
§ Not literally on premises: (1) quarters constitute integral part of business; (2) premises in which corp carries out substantial part of business activities
o (c) “convenience of employer test” implicit (primary purpose)
(4) Delayed compensation (i.e. free until death then vest me w/ something) IS compensation—NOT a gift/devise excludable under §102.