The Law of Federal Income Taxation
Authors:
Rosenberg, Joshua D. / Daher, Dominic
Edition:
1st
Copyright Date:
2007
25 chapters
have results for tax
Chapter 5. Accounting Issues 97 results (showing 5 best matches)
- Two provisions of section 461 concern the accrual of state and local taxes. Section 461(c) allows taxpayers to accrue ratably real property taxes that relate to a definite period of time. According to the Tax Court in Epoch Food Service, Inc., the legislative history of section 461(d) suggests that Congress intended to deny accrual method taxpayers the right to accrue and deduct taxes for two years in one tax year when they only paid the tax for the one year. The taxpayer in Epoch Food Service was a California corporation. The California corporate franchise tax was incurred in a tax year based on the previous year’s business activities. However, the law was amended so that dissolving corporations would pay the franchise tax based on activities in the year of termination plus the prior year. The Tax Court held that although the amendment accelerated the taxpayer’s corporate franchise tax liability, section 461(d)(1) limited the taxpayer’s right to accrue the franchise tax using the...
- Section 111 provides that the recovered amount may be excluded only to the extent it did not reduce income subject to tax. Also, when an amount is recovered that relates to a credit, other than the foreign tax credit claimed in a prior year, the tax is increased by the amount of the credit attributable to the recovered amount but only to the extent the credit reduced the tax.
- See also Rev. Rul. 74–244, 1974–1 C.B. 118, and Rev. Rul. 76–474, 1976–2 C.B. 135. In both revenue rulings the taxpayer was a lessee who agreed to pay the real estate taxes that the lessor was liable for; the lessor became liable for the real estate taxes on January 1, but the taxes were not due until June 1 of the following year when the bills were sent. In Rev. Rul. 74–244 the lessee was not required under the terms of the lease to pay the tax until the lessor was obligated to do so on June 1 of the following year. Under the terms of the lease his liability did not arise until that date. Thus, the liability did not become fixed, and the taxpayer was not allowed to accrue and deduct the taxes, until June 1. However, in Rev. Rul. 76–474 the taxpayer-lessee’s liability for the real estate taxes, in accordance with the terms of the lease, became fixed when the taxes accrued on January 1. The taxpayer was allowed a deduction in the year the taxes accrued, even though he was not...
- Income tax liability is usually determined in the context of a twelve-month period referred to as a taxable year. This chapter deals with the rules governing the allocation of gross income and deductions to the proper taxable year. Although the allocation may be performed in accordance with generally accepted accounting principles, there are differences between financial accounting and tax accounting. Financial accounting seeks to match revenues with the costs of producing them while tax accounting starts from the premise of a need for certainty in the collection of taxes and focuses on the ability to pay. Moreover, in the case of tax accounting, a variety of statutory, regulatory, and judicial pronouncements are necessary to counter tax avoidance. For example, if the IRS believes that a taxpayer’s method of accounting does not clearly reflect income, section 446(b) authorizes the Service to change the taxpayer’s method of accounting to a more appropriate one which clearly reflects...
- The carryback or carryforward of operating losses prevents the income tax from functioning as a tax on capital in years of loss when expenditures devoted to the production of income would be otherwise wasted; it has also been justified on the ground that it reduces the incidence of risk-taking in investing, thereby causing the income tax to function with more neutrality in the context of investment decisions.
- Open Chapter
Chapter 4. Deductions Part 2 93 results (showing 5 best matches)
- Section 164(d) provides for apportionment of real property taxes between the seller and the purchaser. Under section 164(d)(1) taxes for the “real property tax year” in which the property is sold are allocated to the seller and the purchaser, and the deduction allowed each is limited to the portion of taxes that corresponds to the part of the “real property tax year” during which each owned the property. The term “real property tax year” “refers to the period which, under the law imposing the tax, is regarded as the period to which the tax imposed relates.”
- Section 164(a) permits a taxpayer to deduct the following in the year in which paid or accrued: (1) state, local, and foreign real property taxes, (2) state and local personal property taxes, (3) state, local, and foreign income taxes, (4) the environmental tax imposed on corporations that have an alternative minimum tax of at least $2 million, and (5) the generation skipping tax imposed on income distributions. Other state, local, and foreign taxes paid or accrued in carrying on a trade or business or section 212 activity are also deductible. However, state, local, or foreign taxes, other than the six enumerated taxes, incurred in a trade or business or section 212 activity in connection with the acquisition or disposition of property are not deductible. Instead, such taxes must be treated on the acquisition of the property as part of the cost and on the disposition as a reduction of the amount realized. For example, a sales tax paid on the acquisition of the property for use in...
- Section 275 denies a deduction for certain taxes, including federal income taxes and foreign income taxes taken as a credit under § 901. Taxes may be subject to the capitalization rules of § 263A. Under § 266 a taxpayer may elect to capitalize taxes.
