Professional Documents
Culture Documents
Fall 2008 1
Individual Income Tax Outline Chad Hallberg
or appeal is possible.
b. Taxpayer does not pay the tax but instead fights it out with the IRS in either Tax
Court, where no jury trial is available, or local Federal District Court to file a refund
action, where a jury trial can be obtained.
Appeals • In any of the courts Tax Court, Claims Court, or District court either party can appeal.
STATUTE OF LIMITATIONS: § 6501
• Period of limitation is the period of time in which taxpayer can amend a return to claim a
credit or refund or the IRS can assess additional tax. IRS Pub. 552.
• General Rule: 3 year SOL begins to run on the date in which the return is filed.
Generally
• EX: Returns for 03, which are filed on April 15, 04 has a SOL period until the year 07
• If filed before, for example on January 15, the SOL period still begins on April 15; If filed
after, for example on July 15, the SOL period will begin on July 15.
1. False Return – No SOL.
2. Civil Fraud / Willful Attempt to Evade / No Return– No SOL
3. Tax Evasion / Criminal Statutes – 6 years
Exceptions
4. Civil Negligence – 6 years
5. Substantial Omissions of Items on Return (25% or more) – 6 years
6. Loss from a worthless security – 7 years
BURDEN OF PROOF
• If taxpayer cooperates and has records to support their claim then the BOP is on IRS; otherwise, it’s on taxpayer
SUBSTANCE OVER FORM DOCTRINE
• No matter how you prepare your taxes in order to make them look like the taxes are legit (form), the substance of
what they really are (substance) will overrule and force you to pay taxes
BASIC SCHEME
Total Income (§61) – Above the Line Deductions = AGI
AGI – Either Standard or Itemized Deduction = X
X – Exemptions = Total Taxable Income
Total Taxable Income – Credits = Y
Y + any other tax = TAX
BASIC DEFINITIONS
• Except as otherwise provided in this subtitle, GI means all income from whatever
source derived
Gross Income §61
• Lay Speak: Everything is gross income unless some other provision in Subtitle A of the
Code says it is not.
Expenses or losses incurred by a taxpayer that can be used to reduce the ultimate amount of
Tax Deduction the taxpayer’s taxable income. Takes that deduction amount off of your income.
A term used to describe those deductions which the IRS allows a taxpayer to subtract from his
Above the Line
or her GI as set forth in §62. GI - above the line deductions = AGI. Because these deductions
Deduction
are taken before AGI is calculated, they are termed "above the line."
AGI = GI – Deductions. An important benchmark determining certain other allowed benefits.
EX, most limitations on deductions or credits are determined based on either AGI or modified
AGI
adjusted gross income (MAGI). MAGI is AGI modified by certain amounts specific to the
given limitations
Fall 2008 2
Individual Income Tax Outline Chad Hallberg
A dollar amount that non-itemizers may subtract from their income and is based upon filing
status. Since can’t take both itemized deducts & a stnd deduct, taxpayers generally choose the
Standard
Deduction deduct that results in the lesser amount of tax owed. Look for 65+ yrs old and blindness for a
bigger stnd deduction
A list of allowable deductions that a taxpayer can take in place of the stnd deduct in deducting
Itemized
Deductions an amount from their GI (along with personal exemptions).
An exemption from all or certain taxes in which part of the taxes that would normally be
collected from an indiv or an org are instead foregone. Normally a tax exemption is provided
to an indiv or org which falls within a class which the gov’t wishes to promote economically,
Exemptions such as charitable orgs. They are usually meant to either reduce the tax burden on a particular
segment of society in the interests of fairness or to promote some type of economic
activity through reducing the tax burden on those orgs or indivs involved in that activity.
It reduces the tax owed, rather than reducing taxable income like a deduction. This amount of
Tax Credit tax savings is not dependent on the rate the taxpayer pays.
SCHOLARSHIPS
• Non Taxable
If a scholarship is received without strings attached (except good GPA).
Sports Scholarships.
Does not have to do anything for the University, but has to work somewhere else e.g.
§ 117
community service.
Rev. Ruling §1.117
• Taxable
Student has to do something like work.
Scholarship is given in exchange for student doing something for school i.e. law
review.
1. Rev. Rul. 58-403
a. Facts – Taxpayer seeks advice whether son, who is in the United States Navy’s
educational assistance programs qualifies as a scholarship and if π can claim minor
son as a dependant.
b. Black Letter – Because son is under obligation to render employment services to the
Navy upon completion of his studies, the scholarship is taxable.
2. Ide v. Commissioner
a. Facts – Same as above.
b. Black Letter – Primary benefit of education would be to Charles in his individual
Cases
capacity, therefore the payment of the scholarship to Charles shouldn’t be taxed.
2. Lange v. Commissioner
a. Facts – π was determined to have a $308 deficiency because he did not include $1,981
amount given to him as a financial need scholarship. He received that money for
working in law school clinic.
b. Black Letter – Although §117(b)(1) excludes amounts given for teaching,
researching, or other services for scholarship purposes, the amount received by π was
for financial need and the clinic is an integral part of the study curriculum. Similar
payments were not received by entire student body.
Fall 2008 3
Individual Income Tax Outline Chad Hallberg
§ 61: GROSS INCOME (The Starter § for all essays)
• Except as otherwise provided in this subtitle, GI means all income from whatever
General Rule source derived
§61(a) • Lay Speak: Everything is gross income unless some other provision in Subtitle A of the
Code says it is not.
Examples, cont.
