FEDERAL PERSONAL INCOME TAX OUTLINE
TABLE OF CONTENTS:
I. Introduction [1-36]
II. Characteristics of income [p. 37-42 Notes; §61; Reg. §1.61-1 (a), Reg. §1.61-2(a)(1), (d)(1)]
· noncash benefits
o food and lodging [p. 42-48; §119(a), (b)(1), (2), (4); Reg. §1.119-1(a)(1) and (2), (b), (c), (f)]
o Other fringe benefits [p. 49-56, 59-63; §79(a), §106(a), §125(a), (d)(1), (f), §129(a). (b), §132(a)-(f)(5), (gH)(U (j)(4)]
o imputed income [p. 63-70]
· windfalls and gifts
o punitive damages [p. 70-73]
o gifts [p. 73-83, 91-95, questions; §85, §102(a), (c), §274(b)]
o intervivos transfers of unrealized gain by gift [p. 95-99 (skip note 6); §1001(a)-(c), §1011(a), §1012, §1015(a)]
o transfers at death [p. 99-101 (only note 1), §1014(a), (b)(1)-(4)]
o gifts of divided interests [p. 103-105]
· recovery of capital
o capital gains [p. 25]
o basis [p. 105-109, Reg. §1.61-6(a)]
o annuities and pensions [p. 115-119; §72(a), (b)(1)-(3)(A), (c)(1), (3), (4)]
o gains and losses from gambling [p. 120-121]
o recovery of loss [p. 20-21 (re-read carryover paragraph), 121-126; §165(a), (b), (c)(3)]
· recoveries for personal & business injuries [Raytheon, Murphy v. U.S.; p. 141-45; §104(a), §105(b)-(c); Reg. §1.104-1(c)]
· transactions involving loans and discharge from indebtedness
o loan proceeds [p. 145-146]
o true discharge of indebtedness [p. 146-149; §61(a)(12)]
o relief provisions [p. 149-150; §108(a)(1), (d)(1)-(3), (e)(5)]
o misconceived discharge theory [pp. 150-163, §1011(b); Reg. §1.1001-1(e)]
o transfer of property subject to debt [p. 28-29; p. 163-180; Reg. §1.1001-2(a)]
· Illegal Income [p. 180-185]
III. Problems of timing
· gains and losses from investment in property
o realization requirement [p. 27-28, 193-194, 213-224; §109, §165(a); Reg. §1.61-8(c), §1.165-1(a)]
o express nonrecognition provisions [p. 190-91, 224-26, 231; §121(a)-(c), §1031(a)-(d), §1033(a)(1),(2)(A),(B); Reg. §1.1031(a)-1]
o boot and basis [p. 231-233]
· recognition of losses[p. 237-241]
· annual accounting and its consequences
o The use of hindsight [p. 126-131; §172(a), (b(1)(A), (2), (3), (c), (d)(1)-(4), §441(a)-(e); Reg. §1.165-1(d))]
o claim or right [p. 131-138; §1341(a), (b)(1)]
o tax benefit rule [p. 138-141; §111(a), (c)]
· constructive receipt and related doctrines
o introduction to accounting methods [p. 25-27; §446(a)-(d); Reg. §1.446-1(c)(1)(i), (ii)]
o constructive receipt and economic benefit [p. 253-59; §451 (a); Reg. §1.451-1(a), Reg. §1.451-2]
o deferred compensation [p. 268-274; §83(a)-(e)]
o qualified employee plans [p. 282-286]
o stock options, restricted property, and other employee compensation [p. 286-301; §422; Reg. §1.83-7(b)]
IV. Income Splitting and the Taxation of the Family
· Income from services [p. 599-610]
· transfers of property and income from property [p. 618-626]
· transfers incident to marriage [p. 301-307; §1041]
· alimony, child support, and property settlements [p. 311-318; §71, §166, §215(a), (b)]
V. Personal Deductions
· introduction [p. 22-24, 339-342; §67(a), (b), §68(a)-(d), §162(a), §262(a)]
· casualty losses [p. 342-345, 352-355; §165(c)(3), (h)(1)-{3); Reg. §1.165-7(a)(1), (2), (b)(1)]
· extraordinary medical expenses [p. 356-365; §213(a), (b), (d)(1)]
· charitable contributions [p. 366-368, 372-383; §170(a)(1), (c)(1), (2)]
VI. Deductions for Mixed Business and personal expenses [p. 401-403]
· hobby losses [p. 403-411, §183(b)(2)]
· home offices and vacation homes [p. 411-419; §280A]
· income unconnected to a trade or business [p. 419- 429]
· travel and entertainment [p. 431-439, §274(a), (d), (e), (k)-(n)(2)(B)]
· business lunches [p. 440-443, Questions a-f, p. 443]
· childcare expenses [p. 456-459; §21 (a)-(d)]
· commuting and moving expenses [p. 459-75; §162(a)(2), §217(a),(b)(1),(c); Reg. §1.162-2(e)]
· legal expenses [p. 478-484]
VII. Deductions for the cost of earning income
· distinguishing current expenses from capital expenditures [p. 491-498, 500-502; §174(a)(1), §263(a); §1.263(a)-1]
· repair and maintenance expenses [p. 502-506; Reg. §1.162-4]
· ordinary and necessary; extraordinary behavior [p. 530-536]
· reasonable compensation ; costs of illegal or unethical activities [p. 537-544]
Federal Personal Income Tax OUTLINE
I. Introduction [1-36]
· Tax Rate Schedules:
o (1) married people
§ permitted to file a “joint return” (i.e. a return on which they aggregate their income and deductions so that it does not matter who earned what
§ also available for “surviving spouses” but not for single-sex couples
o (2) heads of households
§ less favorable than married couples
§ unmarried person with a dependent living w/him/her
§ idea is that the head of household has financial burdens similar to a married couple