- To be deductible under section 164(a)(2) state and local personal property taxes must meet three requirements. First, the tax must be substantially proportionate to the value of the property (ad valorem) as opposed to, for example, a motor vehicle tax based upon weight, model year, or horsepower. Second, the tax must be imposed on an annual basis regardless of whether it is collected more or less frequently. Finally, the tax must be in respect of personalty. If a tax is based partly on value and partly on other criteria, the portion of the tax based on value may be deducted while the other portion may not.
- The basic requirement of section 164 is that the amounts paid or incurred are “taxes.” The Service has observed that “[g]enerally, the word has been defined as an exaction of the state laid by some rule of apportionment according to which the persons or property taxed share the public burden and the proceeds of which go into the state’s general revenue fund.” Labels are not determinative of whether charges are or are not taxes. Such items as turnpike tolls are not taxes, but “fees” paid by corporations for filing certificates of increase of capital stock are taxes.
- Open Chapter
Chapter 1. Introduction 175 results (showing 5 best matches)
- Congress would also have paid close attention to the revenue raised by the proposed tax. Some politicians would have explained that they would tolerate no net tax increase, so that if a “no seatbelt” tax were to be enacted, some other tax would have to be correspondingly decreased. Other politicians would have suggested not only that some other tax would have to be decreased, but that a tax decrease would have to impact the same income classes who would be impacted most significantly by the new tax; hence, the ultimate impact of the tax legislation would be neutral across income classes.
- See Reese, The Politics of Taxation (1980); Gallagher, The Tax Legislative Process, 3 Rev. Tax’n Individuals 203 (1979); Ferguson, Hickman & Lubick, Reexamining the Nature and Role of Tax Legislative History in Light of the Changing Realities of the Process, 67 Taxes 804, 808–12 (1989). See also Pechman, Federal Tax Policy 37–51 (4th ed. 1983); Evans, The Condition of the Tax Legislative Process, 39 Tax Notes 151 (1988); Leonard, Perspectives on the Tax Legislative Process, 38 Tax Notes 969 (1988); McDaniel, Federal Income Tax Simplification: The Political Process, 34 Tax L. Rev. 27 (1977).
- The federal income tax has not always dominated the federal government’s revenue raising activities. Although an income tax was proposed as early as 1815, perhaps influenced by the English income tax first levied during the Napoleonic Wars, the federal government did not resort to an income tax until 1862, when revenue was needed to finance the Civil War. The Act of 1862 had tax rates ranging from 1.5% to 5%; income tax contained prototypes of a number of salient features of the present structure such as graduated rates, tax withholding, and returns filed under penalties of perjury. However, this first individual income tax was retained for only a decade, and from 1872 to 1913 the federal government limited its taxing measures largely to excise duties, primarily on liquor and tobacco, and customs receipts. These were the traditional means of raising revenues.
- There are several fundamental issues that arise consistently and necessarily in any discussion of federal income taxation. Put simply, these issues raise questions about: (1) what to tax; (2) who to tax; (3) how much to tax; (4) when to tax; and (5) how and why to tax.
- While a tax on “income” may not be the fairest of all possible taxes, most people believe that since that happens to be the kind of tax currently used, fairness suggests that, absent good reason for doing otherwise, the tax should be applied evenhandedly to all types of income rather than arbitrarily or simply in accordance with political power. For example, taxing earnings of plumbers, but not earnings of carpenters, would seem to many to be unfair and too arbitrary to be acceptable. Similarly, taxing interest earnings from bank accounts but not taxing rental earnings from real estate investments might also seem unfair.
- Open Chapter
Chapter 3. Exclusions From Gross Income 90 results (showing 5 best matches)
- What this means is that there is no “special interest groups” supporting a broader tax base. No one argues to Congress that it ought to impose taxes on exclusions from gross income; this is because the only ones really interested in the exclusions are the ones who benefit from them. Although the tax rates imposed by our federal income tax system can be viewed as independent of the tax base, many who call for a “flat tax” have in mind as part of that “flat tax” an expanded tax base, which cuts back on some or all exclusions from income.
- To some extent, taxation is a zero sum game. Since excluding any receipt necessarily reduces the tax liability of the recipient, then to retain tax neutrality, typically someone else must pay tax. Either some other taxpayer must include some amount that she otherwise would not, or the tax rates on everyone must be raised to maintain the same net revenue to the United States Treasury. If nobody’s tax liability is correspondingly increased when another’s tax liability is decreased (by allowing some receipt to go untaxed), the result is either an increased federal deficit or reduced government services.
- Because our federal income tax system has graduated tax rates, an exclusion of some receipt from gross income provides different amounts of benefit for different taxpayers. If T1 is in the 35% tax bracket, T2 is in the 15% tax bracket, and T3 has little enough income to put her in the 0% tax bracket, then the same exclusion from income of the same amount received will have very different tax consequences for the three taxpayers. The exclusion of $1,000 will save T1 the $350 tax she would otherwise have to pay on an extra $1,000 of income. It will save T2 the $150 she would otherwise have to pay on that extra $1,000 of income, and it will save T3 nothing, since T3 will pay no tax regardless of whether she is required to include the $1,000 receipt in income.
