U.S. Federal Income Tax of Individuals 2015
Deborah A. Geier
U.S. Federal Income Tax of Individuals 2015
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This textbook is not intended to be an exhaustive treatise; rather, it is intended to be far more useful than that for beginning tax law students by equipping the novice not merely with unmoored detail but rather with a rich blueprint that illuminates the deeper structural framework on which that detail hangs (sometimes crookedly). Chapter 1 outlines the conceptual meaning of the term “income” for uniquely tax purposes (as opposed to financial accounting or trust law purposes, for example) and examines the Internal Revenue Code provisions that translate this larger conceptual construct into positive law. Chapter 2 explores various forms of consumption taxation because the modern Internal Revenue Code is best perceived as a hybrid income-consumption tax that also contains many provisions—for wise or unwise nontax policy reasons—that are inconsistent with both forms of taxation. Chapter 3 then provides students with the story of how we got to where we are today, important context about the distribution of the tax burden, the budget, and economic trends, as well as material on ethical debates, economic theories, and politics as they affect taxation.



Armed with this larger blueprint, students are then in a much better position to see how the myriad pieces that follow throughout the remaining 19 chapters fit into this bigger picture, whether comfortably or uncomfortably. For example, they are in a better position to appreciate how applying the income tax rules for debt to a debt-financed investment afforded more favorable consumption tax treatment creates tax arbitrage problems. Congress and the courts then must combat these tax shelter opportunities (sometimes ineffectively) with both statutory and common law weapons. Stated another way, students are in a better position to appreciate how the tax system can sometimes be used to generate (or combat) unfair and economically inefficient rent-seeking behavior.



This is the second version of this textbook, updated through January 2015.

Language
English
ISBN
1191974634
Title Page
About the Author
About CALI eLangdell Press
Notices
Permissions
Preface
Table of Contents
Introduction
The legislative branch
The executive branch
Tax procedure overview
The judicial branch
Excerpt from Of Crud and Dogs
Unit I: The Core Structures of Income and Consumption Taxation and Tax Policy
Introduction to Chapters 1 through 4
Chapter 1: The Essential Structure of the Income Tax
A. The theoretical core structure of a tax on “income” and how it is implemented in positive law
Introduction to § 61 “Gross Income”
Deductions (part 1): nondeductible “capital expenditures” vs. potentially deductible “expenses”
§ 61(a)(3) “gains derived from dealings in property” and the critical role of “basis”
Deductions (part 2): which “expenses” are deductible and why?
Deductions (part 3): § 1001 “loss” (and more on normative income tax theory)
Deductions (part 4): depreciation
§ 1016 basis adjustments
A brief introduction to the concept of “capital” gains and losses
Problems
B. The tax rate structure, marginal vs. effective rates, and more
§ 62 above-the-line deductions
Personal and dependent exemption deductions and standard deduction
§ 68: the partial phase-out of itemized deductions
§ 67: the 2% floor under “miscellaneous itemized deductions”
Alternative minimum tax
Child tax credit and earned income tax credit
Effective tax rate versus marginal tax rate
Problems
Chapter 2: Consumption Taxation and Our Hybrid Income/Consumption Tax
A. Consumption taxation forms and comparison to income taxation
A retail sales tax
A value added tax
A cash-flow consumption tax
Exempting capital returns from tax: the wage tax and the E. Cary Brown yield-exemption phenomenon
B. Consumption tax provisions in the Internal Revenue Code
C. The additional wrinkle of debt
D. Tax arbitrage: the income tax treatment of debt coupled with consumption tax treatment of the debt-financed investment
Chapter 3: Ethical Debates, Economic Theories, and Real-World Impacts
A. The development of the income tax and how taxes affect the Federal budget and living standards
Excerpt from The Taxing Power: A Reference Guide to the United States Constitution
B. Fairness norms, economic theories, and politics
Fairness norms in general
Excerpt from Incremental Versus Fundamental Tax Reform and the Top One Percent
Fairness and the wage tax
Fairness and other forms of consumption taxation
Welfare economics
Chicago-school-style economics
Negative externalities
Rent-seeking behavior
Supply-side economics
The limits of economic theory
What Legal Scholars Need to Know About Economic Research on Taxation: The Evidence Thoroughly Debunks the Conventional Wisdom
Tax expenditures
Chapter 4: The Contours of “Capital Expenditure” v. “Expense” (or Current Depreciation)
A. Outlays pertaining to intangibles
INDOPCO, INC. v. COMMISSIONER
Post-INDOPCO developments
Outline of the regulations pertaining to intangibles
Problems
B. Outlays pertaining to tangible assets
Two alternative de minimis elections
The § 162 deduction for “materials and supplies”
Problems
The difficult distinction between repair (expense) and improvement (capital expenditure)
AMERICAN BEMBERG CORP. v. COMMISSIONER
Improvement: betterment, restoration, or adapting the property to a new use
Determining the “unit of property”
Routine maintenance safe harbor
Small business safe harbor election for building improvements
Problems
C. Indirect costs of producing inventory (and other property)
COMMISSIONER v. IDAHO POWER CO.
