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Washington & Lee University School of Law
Kahn, Jeffrey H.

Tax Outline
Fall 2010
I.        Brief History
A.      First American Income Tax in the civil war
                                                   i.      Both needed the revenue for the war
                                                 ii.      The principle taxes were tariffs
                                               iii.      Both taxes dissolve
B.      In 1894 the political parties strike a deal to reduce tariffs to reinstate in income taxes to make up for the revenue
                                                   i.      Flat 2% on income above 4000
                                                 ii.      Still progressive because not everyone had to pay it
C.      Claimed the tax was unconstitutional:
                                                   i.      Article 1 Section 9 Clause 4
1.      No capitation or other direct tax shall be law unless proportion to the census or enumeration
2.      Aka a poll tax…everyone has to pay the same amount
                                                 ii.      No direct tax is what the limitation is…indirect tax is ok
1.      Pollack v. Farmer’s trust:
a.       Direct tax on property so that part is unconstitutional
b.      Only time the address the part on rental income
c.       Declares the modern income tax unconstitutional
D.     1909 Congress passes a corporate income tax…
                                                   i.      flint v. stone tracy…say its constitutional because it is an indirect tax.
1.      Power to pass taxes.
2.      Overrule Pollack v. Farmer’s
3.      16th amendment in 1913
a.       can lay and collect income tax without regard to the census or enumeration
E.      Now we have progressive tax…graduated rates
                                                   i.      The more income that you have the higher the percentage
                                                 ii.      Rates for now are in section one
1.      1i. have the tax cuts (bush tax cuts) new rates
2.      sunset provision: once the years past go back to the higher amounts
                                               iii.      marginal rate: rate that the last dollar they were taxed at
II.      Sources
A.      Internal revenue code:
                                                   i.      After 1913 passed the revenue act of 1913 (but it only lasts for 2 years so then it lapses)
                                                 ii.      Permanent after 1939 IRC
                                               iii.      Revenue acts now just make changes.
1.      After 1939 refers to the changes
                                               iv.      1954 repeal the code and adopt a new one
1.      IRC of 1954
2.      Changed the order
                                                 v.      In 1986 the code was changed into the IR act of 1986
1.      Changed the bill and made the name change
2.      IRC of 1986 as amended** is now what it is called
3.      They changed the name because the regs were around…congress codified the regs. They enacted the code with the regs, they have the same power as the code
B.      Treasury regulations:
                                                   i.      The number following the section are different roles (ie. 1 is the income tax)
                                                 ii.      Three regulations:
1.      Legislative: difficult to overturn (congress)
2.      Interpretive: interprets the provisions
a.       Congress has the authority to determine what the provisions mean
b.      Difficult to overturn
3.      Administrative
a.       Less substantive and more aboiut the regulation of fed. Income system
                                               iii.      Proposed regulations: have hearings, change them and re-propose them and finalize
                                               iv.      Mayo Case:
1.      Involves regulations
a.       Whether the Mayo residents are students
b.      Original rulings…case by case basis
c.       You work 40 hrs a week then student
2.      Muffler: don’t give enough deference to the treasury
a.       Regs given too much
3.      Chevron: difficult to overturn regulations
a.       Not case by case because they do not want wasteful litigation
C.      Rulings:
                                                   i.      bulletins published weekly. Rev Rul 2004-13 (13th rev rule for 2004)
                                                 ii.      factual situation…here’s the facts and this is how we would rule on them
                                               iii.      PLR: write to the IRS, ask for a ruling on an issue that there is some controversy about.
1.      Used to be private… now they publish them
2.      Cannot cite them in court (can cite to rev rul)
3.      PLR comes from a tax payer
4.      Tam (little office) gets it from the main office
D.     Courts:
                                                   i.      Audit
1.      If a tax payer disagrees with the audit and appeals it…refuse pay and they sue you for the money (sue for the refund if they pay)
a.       Got to: Fed district
b.      Tax ct
c.       US fed. District court of claims
d.      IRS represents the government
                                                 ii.      Commissioner is the attorney on the other side
E.      Note:
                                                   i.      Congress came up with a test called the audit test to prove if people were lying…have to go through all of the tax deductions and prove them.
III. Basics
A.      Rate Structure:
                                                   i.      Tax income = gross income less certain deductions

ds a letter stating whether they will make a ruling on the matter. (tells the TP their stance on the matter)
L.      Tax litigation: Three courts:
                                                   i.      DC
                                                 ii.      Tax Court
                                               iii.      US Federal claims
1.      Golsen Rule: apply the rule of the court of appeals when the matter is on appeal
M.    Burden of proof: used to be on the TP now it is on the government if the conditions are right
                                                   i.      (factual issues.)
                                                 ii.      Can sometimes recover costs from the government.
V.     Income
A.      Lay and collect taxes on income (16th amendment)
                                                   i.      Gross income=gross receipts-cost of goods sold
1.      X sold radio for $50 that he paid $30 for with $3 for adds
2.      Net income of 17 after selling costs
3.      Gross income of 20 because do not include costs to sell it.
                                                 ii.      Rule of thumb test
1.      Gross income is basically the increase in net worth
2.      (haig simons definition)
B.      Imputed income from property or services
                                                   i.      A TP does not need to pay additional for the enjoyment of his property
                                                 ii.      Benefit derived from property that is used by him solely is not included
                                               iii.      Home ownership:
1.      X invests 40k at 10% ROR
2.      X wants to live at a house and either has to pay 40K to buy or 4k to rent
3.      If X rents the 4k from the investment is taxed so she must get more from somewhere else
4.      Or she can take out the 40k and not pay tax on it because it does not increase her gross income
                                               iv.      Not taxed for self improvements or self services
C.      Significance of state law in the form of a transaction
                                                   i.      Rights and interests determined by local law
                                                 ii.      Substance v. form and business