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Federal Income Tax
Widener Law Commonwealth
Jones, Katherine Mason

FEDERAL INCOME TAX
1. Introduction
2. Noncash Benefits
3. Imputed Income
4. Windfalls and Gifts
5. Transfer of Unrealized Gain by Gift
6. Recovery of Capital
7. Annual Accounting
8. Recovery for Injuries
9. Loans and Income from Discharge of Indebtedness
10. Transactions Involving Loans
11. Illegal Income
12. Tax-exempt Bonds
13. Gain on the Sale of a Home
14. Special Rate for Dividends
15. Gains and Losses from Investments in Property
16. Realization/Constitutional Doctrine
17. Realization Doctrine
18. Statutory Nonrecognition Provisions
19. Deemed Realization
20. Original Issue Discount
21. Open Transactions
22. Installment Sales
23. Constructive Receipt
24. Nonqualified Deferred Compensation
25. Transfers Incident to Marriage and Divorce
26. Cash Receipts and Payments of Accrual-Method Taxpayers
27. Personal Deductions, Exemptions, and Credits
28. Casualty Losses
29. Extraordinary Medical Expenses
30. Charitable Contributions
31. Taxes
32. Credits Based on Personal Circumstances
33. Controlling the Abuse of Business Deductions
34. Travel and Entertainment Expenses
35. Child Care Expenses
36. Commuting Expenses
37. Current v. Capital Expenditures
38. Ordinary and Necessary
39. Depreciation and the Investment Credit
40. Capital Gains and Losses
41. Property Held “Primarily for Sale to Customers”
42. Transactions related to the Taxpayer’s Regular Business
43. Assignment of Income from Services
44. The Marriage Penalty
45. Transfers of Property vs. Income

INCOME TAX FORMULA

+ GROSS INCOME

_ EXCLUSIONS (above the line: items of GI not taxed)
Sections 101-150 (eg. Gift)

_ BUSINESS DEDUCTIONS (Expenses related to business)
Section 162

_ SPECIFIED DEDUCTIONS
Section 62
Individual Retirement Accounts
Alimony
Reimbursed Employee Expenses
Moving Expenses RE Job
Losses from Sale of Capital Assets ($3,000 Limit Rule)

= ADJUSTED GROSS INCOME (a subtotal)

_ STANDARD DEDUCTION (automatic)

OR

_ TOTAL ITEMIZED DEDUCTIONS (Personal, related expenses)
6 Categories:
Medical Expenses (not covered by insurance and paid for)
State and Local Income and Property Taxes
Interest (on home, eg)
Charitable Deductions
Casualty Loss (Catastrophic – to the extent insurance doesn’t cover)
Miscellaneous
Non-reimbursed employee expenses
Investment and tax related expenditures

_ PERSONAL EXEMPTION (additional deduction)
(TP + Spouse + Dependents) x personal exemption allowance
This is an automatic deduction

= TAXABLE INCOME (bottom line)
Look at Rate [15% – 39.6%] Higher the income, higher the bracket

FEDERAL INCOME TAX OUTLINE
I. Introduction
a. The Tax System
a. Executive branch collects tax revenue – treasury department
b. Sources:
1. Primary source:
a. statutory – Title 26 of US code (Internal Revenue Code)
2. Secondary sources:
a. Treasury regulations
i. Section 7805 – the IRS can provide its interpretation of each code section in a regulation
ii. *So if you have a code question, go to regulations first
3. Other sources – IRS guidance
a. Revenue Rulings
i. Litigation position of IRS
ii. Can be used for precedence
b. Private Letter Rulings
i. Only applicable to the TP that asks for it
ii. But can get redacted copy on westlaw – insight into how IRS would be likely to respond to an issue
c. Revenue Procedures
i. Statements used by IRS to explain procedural practice
d. Technical Advice Memo
i. Internal document to provide IRS lawyers with advice
e. General Counsel Memo
i. Internal document to field staff
c. Legislative process for how tax law originates
1. Bill in house of reps
2. Ways and means committee
3. Votes and produces bill voted on by entire house of reps
4. Senate finance committee gets it, hearings, votes, produces its own bill
5. Sent to joint conference committee to work out differences between two bills
6. Something comes out of there and goes to president
d. Tax Controversies
1. Case law – litigation between taxpayer and government
2. TP has 2 options:
a. Sue now, pay later
i. US tax court – known to be pro government
1. Bench trials
b. Pay now, sue later
i. Federal district court or the US court of claims
1. Judges not former tax lawyers
2. Jury trial
e. Choice of Tax Base
1. Tax to provide for Gov. Services
2. Income Tax: Example:
a. Revenue = 800 billion; 200 million adults; $4,000 a head
i. Lots of people can’t afford this, for lots of people this is nothing
ii. So our system is based to ABILITY TO PAY
b. Things that wouldn’t work
i. Sales tax
1. Discourages consumption
2. Encourages savings
3. Cons: LESS progressive than income tax
ii. Property tax
1. Discourages buying
2. Encourages renting
3. Cons: valuation system would be complex
f. Individual Income Tax Rates f

Commissioner
1. H working as hotel manager. Paid salary, lived in resort with W, all meals provided by hotel. Room + meals was worth 7,844, according to IRS. Argument for TP – it’s necessary for him to be on site, it’s for the convenience of the employer. But, he can travel and stuff so it looks less like a convenience for the employer. Also, wife gets a benefit. Court says it is the convenience for the employer and we’re not going to tax it…
2. KEY: if expense is for the BENEFIT of the EMPLOYER, there will be NO tax!
3. NOW there’s a code section
a. Section 119
i. All these terms – employee, meals, lodging – have been litigated.
d. Fringe Benefits
1. Section 132: Gross income shall NOT include FRINGE BENEFITS
a. Examples p 68:
i. Flight attendant takes advantage of employer’s policy that she and members of immediate family can fly for a nominal charge sometimes.
1. EXCLUDED pursuant to 132(b) – employer incurs no additional cost including forgone revenue.
ii. P takes corp.’s private jet to LA for business trip and wife goes with him for personal reasons.
1. EXCLUDED for P pursuant to 132(a)(3); INCLUDED for W because it doesn’t come under 132(a)(3) and pursuant to 132(b)(1). However, under 1.61-2T(g)(10), the value of the tag alone trip is zero if at least half of the seats occupied by people flying primarily on business.
iii. B gets personalized financial planning from company without charge.
1. INCLUDED in B’s income. It is too valuable to be de minimis and no exception applies
iv. Qualified employee discounts
1. EXCLUDED pursuant to 132(c)(1)(A)
v. Excess of discount granted by employer over the permissible discount is INCLUDED. 1.132-3(e)
vi. INCLUDED where discrimination among employees under 132(j)
vii. EXCLUDED 132(j) does not apply to de minimis fringes.
viii. INCLUDED § 132(f)(5)(E) denies partners the parking “qualified transportation fringe”—kicks out the self-employed from this de minimis fringe.