§ 263A codification
Unit II: Two Types of Gross Income: Compensation and Residual Gross Income
Introduction to Chapters 5 and 6
Chapter 5: § 61(a)(1) Compensation
OLD COLONY TRUST CO. v. COMMISSIONER
REVENUE RULING 79-24
A. Section 119
COMMISSIONER v. KOWALSKI
LINDEMAN v. COMMISSIONER
B. Section 132
Excerpt from General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984
Problems
C. Section 83
Problems
Chapter 6: § 61 Residual Gross Income
COMMISSIONER V. GLENSHAW GLASS
A. What is an “accession to wealth” within the meaning of Glenshaw Glass?
Cash receipts that are not basis recovery
NOTICE 99-3
REVENUE RULING 76-131
Consumption received in kind
Oscar Freebies Balloon to $80K (Don’t Tell IRS)
UNITED STATES v. GOTCHER
Problem
HAVERLY v. UNITED STATES
Problem
B. When is a wealth accession “clearly realized” within the meaning of Glenshaw Glass?
The bargain purchase rule
Problem
Commercial rebates
REVENUE RULING 76-96
Problem
Lessee improvements that are not “rent”
HELVERING v. BRUUN
Treasure trove
Excerpt from Defining Income
Unit III: The Possibilities for Income Shifting
Introduction to Chapters 7 through 9
Chapter 7: Gifts and Bequests
Possible taxation approaches to the transfer and receipt of gifts and bequests
A. The basis of property received in kind as a gift or bequest (and related rules)
Problems
Historical development
Is § 1014 justified? If not, which alternative would be better?
B. What is a “gift” within the meaning of § 102(a)?
COMMISSIONER v. DUBERSTEIN
Consequences of the Duberstein Court’s approach to “gift”
A Duberstein example and introduction of “small tax case” jurisdiction in the Tax Court
JUE-YA YANG v. COMMISSIONER
Problem
The possible limits of the Duberstein “intent” approach
OLK v. UNITED STATES
The relationship between § 61 and exclusion provisions
Final thoughts
C. Life insurance proceeds received on death of the insured
Is the § 101(a)(1) exclusion justified?
Sales of life insurance policies to investors
Problems
Chapter 8: Income Shifting in the Happy Family
A. Income splitting via the joint return
LUCAS v. EARL
POE v. SEABORN
Same-sex married couples, registered domestic partnerships (RDPs), and civil unions
CHIEF COUNSEL ADVICE 201021050
B. Income-shifting possibilities outside the joint return
Problems
BLAIR v. COMMISSIONER
HARRISON v. SCHAFFNER
The § 1(g) so-called kiddie tax
The grantor trust rules
HELVERING v. CLIFFORD
Income splitting using a nongrantor trust
Final thoughts
Chapter 9: Income Shifting in the Fractured Family
A. Cash payments
GOULD v. GOULD
Excerpt from Simplifying and Rationalizing the Federal Income Tax Law Applicable to Transfers in Divorce
TUCKER v. COMMISSIONER
Problems
B. Transfers of property in kind
Problems
C. Same-sex spouses, unmarried cohabitants, and members of an RDP or civil union
Same-sex married couples
Unmarried cohabitants with no formal legal relationship
REYNOLDS v. COMMISSIONER
RDPs and civil unions
Problem
Unit IV: Everything You Ever Wanted To Know About Debt but Were Afraid To Ask
Introduction to Chapters 10 through 12
Chapter 10: Borrowing and Lending
A. The basic rules of the road
B. Section 7872
C. Identifying principal and interest (including original issue discount) and the timing of interest inclusions and deductions
