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Federal Income Tax
Widener Law Commonwealth
Sealing, Keith

Federal Income Tax Outline –Sealing Fall 2013

1. Introduction[MS1]

a. Various Taxes out there on –

i. Property Taxes

1. Personal Property

2. Real estate

ii. Income Taxes

1. Ordinary

2. Capital Gains

iii. Sales and Use Tax

iv. Excise Taxes

1. Liquor Tax

v. Gift/Estate/GST

vi. Employment Tax

vii. Health Care

b. Policy Concerns on taxes

i. Government looks for policy reasons when making tax decisions. For example, government doesn’t tax items deemed necessities because it doesn’t want to charge more for clothes and food items that people need.

c. Internal Revenue Code

i. Is the primary authority governing federal income tax. Thus, always start with the code itself.

1. Example:

a. 16 USC § 61(a)(4)

i. (AKA) IRC § 61(a)(4)

d. Treasury Regulations

i. 26 CFR § 1.67-7(a)

1. (AKA) Treas. Reg § 1.67-1(a)

e. Example on Gross Income

i. IRC § 61(a)(4) Gross Income – All income derived from every source: (which includes interests)

ii. Then go to the treasury regulations to see if there is some interpretation on interests. Treas. Reg § 1.67-7(a)

f. Other forms of tax laws

i. Revenue Rulings

1. You can rely on revenue rulings if the facts fit it. Gov’t could revoke it but if facts fit and it is out there, the revenue ruling can be used.

ii. Revenue Procedures

1. are more revenue and procedure focused.

iii. Taxpayer Specific Advice

1. Private Letter Rulings – only applicable to the taxpayer to whom they are issued. If IRS issues letter to Alex, John can’t use that. That is, the IRS can change its mind. Adversely, not bound by it. That is, the party is free to take the ruling to court and argue against it.

2. Technical Advice Memorandum

3. Field Service Advice

g. Procedure

i. File Return with Service Center

ii. Examination

1. Usually audit with revenue agent

iii. Appeals Division

iv. Court

1. Us Tax Court, or

a. US District Court, or

i. Pay tax and sue for a refund

b. US Claims Court

i. Also must pay tax and sue for refund

2. Circuit Court of Appeals

3. U.S. Supreme Court

h. Terminology and tax structures

i. Tax Structures

1. Progressive – as income goes up, the marginal rate steps up

a. Marginal Rate – Income tax rate at which your last dollar of income is taxed. It is important for figuring out the value of deductions.

b. Effective Rate – The overall rate of tax that you pay based on the amount of your income. Therefore, the effective rate is always lower than the marginal rate.

c. Progressive Rate Tax Structure Example

i. Taxable Income – Progressive Tax Rate Example

1. 0 to 10,000 – 10%

2. 10,001 to 25,000 – 15%

3. 25,001 to 100,000 – 30%

4. Over 100,000 – 35%

ii. Examples:

1. Suppose 20,000 of taxable income. On first 10,000 will pay 10%. The second 10,000 pay 15%. = $2,500. The marginal rate is 15% and the effective rate is 12.5%

2. Suppose Income is at $5 0,000. First 10,000 is 10% – 1,000 for tax. The next 15,000 is at 15% – 2,250 for tax. Next 25,000 is at 30% = 7,500 for tax so total is 10,750. Marginal rate is 30% and effective rate is 21.5% [10,750/50,000].

a. Say you donate 5,000 to widener now. Now we would subtract 5,000 from the last 25K to get 20K. So 20K X 30 is 5000. So now the last tax owed is 5000 and not 7500 and now save 1500.

b. Deductions – First, you must have enough to itemize. That is, must have more than the standard deduction.

