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Federal Income Tax
University of Oregon School of Law
Mann, Roberta F.

MANN – Spring 2016
Gross Income Above the Line Deductions Adjusted Gross Income Itemized/Standard deductions and Personal Exemptions Taxable Income x Tax Rate Tentative Taxable Income Adjustments Credits Final Taxable Income
5 steps to Tax Liability
Determine Gross Income
Collect all items that increase wealth
Eliminate excluded items
Determine Adjusted Gross Income
Determine Taxable Income
Subtract exemptions
Subtract either
Itemized deductions OR
Standard deduction
Apply Tax Rate to taxable income
Subtract Applicable Credits
Gross Income: income from whatever source derived, except as otherwise provided – §61 (a)
Income does not have to be recurring or periodic to be income (i.e. treasure trove; Cesarini – undisputed possesion)
Income does not have to be money – can be property or services (reg § 1.61-1(a))
Income can arise from the payment to a third party on your behalf
Income is “undeniable accessions to wealth, clearly realized and over which the taxpayers have complete dominion.” (Glenshaw glass, which modified Eisner v. Macomber’s holding that income is “gained derived from capital, from labor, or from both combined)
Income must be realized and recognized (Glenshaw)
Exclusions: free parking from employer, up to $250/mo (§132); physical injury suit or agreement (§104)
Adjusted Gross Income – §62
Gross income minus the deductions listed in §62(a)
Above the line deductions
Gross Income – above the line deductions = AGI
Taxable Income – §63
Adjusted Gross Income minus allowances for personal exemptions and itemized deductions
§63(a) itemized deductions
Gross Income minus all deductions except the standard deduction
Gross Income minus
Deductions allowed under §62 arriving at AGI
Itemized deductions, and
The deduction for personal exemptions
§63(b) standard deductions
Gross Income minus
The deductions allowed under §62 in arriving at AGI
The standard deduction, and
The deduction for personal exemptions
Deductions v. Credits
Unlike a $1 deduction, which reduces taxable income by $1, a $1 credit reduces tax liability by $1
Marginal Tax Rates
Tax rate applied to the last dollars of income
Effective Tax Rates
The average rate at which an individual is taxed on earned income, or the average rate at which a corporation is taxed on pre-tax profits
Average Tax Rates
Tax liability as a percentage of taxable income
Tax Expenditures
Government spending through the tax code. Tax expenditures alter the horizontal and vertical equity of the basic tax system by allowing exemptions, deductions, or credits to select groups or specific activities
Evaluating Tax Policies
Tax Return Preparation Standards and Penalties
Accuracy Related (Substantial Understatement) – § 6662
Failure to File/Pay – §6651
Preparer’s Penalties – §6694
Power to Tax
The power to tax comes from the Constitution:
Article I
Constitution (Apportionment Clauses)
16th Amendment
This was adopted on February 28, 1913
This was viewed as necessary because the Constitution authorized it in Article I
After 16th Amendment was enacted, Congress takes over and now enacts all the tax laws that we have in the Tax Code.
House of Representatives
Tax Bills will first originate in the house
Tax Bills are then considered (revised?) by the senate
Both the (1) Full House of Representatives and (2) Full Senate will vote on the Tax Bill.
The Tax Bill then goes to the President for signature or veto.
Treasury Department
If it is signed, the Treasury Department now interprets the Code provision and write regulations
The IRS is the highest authority.
Paying Taxes
Taxes are calculated on the calendar year, and due every April 15th.
Joint Returns: This can combine income, but it is just like joint and several liability—each person is responsible for the other’s tax.
NOTE: Same sex couples cannot file joint returns.
Importance of Federal Income Tax
(1) Funds the government
(2) Creates economic incentives
(3) Creates social incentives
(4) Redistributes income
Policy of our Tax System: The “Three E’s”
(1) Equity
(1) Horizontal Equity: Similarly situated people are taxed similarly
An example of a violation of horizontal equity would be this: You sell your $5000 Nike stock, which would be taxed at 15% (capital gain). But if someone else works for a living, they will be taxed at the marginal tax rate (25% or 35%). These are taxed differently, so this could be a violation of horizontal equity.
(2) Vertical Equity: Differently situated people are taxed differently
Example: Higher income people should be taxed at a higher rate, because they are differently situated.
(2) Efficiency
Taxes shouldn’t change consumption or investment decisions.
The tax system should raise revenue in an efficient manner, and not change the business decisions of individuals.
Problem: Our tax system is far from being efficient, and it changes hundreds of millions of business decisions!
(3) Ease (Simplicity)
(1) Administerability
Taxes should be easy to administer.
People should be easily learne

raise revenue.
Are Expenditures Efficient: Maybe. We want people to buy houses, because home ownership is good (people are more involved in communities, happy, etc.). On the other hand, subsidizing home ownership raises the cost of housing for everybody, and we might even get a housing bubble.
Where Do Most Federal Tax Dollars Go
Defense and Security = 21%
Social Security = 21%
Safety Net Programs = 11%
Interest on Debt = 8%
Medicare, Medicaid, CHIP = 20%
Benefits for Federal Retirees (Mom) Veterans= 6%
Scientific and Medical Research = 3%
Transportation Infrastructure = 3%
Education = 2%
Non Security International = 1%
All Other = 5%
Who Pays The Most Taxes
The top 1% pays more than the bottom 95%
Obviously, because they have more income.
Tax Law & Litigation
Writes Tax Laws
Writes regulations which interpret the Tax Code
Courts will generally uphold any reasonable interpretation.
Administers Tax Code
Issues Rev. Rulings
There is no presumption of validity, because it is not law.
However, taxpayers may rely on these.
Order of Authority
Tax Code > Regulations > Rev Rulings.
There are three sources of law:
Tax Code (Congress)
Regulations (Treasury)
Judiciary / Cases (Tax Court, Circuit Court, Court of Federal Claims)
The US Tax System is a voluntary tax system—this means you tell the IRS what you owe (not the other way around). A better term would be a “self-assessment” system.
If the IRS doesn’t agree with your self-assessment:
Think you owe less: Send you a check
Think you owe more: Send you the first letter
This will be an assessment and questions to answer. Additionally, there will be a schedule for:
(1) Audit by Correspondence
(2) Office Audit
(3) Field Audit
If things don’t go well, then you can go to the Appeals Office. They will look at what you say, and what the IRS said. If you can convince the Appeals Office, then you win outright. If you don’t want to go to the Appeals Office, then you may litigate instead (see below).