Identifying principal and interest
Segue to a brief discussion of methods of accounting
Original issue discount
OID pertains to realization rather than accounting methods
D. Recovery of annuity basis under § 72
Problem
E. Which receipts fall within the “borrowing exclusion”?
JAMES v. UNITED STATES
NORTH AMERICAN OIL CONSOLIDATED v. BURNET
Lewis and the enactment of § 1341
A workable tax definition of “loan”: absolute versus contingent obligation to repay
COMMISSIONER v. INDIANAPOLIS POWER & LIGHT
Problem
Chapter 11: The Bad-Debt Deduction (for Lenders) and Debt-Discharge Income (for Borrowers)
A. The lender’s deduction for a bad debt (or worthless security)
§ 165(g) deduction for a worthless security
§ 166 bad-debt deduction
Bona fide debt
Worthlessness
REVENUE RULING 93-27
Problems
B. § 61(a)(12) income from the discharge of indebtedness
UNITED STATES v. KIRBY LUMBER
The modern rationale underlying § 61(a)(12): the borrowing exclusion
Deferral of § 61(a)(12) debt-discharge income under § 108
Failure to grasp the modern rationale by some courts
PAYNE v. COMMISSIONER
Problems
Measuring the economic value received in the borrowing year with two-party debt
ZARIN v. COMMISSIONER (Tax Court)
ZARIN v. COMMISSIONER (Third Circuit)
Chapter 12: Debt and Property
A. The purchase of property with borrowed money—the front-end rule in Crane
B. The transfer of property subject to debt—the back-end rule in Crane, Tufts, and Rev. Rul. 90-16
Relief from recourse debt not in excess of property FMV
Relief from nonrecourse debt—whether or not in excess of property FMV
COMMISSIONER v. TUFTS
Relief from recourse debt in excess of property FMV
REVENUE RULING 90-16
C. Reduction of property debt without a property transfer
REVENUE RULING 91-31
§§ 108(a)(1)(D) and (e)(5)
Problems
Unit V: The Ownership and Disposition of Property
Introduction to Chapters 13 through 16
Chapter 13: Properly Accounting for, and the Nonrecognition of, § 1001 Realized Gain or Loss
On the disposition of property
A. Properly accounting for realized and recognized gain and loss
Inventory sales
Timing of § 1001 realized and recognized gain inclusion
Installment sale reporting
Open transaction reporting
B. The nonrecognition of § 1001 realized gain or loss
§ 1033 involuntary conversions of built-in gain property
§ 1031 like kind exchanges
Three-corner exchanges
CRANDALL v. COMMISSIONER
Does § 1031 reflect sound policy?
§ 267(a)(1) sales of loss property to a related party
§ 1091 wash sales of loss securities
Problems
Chapter 14: Depreciation and Amortization in a Realization-Based Income Tax
A. Economic depreciation in a realization-based income tax
B. “Wear and tear” within the meaning of § 167(a)
SIMON v. COMMISSIONER
Loose Application of Depreciation Doctrine
C. Depreciation of tangible assets
Non-real estate
§ 179 expensing
§ 168 depreciation
Real estate
§ 280F limitations
D. Amortization of intangible assets
E. Amortization of start-up costs
F. Tax arbitrage: an interest deduction for debt-financed purchases of expensed (or nearly expensed) assets
Problems
Chapter 15: Capital Gains and Losses
A. Capital losses
Problem
B. Net capital gain
Why is net capital gain taxed at a preferential rate?
The double tax argument regarding capital returns
Lock-in effect
Inflation gain
Encouraging risk-taking entrepreneurship to stimulate economic growth
Bunching effect from the realization requirement
The definition of “net capital gain”
Planning possibilities regarding the timing of realized capital gains and losses
C. The meaning of “capital asset” and “sale or exchange”
§ 1221(a)(1): the inventor or dealer exception
BYRAM v. UNITED STATES
§ 1221(a)(2): certain property “used” in the taxpayer’s trade or business
§ 1221(a)(3): certain copyrights, works of art, musical compositions, and similar property
§ 1221(b)(3): the election for self-created musical works
§ 1221(a)(7): hedging transactions
The sale of a right to collect ordinary income in the future
The sale or exchange requirement
The Arrowsmith doctrine
D. Section 1231 gains and losses and depreciation recapture
§ 1231 gains and losses
§§ 1245 and 1250 “depreciation recapture”
Problems
E. The § 1(h) rates applicable to “net capital gain”
Chapter 16: Tax Shelters
Policy concerns
A. Common law doctrines used in tax shelter litigation
Sham debt
KNETSCH v. UNITED STATES
ESTATE OF FRANKLIN v. COMMISSIONER
Tax ownership
The business purpose doctrine
The economic substance doctrine
B. Statutory tools in combatting tax shelters
The § 456 at-risk rules and § 469 passive activity loss rules
Problems
The § 163(d) investment interest deduction rules
Problem
Unit VI: Distinguishing Between Income-Producing Activities and Personal Consumption and the Personal Consumption Tax Expenditures
Introduction to Chapters 17 through 20
Chapter 17: On Human Capital
A. Education costs
Tax Incentives for Education: Not Making the Grade
Problems
Treas. Reg. § 1.162-5: education costs as deductible business expenses under § 162
SHARON v. COMMISSIONER
Problems
B. Compensation received on account of the loss of human capital
Excerpt from Murphy and the Evolution of “Basis”
§ 104(a)(2) as tax expenditure
The treatment of attorney fees
AMOS v. COMMISSIONER
Problems
Chapter 18: Homes, Health, Charity, and More
A. Owner-occupied housing
The exclusion of imputed income with respect to owner-occupied housing
The deduction for qualified residence interest under § 163(h)(3)
Problems
The exclusion of gain on the sale or exchange of a principal residence under § 121
Problem
The exclusion of § 61(a)(12) debt-discharge income under §§ 108(a)(1)(E) and (h)
Excerpt from Before the Senate Committee on Finance, At a Hearing on “The Housing Decline: The Extent of the Problem and Potential Remedies”
Problem
B. Personal casualty and theft losses
Determining whether the loss arises from “theft” or “casualty”
Determining the amount and character of a personal casualty or theft loss and whether it is an Itemized Deduction or Above-the-Line Deduction
Problem
C. Health care
The § 213 deduction for certain medical costs
The §§ 105(b) and 106 exclusions for employer-provided health care (and the § 162(l) deduction for the self-employed)
The consumer-driven, health-care movement: HSAs and high-deductible plans
Health care for same-sex spouses and partners
The § 36B premium health care credit
Problems
D. Charitable contributions
Tax-exempt organizations
Who benefits from the § 170 deduction and where do our charitable dollars go?
