U.S. Federal Income Tax of Individuals 2015
Free

U.S. Federal Income Tax of Individuals 2015

By Deborah A. Geier
Free
Book Description

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.

Table of Contents
  • 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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