• Annuities (payments over time)
• Income from Life Insurance (only sometimes) and
Endowment Ks
Examples The following list is NOT all-inclusive • Pensions
• Compensation for services, including fees, • Income from discharge of indebtedness
commissions, fringe benefits (but see §132), - EXCEPTIONS (108a1A-E)
and similar benefits - Discharge from Ch 11 Bankruptcy
• Gross income derived from business - “” insolvency (Liability > Assets)
• Gains derived from dealings in property - “” qualified farm indebtedness
• Interest - (for taxpayers other than Corps) the qualified prop is
• Rents, Royalties, Dividends ($ from stock) biz indebtedness
• Alimony (child support is NOT income) and - NEW §: If qualified prin residence and indebtedness
Separate Maintenance Payments discharged before 1/1/2010 (response to Mtge Crisis)
• Distributive share of partnership gross income
• Income in respect of a decedent ($paid2person post-death)
• Income from an interest in an estate or trust
• Prizes and awards (§74) except for §§74 or 117
(qualified scholarships) exclusions
NON-GROSS INCOME EXAMPLES
- Gifts (giving person taxed, not receiver)
- Inheritances
GROSS INCOME TEST
1. See if it’s in §61a
2. Glenshaw Glass rule:
3. Categories of Income based on Glenshaw Glass
4. Categories of Non-Income
TREASURE TROVE
• Found income is taxable the year it is in the undisputed possession of the person who
found the income even if the income is not cash and regardless if it is sold. T.R. § 1.61-14
General Rule
• Mark McGuire exception (“We won’t tax in this case”)…can argue all TTrove shouldn’t be
Cesarini
taxed at discovery
• Tony Roma’s waitress case.
§ 1.61-2(d)(1) & Rev Ruling 79-24: BARTER AS INCOME
General Rule • If services are paid for other than in money, the fair market value of the property or
services taken in payment must be included in income.
• EX: In return for legal services, a lawyer gets his house painted by a house painter.
Held: FMV of the services received by the lawyer and the house painter are includible
in their gross incomes under § 61 of the Code.
• Gift: Cts will look at whether the services are a gift Determined by whether services
are a “detached and disinterested generosity”, which equates to a NON-gift
Fall 2008 4
Individual Income Tax Outline Chad Hallberg
• Samples: Samples aren’t income
GROSS INCOME CASES
1. Facts – π received a dividend in stock (2,200 to 3,300 but still has same $ value) and IRS wanted to treat
as income.
2. Black Letter – Stocks, dividends, or other investments are not income unless it is
cashed in or sold…until the gain is realized by the sale or exchange or such an asset,
Eisner v. Macomber there is no assurance the gain will stay there.
a. Part 1 Income may be defined as the gain derived by capital, from labor, or from
both combined, provided it be understood to include profit gained through a sale or
conversion of capital assets.
1. Are back profit AND punitive damages income as defined by Macomber?
2. Part 2 Ct says both are income (including punitive damages) b/c income is “income
Glenshaw Glass from whatever source derived” (16th A.) and § 61a is not an exhaustive list of what income is
3. Part 3 Current Defn of Income: (1) Undeniable accessions to wealth, (2) clearly
realized, and (3) over which the taxpayers have complete dominion MEMORIZE!
4. Facts – Lawyer agrees to pay $10,618.87 in taxes for a client who lost that amount due
Clark v. to the bad advice from the attorney.
Commissioner 5. Black Letter – The amount received from the attorney was compensation for a loss
which impaired petitioner’s capital.
FRINGE BENEFITS
General Rule § 61 • Fringe benefits are taxable unless qualified under IRC (below)
Fall 2008 5
Individual Income Tax Outline Chad Hallberg
• Gross income shall not include any fringe benefit which qualify as a––
1. No-Additional Cost Service
2. Qualified Employee Discounts
3. Working Condition Fringe
4. De Minimus Fringe
§1.61-21(a)(2), 5. Qualified Transportation Fringe
(a)(4), (b)(1)&(2) 6. Qualified Moving Expense Reimbursement
7. Qualified Retirement Planning Services
8. Qualified Military Base
• Go to more specific § in tax; it has precedent over §§ w/general terms discussion
• IRS is most worried about the employer and giving “disguised compensation”
(1) Is the perk a condition of employment?
Is a perk income?
(2) Is the perk for the convenience of the employer (not of the emp-ee)?
TEST (3) Is the perk on biz premises of the employer? (cafeteria, housing)?
FRINGE BENEFIT EXCEPTIONS
• Any service provided by an employer to an employee for use by such employee if:
1. Such service is offered for sale to customers in the ordinary course of the line of
business the employer in which the employee is performing services; AND
No-Additional Cost
2. The employer incurs no substantial additional (including forgone revenue) cost in
Service §132(b)
providing such service to the employee.
• Example – Airline tickets & Hotels to their emp-ees; Gym giving free gym
membership; Gym membership may be ok
• Non-taxable so long as discount does not exceed:
1. The gross profit percentage of price which the property is offered by employer to
customers; OR
Qualified Employee 2. 20% of the price at which services are offered by employer to customers.
Discount §132(c) • Reality – Don’t differentiate on prop v services, but FOR EXAM…keep up the diff
• If companies give more than the 20% discount, the emp-ee pays the diff on the amt
• MUST be in the same line of business as the employer deals in general (i.e., shoe store)
• Excludes any property or services provided to an employee or employer to the extent
Working Condition that, if employee paid for such property or services such payment would be allowable as
Fringe §132(d) a deduction under §162 or §167.
• EX – Professors’ $2k/year from GU Law to go to CLEs
De Minimus Fringe • General Defn: Any property or service, the value of which is so small as to make
§132(e) accounting for it unreasonable or administratively impracticable is excluded from tax.
- But, it’s pretty minimus!
