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Federal Income Tax
Widener Law Commonwealth
Hussey, Michael J.

Federal Income Tax – Spring 2012
Prof. Hussey
Generally, a tax is a compulsory payment to the gov in exchange gov provided svcs
                          i.      Tolls & Auto registration are considered user fees not a tax
Hierarchy of Authority
                          i.      Code/Statute – Primary Authority: IRC – statutory law made by Congress.  There is no fed tax common law, if there isn’t a statute authorizing it, it doesn’t exist
                        ii.      Regulations
                      iii.      Revenue Rulings
                      iv.      Ct Decisions/Case Law
                          i.      IRC = I.R.C. §61(a)(4)
                        ii.      Treasury Regulations = Treas. Reg. §1.61-7(a)  Regs begin w/a “1”
Brief History of Federal Income Tax
Started in 1913 with ratification of the 16th Amendment
“Congress shall have the power to lay and collect taxes on incomes, from whatever sources dervied, without apportionment among the several states and without regard to any census or enumeration.
1913 Income Tax Act
1920, only about 5.5 million paid income tax out of 62+ million Americans ages 20 and older
Withholding system of employers is successful in making sure taxes are paid.
Tax code is largely a product of social policy pushed out by Congress
Tax deductions for mortgage interest encourages home ownership
Charitable deduction provisions, etc.
Federal Tax is a study of governmental policy
Analysis of Tax Liability for Tom and Caroline Taxpayer
Gross Income: All income from whatever source derived, including but not limited to 15 items. Sec. 61
Subtitle A includes all income tax provisions beginning with Sec. 1 and ending with Sec. 1563
Caroline's salary of $150,000 and checks for Tom are gross income
$10,000 landscaping services are tougher
Have to be included since they were a service
Policy: Prevents income shifting
Tom cannot can't the $30,000 dollars he has not received yet since it is not actually or constructively received yet.
$19,000 in interest income counts against gross income
Have to include capital gains off of the ABC stock, $15,000
Dividends are also included
However, they are included within capital gains
Inclusions for capital gains not realized are not included in gross income
Adjusted gross income
No other gross income so their total gross is $320,000
Adjusted gross income: Gross income less certain deductions.
Section 62, not a deduction granting provision.
Categories of Deductions
Deductions a taxpayer may consider in determining his or her adjusted gross income
“Above-the-line” deductions
Deductions a taxpayer may take into account only after AGI has been determined
Viewed as interim measure of taxable income
Used to be itemized but that got way too complicated
Standard Deduction
Taxpayer entitled to deduct the amount specified by Congress regardless of what deductible personal expenses the taxpayer had actually incurred
If your standard deduction was lower than personal, you take personal itemization of deductions
Top of Pg. 13: Every time you have an expense that you believe is deductible, you must find a specific Code section authorizing the deduction
Taxpayer Problem
Tom paid $60k in wages and $20k for business expenses. There are above the line
He bought a building for 500K, so that is capitalized
Section 168 allows for depreciation from wear and tear
So, they get to deduct 10k for this year and then spread the remaining 490k
This is an above the line expense
Incurred 5k in expenses in commuting. That's not deductible.
Where one lives is a matter of personal preference.
Bank fee of 1K
This is not deductible
Higgins v. Commissioner
Mortgage payments are not deductible when against principle
See table on Pg. 15 for results from calculations
Taxable Income
If not itemized, taxpayer only entitled to standard deduction of anything below-the-line
Section 67: 2% floor on Misc. Itemized deductions
Credit v. Deduction
Credit reduces one's tax on a dollar for dollar basis
Deduction reduces taxable income providing a reduction in tax that is dependent on the tax bracket of the individual
I.            Introduction to Federal Income Taxation
A.     Gross income – Gen Def §61: “All income from whatever source derived” including but not ltd to the following items:
§  (1) Compensation for svc, including fees, commissions, fringe benefits, & similar items
§  (2) Gross income derived from biz
§  (3) Gains derived from dealings in prop
§  (4) Interest
§  (5) Rents
§  (6) Royalties
§  (7) Dividends
§  (8) Alimony & sep maintenance payments
§  (9) Annuities
§  (10) Income from life insur & endowment ks
§  (11) Pensions
§  (12) Income from discharge of indebtedness
§  (13) Distributive share of pship gross income
§  (14) Income in respect of a decedent; &
§  (15) Income from an interest in an estate or trust
                          i.      Exclusions: items that would otherwise be included in gross income, but there are statutes excluding them
                       ii.      Glenshaw Glass def (3&):
                                    1.      Accession to wealth: makes them richer at the end
                                    2.      Clearly realized: triggering event
                                    3.      Complete dominion (over which taxpayer has control)
B.      Adjusted gross income (AGI).  §62(a) GEN RU: Gross income minus deductions
                          i.     Add up deductions, subtract from income
                        ii.     Listed deduction get there b/c Congress decides.  Usually policy goal Congress wants to accomplish (encourage educdeduct loan interest & tuition)
                      iii.     Deductions
1.      Above-the-line deductions: Adjusted Gross Income (AGI) deductions listed in §62(a)
2.      Below-the-line deductions: Itemized deductions, all other deductions not listed in §62(a)
○   Reason for above & below the line deductions: economics, Congress needs to decide how many deductions they can afford to give peeps, for ex, by moving a charitable contribution above the line it encourages more peeps to donate, b

r goods for a svc or good (A drafts will & B agrees to mow A’s lawn 20xs.).  Included in gross income
                                    1.      What amt included in gross income?  Fair mkt value of good or svc recvd (Rev Ru 79-24)
C.     Resolution of Tax Issues Through the Judicial Process
                          i.      File return w/svc ctr
                        ii.      Exam: usually audit w/ Revenue agent.  Meant to be indep rev.  More individually driven,  Looking for settlement
                      iii.      Appeals Division: meant to be an independent review.  Looking more at overall case
                      iv.       Tr Ct (options)
1.      US Tax Ct: notice pldg.  Write brief after oral arg then decision.  Rides circuit throughout US (in certain cities on certain days)
2.      US Dist Ct: difference btwn tax & dist ct – in tax ct u don’t need to pay the tax 1st, as opposed to dist & claims ct where u have to pay the tax then petition for refund.  If you don’t have $ you’re going to Tax Ct.  If you have $ you’re going to Dist Ct. 
a.      Pro: may have local “bump,” might be more sympathetic
b.      Less expertise than tax ct (could go either way)
3.      US Claims Ct
                        v.      Circ Ct of Appeals (if you don’t like the decision from lower ct)
                      vi.      US Sup Ct
1.      When Sup Ct makes a decision in the case: Congress not bound.  Tax is statutorily driven so they can change the statute & Sup Ct H can go away
II.      Researching the Tax Law
A.     Legislative Regulation: promulgated by Dept of Treasury in response to authority delegated by Congress.  Happens when Dept of Treasury decides there’s an ambiguity they want to resolve & provide addl guidance.  They are generally upheld.
B.      Taxpayer Specific Advice
                    i.      private letter rulings: seen most often when taxpayer pays fee & tells IRS what they’re going to do & what they think the proper result is.  IRS will send response letter that are individualized to taxpayer.  90 days later a redacted version is released.  No good to you unless issued to you for ct purposes, but good guidance.  They are requested before the transaxn.  Even if the decision goes vs you, u can still try to do it.  If the ruling comes out your way u can staple to tax return.  Decision is not binding & you cant be audited for it
                  ii.      Technical Advice Memo: after transaxn.  Convince agent you’re working w/to write natl office for advice.  Initiated by IRS after the fact