2. Proportional (aka flat) – a flat rate. Used mainly in sales tax.

3. Regressive – a volume discount. As you have more, the rate goes down.

ii. Terminology

1. Deductions

a. Standard Deductions – Everyone gets a standard deduction. But if the itemized deductions (or below the line deductions) are greater than that years standard deductions, then the taxpayer should elect to itemize deduct.

b. Itemized Deductions – things like home mortgage interest, charitable contributions, unreimbursed employee expenses (if above the floor) are common examples of itemized deductions.

c. Above the line deductions – Taxpayer gets these deductions regardless of whether the taxpayer uses the standard or itemized deductions.

i. Examples include: student loan interest, tuition and fees, ect.

2. Credits

a. Reduce the tax liability dollar for dollar.

i. Calculating Taxable Income

i. Step 1: Calculate Gross Income

ii. Step 2: Calculate and subtract the greater of (1) the standard deduction or (2) Itemized deductions.

iii. Step 3: Apply Appropriate Tax Rate

iv. Step 4: Add any Tax Credits

v. Step 5: Final calculations

Calculating Gross Income:

1. What is Gross Income

a. IRC § 61

i. (a) General Definition – Gross income means income from whatever source derived, including (but not limited to) the following items:

1. Compensation for services, including fees, commissions, fringe benefits, and similar items;

a. Treas. Reg. § 1.61-2(a)(1) – In general, Wages, salaries, commissions paid salesmen, compensation for services on basis of percentage of profits, commissions on insurance premiums, tips, bonuses (including Christmas bonuses), termination or severance pay, rewards, jury fees, marriage fees and other contributions received by a clergyman for services, pay of persons in the military, retired pay of employees pensions, and retirement allowances are income to the recipients.

2. Gross income derived from business;

3. Gains derived from dealings in property;

4. Interest:

5. Rents;

6. Royalties;

7. Dividends;

8. Alimony and separate maintenance payments

9. Annuities

10. Income from life insurance and endowment Ks

11. Pensions

12. Income from discharge of indebtedness

13. Distributive share of partnership gross income

14. Income in respect of a decedent; and

15. Income from an interest in an estate or trust

b. Treas. Reg. 1.61-1(a) – Gross income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodat

etermine what it is. Does she have to carry it away (did law firm move locations – need to get rid of stuff to get out of the building?).

iv. NOTE: Calculating FMV – pops up all over the place – face term for what something is worth. If FMV is X just go with that. But in practice, don’t be lulled into thinking that FMV is that easy to do. FMV usually lawyers pull the estate tax regulation which talks about a willing buyer and seller neither being compelled to sell and has knowledge of all the facts, what would they negotiate as the price. That is it the FMV. Reality is that you don’t find this often. Second, until something is actually sold, we don’t know what it is worth.

1. Usually there will be some affidavits and expert testimony. One side saying it’s super valuable and the other saying it is scrap.

I. [MS1]3 Basic Assumptions

a. (1) The Government needs revenue.

i. Subject to multiple ways to examine.

1. Libertarian

a. The smaller the better.

2. Democrat

a. We care more about social services and we must maintain them.

3. Air Craft Carries

a. United States

i. Has 11, with 3 under construction.


i. Has 10, with 3 under construction.

ii. How much is appropriate?

iii. Alternatives to income tax:

1. Bonds;

2. Flat tax;

a. Prevents people from paying money to do taxes.

3. Value Added Tax (VAT);

a. Form of consumption tax where the manufacturer remits to the government the difference between the two amounts, and retains the rest for themselves to offset the taxes that had previously paid on the inputs.

b. (2) Every tax decision is a policy decision.

i. Every tax decision has an implication.

1. Who is going to pay?

a. Rich;

b. Poor?

2. VERY hard to think of a neutral decision.

c. (3) Every tax decision is a political decision.

i. Who should pay?

ii. What should it be spend on?

iii. What income sources do you believe in?

1. Different View Points

a. 99% v. 1% – Occupy Wall Street

i. Occupy Wall Street believes that only 1% is rich.

b. 53% v. 47% – Tea Party

i. 47% of Americans pay no federal income taxes.

1. They do pay some other form of tax, just not federal income tax.

2. 8% of America is strictly on Social Security.