Federal Income Tax Outline

Federal Income Tax Outline - Use statutes as authority o...

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- Use statutes as authority o The statutes are interpreted by treasury department Way regulations work Treas. Reg. Section 1.132-2(a)(2) o 1 – ignore o 132 – Section in IRC o 2 – sequential number (2 nd regulation that the treasury has promulgated) o a – subsection o 2 – paragraph Step 1: calculate the gross income Step 2: subtract above the line deductions to get the adjusted gross income Step 3: subtract below the line deductions (the personal exemptions and either the standard deduction or itemized deductions) to get the taxable income Step 4: apply the tax rate schedules to the taxable income to determine tentative tax liability Step 5: Subtract any tax credits (remember: deductions reduce income, while credits directly reduce tax liability) to get the final tax liability WHAT IS INCOME? - no universally accepted definition of income o Different definitions in pg. 89 § 61 Gross Income Defined - (a) – Gross income means all income from whatever source derived including: o Compensation for services including fees, commissions, fringe benefits; interest; rents; royalties; dividends; annuities; pensions; income from life insurance; etc. Fringe benefits – some form of non-cash benefit provided by employer. This tells us that Congress thought that the concept of compensation goes beyond cash o Note : this is no definition at all – it DOES NOT HELP. There is no general definition of income in the code. Therefore have to come up with concept of income to use. Where we get concept of income: - Ordinary usage; legislative history; economic theory - The statute relied on amendment to the Constitution – says that direct taxes must be apportioned amongst the state based on population. When Congress enacted 1 st income tax it was stuck down b/c it was a direct tax but not based on population. o 16 th amendment – says Congress can tax income (although no definition of income). o So what is the constitutional meaning of income? It is not the same as a legislative meaning (b/c Congress can tax less than what is constitutionally allowed) - For a long time, no tax was struck down as unconstitutional until last week. Hypo : Suppose hit by a car and sue the driver – you get a damage award. There used to be a provision in the code that the award was not taxable due to personal injury. (See Glenshaw Glass) - Then cases came up where fired from a job b/c of discrimination – is that taxable? o First ct said no but then Title 7 was amended and they said yes 1
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However, Congress then amended personal injury to be physical so that discrimination was not legitimate. The argument in the case was whether Congress could make personal injury awards income – the argument is that they can’t. Two Concepts of Income
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Federal Income Tax Outline - Use statutes as authority o...

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