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Federal Income Tax
University of Toledo School of Law
Chapman, Douglas K.

Federal Income Tax – Professor Chapman
 
TABLE of CONTENTS
o               Chapters
¨        Introduction                                                                                  Ü Chapter 1     {pg. __}
 
¨        Gross Income                                                                                Ü Chapter 2     {pg. __}
 
¨        Exclusions of Gifts & Inheritance                                              Ü Chapter 3     {pg. __}
 
¨        Employee Benefits                                                                       Ü Chapter 4     {pg. __}
 
¨        Awards, Prizes & Scholarships                                                 Ü Chapter 5     {pg. __}
 
¨        Gains From Dealings in Property                                               Ü Chapter 6     {pg. __}
 
¨        Life Insurance Proceeds & Annuities                                      Ü Chapter 7     {pg. __}
 
¨        Discharges of Indebtedness                                                      Ü Chapter 8     {pg. __}
 
¨        Damages & Other Settlements                                                   Ü Chapter 9     {pg. __}
 
¨        Separation & Divorce                                                                  Ü Chapter 10  {pg. __}
 
¨        Other Exclusions From Gross Income                                       Ü Chapter 11    {pg. __}
 
¨        Deductions for Business Expenses                                          Ü Chapter 14    {pg. __}
 
¨        Deductions for Profit-Making Non-Business Activities       Ü Chapter 15    {pg. __}
 
¨        Deductions for Non-Profit Activities                                       Ü Chapter 16    {pg. __}
 
¨        Deductions for Individuals Only                                               Ü Chapter 17    {pg. __}
 
¨        Capital Gains & Losses                                                               Ü Chapter 21    {pg. __}
 
¨        Gains From Depreciable Property                                              Ü Chapter 22    {pg. __}
 
 
o               KEY
 
Federal Internal Revenue Code
=
.§§.
IRS Federal Tax Regulations
=
Reg #
“Internal Revenue Code”
=
IRC
“Internal Revenue Service”
=
IRS
“employee”
=
EE
“employer”
=
ER
“donor”
=
DR
“donee”
=
DE
“corporation”
=
©
“taxpayer”
=
TP
“reasonable”
=
®
“adjusted gross income”
=
AGI
 
 
INTRO to FEDERAL INCOME TAX– [Chapter 1] I                     Purpose of Income Tax
A        Revenue Raising
1          Tax
i         causes TP’s to spend less on consumer goods
a        Exceptions:
(i)       Deductions
(ii)      Tax credits
(iii)     Exemptions
2          Borrow
i         causes inflation
3          Print Money
i         causes inflation
B         Economic Regulation
1          Times of Recession
i         Ü lower taxes so TPs can spend more $$$
2          Times of Boom
i         Üraise taxes so TPs don’t spend as much
a        Regulates amount of “disposable income” in the general population
b       Income tax usually inverse to economic level
3          Generally
i         economic regulation is slow to affect
C         Social Engineering & Carrying Out Social Agenda
1          Incentives to Increase Good & Decrease Bad Behaviors
i         Ex:
a        Don’t like pollution à incentives NOT to pollute through tax
b       Don’t like gas guzzling SUV’s à penalties for ownership
c        Don’t like smoking à heavy tax on tobacco products
 
II                  History & Constitutionality of Federal Income Taxation
A        History
1          Prior to 1913
i         Fed taxation on income was unconstitutional
a        tax needed to be apportioned equally among the states
2          1913
i         16th Amendment gave Fed Gov’t right/power to tax income       
a        *congress has power to levy taxes w/out apportionment among the states
3          1939
i         Federal tax laws were first put into code form
4          1986
i         IRC was totally overhauled & revised in 1986
a        *present version of the IRC, albeit modified
B         Constitutionality
1          Income Tax NO longer Un-Constitutional
i         16th Amendment to US Constitution gave Congress power to levy taxes on income but àprovisions w/in the IRC may be found to be unconstitutional for other reasons
 