• Excludible Examples: §1.132-6(e)(1):
1. Occasional typing of personal letters by a company secretary.
2. Personal use of employer’s copying machine (85% must be for biz purposes).
3. Occasional cocktail parties, group meals, or picnics for employers and guests.
4. Donuts at work, cake for someone’s b-day w/low FMV
5. Employer provided transportation in certain circs: (1) Unusual circs; (2) Unsafe
conditions
• Non-Excludible Examples: §1.132-6(d)(4)(e)(2):
1. Season tickets to sporting or theatrical events.
2. Commuting use to an employer provided car or other vehicle more than one day a
month.
3. Membership in a private country club or athletic facility regardless of frequency.
Fall 2008 6
Individual Income Tax Outline Chad Hallberg
4. Employer provided group term life insurance on the life of the spouse or child.
5. Weekend use of employer-owned/leased cabin
• They’re really looking to kick out “disguised compensation”
• Transportation in a commuter highway vehicle ($115 limit), transit pass ($115 limit), or
Qualified qualified parking ($220 limit) and anything above is taxed to Emp-ee.
Transportation • Parking doesn’t have to be onsite, but must be at least from a spot where transit can be
§132(f) taken
• Applies to cash so long as emp-ee provides a voucher
• Any amount received from an employer as payment of reimbursement for moving
expenses which would have been deductible under §217 is deductable
Qualified Moving • §217(b) – Moving of household goods and personal effects from the former residence to
Expense §132(g) the new residence; traveling, etc.
• Meals are NOT included (§217)
• §132(h) lays out a special rule for parents and air transportation.
Qualified • Any retirement planning advice or information provided an employee and his spouse by
Retirement Services an employer maintaining a qualified plan is deductable.
§132(m) • Higher income emp-ees get this deduct only if all emp-ees get it as well
Military Base
Realignment • Payments when you have to change military bases or you’re realigned are deductable.
§132(n)
• §132(o) – Commissioner given authority within code section to proscribe certain fringe
benefits.
Other §132(o)
• Non-Discrimination Rules – can’t just give benefits of plans to the board of directors, etc.
it must apply to everyone down to the lowliest janitor.
• Child care programs.
Dependant Care
• Gross income does not include amounts paid by an employer. Services cannot exceed
Assistance §129
$5,000 or $2,500 for married filing joint.
Other Fringe • Athletic Facilities – If located on the premises of the employer AND NOT used by
Benefits others, then there is no additional tax for the taxpayer. §132(j)(4); §1.132-1(b)(3)
• Achievement Awards - §74(c) – (1) Tangible personal prop (2) only up to certain value
and (3) only in connection length of service or safety; Doesn’t work for cash bonuses,
season tickets, or really expensive stuff (b/c then it’s “disguised compensation”).
• Group-Term Life Insurance - §79
• Accident and Health Plans - §105 and §106
• Rental Value of Parsonages - §107
• Meals or Lodging for Convenience of the Employer - §119(d) – Must be on the
premises of the business. Firefighters, Mental Illness Centers. As long as you’re required
to stay there by your employer.
- Meals: (1) furnished by emp-er; (2) for convenience of emp-er; (3) on biz premises
of emp-er (loose interp)
- Lodging Adams v US (US expat as CEO for Mobil One Jap Co): (1) furnished by emp-
er; (2) for convenience of emp-er; (3) on the premises of the emp-er (loose interp);
(4) emo-EE req’d to accept as condition of employment
• Combat Pay - §112
• Qualified Tuition Reductions - §117(d) – Must be below the graduate level.
• Group Legal Services Plan - §120
Fall 2008 7
Individual Income Tax Outline Chad Hallberg
• Cafeteria Plans - §125 – Should get Form 1099 (“Misc Payments”) from emp-er for $
over exclusion limit
• Military Benefits - §134
• Adoption Assistance - §137
• Educational Assistance - §127; §127(c)(1)(B) for limitations.
• Dependant Care Assistance Program - $5,000 maximum. §129
• Cash – only occasional meals or parking (w/voucher)
• Always taxed to the employee. If for example a son or daughter uses a gym facility, the
Who’s Taxed?
employee would get charged.
How Much? • The fair market value of the good or service being received by the taxpayer.
BASIC SCHEME
Total Income (§61) – Above the Line Deductions = AGI
AGI – Either Standard or Itemized Deduction = X
X – Exemptions = Total Taxable Income
Total Taxable Income – Credits = Y
Y + any other tax = TAX
Fall 2008 8
Individual Income Tax Outline Chad Hallberg
• If you take it out early you have to pay tax plus a 10 percent penalty. The eligible
age is 59 ½.
• Exceptions to take it out early:
• (72)(t) – Death, Disabled, Unemployed for at least 12-weeks, Qualified Domestic
Donations Order, A lot of people have no idea until they know what is says on the
penalty.
• Roth IRA you can’t take a deduction but the IRA is tax free.
General Rule •
Penalty •
§ 221: STUDENT LOAN INTEREST DEDUCTION
• Deduction allowed for the taxable year an amount equal to the interest paid by the
General Rule taxpayer during the taxable year on any qualified education loan.
• Must be a recognized institution, 5-years to pay off your student loans.
Limitations • $2,500 in interest per year.
• 221(b)(2)(B) – 1/3 of amount where AGI is in excess of $50,000 for single,
Phase Out
$100,000 for joint.
§ 62: EDUCATOR EXPENSE
• Teachers in K-12 are allowed $250 as a deduction for educated related expenses;
General Rule
Teachers must keep their receipts.
§ 222: DEDUCTION FOR TUITION
• In the case of an individual there shall be allowed as a deduction an amount equal to
General Rule
the qualified tuition and related expenses paid by taxpayer during the taxable year.
• Only available if the taxpayer doesn’t qualify for the Hope or Lifetime learning credit
Scope
(these are much better because they’re credits $ for $).
