Taxation Outline
General Information
1) Sources of Authority
a) Internal Revenue Code
· Statutory (USC Title 26)
· Code is binding on courts but subject to interpretation
b) Treasury Regulations
· Sections from this interpret the IRC
· Technically not binding (can argue that the regulation misinterprets the Code – rarely successful)
c) Revenue Rulings & Procedures– IRS position/interpretation on a substantive tax matter
2) Definitions
a) Internal Revenue Service – Subdivision of the Dept of Treasury
i) Administer tax law
ii) Collect tax
b) Tax Commissioner – Of the IRS, presidential appointment
c) Secretary – Secretary of Treasury, Cabinet member
3) Courts to litigate federal tax matters (civil)
Three courts of original jurisdiction:
a) Trial Courts
i) United States Tax Court (Most tax cases start here)
(1) Do not have to pay tax deficiency before filing a petition
(2) Experienced judges in tax law
(3) No right to trial by jury
ii) Federal District Court
(1) Must pay tax deficiency first and then sue government for a refund
(2) Trial by jury
iii) United States Claims Court
(1) Must pay tax deficiency first
(2) May choose to go to Claims Court if there’s favorable case law for your client.
(3) No right to trial by jury
You can “cherry pick” the court to give you a better chance at a favorable outcome
4) Federal Tax Appeals
a) US Tax Court or US District Court
i) US Court of Appeals for the circuit in which the taxpayer resides.
ii) The Tax Court is subject to the case law of the circuit which would hear the appeal.
b) US Claims Court
i) Appeals go to the US Court of Appeals for the Federal Circuit.
c) Final appeals go to the US Supreme Court if the Court grants certiorari.
Constitutional Basis of Taxation
· Based strictly on Article I of the US Constitution – but originally it stated that it would be apportioned by the states, meaning that the amount paid would be proportional to the population of each state.
· 16th Amendment (1913) – Changed the apportionment requirement
“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
Five Main Issues in Federal Income Tax
1) What items of economic income or gain will be includible in gross income? Weeks 1-5.
· Starting point for establishing what income is taxable
2) What items of expense will be allowable as deductions? Week 5-8.
· Subtraction from gross income, resulting number is taxable income
3) What is the character of the items of income or the deductions? Weeks 8-9.
· Not all income is equal
4) When is gain or loss recognized? Weeks 9-10.
· Issues of timing – when does a gain have to be reported
5) When is an amount included in income or deductible? Week 11.
6) Who is going to be taxed on items of income? Week 12.
· Progressive rates effect how much will be paid
I. Gross Income: Concepts and Limitations
Internal Revenue Code § 61. Gross income defined
Main point is that income is defined in a broad manner, meaning you should include all possibilities of income unless the IRC states otherwise.
a) General Definition. Except as otherwise provided in this subtitle, gross income means all 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;
(2) Gross income derived from business
Most income from (1) & (2)
(3) Gains derived from dealings in property (buying property low and selling high)
(4) Interest
(5) Rents (see also Treas. Reg. § 1.61-8(a))
(6) Royalties (see also Treas. Reg. § 1.61-8(a))
(7) Dividends (see also Treas. Reg. § 1.61-9(a))
(8) Alimony and separate maintenance payments
(9) Annuities
(10) Income from life insurance and endowment contracts
(11) Pensions (see also Treas. Reg. § 1.61-11(a))
(12) Income from discharge of indebtedness – borrow money and loan is discharged, considered income
(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.
· General rule is to include income unless there is something in § 61 that states otherwise
· § 61 says income from whatever source, but doesn’t say what income is
Eisner v. Macomber (1920)
· The Court defined “income” as the “gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets . . . .
· Definition is narrow and isn’t considered satisfactory
· Gifts, settlements, lottery winnings are sources not
e year the piano was found (1957) and as such SOL excludes them from paying taxes on it.
§ The Court sees that the cash was reduced to undisputed possession when it was found, 1964
· The court cited a Revenue Ruling that provided that treasure trove is includible in gross income in the year it is reduced to undisputed income.
While there is no treasure trove exclusion in the IRC, this cases demonstrates how treasure trove is income under the definition in Glenshaw
Old Colony Trust Co. v. Commissioner (1929) – Payment of debts by someone else (including tax)
· Plaintiff’s company made an agreement where they would pay any taxes for him from the company’s treasury and his salary given to him would not be taxed.
· The Court saw that the payment of the taxes for the plaintiff is additional compensation
· Also, under the Glenshaw definition it would be income
· Irrelevant that the employee argued that he did not bargain for the payment of his taxes
· It didn’t matter that the company paid the government directly nor that the employee never received cash to pay the taxes
· What’s important to the definition of gross income is that it is the payment of consideration for services
· The form of the income doesn’t matter. It usually can take the form of money, but can be something else as well, such as paying for your taxes
· A key fact is that the payment of the tax was a compensation of services, if he hadn’t worked for the company, those taxes wouldn’t have been paid
Treasury Regulations § 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, accommodations, stock, or other property, as well as in cash. Section 61 lists the more common items of gross income for purposes of illustration