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Federal Income Tax
Widener Law Commonwealth
Hussey, Michael J.

Federal Income Tax Outline
Spring 2009
 
I.                   Chapter 1 – Tax Basics
 
a.       The 16th Amendment allows the government to impose income taxes
b.      Primary Authority
                                                              i.      IRS Code
                                                            ii.      Treasury Regulations
1.      Interpretive
2.      Legislative – Congress specifically requests regulations to carry out specific Code sections (§ 409A(3))
                                                          iii.      Revenue Rulings
1.      Advice issued by the treasury intended for all taxpayers to rely upon
2.      Creates fact patterns of common tax situations and corresponding issues
                                                          iv.      Revenue Procedures
1.      Administrative in nature
2.      Provides guidance regarding bureaucratic procedure
                                                            v.      Taxpayer-specific Advice
1.      Private Letter Rulings (only good for the taxpayer to whom they are issued)
2.      Technical Advice Memorandum
3.      Field Service Advice
c.       Process
                                                              i.      Taxpayer files return with the appropriate service center
                                                            ii.      Examination
1.      Audit stage – try to resolve matter with an IRS agent
2.      If you can’t, you have 30 days to appeal the agent’s decision
                                                          iii.      Appeals Division
                                                          iv.      Go to Court
1.      Taxpayer has 90 days after the final decision to go to court
a.       Tax Court
                                                                                                                                      i.      Don’t need to pay deficiency before filing here
                                                                                                                                    ii.      Notice Pleading
                                                                                                                                  iii.      Court has expertise in tax matters
b.      District Court
                                                                                                                                      i.      Pay tax first and seek a refund
                                                                                                                                    ii.      Might be more sympathetic to the taxpayer because the court is local
c.       Claims Court
                                                                                                                                      i.      Pay tax first and seek a refund
d.      Court of Appeals
e.       Supreme Court
d.      Tax Liability Discussion
                                                              i.      Gross Income
1.      IRC § 61 – “all income from whatever source derived, including, but not limited to, a list of fifteen different items.
2.      Includes income realized in any form whether in money, property, or services. Reg. § 1.61-2 (d) (1)
3.      Assignment of Income Doctrine
a.       Prevents income shifting
b.      Prevents tax payers in high tax brackets from constantly shifting their income to related taxpayers in a lower bracket
4.      Individuals use the “cash method”
a.       Only includes income that has been actually or constructively received
b.      Stock value only taxable when it is “realized”
                                                            ii.      Adjusted Gross Income
1.      IRC § 62 – Gross income less certain deductions
a.       Above-the-line: deductions the taxpayer takes in determining his adjusted gross income
b.      Below-the-line: deductions a taxpayer may take into account only after the adjusted gross income has been determined
c.       In lieu of itemizing personal deductions, taxpayers have the right to elect a standard deduction
                                                                                                                                      i.      Regardless of the amount of a taxpayer’s potential deductions, if the taxpayer elects to use the standard deduction, he uses the congressionally-mandated figure
                                                          iii.      Deductions
1.      Begins with § 161
2.      Every time you have an expense that you believe is deductible, you must find a specific code section authorizing the deduction
3.      IRC § 162 – Personal expenses are not deductible
a.       This includes commuting expenses
4.      IRC § 212 – Expenses for the production of income are deductible
5.      Mortgages
a.       IRC § 163 (a) – Interest payments are deductible as “qualified residence interest”
6.      IRC § 164 – Certain local and state taxes are deductible
7.      IRC § 170 – Charitable contributions are dedu

                                                          i.      Exchange of property/services for other property/services, without actually paying in cash for either one
1.      Both parties have income as to property or services received that is taxed
2.      The fair market value of the property or services taken in payment (received) must be included in income
3.      In order to have income à must be a “realization” event
                                                            ii.      “Thanking” someone
1.      Look to see if there was quid pro quo
a.       If so, gross income
b.      If not, transactions are separate – probably a gift
2.      Even in the family context, may still have a bartered transaction
3.      Make arguments for both
h.      Employment Bonuses
                                                              i.      Includes free trip taxpayer qualified for through her good sales performance à compensation for the taxpayer’s good work (McCann)
1.      FMV of the trip should have been included in their gross income
2.      Mostly recreational
i.        Unemployment benefits constitute gross income – IRC § 85
 
j.        Imputed Income
                                                              i.      Income you save by performing the services yourself
1.      Ex: shoveling snow in your own driveway
a.       Hard to administer
b.      Discourages innovation
c.       Un-American
k.      Bargain Purchases
                                                              i.      Generally do not constitute gross income
                                                            ii.      Different in employment settings:
1.      If property is transferred as compensation for services in an amount less than its FMV, the difference between the FMV and the amount paid is gross income. Reg § 1.61-2(d)(2)(i)
2.      If an employer transfers to an employee, as compensation, stock worth $500 in return for payment of $100, the employee has gross income of $400. Reg § 1.61-2(d)(2)(i)