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Federal Income Tax
Wayne State University Law School
Schenk, Alan

Taxation – Schenk Fall 2005
 
WHOSE INCOME IS IT?
 
Midterm is either worth ¼ or 1/3, whichever is better for the student
The final will be entirely essay.
The Taxable Unit5
Taxation of the Family. 5
Druker. 5
2003-85, 2003-49 IRB 1184. 6
Kiddie Tax: I.R.C. §1(g)6
Dissolution of the Family. 7
REV. RULING 76-255. 7
—      IRC §143(a)(1)8
—      IRC §6013. 8
Estate of Borax. 8
Rev. Rul. 67-442. 8
Davis. 8
§ 1041. 8
Reg. 1.1041-1T(b) Q-7. 9
IRC § 71(a)9
IRC § 71(b)10
Lester. 10
Antenuptial Agreements. 10
FARID-ES-SULTANEH V. COMMISSIONER.. 11
Assignment of Income. 12
Income from Services. 12
Lucas v. Earl12
Teschner. 12
Armantrout v. Commissioner. 13
Teschner v. Commissioner. 13
REVENUE RULING 74-581 [483]. 13
Giannini14
Hundley. 15
Income from Property. 15
Tree and Fruit Doctrine. 15
HELVERING v. HORST. 15
Blair. 16
Braunstein. 17
Riebe. 17
Salvatore. 18
Income from Property or Services. 18
Siegal v. U.S.19
Heim v. Fitzpatrick. 19
Tatum.. 20
Stranahan. 21
Using Entities. 21
Johnson. 21
Partnerships. 22
Schneer. 22
704(e)22
Culbertson. 22
Capital Gains and Losses. 24
Mechanics of Treatment of Capital G/L.. 24
1222. 24
IRC § 1(h)24
IRC § 1211. 25
IRC § 1222. 25
IRC §1091. 27
What is a Capital Asset28
IRC §1221. 28
Miller. 29
“Property held for Sale to Customers”:29
Malat v. Riddell29
Continental Can Co. v. US. 30
International Shoe v. U.S.30
“Property held for Sale to Customers”– REAL ESTATE cases:30
U.S. v. Winthrop. 30
Biendenharn Realty. 31
Bramblett32
Adams. 32
Bifurcated Ordinary Income and Capital Gain Treatment:32
IRC §1237. 32
Mechanics of §1231:33
IRC § 1231. 34
IRC §1245. 36
1221(a)(3)37
CORN PRODUCTS. 37
ARKANSAS BEST CORPORATION.. 38
Disposition of Leases, Life Estate, K and Other Interests. 40
Hort40
P.G. Lake, Inc.40
Bell’s Estate. 41
Gueggenhein. 42
Rev. Ruling 82-221. 42
What is the Meaning of PROPERTY?. 42
Commissioner v. Ferrer: [596]. 42
United States v. Maginnis. 44
Sale of Going Business. 44
Williams v. McGowan. 44
Effect of Prior Transactions: (Arrowsmith principle)46
Arrowsmith. 46
Cummings. 46
US v. Skelly Oil47
WHAT IS A “SALE or EXCHANGE?”. 48
SALE vs. ABANDONMENT or EXTINGUISHMENT OF RIGHTS. 48
Yarbro. 48
Foote. 49
Statutory “Sales or Exchanges“. 49
“Net” Gifts. 50
Diedrich. 50
HOLDING PERIOD:50
Rev. Rul. 70-598. 51
IRC § 1223. 51
NONRECOGNITION OF GAIN or LOSS. 53
EXCHANGES OF “LIKE – KIND” PROPERTIES. 53
IRC § 1031. 53
What is an “EXCHANGE?”. 56
Carlton v. U.S.56
Starker. 56
o      Rev. Rul. 82-96. 57
o      Rev. Rul. 79-44. 57
o      Rev. Rul. 82-166. 57
INVOLUNTARY CONVERSIONS. 57
IRC §1033. 57
Masser. 57
SALE or EXCHANGE OF TP’s RESIDENCE.. 58
IRC §121. 58
WHEN IS IT INCOME? OR DEDUCTIBLE?. 60
IRC §446. 60
THE TAXABLE YEAR.. 61
Burnet v. Sanford & Brooks. 61
The Tax Benefit Doctrine. 61
Rosen. 62
Hillsburough Bank v. Commissioner. 63
Claim of Right Doctrine – Income Received Subject to Contingencies or Liabilities. 65
Economic Benefit Doctrine. 65
U.S. v. Lewis. 66
IRC §1341. 66
U.S. v. Skelly Oil. Company. 67
IRC § 446. 68
IRC §451. 69
IRC §461. 69
Reg. 1.446-1(c)(1)(i)69
Reg 1.446-1(a)(4)(i)69
1.446-1(a)(4)(C)(2)(i)69
CASH METHOD.. 69
Reg: 1.451-2(a)70
Carter v. Commissioner. 70
Paul Hornung:70
Fetzer Refrigerator. 71
Oates and Olmstead cases. 72
Busby v. U.S.72
Alsop v. Commissioner. 73
Donohue. 73
REV. RULING 80-52. 74
Lavery v. Commissioner. 74
Baxter. 74
Williams. 74
Rev Rul. 76-3. 74
Cowden. 75
Reg. 1.461-1(a)(1)76
Anastasio. 76
REVENUE RULING 80-335. 76
REVENUE RULING 78-38. 76
Vander Poel, Francis v. Commissioner. 77
Price. 77
Cleaver. 77
Burgess. 77
Battlestein. 77
Noble. 78
Crown. 78
BOYLSTON MARKET ASS’N.. 78
ACCRUAL METHOD.. 79
All Events Test:80
Spring City Foundry v. Commissioner. 80
Hallmark Cards, Inc. v. Commissioner. 81
Rev. Rul. 83-106. 81
Georgia School-Book Depository v. Comm.82
North American Oil v. Burnet83
James v. U.S.83
AAA v. U.S.83
Schlude. 84
RCA Corp. v. U.S.84
Artnell Co. v. Commissioner. 85
REV. PROC. 71-21. 85
Reg. 1.451-5(c)86
Hughes Properties. 86
U.S. v. General Dynamics Corp. [699] (US 1987)87
Ford Motor Company v. Commissioner. 88
IRC § 461(h)88
Mooney Aircraft v. U.S.89
INSTALLMENT METHOD.. 90
IRC § 453. 90
Burnet v. Logan [723]. 91
REVENUE RULING 60-31. 92
NON-QUALIFIED DEFERRED COMPENSATION.. 93
Albertson’s Inc. v. Commissioner. 94
QUALIFIED PENSION PLANS. 94
Realization:96
Effect of Debt on Basis and Amount Realized. 97
Capital Appreciation and the Recovery of Basis:98
 
