OUTLINE: Federal Income Tax
· General
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
16th Am gives authorization for income tax
A lot of social policy goals are accomplished through the IRS. The time it takes for a tax statute to pass depends upon the political will behind it.
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
Abbreviations:
i. IRC = I.R.C. §61(a)(4)
ii. Treasury Regulations = Treas. Reg. §1.61-7(a) àRegs begin w/a “1”
I. Introduction to Federal Income Taxation
Ø Objectives
i. To recall the formula for determining an individual’s tax liability
ii. To ID items likely to constitute income
iii. To recognize there are some deductions taken into acct in determining adjusted gross income (“above-the-line deductions) & some deductions which taxpayers may only claim if they elect to itemize their deductions. (These latter deductions are referred to as “below-the-line deductions”)
iv. To recall that §62 is not a deduction granting provision
v. To recall that a taxpayer must rely on a spec Code § if the taxpayer is going to claim a deduction for an expenditure
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 bennys, & 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 educàdeduct 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 lineit encourages more peeps to donate, but also creates less revenue
From Gross Income (“Above the line”)
From AGI (“Below the line”)
Trade or biz deductions
Standard Deduction
Reimbursed expenses of empees
OR
Capital losses
Medical Expenses
Deduction from sale or exchange of prop
Charitable Contributions
Deductible “non biz” expenses related to rent or royalty income
Casualty & Theft losses
Alimony
“Nonbiz” expenses for prop held for the production of income
Moving expenses
“Nonbiz” expenses – expenses of a tax-related matter
Interest on educational loans
Other “misc itemized deductions”
Contributions to IRAs (but not Roth IRAs)
Home mortgage interest
3. Stand deduction: substitute for deducting below-the-line deductions. If a taxpayer’s itemized deductions are less than the standard deduction, he simply takes the standard deduction instead (§63(c))
4. Personal exemption: a taxpayer is entitled to an exemption for himself. If spouses file a joint return, ea claims an exemption. Exemptions are below-the-line deductions (i.e., deducted from AGI). However, they can be deducted in addition to the standard deduction. Exemptions are not subject to the 2% floor on miscellaneous itemized deductions, or the deduction phaseout
iv. Credits
1. Tax credit: different than deductions. Deductions go vs your marginal bracket. Credits reduce taxes dollar for dollar. Use credits after you decide what your tax due is & your tax bracket
2. Earned income tax credit: encourage peeps to find empment knowing $ would be coming back (social policy)
§Sometimes you have to choose whether to take a credit or deduction (Can take educ credit, but cant also take tuition fees deduction à need to figure out which one if gonna benefit u most)
Ø Vocab
i. Joint return: A H & W may elect to file a joint income tax return. The effect of such a return is to tax income ½ to ea spouse, irrespective of which spouse actually earned it
ii. Tax bracket
iii. Tax Rates
1. Marginal rate: rate at which the last dollar of income is taxedàimp for deciding deductions – the higher the marginal bracket, the more the deduction
2. Effective Rate: overall tax
○ We have a different btwn the marginal & effective rates b/c we have a progressive tax system
3. Progressive Tax rate: rate of taxation increases as the amt subject to t
he discussion of “income” in Glenshaw Glass
iii. To recall that Glenshaw Glass provides that accessions to wealth generally constitute gross income
iv. To describe several forms, other than cash, in which income may be realized
v. To recognize barter transaxns
vi. To provides exs of realization events
vii. To provide exs of imputed income
viii. To provide exs of bargain purchases
ix. To distinguish a non-compensatory bargain purchase form a compensatory one
A. Income Realized in Any Form
ü Remember that prizes are GI but gifts aren’t. Forgiveness of indebtedness is considered pert of GI.
i. Treasure trove: finding something of value, includable in gross income (Cesarini: The family bought a piano and found some old currency in there. they initially reported the found money but later filed an amended return to exclude the money. They found the money 7 years after they bought the piano, ct) said this is includable in gross income, relying on Reg. §121-14 “Treasure trove, to the extent of its value in US currency, constitutes gross income for the taxable yr in which it is reduced to undisputed possession.”
ii. Debt Forgiveness: someone else pays your debt, this is includable in GI. (Old Colony Trust Co v. Commissioner: W was president of AWC. The bd agreed to pay the income taxes of the executives. This comm. said that additional taxes were due on the benefit received. So, that money needs to be included in GI. It doesn’t matter that the guy never had the money in his hand – it was a debt he had and someone else paid it for him, so it is GI.)
1. § 108 gives us exclusions from GI/discharge if indebtedness.
iii. Employer Prizes: Employer rewards empee for svcs w/prize or award, this is essentially a bonus & is includable in GI
§ McCann v. US:M is an insur co empee. The co pays for those who sell a certain amt of policies to go on a trip. M argues this should not be included in GI bc it is a biz trip, it’s just held in Vegas. Ct says that this is compensation for work – the co is awarding services of ee. This is essentially bonus.
a. RA: Nature of the convention: too much eating, drinking, etc, and no actual business meetings. They would have to have shown that there was an actual business purpose for the trip. Also, you have to look at who was there. not everyone invited, they only brought the top performers.
b. So what did they have to pay? They include the fmv. So what is this? we have 2 options.
A. Cost to the co (ct says this, even though its usually going to be lower b/c cos get better deals)
B. Actual Mkt value of the room