- As a result, a taxpayer (T1) in the 35% tax bracket who lends $100,000 to a corporation at a 10% rate of interest will receive $10,000 annual interest. Because that interest is subject to tax at T’s 35% tax rate, T1 will be required to pay income tax of $3,500, leaving him, after-taxes, with net income of $6,500. If T1 could instead invest his $100,000 in a state or municipal tax-free bond at, for example, 6.1%, he would earn $6,100, pay no tax at all, and be better off, after-taxes, than he would have been with his 10% taxable corporate bond. Hence, states and municipalities can borrow money at significantly lower interest rates than can other borrowers with similar credit ratings. Ultimately, section 103 provides a
- Nevertheless, some commentators do not care for section 103; they complain that one problem with section 103, as with any exclusion from income, is that the value of the benefit of the exclusion varies directly and proportionately with the investor’s marginal tax rate. For example, if T2, who also has $100,000 to invest, is in the 28% tax bracket, then her investment in a 10% taxable corporate bond would yield a gross annual amount of $10,000, minus federal income tax due of $2,800, for a net profit of $7,200. On the other hand, an investment in a tax-exempt bond would yield, both before and after-tax, only $6,100 annually. Rather than saving money, T2 would lose money by investing in tax exempt bonds. Obviously, for taxpayers in lower-brackets, the loss from investing in tax-exempt bonds would be even greater.
- Open Chapter
Chapter 14. Tax Shelters and Tax Avoidance 149 results (showing 5 best matches)
- Additionally, credits from tax shelters generally are limited to the tax allocable to other tax shelters. Any excess is carried forward and treated as a credit from tax shelters in future years, but any excess credits from one activity are not allowed upon disposition of the activity (unless, of course, the taxpayer has sufficient tax liability from other tax shelters to enable use of the credits).
- During the heyday of tax shelters, a high-income individual taxpayer might significantly reduce her tax liability by doing little more than going to her tax professional, explaining she wanted a tax shelter, and writing a check. In return for that check and a signature, the taxpayer would receive papers explaining her right to substantial tax deductions and/or credits whose value far exceeded the amount of the check she had written.
- To put this all together, in year one, T pays $1,000,000 and receives tax savings of $1,333,200, for an immediate of $332,200. In year two, T pays nothing and receives tax savings (profit) of $1,778,000. In year three T pays nothing and receives tax savings (profit) of $592,000, and in year four T pays nothing and receives tax savings of $296,000.
- Many tax shelter investors ignored the potential problems in closing out the tax shelter in year 10 because they realized that all that would happen in year 10 would be that they would have lots of income, and all they would need to do to avoid paying tax on that income would be to invest in another tax shelter in year 10. Those taxpayers who were more risk averse, however, may well have performed a present value analysis of the original investment, taking into account the impending year 10 liability, prior to investing. To do so, T might initially set out the net receipt or payment, after-taxes, for each year, and its present value, as follows:
- While most tax shelters do not produce tax profits, to the extent that a tax shelter does produce net income for a given year and the taxpayer does not withdraw that income from the activity, that income represents tax profits which, if left in the activity, represent additional amounts at risk.
- Open Chapter
Chapter 8. Timing Issues Surrounding Capital 80 results (showing 5 best matches)
- Section 453A approximates this result in certain cases. Basically, section 453A requires sellers to pay interest each year (at the rate imposed on any tax underpayment) on their “deferred tax liability,” and that deferred tax liability is essentially the amount of tax they would have owed on the sale if it had been taxed in full in the year of sale.
- In the first year, then, the taxpayer has a deduction of $200,000, which will save her $80,000 in taxes (40% of $200,000), and she has income of $23,500, which will cost her $9,400 in tax (40% of $23,500). This leaves the taxpayer with a net tax of $70,600. In every subsequent year, she will owe tax of $9,400. Because under this method the taxpayer gets a tax refund in year one, she has more to invest early on in the investment period. Because she can earn a return (presumably 10%) on that investment, she will be significantly better off after-taxes than she would be under the accrual taxation method. As a result, allowing immediate deduction of the amount invested provides significant tax benefits (over and above any non-tax gains) to the taxpayer-investor.
- One might note the extent of this benefit by seeing that T could invest her $70,600 year-one tax savings in a separate annuity, the proceeds of which she could use to pay about 90% of all of the tax due in subsequent years. Indeed, consider the present value results if T could get her $80,000 tax refund at the of year one (when she makes the payment) and pay tax on her $23,500 receipt only at the of year one (when she actually receives the payment). In that case, as of the beginning of year one, T would have $80,000 cash (her tax refund) in addition to the annuity. Assuming the same 10% interest rate, T could invest that $80,000 in an annuity that would pay $9,400 per year each year for the next 20 years, beginning at the end of year one. T could then use those annuity payments to pay the $9,400 tax due on the $23,500 received each year. In other words, T could use her year one tax ...her taxes due in years 2–20. In still other words, T could keep all of the $23,500 cash...
