FEDERAL INCOME TAX Professor Gabilondo Fall 2013 INTRODUCTORY COMMENTS TO THE COURSE...................................9 CHAPTER 1..................................................................................10 I.PROBLEM ..................................................................................................10 II.VOCABULARY ...........................................................................................11 III.OBJECTIVES ............................................................................................12 IV.OVERVIEW ..............................................................................................12 1.A brief History of Federal Income Tax............................................................12 2.The Tax Practice............................................................................................12 3.Resolution of Tax Issues Through the Judicial Process....................................12 A.Trial Courts.......................................................................................................12 a.The Tax Court....................................................................................................13 b.Federal District Court........................................................................................13 c.The United States Court of Federal Claims........................................................13 B.Appellate Courts...............................................................................................13 C.Selection of Forum............................................................................................13 V.ANALYSIS OF THE COMPUTATION OF TAX LIABILITY OF CAROLINE TAXPAYER....................................................................................................13 A.Basic Questions Addressed by an Income Tax System......................................13 B.Evaluating the Taxpayers' Tax Liability..............................................................14 oGross Income§61[everything].......................................................................14 oAdjusted Gross Income [Gross income - above the line deductions]§62........15 oDeductions....................................................................................................15 oCalculating Adjusted Gross Income =$230k.................................................16 oTaxable Income[AGI - (below line deductions/standard deductions + personal exemptions)]§63.................................................................................................16 oTax Rates =§ 1..............................................................................................16 Class Notes: 08-13 (Mon.)............................................................................................17 TAXATION OF INDIVIDUAL INCOME, J. MARTIN BURKE AND MICHAEL K. FRIEL, 10THEDITION, LEXISNEXIS, ISBN 978-1-4224-8241-4............17 Class Notes: 08/15 [Wed.]............................................................................................18 CHAPTER 2§61............................................................................19 I.PROBLEMS ................................................................................................19 II.VOCABULARY ...........................................................................................19 III.OBJECTIVES ............................................................................................20 IV.OVERVIEW ..............................................................................................20 A.The Search for a Definition of Income...............................................................20 B.Income Realized in any Form§1.61-1(a)...........................................................20 C.Realization, Imputed Income & Bargain Purchases...........................................21 a) Commissioner v. Glenshaw Glass Co...............................................................21 b)... income is:(1) any undeniable accession to wealth (improved situation), (2) which is clearly realized (change in value) by the taxpayer, (3) over which the taxpayer has complete dominion (can use it).................................................21 c) Cesarini v. US..................................................................................................22 d)... The rule requiring all income to be included as gross income is intentionally broad to allow Congress to use its taxing power broadly under the Sixteenth Amendment....................................................................................................22 e) Old Colony Trust Company v. Commissioner...................................................22 1
f)......... The discharge of a taxpayer's obligation by a third party is equivalent to direct receipt by the taxpayer [receive a benefit] = taxes paid by company = additional income of person...........................................................................22 g) REVENUE RULING 79-24.................................................................................23 h) McCann v. US..................................................................................................23 i)............... when a company pays travel expenses, a taxpayer must include such compensation in gross income when the excursion is viewed as a reward for outstanding employee success within the company.......................................23 j) Pellar v. Commissioner....................................................................................23 k).................................... bargain purchases generally do not constitute gross income .......................................................................................................................23 l) Roco v. Commissioner.....................................................................................23 Class Notes: 08-20 [Mon.]............................................................................................23 Class Notes: 08-23 [Wed.]............................................................................................23 CHAPTER 3: THE EFFECT OF AN OBLIGATION TO REPAY [§1341 - OVER $3K, BTL DEDUCTION]..................................................................24 I.PROBLEMS ................................................................................................24 II.VOCABULARY ...........................................................................................25 III.OBJECTIVES ............................................................................................25 IV.OVERVIEW ..............................................................................................26 A.Loans -Loan proceeds do NOT constitute gross income...................................26 B.Claim of Right -if there is a contingent repayment obligation, have to treat it as income as soon as you get it, then §1341................................................................26 C.Illegal Income...................................................................................................26 D.Deposits...........................................................................................................27 m) North American Oil Consolidated v. Burnet (1932)..........................................27 n). . if a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received reportable income, even if he may later be required to repay.If he does have to repay, it will be a deduction in that year................................................................................................................27 o) James v. US.....................................................................................................28 p)...... receipt of illegal funds constitutes income taxable to the wrongdoer [if the taxpayer receives income, lawfully or unlawfully, without consensual recognition of obligation to repay, that income is taxable..............................28 q) Commissioner v. Indianapolis Power & Light Company...................................29 r).......... "control standard" [complete dominion standard] - Determining factor = control over conditions of refund - Q = "who has the dominion in the end?". 29
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