o (3) unmarried individuals - “single people”
§ less favorable than heads of households
o (4) married people filing separate returns
§ least favorable of all
§ special rate → generally results in increased aggregate taxes and only rarely will result in reduced aggregate taxes
· “Marriage Penalty” –added tax paid by 2 people who have roughly the same earnings are married
o the secondary worker in a married couple is subject to tax rates determined by the income of the primary worker
· Penalties
o TP must pay a penalty equal to 20% of the amount of any underpayment due to negligence
o substantial understatement = one that exceeds the greater of 10% of the proper tax or $5,000 ($10K for a corporation)
o error attributable to fraud
§ civil penalty only imposed in cases of “highly flagrant behavior”
§ criminal fraud, aka “willful attempt to evade or defeat any tax imposed by this title or the payment thereof” is a felony carrying a penalty of not more than $100K ($500K corporations) or 5 years in prison, or both
· Tax Mistakes:
o Adjustment - if taxpayer later finds a mistake, make an adjustment in year the true facts appear
o Amended Return - if, however, the mistake was plainly an error at the time of reporting, then the remedy is to file an amended return
o 3 year SOL for claims for refunds of overpayments, made by amended return or otherwise
· IF the taxpayer & the IRS cannot reach agreement, IRS will order the taxpayer to pay the deficiency, plus interest and any applicable penalties, and the taxpayer must either do so or go to court
o 3 options for judicial review
§ (1) decline to pay the tax and file a petition for review a/the Tax Court
· available only if the tax has not been paid as of the date of the petition
§ (2) pay the tax and sue for a refund in federal district court where the taxpayer resides
· judge not likely to be tax expert, however jury trial available
§ (3) pay the tax and sue for a refund in the US Court of Federal Claims
· decisions reviewable by the US Court of Appeals for the Federal Circuit
· if an issue is 1st litigated by a TP who obtains a favorable legal ruling in the Claims Court, that ruling is upheld on appeal, all other taxpayers may then take their cases to that court foreclose the possibility of a conflict among circuits
· Process: calculate the following in the following order…
o (1) Gross Income §61 - “all income from whatever source derived, including…”
o (2) Adjusted Gross Income (AGI) §62
§ calculate after the TP’s gross income has been determined
§ AGI is arrived at by deducting from gross income a set of items listed in §62
o (3) Taxable Income §63
§ calculate after calculating AGI
§ involves deducting (a) the amount of the personal exemptions of the TP and their dependents, if any, plus either (i) the standard deduction OR (ii) itemized deductions
o (4) Offsets – offset the tax with any credits that may be available and determine whether a minimum tax must be paid
§ Credit = direct offset to the tax (see §21-41)
§ Deduction = reduces taxable income and thereby reduces the tax payable by the amount of the deduction multiplied by the relevant rate of tax
· Alternative Minimum Tax (AMT) for individuals - §55
o tax imposed on a special base at a rate of 26% of the first $175K and 28% on amounts above that
· Realization & Recognition
o Realization – a gain or loss is realized when there has been some change in circumstances such that the gain/loss might be taken into account for tax purposes [note: recognition not necessary]
o Recognition – a gain or loss is recognized when the change in circumstances is such that a gain or loss is taken into account [note: there must have been a realization event]
· Entities
o Sole proprietor - all items of income and expenses of the business are treated for tax purposes as items of income and expenses of the sole proprietor
o Partnership – pass through taxation
o Trust – generally pass through taxation to the beneficiary
o Corporation – treated as separate taxpaying entities
· Tax Deferral
o Advantages – a tax liability deferred from the present to the future gives the TP the use in the interim of the amount that would otherwise have been paid presently in taxes
o Discounting to Present Value – the process of calculating present value of a future amount
o “The Rule of 72” – roughly an amount doubles within the number of years determined by dividing 72 by the interest rate
II. Characteristics of Income [p. 37-42; §61; Reg. §1.61-1, Reg. §1.61-2]
· Income Defined:
o Eisner v. Macomber – “the gain derived from capital, labor, or both” (narrow)