- Although not quite as favorable as the expensing method described above, which provides the taxpayer with a tax refund in year one, this treatment is nonetheless quite favorable to the taxpayer. Rather than paying more tax earlier on and less tax later, as accrual taxation would require, and rather paying tax on $13,500 each year, as pro-rata return of capital would require, this allows her to defer any and all tax payments for almost eight years. T can therefore keep and invest her money, defer tax liability, and happily know that this investment provides clear tax benefits in addition to the 10% return on her investment.
- Interest is ordinary income (as opposed to capital gains) for the recipient and provides an ordinary deduction to the payer. The seller of property that might otherwise qualify for the reduced tax rates applicable to long-term capital gains often had an incentive to characterize transactions as ones which produced more long-term capital gain and less interest. To see how taxpayers attempted to convert interest income to capital gains, assume that T lends D $100,000, and in return, D promises to pay T $259,013 at the end of 10 years. Rather than hold the note for the 10 years and pay tax on the $159,013 interest earned, T might sell the note after nine years for $235,466. T would then claim that her gain of $135,466 on the sale of the note was long-term capital gain; after all, it was gain from the sale or exchange of investment property. By ensuring that interest is taxed as it accrues, the OID rules prevent T from claiming long-term capital gain treatment on the sale, because all...
- Open Chapter
Chapter 2. Gross Income 59 results (showing 5 best matches)
- If A and B are in the 35% marginal tax bracket, A’s $30,000 salary results in a $10,500 additional federal income tax liability. Hence, on an after-tax basis A and B loose $5,500 ($30,000 salary—$10,500 federal income tax liability-$25,000 salary paid to C) per year as a result of A working outside the home.
- Prior to the Tax Reform Act of 1984 taxpayers used interest-free and below-market loans in a variety of ways to reduce taxes. Such loans were used, for example, to shift income between family members. Loans between family members made to avoid the assignment of income rules and grantor trust rules generally involved a parent loaning money to a child, but without charging any interest. Income the child earned on the money would be taxed at the child’s lower rate, resulting in a lower overall tax liability for the family. the income to the child, the parent would have been taxed under the assignment of income doctrine. Likewise, if the parent had made a transfer to a trust for the child that had a term of less than ten years or that was revocable at will, the income would have been taxed to the parent.
- While the federal income tax system’s failure to tax imputed income from services one provides directly for herself seems reasonable, it can create some problems and resentment of taxes for certain taxpayers. For example, assume that A and B are a married couple. Further assume that B earns a substantial salary (which results in A and B being in the 35% marginal tax bracket), that A resides at home taking care of the house and garden and cooking meals for himself and B, and that A’s household services are worth $25,000 per year. Of course, A and B must pay taxes on B’s salary, but they are not taxed on the $25,000 value of A’s services because there has been no “realization event.” Neither A nor B would object to this result, nor would observers of their situation.
- The Sixteenth Amendment provides: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” Nowhere in the foregoing grant of taxing authority is Congress given the power to tax capital receipts. Of course, the pertinent question here is what are capital receipts? This question may be encountered in a number of areas of the tax law.
- Hurley, The Interest–Free Loan Is Free No More, 9 Rev. Tax’n Individuals 353 (1985); Hutton & Tucker, The Taxation of Below–Market and Interest–Free Family Loans: A Legislative and Judicial History, 19 Fam. L.Q. 297 (1985); Lieber, Interest–Free Loans, 23 Duq. L. Rev. 1019 (1985); Christopher T. Carlson, Personal and Business Planning: The Impact of a Low–Interest Loan, 44 N.Y.U. Inst. on Fed. Tax’n 35–1 (1986); Phillip J. Closius & Douglas K. Chapman, Below Market Loans: From Abuse to Misuse—A Sports Illustration, 37 Cas. W. Res. L. Rev. 484 (1986); Gregor S. Chvisuk, Taxation of Loans Having Below–Market Interest Rates, 21 Idaho L. Rev. 257 (1985); Mark D. Edwards, Interest–Free Loans Are Held To Be Gifts in Supreme Court’s Recent Dickman Decision, 60 J. Tax’n 266 (1984); Michael D. Hartigan, From Dean and Crown to the Tax Reform Act of 1984: Taxation of Interest–Free Loans, 60 Notre Dame L. Rev. 31, 53–57 (1984); S. Scott Massin & Charles R. McGuire, Death of a Loophole:...
- Open Chapter
Chapter 7. Taxation of Property Transactions 123 results (showing 5 best matches)
- Of course, from a wherewithal to pay perspective, absent a realization event, it is unlikely most taxpayers would have the funds available to pay any amount of tax due. Some tax experts respond to this assertion by pointing out the fact that most people with substantial appreciated investments also have substantial liquid assets that could be used to pay tax. These same tax experts also explain that if taxpayers holding appreciated assets do not have cash on hand to pay the tax, then at least if the assets are publicly traded securities it is easy enough to sell some of the securities to pay the tax. If the appreciation is in an illiquid asset such as real estate, the taxpayer can usually borrow against the property to pay the tax.
