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Federal Income Tax
Widener Law Commonwealth
Hussey, Michael J.

Federal Income Tax


Fall 2015

I. Introduction

A. Random Basics

a. Federal gift tax – privilege of transferring property is considered excise in the federal system

b. Sales tax- regressive tax = poor people pay as much as rich people

B. Tax Authority

a. Primary Authority

1. Internal Revenue Code 26 USC or IRC – Internal Revenue Code

2. Treasury Regulations – 26 CFR – code of federal regulations

i. Expands on what the IRC says

3. Revenue Rulings

i. Poses a hypothetical and answers its own question

ii. Can rely on these

iii. Important to make a factual distinction when arguing

4. Revenue Procedures

i. Administrative and procedural focused

ii. Ex: inflation adjustments

b. Non-binding authority

1. Private letter rulings – taxpayer specific advice

i. Only applicable to taxpayer whom issued

2. Technical advice memorandum

3. Field Service Advice

4. Chief Counsel Advice – subject to FOIA

C. Hierarchy of Tax Authority

a. Internal Revenue Code

b. Treasury Regulation

c. Revenue Rulings/Procedures

d. US Superior Court

e. Circuit Court

f. Tax or District Court

D. Process of Taxing

a. File return at service center

b. Examination

1. If service does not like the return then it goes to audit

i. Request for information in the mail

ii. Live conference with agent

c. Appeals Division

d. Court – 3 options

1. Taxpayer has 90 days to appeal in court – “90 day letter” says they have an automatic right to tax court

2. United States Tax Court = based in DC

i. To get into tax court, you DO NOT have to pay the tax

ii. Travels around the US to hear all the tax cases

iii. Only has notice pleading – after pleading, judge tells you what to brief

iv. IRS chief counsel represents government

3. US District Court (court of refund)

i. Must first pay the tax/interest/penalties to get jurisdiction in court

ii. Department of Justice represents the government

4. US Claims Court (court of refund)

i. Must first pay tax

ii. Department of Justice represents the government

E. Basic Definitions

a. Marginal Rate – income tax rate in which the last dollar of income is taxed

1. Important for rate of deductions

b. Effective rate – overall percentage rate of tax you pay based on the amount of income you have

1. Always lower than the marginal rate

c. Rates –

1. Progressive – as income goes up, marginal rates step up

2. Proportional aka Flat – same rate on everything

3. Regressive – not seen at all in tax

i. Volume discount

ii. As you have more, the rate goes down

d. Progressive Tax Structure

1. 0-10K = 10%

2. 10K-25K= 15%

3. 25K-50K=30%

4. What is the tax due on 20K income?

i. 10% on first 10K= 1K

ii. 15% on the next 10K= 1.5K

iii. Total tax is $2,500

iv. Marginal tax rate is 15%

v Tax rate on the last dollar of income

v Marginal rate is used to figure out at what percent to use when trying to see if you will save on deductions

v. Effective rate is 12.5% (2500/20K)

v Amount of tax/total income

e. Adjusted gross income

1. Above the line – page 1 of deductions (1040)

i. Deductions the taxpayer taxes in determining his adjusted gross income

ii. Deductions that come off income regardless of whether the tax payer itemizes deductions

2. Below the line – on pg 2 deductions (itemized deductions)

i. Individual itemized deductions done AFTER adjusted gross income is calculated – if this number is bigger than the standard deduction, you go with this

ii. Ie mortgage and charitable contributions

f. Deductions

1. Begin in IRC § 161

2. Deductions are only a percentage saving of your income. If you have a $1000 deductible in a 20% tax shelf would only be $200.

g. Credits for income (pg 2 of 1040)

1. Different from deductions – credits are dollar for dollar (if you have a $200 energy credit, you will literally get $200 in credit against the amount you owe)

2. Non-refundable credits – If credits exceed the amount of tax you owe, you don’t get the excess credit in cash, it simply zeroes out your

t receiving cash

2. MUST include in gross income the fair market value of the item received (not the services given) CFR § 1.61-2(d)(1)

i. § 1.61-2(d)(1) If services are paid for in property, the FMV of the property taken in payment must be included in income as compensation.

ii. § 1.61-2(d)(1) If services are paid for in exchange for other services, the FMV of such other services taken in payment must be included in income as compensation.

iii. If the services were rendered at a stipulated price, such price will be presumed to be the fair market value of the compensation received in the absence of evidence to the contrary.

3. Fair market value – estimate of the value of the service in the fair market = hypothetical buyer and seller

i. Lots of wiggle room – get appraisals

4. Rev. Ruling 79-24

i. Bartering for legal services and house painting are includable in income at their FMV.

ii. Tricky with art – when you DON’T know the FMV of what you received, you calculate the value of what you gave

v You give 6 months’ rent in return for art. Art FMV is unknown so it is worth 6 months’ rent

iii. Basis – two parties at arm’s length will strike a fair deal

5. Thanking someone by performing services

i. Must see if there is a quid pro quo

v If so, gross income

v If not, probably a gift and not gross income

ii. If there is a quid pro quo – the transactions ARE related and there is income, if NOT related, could be gift and not income

iii. Factors

v How are the two events related?

v Have they done similar things in the past?

iv. Most transactions between family members can constitute gifts (not gross income) BUT CAN have bartered transaction intrafamily (gross income)