• § 222(b)(2)(B)
(i) AGI doesn’t exceed $65,000 ($130,000) = $4,000
Phase Out
(ii) AGI doesn’t exceed $80,000 ($160,000) = $2,000
(iii) Any other taxpayers the amount is 0.
§ 164(f): ½ SELF EMPLOYMENT TAX
General Rule • A taxpayer can deduct half of self-employment tax paid (15.3 %) of their income.
Other Related • § 162(l) – Self-employment Health Insurance deduction and Self-Employment IRA
Deductions deduction.
BUSINESS DEDUCTIONS
• “A taxpayer may deduct all the (1) ordinary and necessary expenses (2) paid or incurred
Generally § 162
during the taxable year in (3) carrying on a (4) trade or a business.”
• Ordinary: Common and accepted AND
“Ordinary &
• Necessary: Appropriate and helpful
Necessary”
- Necessary is pretty easy to reach
• Where a taxpayer is seeking employment in a new trade or biz activity, the
“In connection §162(a) is appropriately denied b/c the taxpayer is not yet carrying on that
with” biz; The indiv must already have the employment in order for the expense to
be in connection with and :., deductible
• Involved in the activity w/Continuity and Regularity w/intent to make a
profit (even if you don’t make a profit)
• Enough regularity to call it a biz, but not necessarily full-time (case-by-case
analysis)
“Trade or
• Regular Gamblers: Must report income, but still may report 50% of the loss.
Business”
Normally, personal loss is not deductible, only where Congress allows.
Casinos give you a 1099 Form.
• Only Professional Gamblers can take full loss, so IRS wants these types of
gamblers to be full-time and will be strict w/them
Personal, Living • No deduction is allowed for personal, living, or family expenses. Also, when in conflict,
Expenses § 262 §262 holds precedent over §162.
• Business expenses are those incurred in producing, or in the expectations of producing,
Distinction revenues to the business, as distinguished from expenses incurred for the convenience,
comfort, or economy of the individual in pursuing his business.
Statutory • 162c1 Illegal Bribes
Disallowances • 162e Certain lobbying expenses
of Deductions • 162f Fines paid to gov’t for violations of law
for Public • 162g Treble damages payments on guilt for federal antitrust laws
Policy • 280e Expenses for illegal sale of controlled substances
1. Facts – Woman tried to write off breast enlargements as a business expense.
Hess v. 2. Black Letter – As an exotic dancer, π’s expense of breast augmentation made them so
Commissioner freakishly huge and her profits went up substantially that the breasts were essential to
the taxpayers business and there is no other suitable purpose for the horrendous breasts.
BASIC SCHEME
Total Income (§61) – Above the Line Deductions = AGI
AGI – Either Standard or ITEMIZED DEDUCTIONS = X
X – Exemptions = Total Taxable Income
Total Taxable Income – Credits = Y
Y + any other tax = TAX
Fall 2008 12
Individual Income Tax Outline Chad Hallberg
purpose of affecting any structure or function of the body (~cosmet if ~based on disease)
• Applies to unreimbursed medical expenses paid for in the taxable year AND in
excess of 7.5% AGI.
• EX: AGI = $100,000; 7.5% = $7,500; ME = $9,000; Deduction = $1,500
COVERED §213c NOT COVERED
• Transportation • Teeth Whitening
• Retirement / Nursing Homes (Long-Term care) • No Snow Bird Exception
• Birth Control, Abortions – if legal in your jurisdictions • No Cosmetic Surgery unless based on disease
• Only Prescription Drugs (Viagra even!) • No Meals on Wheels
• Smoking Cessation programs if ~ OTC (ie, patch or gum) • Babysitter in order to go to the doctor
• Weight loss Programs/Fat Farm: if under medical obesity • Illegal Drugs, even if legal in your jurisdiction.
• May cover lodging primarily for and essential to medical • Marriage counseling
care $50 and no higher for each night. § 213(d)(2)
• Vasectomy
• Psychiatric Treatment for Sexual Inadequacy • Sex change is before the tax court right now
• Fertility Enhancement
• Guide Dogs
• Chiropractor / Massage therapy
• Alcoholism Treatment
• Vision correction
• General Rule – Home modifications for medical purposes are deductible, however,
aesthetic improvements are not;
• Case: Ferris v. Commissioner – Amount of increase of the home’s value is subtracted
Home from the deduction amount; deduction must be what the reasonable minimal cost of the
Modifications structure would be.
• Example: Taxpayer’s doctor prescribes a spa be put in home to help w/arthritis or some
other ailment: SPA = $7k; Increase in Value of home = $5k; Medical Deduction = $2k
§ 164: TAXES PAID
• Taxes paid are deductible; however tax refund must be included in gross income on the
General Rule
following year.
• NO FED TAX DEDUCTIONS
• State Income Taxes
• State Sales Taxes (for 2008-09)
Types • Local Taxes
• Property Taxes
• Personal Property Taxes
• Car Tabs (if the amount is determined to be an excise tax and not a registration amount)
How To • Take amount gov’t gives you and deduct it OR save all your receipts
§ 163: INTEREST PAID
General Rule • There shall be allowed as a deduction all interest paid or accrued within the taxable year
on indebtedness up to $1M.
• Any interest on home + loans taken against home (Home Equity) even if that $ ~ used on
home
• (h) No deduction for personal interest (i.e., Credit Cards)
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Individual Income Tax Outline Chad Hallberg
• Qualified Residences: Primary + 1 other residence (not just any rental)
• Mortgage Interest and Points (can include two homes)
• Home Equity loans taken out to pay off credit cards
Examples
• Interest for rental properties is taken on Schedule E.
• NOT – Credit card interest
§ 170: CHARITABLE CONTRIBUTIONS
1. Qualification – Organization must be qualified charity under 501(c)(3).
2. Amount of Contribution §170(f)(8(A) – Up to 50% of AGI can be deducted; 30% if a
capital asset.