- Fortunately, though, the tax law provides another route to give T the proper basis in this and similar situations. The concept of “tax cost” or “tax paid” makes it clear that if a taxpayer receives property and includes that property in income on receipt, her basis in that property is the same as if she had received (and been taxed on) cash and used that cash to purchase the property. In other words, T’s basis in the above hypothetical would be the same as if T received cash of $17,000 and used that cash to purchase the car. Note, by the way, that despite the reference to a “tax cost” basis, the taxpayer’s basis is unrelated to the actual tax paid, but it is instead determined by the amount the taxpayer included in income upon receipt of the property.
- Under section 1015(d)(6) post–1976 gifts receive an increase in basis by an amount that bears the same ratio to the gift tax as the net appreciation in the value of the property when given bears to the total value of the property, with the net appreciation in value and the property’s total value being measured as of the date of the gift. However, that increase cannot exceed the gift tax actually paid. This treatment demonstrates Congress’ rationale that the gift tax is a cost of the property, but only to the extent of the tax allocable to appreciation while the property was in the hands of the donor.
- When T sells the land at the end of 40 years, he will be taxed on his $1,000,000 gain, and will be required to pay tax of $400,000. If T were taxed on his economic income (the increase in value of his land) at the end of year one (when his net worth increased) as opposed to year 40 (when there is a realization event), he would still owe the same tax of $400,000. The only difference between the two systems (realization versus taxation of economic income as it accrues) is in the timing of taxation.
- Taxing imputed income from a taxpayer’s use of her own property is not unheard of in tax systems of other countries. Moreover, some economists have suggested the availability of such income as a means of expanding the base of the U.S. income tax. Nevertheless there is no requirement to include such imputed income in gross income for federal income tax purposes. The failure to include such income is probably a self-imposed limitation of the government, perhaps based upon political or administrative, rather than upon legal
- Open Chapter
Table of Articles and Books Cited 152 results (showing 5 best matches)
- Kaplow, The Income Tax Versus the Consumption Tax and the Tax Treatment of Human Capital, 51 Tax L. Rev. 35 (1995)—
- Auster, Home–Office Tax Myths Discourage True Tax Savings, 64 Prac. Tax Strategies 283 (2000)—
- Rice, The Corporate Tax Gap: Evidence on Tax Compliance by Small Corporations, in Why People Pay Taxes 125 (Joel S. Slemrod ed., 1992)—
- Attiat & Ott, Simulation of Revenue and Tax Structure in Studies in Substantive Tax Reform 25 (Willis ed. 1969)—
- Auster, Allocation of Lump–Sum Purchase Price upon the Transfer of Business Assets After–Tax Reform, 65 Taxes 545 (1987)—
- Open Chapter
Chapter 11. Tax Issues Related to Litigation Recoveries and Settlements 39 results (showing 5 best matches)
- Similarly, the taxpayer who recovers damages in lieu of receiving tax-exempt interest owed to her will be treated as if she received that tax exempt interest, so that the damages will be excluded from tax.
- If a recovery relates to a capital asset, it is tax-free to the extent of the taxpayer’s basis, and thereafter any additional recovery is taxed at favorable capital gain rates. the extent the taxpayer received nothing in excess of his basis in the asset he has no economic gain and therefore should not be taxed.
- See e.g., “Shop Talk: Debunking The Crop–Share Analogy To Contingent Attorney’s Fee Arrangements,” 97 J. Tax’n 320 (Nov. 2002); “Shop Talk: Whipsaw On Lawsuit Settlements: The Courts Still Can’t Agree,” 93 J. Tax’n 188 (Sept. 2000); “Sixth Circuit Reverses Tax Court And Excludes Contingent Attorney’s Fees,” 99 J. Tax’n 259 (Nov. 2003).
- Moreover, the taxpayer who recovers lost profits for breach of contract is taxed on the damages just as she would have been taxed on the profits themselves had they been earned under the contract.
- While there are multiple causes to the inequity in this area of the tax law, the primary culprit is the alternative minimum tax (or AMT). As hard as it is to believe, there have even been cases where taxpayers have ended up out-of-pocket after ostensibly winning a lawsuit.
- Open Chapter
Chapter 12. Losses on Business or Investment Property 16 results (showing 5 best matches)
- E.g., clothes, food, housing, cars, and listed property. Anticipated or hoped for tax savings do not equate to a “profit” motive. As a result, the taxpayer who enters into a transaction for the primary purpose of avoiding taxes rather than for the primary purpose of making a before-tax profit (not taking into account tax savings) will not be allowed a deduction for any loss sustained in that transaction. See Chapter 14,
- If, though, the gain and loss would be subjected to different tax consequences, that balancing may not be so simple. For example, if T could have excluded the $250,000 gain that accrued while she lived in the home under section 121, but could have deducted, perhaps against ordinary income, the $250,000 loss that accrued to the property while it was being used for business, the cancellation of both the gain and the loss puts T in a tax situation substantially different from what she would have been in had she been taxed separately on both the gain and the loss.
- For tax purposes, the term “loss” is often also used to refer to the excess of deductions over income, whether it is for a certain period of time, with respect to a specific activity, or with respect to the disposition of certain kinds of property. Often, the references in the Code to various kinds of losses are there specifically in order to limit their deductibility.