What is a “contribution or gift” within the meaning of § 170(c)?
HERNANDEZ v. COMMISSIONER
SKLAR v. COMMISSIONER
Determining the deductible amount when property is contributed in kind
Contributions of services in kind
Substantiation requirements
AGI percentage contribution limits
Problems
E. State and local taxes
F. Expenses for the determination, collection, or refund of any tax
Chapter 19: Gambling and Hobby Losses
A. Gambling losses: § 165(d)
GENERIC LEGAL ADVICE MEMORANDA 2008-011
Problem
B. Hobby losses: § 183
Establishing a profit motive
ZARINS v. COMMISSIONER
The § 183(d) presumption and § 183(e) election
Defining the scope of “the activity”
TOPPING v. COMMISSIONER
Hobby or Business: Brothel-Hopping Scrutinized by the IRS
Problems
Chapter 20: Allocating Costs Between Income Production and Personal Consumption
A. The meaning of “ordinary” and “necessary”
Lobbying costs as business expenses
GEARY v. COMMISSIONER
Bribes and kickbacks, fines and penalties, treble damages under the antitrust laws, and the end of the common law public policy exception (or is it?)
Excess compensation
B. The origin-of-the-claim test
UNITED STATES v. GILMORE
Gilmore II
How far back do we go in looking for the “origin” of a cost?
The origin of commuting, clothing, and meal costs unconnected to travel or entertainment
PEVSNER v. COMMISSIONER
MOSS v. COMMISSIONER
Problems
C. Travel and entertainment costs
“Away from home in pursuit of a trade or business”
COMMISSIONER v. FLOWERS
REVENUE RULING 93-86
HENDERSON v. COMMISSIONER
Mixed trips
§ 274: entertainment
§ 274: business meals
Substantiation of costs
Problems
D. Use of a personal residence for income production
Converting a former personal residence wholly to income production
The so-called home office deduction
RAYDEN v. COMMISSIONER
E. Distinguishing between “business” and “investment”
UNITED STATES v. GENERES
Unit VII: The Taxable Year and Methods of Accounting
Introduction to Chapters 21 and 22
Chapter 21: The Taxable Year
A. The annual accounting principle in general
The borrowing exclusion
§ 61(a)(12) debt-discharge income
Receipts subject to a contingent obligation to repay
Depreciation recapture and the Arrowsmith doctrine
B. The tax benefit rule
REVENUE RULING 92-91
Problem
C. Net operating losses
BURNET v. SANFORD & BROOKS COMPANY
Problem
Chapter 22: Methods of Accounting
A. The cash method of accounting
The constructive receipt doctrine
Deferred compensation, the economic benefit doctrine, rabbi trusts, and § 409A
SPROULL v. COMMISSIONER
PRIVATE LETTER RULING 8113107
Problem
B. The accrual method of accounting
Accrual accounting in financial reporting and the divergence of financial accounting and income tax values
THOR POWER TOOL COMPANY v. COMMISSIONER
The all-events test and its use as a tool for diverging from GAAP
The accrual (deduction) of expenses not yet paid
FORD MOTOR COMPANY v. COMMISSIONER
The accrual (inclusion) of prepaid income (advance payments)
REVENUE PROCEDURE 2004-34
Back to our roots and the elimination of accrual accounting for § 61 Gross Income and expenses for income tax purposes?
Problem
Notes
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