• Example: If AGI = $100,000, maximum amount of deduction = $50,000.
3. Non-Cash Donations – Property, clothing, etc. can also be deducted as a charitable
contribution. FMV will determine the amount of each item.
4. Filing requirements per amount contributed
• $.01-250: Cancelled check, receipt, or letter from org showing date&amt of contr
• $250-$499: Same as above + description of prop, FMV, basis, org.al agreement
• $500-$4,999: Manner & Date of acquisition, Cost/Basis (must attach to return)
General Rule • $5,000+: Must include appraisal in return, cost of which is not included in the
donation; Phys condition of prop; description of prop; terms of agreement; stmt
from appraiser; date of appraisal (can be appraisal penalty for bad appraisal)
5. Cookies from Scouts – Must subtract the FMV of the goods purchased and take the rest
of the amount contributed as a donation.
• Formula: Whole Contribution – FMV (received in return) = Net Contribution
6. Carry Over – Any contributed amount which exceeds the 50% restriction of AGI can be
carried over for up to 5-years.
7. Leave Donation Programs – Notice by the IRS the amount is not deductible but the
amount is not included in income.
8. Uniforms – Can be deducted if needed to work for charitable service organization.
Candy striping outfits.
1. Political Campaigns/Candidates – Can’t endorse or oppose any political campaign or
candidate.
2. Tuition – Tuition is not deductible.
Restrictions on 3. Foreign Orgs – Deductions are not allowed for contributions or grants to foreign orgs
Contributions 4. Control – To the extent you give something you must not hold strings back; Control
must be given to the organization.
5. Services 1.170A1(g) – Service to charitable donations is not deductible.
• Example – Blood donated to Red Cross during blood drive.
1. Was Scientology Church receiving Quid Pro Quo (giving something and then getting
something in return?) Yes they were
Hernandez
2. Personality testing where people take deduction for charge of the test (a set price)
3. Ct says they’re not donations, but a quid pro quo
1. To extent payment for religious/private school tuition is paid by parents, they shouldn’t
Jewish School get deduction b/c can’t parse out how much $ goes to school and how much was for
charitable contrib
1. Parents paying for kid’s mission as in old days, try to deduct, IRS says no
LDS Missionary 2. Now, parents pay a flat rate for everyone to Church HQ – Deduction ok b/c contrib. to
Church
§ 165: CASUALTY AND THEFT LOSS
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Individual Income Tax Outline Chad Hallberg
§ 165: Casualty & Theft Biz Loss
General Rule • Will allow a whole lot more from the loss of business rather than from personal loss.
§§ 165(c), 1.165-1: Casualty & Theft Personal Loss
• Loss actually sustained during the taxable year and not made good by insurance, which
is sudden, unexpected, and unusual.
General Rule
• Based upon FMV before and after the incident.
• Property must have actual physical damage.
• Must be over $100; AND
Restrictions • In excess of 10% of AGI.
• AGI = $100,000; 10%= 10,000; Casualty Loss= $12,000; Deduction = $2,000
Example Loss: Example Not Loss:
1. Hurricanes, Flood 1. Animals – general rule is forget about taking the deduction.
2. Car Wreck, so long as it wasn’t intentional, 2. Termites – most cts say it is gradual so no loss deduction.
and don’t forget to factor in insurance. 3. Erosion from ocean waves.
3. Property that is actually stolen and not lost; 4. Intentional Acts
File a police report for verification. 5. Couple Lived Next Door to O.J. – Court said no casualty
4. Landscaping –need an appraiser to compare it because there is no physical damage; Loss on sale of a
to the value of your home after casualty. home is not included as an itemized deduction.
1. Losses Incurred In a Trade or Business
2. Losses Incurred in any Transaction Entered into for Profit, not connected with trade or
Limitations bus.
3. Losses arising from fire, storm, shipwreck and casualty theft.
• Casualty Theft – Loss taken in year of discovery; only $ amount no interest.
• General Rule (§165(d)) – Deduction granted only to the extent of your gambling
winnings.
• Example: Win $10,000; Lose $5,000; Deduction = $5,000; Win $1,000; Lose
$5000 Deduction = $1000.
• Professional Gambler – Professional gambler reports losses on Sche. C. Same rule
Gambling Losses applies.
• Non-professional Gambler – Losses reported on Schedule A as a Miscellaneous
Itemized Deduction (MID). Subject to 2% haircut.
• When Incurred – Loss taken in particular year in which the wagering took place.
• How Verified – Maintain a diary or similar record including date, type of wager activity,
and gambling venue, travel receipts and each slot machine should be numbered.
§ 162: EMPLOYEE BUSINESS EXPENSES
• Test – Expenses must be ordinary and necessary and in the course and scope of
employment. Test same for Corps., LLPs, and trusts.
General Rules
• Meals and Entertainment § 274(n) – Limited to 50% deductible for dinner expenses.
• Self-Employed – Full deduction so long as expenses are ordinary and necessary.
• 2% Haircut – If AGI = $100,000; 2%= $2,000; Amount of expenses exceeding the
Limitations
$2,000 Haircut may be taken for a deduction.
• General Rule § 68 – In the case of an individual whose AGI exceeds the applicable
amount, the amount of the itemized deductions otherwise allowable for the taxable year
Phase-Out shall be reduced by the lesser of:
(1) 3% of the excess of AGI over the applicable amount ($100,000 MFJ; $50,000); OR
(2) 80% of the amt of the itemized deducts otherwise allowable for such taxable year.
Fall 2008 15
Individual Income Tax Outline Chad Hallberg
• Working Family Tax Relief Act of 2004 – Extends the provisions that were set to expire
at the end of 2004 and has a uniform definition of child.