- Not surprisingly, the taxpayer who uses an intermediary to sell property at a loss to a related party will be disallowed that loss, at least if the Service becomes aware of the entire transaction. The substance rather than the form of the transaction will govern the tax consequences, and if the substance is a sale to a related party, section 267 will apply regardless of the presence of an unrelated intermediary.
- (8) The financial status of the taxpayer. The fact that the taxpayer does not have substantial income or capital from sources other than the activity may indicate that an activity is engaged in for profit. Substantial income from sources other than the activity (particularly if the losses from the activity generate substantial tax benefits) may indicate that the activity is not engaged in for profit especially if there are personal or recreational elements involved.
- Open Chapter
Chapter 6. Assignment of Income 50 results (showing 5 best matches)
- The Service and courts have remained attached to the property-income distinction in large part because they understand that if T holds onto her bond that pays $10,000 per year interest, T ought to be taxed on the entire $10,000 received each year. The Service and the courts were concerned that if T’s transfer to S of the right to receive year three’s interest payment were treated as a gift of property with a value of $7,510 (and S ought to be taxed on income of only $2,490 when he collects the $10,000 in year three), then T would argue that when T retains the entire bond and collects $10,000 in year three T, like S, ought to be taxed on only $2,490. The only choices the Services and the judiciary saw were to either overtax S by taxing him on an amount in excess of his real “income” or under-taxing T on her income when T holds onto the bond and all its accompanying rights to payment.
- As noted in Chapter 1, the federal income tax system tax system bases the notion of income on realization and receipt. To put this in the context of assignment of income, if T works for X and earns the right to receive a payment of $100, T will be taxed on that payment even if she directs that it be made directly to a different person (D). If T’s motivation for directing the payment to D is something other than the detached disinterested generosity necessary to support gift treatment to D, T will be taxed under the principles of Old Colony Trust (T has received a benefit equal to the amount transferred to D). If T’s motivation for directing the transfer to D is donative, T will be taxed under the assignment of income doctrine. Either way, T is taxed on $100 of income that she in turn directs to D.
- Prior to the enactment of the Kiddie Tax, it was common practice for wealthy families to assign income producing assets to children to take advantage of the federal income tax system’s progressive nature (and the children’s lower marginal tax rates). Of course, the Service was not particularly pleased with these purported assignments of income; accordingly, Congress enacted the Kiddie Tax, which is now found in section 1(g).
- In a progressive rate tax system is one where the taxpayer pays a higher rate of tax as the tax base increases.
- This chapter concerns a deceptively simple question; who is the proper taxpayer? The inquiry into who must report income and who may take a deduction is frequently encountered in a variety of areas of tax law. It arises when a taxpayer attempts to transfer or shift income or a deduction to another taxpayer, often a family member. Since the result is usually a reduction of the collective tax liability, such transfers have been subjected to close scrutiny by the Service in an attempt to curb abuses. The tax law in this area is detailed and complex.
- Open Chapter
Chapter 13. Deferred Compensation 40 results (showing 5 best matches)
- Because of the tax-exempt status of the plan, an employer might be tempted to make contributions in excess of the deductible amount. Section 4972 imposes a 10% tax on excess contributions, unless they are returned within the taxable year to the employer. Under section 4973 a 6% tax is imposed on excess contributions to IRAs and section 403(b) annuities. Moreover, section 4979 imposes a 10% tax on excess contributions under cash or deferred arrangements and under employee contribution or employer matching contribution arrangements.
- In addition to any regular tax that may be imposed, section 72(t) imposes upon the recipient a 10% additional tax for early distributions. The additional tax does not apply to distributions made after the employee attains age 59½, dies, becomes disabled, or retires early after attaining age 55.
- If a plan retains an amount required to be distributed, section 4974 imposes a tax of 50% on the difference between the minimum required distribution and the actual distribution. The tax may be waived if the shortfall was due to reasonable error and steps are taken to remedy it.
- In addition to annuity plans there are tax-deferred annuities under section 403(b). These are available only to section 501(c)(3) charitable organizations, public schools, or state agencies. These employers may purchase annuities for their employees, and the employees are taxed as if covered under a qualified plan.
- The fifth example concerns a contract between an actor and a producer. Under the contract the parties agreed to share profits and losses from the production of a play. The contract required the producer to provide the financing and the actor to play the leading role and to direct the play. The contract also limited the payment of the actor’s share of the profits to 25% annually during the run of the play and payment of the balance on a deferred basis over the four years after the close of the play. The Service held that because the arrangement qualified as a joint venture, which is taxed as a partnership, the actor could not qualify as an employee. As a partner the actor could not defer income because a partner’s share of partnership profits is taxed at the close of the partnership’s tax year.