 
General:
—        Issues arise b/c of progressive taxation –people want to push income to low bracket taxpayers
—        2004 Consumer Price Index Adjustments- [TC, ix] —        Much of law in this area is case law or administrative (Rev. Rulings) not statute
—        It is difficult to shift income without giving up the property
—        You cann

net unearned income” at the parent’s top marginal rate (e.g. interest, dividends).
—        Designed to eliminate a perceived abuse – that parents would put assets in names of children and therefore income would be taxed at children’s rate or not at all if under standard deduction and personal exemption
—        Represents a major step toward taxation based on family income
—        Amount taxed is that in excess of $650 reduced by greater of $650 or amount of allowable deductions that are directly connected with the production of the unearned income.
Summary:
o Minimum of $1,600 of child’s unearned income is NOT subject to the kiddie tax and is taxed at the child’s marginal rate
o Anything over $1,600 is taxed at parent’s marginal rate
o “unearned income” is interest, dividends etc.
 
Parents may elect to treat children’s income as their own. If child’s income is between $500 and $5,000, parent can choose to report child’s income on return but rate structure is different then under kiddie tax. First $650 is not taxed, next $650 is taxed at 15% and anything over is at the parent’s marginal rate. The advantage is that the children do not have to file returns if this is their only income.
 
The $8,400 of net unearned income would be taxed at the parents’ rate, the remaining $1,600 would be reduced by the §63(c)(5) $800 standard deduction: If child’s income is between $500 and $5,000, parent can choose to report child’s income on return but rate structure is different then under kiddie tax. First $650 is not taxed, next $650 is taxed at 15% and anything over is at the parent’s marginal rate. The advantage is that the children do not have to file returns if this is their only income.
 
Illustration of §1(g):
Parents give child a bond that paid $10,000 of interest per year
The child has no other source of income and no itemized deductions
The child has net unearned income of $8,400, which is $10,000 less twice the standard deduction of $800.