Class Notes
• American Jobs Creations Act 2004 – Passed on Congress on 10-11-04; Far more
incentives for businesses.
BASIC SCHEME
Total Income (§61) – Above the Line Deductions = AGI
AGI – Either Standard or Itemized Deduction = X
X – EXEMPTIONS = Total Taxable Income
Total Taxable Income – Credits = Y
Y + any other tax = TAX
EXEMPTIONS
§ 151: ALLOWANCE FOR DEDUCTIONS
• 1 exemption each for self, spouse, and each qualifying child
• Minus on the tax return and it appears on the second number of the tax return.
• Take that number and multiply and then it is indexed for inflation.
General Rule • (b) Taxpayer exemption and Spouse exemption (Reg §1.151-1b allows for MFJ
spouse exemp)
• (c) An exemption amount for each dependant (as defined in § 152…articulated
below)
• If you make too much $, you will be phased out proportionally of specified exempt.s
• Applies to Itemized deductions as well
Phase Out • If you’re divorced & getting phased out, take child(ren) off your return and have the
other spouse take the child even if you have done everything to take care of the child
• Phase out begins at $239,950 for couples (§151d3C)
• If you make too much $, then you will be proportionally phased out of exemptions
• 2% for every $2500 exceeding the threshold amounts.
Phase-out 1. Joint Return - $239,950
§ 151(d)(3)(C) 2. Head of Household - $199,950
3. Not Married/ Not Surviving Spouse - $159,950
4. Married Filing Separate - $119,975
§ 152: Dependency Exemptions
• A taxpayer may claim as a dependant any of the individuals listed in §152 whose
General Rule
support he or she provided during the taxable year.
1. Child or Sibling – Must be taxpayer’s Child (bio or adopted, step, eligible foster, or
descendant of any of these children) OR Sibling (bio, half, step, or descendant of
any of these siblings)
2. Age – Under 19 or 24 if full-time student
- Permanently & Totally Disabled during any part of the year meets age req’t
Qualifying Children
3. Citizenship – w/ exceptions for adoption, Must be a national or resident of the
Test (c)
U.S., Canada or Mexico not filing joint return w/a spouse (§152b3)
- Must have a U.S. SSN to qualify to prove authenticity
4. Abode – Over ½ time “aboding” w/taxpayer
5. Support – Taxpayer must provide over ½ of support (necessities of life - liberally
allowed by IRS)
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Individual Income Tax Outline Chad Hallberg
1. Income – Dependant must make less than the exemption amount ($3,500)
2. Support – Must provide over half of the support; Yes – Loans; No – Scholarships
3. Relationship to Taxpayer Test – Child (or descendant of a child) (in-law), (step)
(in-law) bro/sis, (step) (in-law) dad/ mom (or descendant of either), niece/nephew,
Qualifying Relatives aunt/uncle, and [§152d2H] anyone else that shares same primary residence &
Test (d) member of taxpayer’s household (i.e., neighbor kid)
4. Citizenship – w/ exceptions for adoption, Must be a national or resident of the
U.S., Canada or Mexico not filing joint return w/a spouse (§152b3)
- Must have a U.S. SSN to qualify to prove authenticity
5. Not Qualifying Child – of taxpayer or any other taxpayer
1. (1) General Rule – Parent with custody gets to claim the child as a dependant.
2. Joint Custody (TR 1.152-4(b)) – (2) whichever parent has physical custody for the
greater part of the calendar year. (3) If equal time, then exemption goes to parent that
Divorced Parents gives most support.
§ 152(e) • Waiver – Parent can waive right; written declaration must be attached; can be for one
year or all years. 152e2
• Practice Tip: If you are getting phased out under 151, then give the child to the ex-
spouse even if you provide all support
• Parents get dependant exemption if
Missing Child
§152f6A 1. Law enforcement presumes child kidnapped by someone other than family AND
2. Child lived w/parents before kidnapping
FILING STATUS
General Rule • LOOK AT THE LAST DAY OF THE YEAR TO DETERMINE FILING STATUS!!
MARRIED FILING JOINTLY
General Rule • Joint and Several Liability, unless an exception is at play
MARRIED FILING SEPARATELY
General Rule • If getting a divorce; OR Does not want to be jointly & sev.ly liable for other spouse.
§§ 1,2: SURVIVING SPOUSE
• Can Claim MFJ for 2-years after year of death of spouse if dependant living at home
General Rule
& no re-marriage for those 2 years
§§ 1, 2: HEAD OF HOUSEHOLD
• Individual is not married at the close of taxable year, is not a surviving spouse; AND
• 1+ qualifying dependant/relative AND
General Rule
• Maintains over ½ of the taxable year as the principal place of abode AND
• Better than Individual rate
BASIC SCHEME
Total Income (§61) – Above the Line Deductions = AGI
AGI – Either Standard or Itemized Deduction = X
X – Exemptions = Total Taxable Income
Total Taxable Income – CREDITS = Y
Y + any other tax = TAX
OTHER
Fall 2008 23
Individual Income Tax Outline Chad Hallberg
• Must be a legal identity and you can identify up to three within the forty-five days and a
sale of on one of them within the 180-days.
Click v.
• Black Letter – When intent is not for like-kind exchange, cannot use §1031.
Commissioner
§ 1033: INVOLUNTARY CONVERSIONS
• (a) If property (as a result of its destruction in whole or in part, theft, seizure, requisition or condemnation or
threat or imminence thereof) is compulsorily or involuntarily converted—
1. Conversion into Similar Property – Property similar or related in service or use to the property so
converted, NO GAIN shall be recognized. (will be recognized later)
2. Conversion into Money – Money or property not similar or related in service or use to the converted
property, the gain if any shall be recognized
Any gain in cash over and above basis that moves from Prop1 to Prop2 will need to be reported within
delay of time (usu. 2 yrs, but can be longer [i.e., GO Zone])
• No need to meet §1031 timing or ID rules; can convert to cash (see rules for that above)
• So long as prop is used for same use, it’ll work just fine
Similar
Property Defn • All real estate is not all real estate you must consult the code in order to determine what the
source is. Much More NARROW than Like-Kind.