- Open Chapter
Chapter 9. Nonrecognition Provisions 27 results (showing 5 best matches)
- Taxpayers are generally not taxed on the increase in value of property they own until they sell or exchange that property. When a sale or exchange does occur, section 1001(c) provides that “except as otherwise provided … the entire amount of gain or loss … on the sale or exchange of property shall be recognized.” As used in the Code, “recognized” means nothing other than “taken into consideration for tax purposes.” Thus, when taxpayers sell or exchange property, that transaction may result in the imposition of substantial tax on gains which may have been accumulating for years. Congress has decided that there are a few occasions when taxpayers ought to be permitted to sell or exchange property without the imposition of taxation (or, at times, without the benefit of receiving a current tax deduction). These occasions are typically governed by the Code’s “nonrecognition” provisions.
- recognized under the Code, the intended result is that the Code should come as close as possible to simply ignoring the transaction for tax purposes. Nonrecognition treatment is intended to exempt gain (or loss) from tax, but, instead, it is intended only to defer that gain (or loss)—to leave the inherent gain or loss intact to be taxed on a later taxable sale or exchange. Nor is nonrecognition treatment intended to change the character of any gain or loss (or any other applicable tax attributes). Instead, nonrecognition provisions come as close as possible to simply tax attributes such as the taxpayer’s basis, holding period, depreciation and recapture that attached to the property sold or exchanged by the taxpayer in the nonrecognition exchange will attach themselves to the asset received in the exchange. This enables the taxpayer and the Service to simply pretend that the unrecognized exchange never happened.
- that gain to the extent of the cash received—$20,000. Since T must pay tax on $20,000 of his $80,000 realized gain, it would be inappropriate to require him to pay tax on the full $80,000 when he sells the new building. In order to ensure that T will not be taxed again on gain recognized currently, section 1031(d) provides that T’s basis in the property he receives shall be “increased in the amount of gain … recognized on such exchange.” In other words, to the extent T recognizes gain now, he increases his basis to avoid recognizing that gain a second time when he sells the new property.
- Congress has enacted relatively few nonrecognition provisions, and those that it has enacted apply only to situations that Congress has determined are particularly inappropriate occasions to impose the federal income tax. The most important examples not covered in this chapter are the formation of corporations, partnerships or LLCs. If Congress had not exempted the mere formation of business entities from tax, people would never form such entities, or at least might never transfer
- Section 1031 generally provides for nonrecognition when the taxpayer, although engaging in something that is an “exchange” and therefore results in the realization of gain under section 1001, does not sufficiently transformation her relationship with the asset to justify the imposition of tax. Hence, section 1031 grants nonrecognition of gain or loss when a taxpayer exchanges certain property for certain other property of a “like kind.”
- Open Chapter
Chapter 10. Capital Gains and Losses 72 results (showing 5 best matches)
- In a restoration, such as in Arrowsmith where the taxpayers were limited to a capital loss in the year of restoration, the benefits of section 1341 are available. Thus, the taxpayer could use the capital loss in the year of restoration or could elect to reduce his tax in the year of restoration to the extent of the tax attributable to the inclusion in income in the prior year.
- The election accorded the taxpayer under section 1341 in an Arrowsmith restoration provides for a computation that permits the use of the lesser of “such deduction” in the year of restoration under section 1341(a)(4), or a tax computed without the deduction but less the decrease in tax that would result solely from the exclusion of the restored item in the year of inclusion under section 1341(a)(5).
- The Tax Court agreed with the taxpayer and held that the gain was capital gain from the sale of a three-seventh’s (15 shares) property interest in livestock held for breeding purposes under section 1231(b)(3). Although the proceeds from the five lifetime agreements were not at issue, the Tax Court stated it would assume, without deciding, that such gain was ordinary income in order to present the Commissioner’s position in its strongest light. The Tax Court admitted that from an economic point of view there was no significant difference between what the syndicate members received and what the owners of the lifetime agreements received; both primarily had only the right to breed mares. However, the Tax Court held that retention of control did not require a finding that the shares sold yielded ordinary income and more important, that the sale of shares effected a significant change in risk bearing. Thus, the share owners, unlike the owners of the lifetime agreement, shared in the...taxes
- With respect to assignment of rights to receive royalties, if the assigned rights result from compensation for personal services the assignor (not the assignee) is taxed upon the receipt of future royalty payments. Even so, the Tax Court has found that an assignment of profits (rather than compensation for personal services) from license exploitation was properly taxable to the assignee.
- The adverse interests of the seller and the buyer regarding the allocation and the need for tax advice by both parties are apparent in negotiations for the sale of a going business. Perhaps if all such negotiations were conducted at arm’s length, and the parties were fully aware of the tax consequences, a recital that an amount was allocated to the covenant not to compete normally would be the end of the matter. However, as the Tax Court observed in Lazisky v. Commissioner,
- Open Chapter
Westlaw Appendix 8 results (showing 5 best matches)
- alternative minimum tax
- • U.S. Tax Court (Board of Tax Appeals) decisions
- One of the easiest ways to follow recent developments in taxation is to access the Westlaw Topical Highlights–Taxation database (WTH–TAX). The WTH–TAX database contains summaries of recent legal developments, including court decisions, legislation, and materials released by administrative agencies. When you access WTH–TAX, you automatically retrieve a list of documents added to the database in the last two weeks.