III               Sources of Tax Law
A        Primary Sources
1          Internal Revenue Code  (“IRC”)
i         Definition:
a        = codification of Federal Income Tax laws passed by Congress AND codified in Title 26 of USC
(i)       Code ÜLAW
2          Case Law
i         Definition:
a        = case precedent used by courts in subsequent tax cases
(i)       Cases Ü LAW
B         Secondary Sources
1          Regulations
i         Definition:
a        = interpretations of the IRC sections & provisions by the IRS
(i)       Regulations ÜNOT Law,butà are made to aid TP’s “understanding of” & “compliance w/” tax laws
1.       Ex: §61 is law AND Reg. 1.61 explains §61
(ii)      However, IRS Regulations in existence in 1986 (@ time the new code was adopted) à are given full force & effect by courts
1.       Courts believe Congress adopted new tax code w/ these Regulations in mind àif Congress had disagreed w/ their interpretations, they would have NOT included them
2          Revenue Rulings
i         Definition:
a        = written declaratory opinions made by the IRS at the request of a TP regarding a forthcoming tax issue  
(i)       Revenue Rulings ÜNOT Law (“non-binding”) but à can be used as persuasive authority
1.       Ex: If I take a deduction for this & this on my tax return, will this violate tax code?
 
IV                Federal Income Tax System
A        General Principles
1          The more $$$ TP makes à the more TP’s $$$ will progress through the tax system
i         There are 6 layers/brackets of taxation
B         Progressive & Marginal Tax Rate System
1          Progressive
i         = applies increasingly higher tax rate in correlation to increases in income levels
2          Marginal
i         = the increasingly higher tax rate is only applied to portion of income which exceeds certain $$$ amounts
a        Only those dollars in the higher tax brackets are subjected to the higher marginal tax rate
(i)       Ex: Married couple who has a taxable income of $14,000 would be taxed $1,400
1.       However, if they earned $14,100, they will pay Ü
a.        $1,400{14,000 x 10% } + $15{100 x 15%} = $1,415
3          Effective Tax Rate
i         = the actual tax rate at which a TP’s tax liability is calculated
a        Effective Rate is always less than  the Marginal Rate
(i)       *can decrease taxes by making “1 big pile of income” into “2 smaller piles of income”
1.       Ex: TP can lower tax liability by à
a.        having his income paid over a number of years
i.         “deferred co

b       If “deficiency amount” is greater than $25,000, TP is Ü
(i)       automatically granted an“administrative hearing”
4          Administrative Hearing
i          
5          Statutory Notice of Deficiency
i         90-day letter
D        Flowchart (“Getting into Court”)
Taxes paid on self-assessment tax system
30-Day Letter sent to TP by IRS
Audit Process
-IRS determines TP’s tax deficiency
 
 
 
 
 
 
 
 
TP Pays Deficient Amount
TP does NOT Respond
TP makes Administrative Appeal
TP Pays
TP Pays
TP does NOT Pay
90-Day Letter sent to TP by IRS
-IRS can being collecting Tax Deficiency
TP does NOT Pay
US District Court
-TP can appeal to US District court in which he is jury-eligible
US Tax Court
-where TP appeals IRS assessment if he did NOT pay & sue for refund
US Claims Court
-more favorable precedent for TP
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OR
 
 
 
 
 
GROSS INCOME & the SCOPE of § 61 – [Chapter 2] I                     Overview
A        “Gross Income” defined – § 61
1          Rule
i         Except as otherwise provided, gross income means all income from whatever source derived, including (but NOT limited to) the following items à
a        compensation for services
(i)       Ex: fees, commissions, fringe benefits, …
b       gross income derived from business
c        gains derived from dealings in property
d       interest
e        rents
f        royalties
g        dividends
h       alimony & separate maintenance payments
i         annuities
j         income from life insurance & endowment contracts
k        pensions
l         income from discharge of indebtedness
m      distributive share of partnership gross income
n       income in respect to a decedent
o       income from an interest in an estate OR trust
2          Method of § 61 Operation
i         Gross income includes everything & anything, unless Ü the code expressly excludes a certain type of income from being included
a        “Gross income” is a tax term while “income” is a generic accounting term à only the definition of “gross income” applies when calculating tax liability
ii        Therefore, gross income includes à
a        $$$, property, services, relief from debt, illegal income, … everything
3          “Netting” defined
i         Determining income from multiple sources which are divided into several income categories AND only allowing certain deductions for those specific categories
a        Ex: Adding up all income from dividends + interest in Schedule B AND taking allowable deductions for that income à then using final “adjusted income” from Schedule B to determine “adjusted gross income” on Form 1040