Federal Income Tax Outline

TAX I- Laro
I. In General
a. What makes a good tax? 3 elements:
i. fair
1. vertical equity – amount of tax should be correlative to ability to pay
2. horizontal equity – the same relative amount of tax should be collected from people who are similarly situated
ii. efficient – tax that raises a lot of revenue with little effort by the government. ex: sales tax, income tax (we report it they check if something looks off)
1. we operate on a self assessment process – taxpayer reports its own reckoning. (alternative systems: schedular system, economic activity, etc.)
iii. administrable – must be understood and accepted by the community
b. Elements of tax – questions to ask:
i. Is there income?
1. How much is it?
2. if foreign currency, what is the value – at what time?
ii. When is it earned/realized?
iii. To whom do we attach it?
iv. What amount is taxable?
1. formula is: (gross income – adjustments) = taxable income * tax rate = payable tax – credits = tax to paid now

II. INCOME
a. What is it? TAX BASE
i. § 61 – income from whatever source derived; “except as otherwise provided in the code” (this is so Congress can take as much as possible – they refine it later w/ carve-outs)[illegally obtained income can be taxed even if it’s subject to restitution] b. Receipt of Financial Benefit
i. When is it attributed?
1. Cesarini – [$ found in the piano years after bought] A. case refers us to the regs: §1.61-14 – adds details the statute doesn’t have
B. accession to wealth is enough to be income – it can “fall out of the sky”– no economic activity needed.
i. When will it be taxed? here b/c cash, in the year it was found
ii. General Rule: With found property, it’s governed by state statute – after reporting and X amount of days have passed – when it becomes yours against the owner
C. If it’s not found property, but re-valued property, when will the increase in value be taxed? at time of disposition, when they get the $.
2. income for labor performed – it is attributed to the year you receive the payment, not the year in which you work
ii. Is it income?
1. Old Colony – [income tax paid by the employer, not by taxpayer] A. the salary is income and so is the money paid in addition as tax – must be paid out of salary of taxpayer to not be additional income
2. Glenshore Glass – [punitive damages awarded for injury] A. are punitives GI? yes, there is no economic activity here, but they still receive the $
3. Charley – [employer would charge clients for first class airfare, then buy coach for employees, and allow employees to retain the leftovers for personal use] A. travel credits are income here b/c:
i. they constitute additional compensation for the employee
ii. if used for an upgrade, the increase in value is taxable as a result of dealing in property
c. Income w/o receiving cash or property
i. Dean v. Commissioner – substance over form: look for an accession clearly realized.
1. housing is income as compensation for services – benefit provided w/o incurring a cost
2. how do you value it? FRV at time property occupied
ii. Helvering v. Independent Ins –
1. owner occupied property not subject to income tax – K question
A. Art. I §p cl.4 – apportionment of direct tax – this is already taxed in real property taxes, can’t tax for income b/c an owner uses it.
2. can only tax property as income when:
A. taxpayer incurs dividends, interest, rents, royalties
B. sells the property
3. Can have a problem with enforcement if tenant pays directly to the bank – then tenant and landlord fuse into one entity and there is no taxable income b/c then technically owner occupied, but the real owner is getting a benefit with no cost incurred.

III. GIFTS AND INHERITANCES
a. What is a gift?
i. §102 – proceeds from a detached and disinterested generosity, out of affection, respect, admiration, charity, or like impulses. [this code section deals only w/ employer/ee situations – see Duberstein for other business relationships]