- The following chart lists selected Westlaw databases that contain information pertaining to federal taxation. For a complete list of federal tax databases, see the online Westlaw Directory or the printed
- Selected Federal Income Tax Law Databases on Westlaw
- Open Chapter
Table of Contents 31 results (showing 5 best matches)
Index 47 results (showing 5 best matches)
Summary of Contents 10 results (showing 5 best matches)
Chapter 4. Deductions 110 results (showing 5 best matches)
- The second step, the focus of this chapter, concerns determining the amount of allowable deductions. The amount left after all relevant deductions are taken is taxable income, the tax base; it is against this base that the applicable marginal tax rates are multiplied to arrive at an individual’s tax liability.
- The Code also allows individuals other deductions independent of their relationship to a trade or business or production of income activity; these deductions are available for interest, taxes, charitable contributions, and extraordinary medical expenses. It is convenient to also refer to these deductions as “personal,” even though corporations are also allowed to deduct interest, taxes, and charitable contributions.
- In lieu of listing personal deductions on the federal income tax return, an individual may take a standard deduction, and whether an individual lists personal deductions or uses the standard deduction, he is entitled to certain personal and dependency exemptions that are taken before arriving at taxable income, the base upon which the tax rates are applied.
- Under section 265(a)(2) interest paid on indebtedness incurred to purchase or carry obligations whose interest is tax exempt is not deductible. The principal target is state and local government bonds whose interest is excluded from income under section 103. The obvious purpose of section 265(a)(2) is to prevent taxpayers from obtaining a double tax advantage from borrowed funds. While section 265(a)(2) does not contain language concerning the taxpayer’s purpose, the legislative history of what is now section 265(a)(2) indicates that Congress intended the critical factor to be the purpose of obtaining a double tax advantage. The courts and the Service appear to be in agreement that the proper test is whether there is a business purpose for the borrowing, and section 265(a)(2) is to be invoked only when there is a “sufficiently direct relationship” between the debt incurred and the purchase or carrying of tax-exempt securities. The Service has indicated that there must be a showing...
- where the Tax Court allowed an investor to deduct for interest paid on a number of investments made at a time when he held tax exempt securities. These included the assumption of a loan to prevent the insolvency of a corporation engaged in cattle raising, an oil drilling venture, and the purchase of various properties. In allowing the taxpayer to deduct, the Tax Court relied upon Wisconsin Cheeseman and reasoned that the “loans were used to finance major, nonrecurring opportunities … and were not foreseeable when the tax-exempt securities were purchased.”
- Open Chapter
Preface 2 results
- with the intention that it serve as a capstone treatise for law students, practitioners, and the judiciary. Hereafter, this Hornbook will be updated from time to time, and new editions will be produced as significant changes in the tax law warrant.
- will serve as your trusted reference guide when researching federal income tax law.
- Open Chapter
Revised Table of Cases 355 results (showing 5 best matches)
- Aaron v. Commissioner, T.C. Memo. 2004-65 (U.S.Tax Ct.2004)—
- ABKCO Industries, Inc. v. Commissioner, 56 T.C. 1083 (U.S.Tax Ct.1971)—
- Adam v. Commissioner, 60 T.C. 996 (U.S.Tax Ct.1973)—
- Adkins v. Commissioner, 51 T.C. 957 (Tax Ct.1969)—
- Aizawa v. Commissioner, 99 T.C. No. 10, 99 T.C. 197 (U.S.Tax Ct.1992)—
- Open Chapter
Title Page 1 result
Table of Cases 355 results (showing 5 best matches)
- Aaron v. Commissioner, T.C. Memo. 2004-65 (U.S.Tax Ct.2004)—
- ABKCO Industries, Inc. v. Commissioner, 56 T.C. 1083 (U.S.Tax Ct.1972)—
- Adam v. Commissioner, 60 T.C. 996 (U.S.Tax Ct.1974)—
- Adkins v. Commissioner, 51 T.C. 957 (Tax Ct.1969)—
- Aizawa v. Commissioner, 99 T.C. 197 (U.S.Tax Ct.1992)—
- Open Chapter
Dedications 1 result
- I dedicate this book to: my wife, Stacy, and my parents, Charles and Patricia, who love and support me; the faculty at New York University School of Law who taught me so much about federal tax law; the University of San Francisco which employs me and fosters a culture of academic excellence; and the Society of Jesus which helps make the world a better place through its efforts to educate individuals in the Jesuit Catholic tradition and serve as a voice for those without one.
- Open Chapter
- Publication Date: February 1st, 2008
- ISBN: 9780314161338
- Subject: Taxation
- Series: Hornbooks
- Type: Hornbook Treatises
- Description: This treatise provides expert guidance to law students and practitioners alike on this increasingly complex area of the law. It provides up-to-date, comprehensive coverage of pertinent provisions of the Internal Revenue Code, relevant administrative guidance, and appropriate case law. Above all, it offers a unique blend of the theoretical and practical aspects of federal income taxation. The authors bring to life one of the most challenging areas of the law with their expert analysis. This treatise is a necessity for anyone hoping to gain a better understanding of federal income taxation.