o Haig-Simmons - “the algebraic sum of (1) the market value of rights exercised in consumption and (2) the change in value of the store of property rights between the beginning and end of the period in question” (broad)
· Noncash Benefits
o Gross Income §61: includes income realized in any form (money, property, services, etc…)
§ “if services are paid for in property, the fair market value of the property taken in payment must be included in income as compensation”
o Taking noncash benefits raises problems of administrative feasibility & may make enforcement difficult
o Food and Lodging [p. 42-48; §119; Reg. §1.119-1]
§ Benaglia – if food & lodging for the convenience of the employer → not taxable income
§ §119 – Definitions
· Meals [groceries maybe, some even include TP, soap, etc…]
· Furnished [meal allowance to CHP not ‘furnished’, but fireman cash that could be for meals or whatever was ‘furnished’]
· Convenience of the Employer [business reasons other than tax advantages, provisions of employment K not determinative, usually shown by proof that employee is ‘on-call’ outside of business hours]
· Business Premises [some say roads/highways, usually official gov’t residences]
· Employee [doesn’t include self-employed persons]
o Other Fringe Benefits [p. 49-56; p. 59-63; §79, §106, §125, §129, §132]
§ Ex: life insurance, medical insurance, discounts, parking, company cars, airline travel, club memberships, and tuition remissions
§ problems of valuation and enforcement
§ §132 – Statutory Exclusions for well-established taxpayer practices
· no additional cost services & qualified employee discounts
o restriction: must work in line of business of employer in which the item is ordinarily offered for sale & employer can’t discriminate for highly compensated employees
· working condition fringes
· de minimis fringe
· qualified transportation fringe
· moving expense
· retirement planning services
· gyms and athletic facilities
§ Cafeteria Plans §125
· employee may choose among variety of noncash nontaxable benefits or may choose to take the cash
· ex: childcare payments
· includes nondiscrimination rule and is limited to (group life insurance, dependent care assistance, adoption, accident/health benefits, 401K)
· Use-it-or-Lose-it Rule
§ Frequent flyer credits
· credits earned by business travel – clearly income but problems w/valuation
o → IRS says it IS income, but you are not required to report it
· credits earned by personal travel – not income
§ Valuation
· items tend to be either wholly excludable or included at their FMV without regard to any argument they were worth less than to the taxpayer
· Turner – 1st class steamship tickets∏ turned into 4 coach tickets
o determined amount be included in income because the tickets gave them the opportunity to enjoy a luxury (subjective valuation though)
· Home Run Ball – IRS says fan does not have taxable income from ball, but may if he decides to sell it (also commercial fisherman, big game hunters, prospectors, miners, and treasure hunters → until they turn bounty into cash)
o Imputed Income [p. 63-70]
§ imputed income is NOT taxed
§ Home ownership: the person who borrows to invest in a personal residence relies on a combination of two tax rules
· (1) the non-taxation of imputed income; and
· (2) the deductibility of the interest payment
· = benefit to taxpayer when they borrow money to invest in tax-favored investments
§ Services: the benefit of the services that one performs for oneself is imputed income
· Homemakers – effect may induce secondary workers to stay home and provide services to the household/children rather than take a job where services are more valuable to society
o §21 – credit for childcare
o §129 – allowing taxfree employer reimbursement for childcare expenses
o §125 – allowing employers to offer employees a choice between a tax free benefits and cash
· Marital dissolution – value of services one performs for oneself in creating human capital
§ “Barter club”
· legal services in exchange for house painting – includible in gross income §61
· artwork for 6 months free rent – includible in gross income §61
o Psychic Income & Leisure – cost of achieving happiness is NOT taxed
· Windfalls and Gifts
o Punitive Damages [p. 70-73]
§ Glenshaw Glass – punitive damages taxable under §22 “gains or profits and income derived from any source whatever”
o Gifts [p. 73-83, 91-95; §85, §102, §274]
§ Gifts are NOT taxable income to the recipient (§102) but income from gifts IS
· no income to the donee & no income to the recipient
· but note: gifts in excess of $10,000 per year by the same donee may be
§ Duberstein – donor’s characterization of his action is not determinative of whether something is a gift → there must be an objective inquiry as to whether it really is a gift