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Federal Income Tax
Washington & Lee University School of Law
Drumbl, Michelle L.

FEDERAL INDIVIDUAL INCOME TAX

DRUMBL

SPRING 2014

I. Applicable Tax Rates

A. Tax Rates and Progressivity; IRC § 1(a)-(d), (f)(1) – (2), (i)

i. Progressive Tax Rates – as a taxpayer’s income increases, so does the tax rate

ii. Effective tax rate – TP’s tax liability as a % of taxable income – avg rate.

1. Will always be equal to or less than marginal tax rate

iii. Marginal Tax Rate – rate of tax applicable to the TP’s last $ of taxable income

B. Impact of Filing Status; IRC §§1(a)-(d); 1(f)(8)

i. Head of household – dependent defined in §2(b): not married, not surviving spouse, and either maintains home of a qualifying unmarried child

II. Computing Liability for Tax

A. Determining “Taxable Income”

i. IRC§§ 61(a); 62(a); 63; 67(a)-(b); 68; 151; 161

§61 Gross Income: All income from whatever source derived, lists 15 examples

less: ATL deductions §62 – preferred – recovering costs

= AGI (Gross income minus 18 specifically identified deductions in 62(a))

less: below line deductions (2013 standard (12,220 MFJ, Single 6,100) or itemized)

see if subject to §67(b) misc item deduction 2% haircut (all other than 12 listed)

the 12 listed are regular itemized deductions not subject to 2% haircut of 67(a) (exceed 2% of AGI)

less: personal exemptions §151 (2013 $3,900 – phase out page 1916)

IRC 152, 151. 1.151-1(b); 1.152-1(a)(2)(i)

§151 – available to all TPs

= Taxable Income (§ 63)

less: credits

B. Overview of Deductions

i. 162 – allows for deduction of ordinary and necessary business expenses: ATL

1. employee expenditures are treated as misc itemized deductions subject to 2% haircut

ii. 212 – deduct expenses for production or collection of income/property held for production of income

iii. Misc Itemized Deductions

1. as AGI is reduced, the amt of allowable misc itemized deductions will increase

2. misc itemized deductions are decutible to the extent they exceed 2% of AGI

C. Credit for Income Taxes Withheld on Wages

i. Refundable credit if paid enough

III. The Meaning of Gross Income

A. Judicial and Administrative Definitions of Income; IRC 61(a); 1.61-2(d)(1); 1.61-14(a)

i. Defining Gross Income

1. Recognized: when realized and included in income for tax purposes

2. Realization Requirement: received a benefit after an event

a. Eisner v. Macomber

i. Issue: Does the TP have gross income from the receipt of 1,100 add’l shares of Standard stock pursuant to the distribution?

ii. No. Realization is a prereq to gross income.

3. Comm’n v. Glenshaw Glass Company

a. Punitive damages need to be reported as gross income – wealth clearly realized.

b. Glenshaw glass definition of income: undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion and control

ii. Finds

1. Cesarini v. U.S. – Found $ in piano.

a. Regulation 1.61-14. Finder of treasure trove is in receipt of taxable income – to extent value in US currency

2. Timing: Treasure trove – taxable. Bargain purchase – not until realized.

a. Treasure trove – literally treasure found in some private place or hidden in earth, silver or gold. Valuable discovery.

iii. Problem 3-1

1. TP finds $500 – If certain not yours, it’s gross income, glenshaw glass. Treasure trove unless TP’s

2. Finds diamond ring – Glenshaw glass and treasure trove, report FMV

3. Find painting – not realization until sell

4. Painting increases in value – Mere fluctuation doesn’t equal gross income, no realization event

5. Bargain Purchases – Not treasure trove b/c not discovery, knew you were buying a piano

iv. Barter and Imputed Income

1. Barter income rule – 1.61-2(d)(1)

a. If services are paid for other than in money, the FMV of the property or services taken in payment must be included in income. If services rendered at stipulated price, such price will be presumed to be the FMV of the compensation rec’d in the absence of evidence to the contrary

b. Rationale: efficiency

2. Imputed income – benefits resulting from a taxpayer’s personal efforts (growing vegetable

s serves no legitimate corporate purpose, & look at primary purpose of expenses

F. Gifts and Bequests; IRC 74(a)-(c)(2); 102; 274(j)(3)-(4); 1.74-1(a); 1.102-1; Proposed 1.74-1(b)-(f); 1.74-2

i. 102(a): gift exclusion – TP friendly

1. no income tax consequence to the donee; not taxable event to Donor

ii. Gifts to employees

1. Section 102(c) – no transfer from an employer to or for the benefit of an employee can be excluded as a gift

a. Doesn’t apply to former employees

b. Non-employees like independent contractors or survivors of employees

2. Proposed 1.102-1(f)(2) – but still followed

a. Not a transfer if employee shows wasn’t made in recognition of employment

b. 102(c) Doesn’t apply to amts b/w related parties (father/son) if related to family relationship not circumstances of employment

iii. What is a gift? Comm’n v. Duberstein – got the Cadillac

1. Proceeds from detached and disinterested generosity

2. Transferor’s Intent

iv. Olk v. U.S.

1. Tokes received as craps dealer

2. Takeaway: tokes are not detached and disinterested generosity, the intent when someone gives a toke is that it’s meant to be part of expected payment

v. Wolder v. Comm’n

1. Gifts made at death.

2. Issue: whether an attorney contracting to and performing lifetime legal services for a client receives income when the client, pursuant to the contract, bequeaths a substantial sum to the atty in lieu of the payment of fees during the client’s lifetime? YES.

3. A transfer in the form of a bequest was the method the parties chose to compensate Wolder for his legal services – so subject to taxation. Postponed payment for legal services