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Income Taxation
University of South Carolina School of Law
Davis, Tessa R.

Income Tax

Spring 2016

Chapter 1: Applicable Tax Rates

Intro

Tax Liability = RATE x BASE

RATE is determined by filing status, income, etc.
BASE is the amount of taxable income (NOT same as Gross Income)

Tax Authority (what are the sources of tax law)

Internal Revenue Code (primary source)
Treasury Regulations

Regs can be interpretative or legislative

Cases

Tax Policy Goals

Efficiency

Certainty for taxpayers for decision-making
Ease of administration

Equitable: Is the tax fair?

Horizontal & Vertical Equity

Horizontal Equity

Tax similarly situated people the same.
Challenge: defining similarly situated

Vertical Equity

As you earn more, you’re taxed more.

Tax Progressivity

As taxable income increases, so does the rate of tax
Terms

Effective tax rate

Average tax rate; tax/income; liability as a % of taxable income

Marginal tax rate

Rate of tax applicable to the TP’s last dollar of taxable income

Pros

Ensure that an individual’s liability is based on his ability to pay
Wealthier individual’s should pay higher % b/c they receive more benefits
Accomplishes wealth distribution

Cons

Progressivity makes the system more complex
Distorts TP decisions
Inequities similarly situated TPs

Flat:

Tax is the same regardless of wealth (sales tax)

Regressive:

As taxable income increases, rate of tax decreases (social security)

The Impact of Filing Status

Married Filing Jointly and Surviving Spouses –

§ 7703(a) – “married” means that the TP is married on the last day of the tax year, except that if the spouse dies during the taxable year, the determination is made at the time of death

(b) – exception where some spouses living apart aren’t considered married

§ 2(a) – “surviving spouse” if your spouse died in either of the two taxable years immediately preceding the taxable year AND surviving spouse maintains over ½ cost of household that is principal place of residence of a dependent child / step-child and to whom the TP is entitled to a deduction under § 151
marriage generally only advantageous when 1 TP earns majority of income
marriage is a state issue – IRS follows state law

Head of Household –

§ 2(b) – “head of household” is one who is not married / surviving spouse and maintains at least ½ of cost of household which is principle residence of a dependent for at least ½ of the taxable year

Must be entitled to deduction under
Types of dependents defined in

So, no dependent, no head of household

Singles / Unmarred-

Unmarried and Not head of household

Married Filing Separately –

Married couples may opt to file separate returns
Gets around “marriage penalty” which hurts couples who earn similar incomes

Chapter 2: Computing Liability for Tax

Tax Ladder

§61 – Gross Income

All income from whatever source derived
(less: Above the line deductions –

Adjusted Gross Income –

(less: personal exemptions -)
(Less: StandardOR itemized deductions)

Taxable Income –

Determining “Taxable Income”

Deductions are generally authorized by, which states that only deductions authorized in the Code may be used to compute taxable income
ALL TPs can take ATL deductions inAND personal exemption in
Itemizing TPs – Itemized Deductions are Either:

(1) Miscellaneous Itemized Deductions –

These are deductions NOT listed in and ARE subject to the 2% haircut

Which means they are only allowed to extent that the aggregate of such deductions exceeds 2% of AGI

(2) Regular Itemized Deductions

These deductions are specifically listed in

All itemized deductions are subject to phaseout at higher income levels

But, 3 deductions excluded from phaseout in

§213 – Medical Expenses Deduction
§163(d) – Investment Interest
§165(a) – casualty or theft losses

Standard Deduction taking TPs

§63(c) – sets forth amount of the standard deduction, which is adjusted annually

Personal Exemptions

Deduction for personal exemptions reflects policy that a certain base amount of income shouldn’t be subject to federal income tax –
Personal Exemptions Include:

Exemptions for TP –

lly, it generates a refund and therefore enhances the redistribution effects of the income tax

Focused on low-bracket payers, phases out at over $5k income

§63 Taxable Income = §62 AGI (minus) §151 Personal Exemptions (Minus) §63(d) Itemized Deductions OR §63(b) Standard Deduction

Chapter 3: The Meaning of “Gross Income”

Judicial and Administrative Definitions of Income

Defining gross income

§61(a) – GI is “all income from whatever source derived”
Haig-Simmons Definition (not definition used by IRS)

Income = TP’s consumption + his change in wealth for a particular period

Glenshaw Glass Definition (The one to actually know)

(1) undeniable accession to wealth
(2) clearly realized
(3) over which the TP has complete dominion and control

Finds – Finding stuff (Anything) is treasure trove

Reg § 1.61-14 – treasure trove constitutes GI for the taxable year in which it is reduced to undisputed possession

Calculated at the time the treasure is put in person’s undisputed possession, not the year you realize its value (sell it).

Bargain Purchase Argument

In a case where you find something inside what you bought, you can argue that you negotiated to buy everything inside for 1 price

IRS doesn’t like accepting this argument though
Under this argument, TP

Promoter Rule: Income rests with the promoter, the party who accrues the primary benefit. (ex. Tide sending free samples: it’s a promotion, not income).

Look to where the primary benefit falls (ex. publisher giving free books to teachers; even if teacher keeps books, NOT income b/c it’s a promotion).
If not income to begin with, then teacher couldn’t claim a deduction for future donations of book. If no GI, no deduction!