Basis • Adj Basis – Amt of $ received + Amt of gain recognized = NEW BASIS
1. Whether the taxpayer has achieved a sufficient continuity of investment to justify non-
recognition of the gain. OR
Test (Davis v. 2. Whether the differences in the relationship of the taxpayer to the two investments compel
U.S.) the conclusion that he has taken advantage of the condemnation to alter the nature of his
investment for his own purpose.
*** The Exchange Should Appear to be of the Same Nature of Business if Possible.
Collections
COLLECTIONS
• Options Available to People Who Can’t Pay:
1. Payment Plan Option – If you can’t pay it right now, you can sign up for a
payment plan. And the IRS is required to do so there is an absolute right and as
long as payments are made on time, then the right is maintained, afterward if a
General Rule
payment is missed such right is foregone.
2. Offer in Compromise:
• What do you have? Give it to us. Food allowance, housing allowance and
one automobile.
• 10-Years on collection from assessment; Can be way out there since an audit can
SOL
move from 1993 to 1996;
1. File Return 3-Years to Audit
2. Do Audit and send a petition.
3. 90-Day Letter + 60 Days to Assess, Then 10 Years §6502 (not always 10-years when
Time Frame the payments are extended past the 10-years)
4. If you go to court, the statute of limitations on assessment is put on hold, IRS may
assess after a case is lost. Then it is another 60-days from a final decision that the IRS
has to assessment.
• There is a #300 on transcript, and it is a computer printout; Pretty much a transcript.
Assessment
Made at the IRS service center and taxpayer is not told of it.
§§ 6320, 6330 LIENS AND LEVIES: COLLECTION DUE PROCESS
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Individual Income Tax Outline Chad Hallberg
1. Notify – The IRS must notify the taxpayer, in writing, of the filing of a lien.
2. Notice Requirement:
a. Given in Person
b. Left at the dwelling or usual place of business of the taxpayer; OR
c. Sent by certified or registered mail to such person’s last known address.
3. Time Frame – IRS must notify the taxpayer not more than 5-days after the day of
§ 6320(a)
filing lien.
Requirements of CDP
4. Terms § 6320(a)(3) – Notice must include in simple non-technical terms:
a. The amount of unpaid tax.
b. The right of the person to request a hearing during the 30-day period beginning
on the day after the 5-day period in §6320(a).
c. The Administrative appeals and procedures available to the taxpayer.
d. The provisions of the title and procedures relating to the release of the lien.
1. General Rule – If the taxpayer requests a hearing under §6320(a)(3)(B), such
hearing shall be held by IRS office of Appeals.
§ 6320(b) Right to a
2. Frequency – Taxpayer is only entitled to one hearing per tax period.
Fair Hearing
3. Impartial Officer – The taxpayer is entitled to one hearing per tax period.
4. Appeals – Hearing at the collections stage may be appealed to the court.
1. Defined – Taking of assets.
2. Assessment – IRS looks at your current assets and assets you may have in the future
§ 6330 Levies (inheritance and future earnings).
3. Exempt Properties – There are minimum exemptions for wages, salaries and other
income; Some states have homestead laws.
§ 6330(c) CDP
• Pennies on the $.
• Tax payer must establish that:
1. Doubt as to liability; OR
Offer in Compromise
2. Doubt as to collectability.
• If you get an offer in compromise once you’ll generally not get one again.
• If the taxpayer is not truthful, he gets in trouble for fraud.
• Right – Taxpayer has the right to an installment agreement as long as they keep their
payment current.
Payment Plans
• Assets – IRS will consider assets for the payment plan.
• Interest – is assessed.
Collection Appeals • Similar to a due process hearing, but cannot appeal the decision to the court.
Program
Criminal Taxation
CRIMINAL TAXATION
• Whether a taxpayer is charged civilly or criminally usually depends on the degree
General Rule
(severity) of the offense and who the person is; Famous People get Screwed!
• If a taxpayer is found guilty of tax evasion, he is also guilty of civil tax fraud. Only
Collateral Estoppel
the amount of liability is at issue.
§ 6531: SOL • Major Offenses have a SOL of 6-years.
• SOL is tolled for the period the taxpayer is out of the country if they are fighting the
charges.
• SOL is measured from last affirmative act of evasion.
Fall 2008 25
Individual Income Tax Outline Chad Hallberg
• IRS must indict within 6-years
• Every criminal has right and procedure applies to the tax arena.
• As soon as the IRS agent realizes that there are possible criminal charges, they must
Criminal Rights of
the Taxpayer drop the case immediately and refer the case to the Criminal Investigation Division.
• There is no accountant/client privilege. In 1998 Congress passed a tax preparer
privilege, but this doesn’t extend to criminal proceedings and tax shelters.
§ 7201: TAX EVASION
1. Degree – Felony
2. Sentence – 6 months to 5-years for each count; $100,000 + tax owed + interest.
General Rule
3. Amount – All you have to show for evasion is $1.
4. BOP – Must prove intent beyond a reasonable doubt.
1. Amount – There must be an amount due.
2. Willfulness:
a. Voluntary, intentional violation of a know legal duty, Subjective; AND
b. IRS must show an attempt to evade tax.
3. Proving Willfulness
a. Expenditure – IRS looks at taxpayers expenditures compared to their reported
Requirements income.
b. Bank Deposit – IRS looks at the bank accounts compared to their reported
income; False entries, double set of books, concealment of assets, covering up
sources of income.
