Tax 1 Outline: Summer 2011
Day 1: June 6
Tax History: Congress has the power to lay and collect taxes a la 16th Amendment (passed in 1913). Higher income thresholds in 1913 tax schedules (only the super-rich were taxed).
Statutory basis for the federal income tax is the Internal Revenue Code (“IRC,” Title 26 of the U.S.C). Tax bills must originate in the House of Representatives.
Current body of tax law based mostly on the IRC of 1986, but revisions have been made since.
IRS administers the IRC (the IRS is the biggest part of the Treasury Dept.).
“Tax Myopia”—tax law as “different” and distinct from other areas of law, even though almost all areas of law intersect with tax law. Last true general practitioners are tax lawyers.
Why is tax important? Comes up in all areas of law; practical—we all have to pay taxes; microcosm of politics.
v Dominant themes of course:
The “what” question: TPs want deductions + less income; IRS wants everything to be income and no deductions
v What is income? (Ch 2)
v What is deductible? (Chs 4 &5)
Party
Income
Deduction
Tax Payer
No
Yes
IRS
Yes
No
The “when” question: TPs want to pay taxes later and get deductions now; IRS wants TPs to pay now and get deductions later
v When is it income? (Ch 3)
v When is it deductible? (Ch 6)
Party
Income
Deduction
Tax Payer
Later
Now
IRS
Now
Later
v Time Value of Money
Almost every dispute in tax law comes down to the time value of money. To TPs, money is worth more now and they’d like to pay taxes in the future. Same for the IRS, so they want TPs to pay their money now, not later. Thus the constant tension between TPs and IRS. Chart p. 42.
Formula for PV (present value) of money: $$ x interest rate
Formula for FV (future value) of money: $$/interest rate
Formula for federal income tax: Gross income – adjustments/exclusions = AGI
AGI – personal adjustments/deductions = taxable income
Formula for federal income tax liability: (Taxable income) x (tax rate) = tax liability
I. Income
Key questions to ask about taxing income:
1. Is the tax fair?
a. Horizontal equity—tax similarly situated people the same amount
b. Vertical equity—as income goes up, so does ability to pay (tax should go up)
2. Is it reasonable?
a. Administrative feasibility (practicality of administering the tax)
3. Does the tax produce good/sound economic effects?
a. Tax policy should reflect/further the goals of economic policy
Definitions of gross income:
1. §61(a): “gross income means all income from whatever source derived.”
2. Eisner v. Macomber: “income is derived from capital, from labor, or from both.”
3. Glenshaw Glass: “Congress applied no limitations as to the source of taxable receipts, nor restrictive labels as to their nature.”
4. Regulation 1.61(a): “gross income includes realization in any form, whether in money, property, or service.”
5. Haig-Simons: “income equals the sum of the fair market value of consumption and the change in the fair market value of the property during the year.”
A. Noncash Benefits (meals and lodging + fringe benefits)
§61(a): gross income means all income from whatever source derived.
Reg. 1.61-2(d)(1): “if services are paid for in property, the fair market value (“FMV”) of the property taken in payment must be included in income as compensation.”
General rule: noncash benefits = income.
1. Meals and Lodging §119(a)
§119(a): can exclude meals/lodging to employee (“ee”), spouse and kids ONLY IF they are provided
for the convenience of the employer (“er”).
Two things are required:
(1) meals must be furnished on business premises, and
(2) lodging must be on premises, and staying there must be a condition of employment for ee.
Tax Court
District Court
Court of Fed Claims
Pay Tax b/f Trial
No
Yes
Yes
Jury Trial
No
Yes
No
Appeal
9th Cir.
9th Cir.
Fed Cir
Tax Expert
Yes
No
Maybe
Choice of forum considerations: Go to a tax court if you are sure you’ll win (b/c that’s where you’ll get a tax expert as a judge); go to a Dist. Court if you want a jury of your peers; go to a Ct. of Federal Claims if there is a circuit split and you have good case law/precedent.
Benaglia (p. 54)—guy is living in a hotel/eating meals there as a manager of the property. Didn’t claim these benefits as “income” and now the IRS is after him. Result: he doesn’t have to include these benefits in his income and §119(a) codifies this outcome. Result today? Benaglia would come out the same b/c of §119—lead to fringe benefits.
Day 2: June 7
2. Fringe Benefits §132
a. No-Additional-Cost §132 (b)
b. Qualified Employee Discount §132 (c)
c. Working Condition Fringe §132 (d)
d. De Minimis Fringe §132 (e)
e. Qualified Transportation Fringe §
extent it would be deductible per §162/167 if ee paid for it.” (not applicable yet)
Ex. a work uniform
Ex. ers may provide outplacement counseling for ees about to be laid off. This is a fringe benefit b/c it would be a deductible expense if the ee paid for it themselves (so it’s treated as deductible to the er, too).
d. De Minimis Fringe §132(e)
§132(e): “any property or service the value of which is so small as to make accounting for it unreasonable or administratively impractical.”
Intended to be a small benefit, like free coffee for employees each morning.
Hypos: Supper and a cab ride home for ees who work late. Must be occasional to qualify. Working late three nights a week is probably not occasional; maybe once every 2 weeks is occasional.
What if supper/cab ride home is only available to highly paid ees? That’s ok, b/c the §132(J)(1) exception is only for no additional cost fringe and qualified ee benefits fringe benefits.
§132(e)(2) Eating facilities are de minimis fringe (“DMF”) if:
(a) on/near employer’s business premises, AND
(b) er at least breaks even.
e. Qualified Transportation Fringe §132 (f)
§132(f) Employee can exclude:
$120 (in 2011) for mass transit; à Obama recently upped this to $230 (only through 2011)
$230 (in 2011) for parking
Hypos: Senior partner gets $75 of free parking (as to all ees)? Parking is excludable up to $230, so this is excludable. If the partner took $75 in cash instead, that would be taxable income.
Companies can give free parking to only execs, for example, and that’s ok under §132(J)(1) b/c it’s not a no-additional-cost/qualified ee fringe benefit.
f. On-Premises Gym §132(g)
§132(g) Excludable if:
1.) Gym is on employer’s premises,
2.) Gym is operated by the employer, and
3.) The gym is used mostly by employees, spouses, and dependent kids.
Hypos: Law firm pays for an attorney to join the local YMCA? Not excludable. Doesn’t fit criteria.
Country club caddies use the course 1 day a week? Not excludable, b/c golf courses aren’t “substantially used” by caddies. Counter argument: this is a no-additional-cost FB, b/c it doesn’t cost more to keep the club open to caddies on a maintenance day than just closing it.
