Income Tax –– Professor Quirk
I. General: how you characterize tax is important.
Tax code is a means of social policy (e.g.- singles taxed more than married).
Tax is ultimate national power ($1.5 trillion); all other powers flow from it.
No constitutional problem for 70 years; why? Taxing power is critical to government.
Quirk disapproves of IRS imposing tax on salaries less than $30,000. Alternatives are national sales tax or consumption tax.
II. Gross Income
A. §63: taxable income defined: gross income minus the deductions by this chapter (other than standard deduction). Rates apply here.
1. Standard deduction
a. $4000 (approximately) for single person
b. $7000 (approximately) for married (joint)
2. §151 personal deduction
a. $2000 for single ($2700 adjusted for inflation); $5000 total combining §§61 and 151; the rest is inflation adjustment (see parenthetical).
3. Rule: combination of standard and personal deductions is threshold of when to file. (standard + personal = filing floor; if below, then don’t file) If you make more than $6400, you must pay taxes.
4. Rate table: 28% for single making $22,100; 7.5% social security on employee, and 7.5% on employer. 8% goes to the state. Total of 51% on 22,100 – very high.
5. the top 20% of the population makes $50K or more and pay 75% of the total amount of income taxes collected. Quirk says this indicates that there is no need to tax people making less than $30,000.
6. In 1939, 1 in 33 people paid income tax. Now, ½ of the population pays income tax. Not a wealth redistribution anymore.
7. Article I, §9 of Constitution forbids a direct tax except in proportion to population (no direct tax on property). SC only had 1/10 of the people in nation, so only had to pay 1/10 of tax. Wealth doesn’t follow population now.
a. Pollock: government couldn’t impose income tax because it’s a direct tax.
b. 16th Amendment passed (1913) in reaction to Pollack allowing the government to impose income tax, but still said you can’t impose a tax on wealth or property.
8. Points of lecture:
a. We are heavily taxed country (Quirk hates taxes!)
b. Financial political impasse because of aging population (p55 of Supp); debt bomb goes off around year 2000 (debt is $6 trillion now; in 1970, debt was $380 billion)
c. Only solution was to raise taxes and lower benefits. Need people’s consent though. Social security is a problem that can’t be solved. (Quirk really hates social security).
9. Jefferson – Earth belongs to the living. The new generation shouldn’t have to pay for past’s foolish spending. Have to compromise to get people to pay for another group’s program. Debt casts burden on future generations. Paying $50-60 million an hour in interest.
10. See chart on p9 of Supp. The point is that it doesn’t matter how much income comes in, the government is still running a deficit. “They” say there is a surplus because “they” count social security (Quirk says this is stupid).
B. Four basics of preparing tax
1. §61 – gross income defined – as broad as Constitution will allow) – except as otherwise provided, gross income means all income from whatever source derived, including (but not limited to) the following items:
a. Compensation for services
b. Gross income from doing business
c. Gains derived from dealings in property
h. Alimony and separate maintenance payments
j. Income from life insurance and endowment contracts
l. Income from discharge of indebted ness
m. Distributive share of partnership gross income
n. Income in respect of decedent
o. Income from an interest in an estate or trust
2. §62 – adjusted gross income = gross income minus particular class of deductions.
a. Trade and business expenses
b. Certain trade and business deductions of employees.
(1) Reimbursed expenses of employees
(2) Certain expenses of performing artists
(3) Certain expenses of officials of state or political subdivision
c. Losses from sale or exchange of property
d. Deductions attributable to rents and royalties
e. Certain deductions of life tenants and income beneficiaries of property for depreciation
f. Pension, profit-sharing and annuity plans of self-employed individuals
g. Retirement savings in §219.
h. Alimony allowed under §215.
i. Moving expenses in §217.
j. Medical savings accounts in §220.
k. Interest on education loans in §221.
3. §63 – taxable income defined – gross income minus (rates apply here)
a. Standard deductions
b. Personal deductions
4. §151(d) – allowance of deductions for personal exemptions – exemption amount of $2000 ($2700 adjusted for inflation).
C. Value of deduction vs. value of credit
1. Value of deduction – in order to tell how valuable a deduction is, you must know the tax rate (e.g.- $15 million to charity has a 50% rate, so tax on $7.5 million comes out of pocket.
2. Value of credit – saves you dollar for dollar; comes off actual taxes to be paid.
3. See p79 for difference between credit and deductions. Deductions are computed as saving tax that would otherwise be paid.
4. Marginal rate – top rate of each dollar over taxed.
D. Form of receipt: Old Colony Trust Co. v. Commissioner (p66)
1. Facts: employer paid employee’s income taxes pursuant to K for salary + commissions only, not his total income from all sources (that includes employer’s payment of taxes for employee)
2. TP’s arguments are that Commissioner can’t impose a tax on a tax, and, alternatively, that the payment was a gift.
3. Rule: if someone pays your obligation, it is as if you had received the money as income.
4. Hypo: Clemson pays off TP’s obligation to Tulane in order to get him – this is income.
5. Baylin v. US – damage awards that pay attorney’s fees are benefit to TP and income.
6. But cf. Cotnam v. Commissioner – allowed to exclude portion of damages award paid direc
g of exchangeable value, proceeding from property, severed from capital.
c. Gain must be realized (received any income).
d. Stock dividend – profit used to adjust capital account (stock).
e. Stock split – accounting measure (there’s not adjustment to a capital stock, but change in number of stock. Value goes down and number of people goes up).
f. Difference – individual has choice with cash dividend, but not with stock dividend.
g. Stockholder owns a proportion of the assets of the company and this hasn’t changed. Therefore, stock dividend wasn’t income.
h. If company had issued a bond instead of stock, this is severable because change in form and would be taxable. Bond cause change in bundle of rights (gets too close to money, so taxable).
i. Capital = tree, and income = fruit of tree.
2. Helvering v. Bruun – (LL gets property back with new building built by tenant when T defaults) Court focuses on property changing hands ands says it’s income.
a. No longer has to be severable (as in Eisner).
b. If he had exchanged building for another, there would be no question that this would be taxable, but Bruun owned the property the whole time.
c. §109 – improvements be lessee on lessor’s property – reversed result in Bruun (and passed as a result of Bruun which was seen as an extreme case that was unfair). Says that gross income doesn’t include income (other than rent) derived by a lessor of real property on the termination of a lease, representing the value of such property attributable to buildings erected or other improvements made by the lessee.
G. Express Statutory Exclusions – a $1 exclusion/benefit is worth more than $1 salary (exclusion is not part of gross income of employee). The difference between the before and after tax amount constitutionally considered income, but excluded by Congress for policy reasons. Provides means for a company to give greater benefits to employees for least money.
1. §79 – group term life insurance purchased for employees.
a. Employees must include in his GI the cost of a group term life insurance paid by the employer which exceeds 50K (up to 50K excludable). If you get 51K in coverage, then 1K is income (reg. 1.79-3).
(1) Plan must be nondiscriminating (i.e. – available to all employees on same terms).
b. If employer is beneficiary of the policy, not taxable to employee because employer is benefiting.