4. Reasonable – Willfulness determination made on a case by case basis and should be
judged according to ∆’s state of mind, true belief of ∆; Must prove willful tax
evasion. Cheeks.
§ 7203: FAILURE TO PAY
1. Degree – Misdemeanor
2. IRS Burden – Must show that taxpayer:
a. Did not pay;
General Rule b. Knew you needed to pay; AND
c. Had the ability to pay at the time the tax was due (willfulness)
** NOTE – IRS usually will not go after a taxpayer until they did not pay for 3-years
(shows willfulness).
§ 7203: FAILURE TO FILE
1. Degree – Misdemeanor
2. Filed Return = Something that gives enough information to the Dep. of Treasury to
establish tax due.
General Rule 3. IRS Burden – Must show that taxpayer:
a. Did not file;
b. Knew you were suppose to file; AND
c. Willfulness
• Willfulness is subjective; The IRS must prove a voluntary, intentional violation of a
Proving Willfulness known legal duty. They look for legitimate excuses such as education level and
whether they are new to the country. Lying to a tax preparer shows willfulness.
§ 7205 FRAUDUENLTY WITHHOLDING INFORMATION
1. Degree – Misdemeanor
General Rule 2. Example – Claiming 99 exemptions on a W-4 form.
3. IRS Burden – Must show willfulness this established by contradictory past behavior.
§ 7205 FRAUDUENLTY WITHHOLDING INFORMATION
Fall 2008 26
Individual Income Tax Outline Chad Hallberg
1. Degree – Felony
2. Generally – Filing a false return; However there are many other crimes under this
section.
3. IRS Burden – Must show the taxpayer:
General Rule
a. Willfully made false statements
b. The Statements were made under penalty of perjury (signing return or in an
offer of Comprise; AND
c. The false statements were material.
• Examples of Fraud or False Statements – Any act to mislead or conceal
• Understating income, exaggerating deductions, claiming false exemptions,
Examples
keeping a double set of books, Making false entries, false invoices or
documents, destruction of books or records.
§ 6663: CIVIL FRAUD
Penalty • 75% of Tax Liability
SOL • None
ASSIGNMENT OF INCOME
• The taxpayer who earns the income should pay taxes on it – Even if they never touch
it. Income cannot be assigned. Lucas v. Earl (husband assigning money to wife; He
General Rule
was in 70% bracket and she had no income so, by giving it to her they were in the
40% bracket).
Grantor Trusts 1.
• So long as the money is given directly to the corporation of the taxpayer, which is
Personal Service separate and distinct from the individual it is okay to transfer funds for the purpose of
Corporation reducing tax. In effect, the taxpayer gives a salary to the Corp. and is given the
dividends in return upon which he is taxed.
1. Facts – Kid drafted by the Phillies; received $70,000 of which $40,000 is given to
Allen v. Mom.
Commissioner (Pg. 2. Holding – Kid is taxed on entire amount because he earned the money for playing
94) baseball, person with whom they are contracting must be taxable to the person who
earns it.
• Can kid take $40,000 as a business deduction? No, not in this case, but cited to the
Application Randy Hundley case; Randy paid his dad, who was a semi-pro ball player. Mom
didn’t have the professional caliber training.
• $100,000 – Attorney would get $33,333 and the other person would get $66,667,
because the one amount goes to the lawyer. This is an assignment of income case;
Bannaits v. Banks Just like the court in the case we talked about it was earned by the client. Physical
injury settlement was earned by the client. Still all taxable to them and they can also
get a deduction for paying the attorney.
DIVORCE SETTLEMENTS
§ 1041: PROPERTY SETTLEMENTS
• Husband → Wife; No gain or loss is recognized on a transfer of property to and from
General Rule and between spouse so long as it is connection of divorce and occurs one year after
marriage ceases or is related to cessation of marriage.
Basis • Basis is carried over from the marriage.
Fall 2008 28
Individual Income Tax Outline Chad Hallberg
• Alimony cannot have characteristics of a property settlement i.e. $100,000 for first
Alimony year and $1,000 for the rest. If alimony is actually a property settlement both spouses
must amend their returns and alimony reduction needs to be recaptured. This can be
rebutted. §1.1041-1T.
ATTORNEY’S FEES
• Not deductible unless they are connected with the production of income which is
General Rule
taken as a deduction under MID Schedule A along with 2% haircut.
• Pay attorney for the divorce and tax advice is included; It must be clearly allocated in
Example
the bill for tax purposes of the meeting with the attorney. Still subject to
Fall 2008 29
Individual Income Tax Outline Chad Hallberg
stock and make it increased. Hire a company to value stock high and spend 2.2.
million to fight takeover.
• Holding – Fighting takes place in one year and therefore is deducted in the year in
which it occurred. Every take over you look to see if it was hostile.
§ 1221: CAPITAL GAINS AND LOSSES
General Rule • Any property not specifically excluded in §§ 1221, 1221(a) and 1.1221-1.
§1221: CAPITAL GAINS
• Taxed at a lower rate than other income; To promote investment and make up for
Rate
inflation.
• Capital Assets held longer than 1-year.
§ 1222(3) Long-Term
• Preferential taxation rates.
• Capital assets held 1-year or less.
§ 1222(1) Short-Term
• Doesn’t do any good. Treated as ordinary income.
§ 1221: CAPITAL LOSSES
• Restrictions on how much you can deduct (up to your capital gains + $3,000 per
General Rule
year).
• Losses can rollover to the next 2-years.
§ 1212 Roll Over
• No Capital loss on houses.
• Higher Tax Brackets – Pre May: 20%; Post May: 15%
Rates
• Lower Tax Brackets – Pre May: 10%; Post May: 8%
Fall 2008 30