Federal Income Taxation of Individuals in a Nutshell
Authors:
McNulty, John K. / Lathrope, Daniel J.
Edition:
8th
Copyright Date:
2012
18 chapters
have results for Federal Income Taxation of Individuals in a Nutshell
Preface 7 results (showing 5 best matches)
- This book, now in its eighth edition, is designed to serve as an introduction to the U.S. law of Federal Income Taxation of individuals. It thus stands as a companion to McNulty and McCouch, “Federal Estate and Gift Taxation in a Nutshell” now in its seventh edition (2011). It is written for use by law students as a supplement to usual law school courses and materials, by foreign lawyers or scholars, and perhaps as a refresher (or an introduction) for members of the bar. It summarizes the law and inquires occasionally into the policy and purposes of, and alternatives to, existing legal rules. It does not attempt a thorough critical evaluation or an adequate history or justification of the law.
- Little or nothing is given to procedure, administration, compliance, forms or tax returns, taxation of foreign income, economics, deep policy analysis or tax reform, among other important aspects of the study of Federal Income Taxation that could not be included within the confines of this volume. Also, as the title indicates, the book limits itself to the taxation of individuals; it does not cover taxation of organizations such as corporations, partnerships, limited-liability companies or exempt organizations. Nor does it do much to cover the special taxation of individuals as they are involved in such organizations, though many of the general principles of individual income taxation apply in that context as well.
- We hope this short book will prove useful to introduce or to review the subject matter of Federal Income Taxation and to afford an overview of the subject matter. It cannot substitute for, it can only supplement, a thoroughgoing examination and analysis of the Code, Regulations, Cases and Rulings which are the sources of our income tax law, and which must be emphasized in the study of that law by law students in law school courses.
- The Federal Income Tax statute (the Internal Revenue Code §§ 1–1563 in particular) forms such a focus of the subject matter that a copy almost must be kept open by the side of this book. Frequent references are necessary inasmuch as the Code provisions could not be spelled out in full. Citations to statutes are to sections of the Internal Revenue Code as amended through early 2011. Such citations are usually made in the form “I.R.C. §§ ________”, to distinguish them from cross references to other sections of this book, generally cited as “§§ ________, .” Section numbers of the Internal Revenue Code, as cited, correspond to section numbers of Title 26, U.S.C. and Title 26 U.S.C.A. Treasury Income Tax Regulations are cited as “Regs. § 1.61–(a).” Such citations conform to sections of Title 26—Internal Revenue—of the Code of Federal Regulations. Internal Revenue Service Revenue Rulings are cited to volume and page of the Cumulative Bulletin, abbreviated “C.B.”
- The Federal Income Tax law is immensely complicated, sometimes subtle or obscure and often puzzling. Legislation during the years since the publication of the early editions of this book in the 1970s has accentuated all these characteristics. Nevertheless, a conceptual basis and structure, principles susceptible of logical and orderly analysis and presentation, can be discerned amidst the complications. It is the discovering and laying bare of that conceptual framework that forms the principal aim of this book. The extreme textual richness and the sweeping scope of the law and the problems with which it attempts to deal force this short book, even more than most such efforts, to serve as a bare beginning and a capsule review of the subject.
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Chapter II. What Is Income? 68 results (showing 5 best matches)
- If the meaning of “income” is taken to be a conception that stresses expenditure, consumption or net disposable command over resources, the result will be to “tilt” the income tax in the direction of a tax on consumption, with the resulting deferral benefits. If that conception is used as the model against which to compare the current U.S. income tax, an income tax that is not “tilted” in the direction of a consumption tax, that is to say a Haig–Simons accretion-type income tax, the present U.S. tax will be observed to produce higher taxation, by way of taxation sooner, on income that is used for savings or investment, compared to the consumption model tax. See Appendix B in this book for a detailed comparison of the tax burden on saved income under income and consumption taxation.
- A thoroughgoing examination of whether the main U.S. federal tax on individuals should be a consumption-type income tax rather than an accretion-type income tax may go beyond the usual scope of a basic income tax course. However, the possibility that income should be conceived in such a way as largely to comprehend consumption, or whether many allowances for savings should be installed in the income tax in order to “correctly” tax saved income or to discourage consumption, has directly to do with the attempts by courts, scholars and others to define “income.” Moreover, the objection to the so-called “overtaxation” of savings under an income tax that does not contain exemptions for savings is freighted with considerations important for an understanding of the income tax in general.
- In contrast to an accretion model, a “consumption model” of an income tax can be constructed and has been suggested as a better model for income tax purposes. It would tax income that is consumed and other consumption—such as from the withdrawal of savings—but would not tax income that was saved. Consumption would be taxed; savings would not be taxed. One approach would be to ask each taxpayer to report all of his or her consumption during the year, and to pay tax on it. Another approach would be to ask for a report of income (and, perhaps, net worth) and tax the taxpayer on all income less any increase in savings (out of the income), and to tax any reduction in savings that paid for current consumption. Putting aside consumption from prior savings, the income tax would apply to all income except the income that was saved (for future consumption). By taxing the expenditure of income rather than receipt, accrual or accretion of income, this proposed income tax would reduce the tax...
- Gross income is the starting point in determining the “base” of the federal income tax, i.e. that which is taxed. Section 61(a) defines “gross income” as all “income” from whatever source derived, which leads the inquiry to what is “income”? Also, the Sixteenth Amendment, on whose authority the federal income tax relies, speaks of a tax on “incomes.” Income, while apparently an obvious concept, turns out to be both subtle and complex at times.
- If a purported item of income is not gross income under § 61(a), it cannot give rise to taxable income or tax liability under the Federal Income Tax. Congress could, however, later change the definition of “gross income” to include such an item. However, if an item is not “income” within the meaning of the Sixteenth Amendment, it cannot be taxed under the income tax no matter what Congress may try to do. So, the holding in ) seemingly put such items beyond the reach of Congress to tax, unless Congress were to comply with both Article I, Section 9, Clause 4 of the U.S. Constitution by taxing in proportion to population and with Article I, Section 2, Clause 3 by apportioning direct taxes among the several states according to their respective numbers.
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Chapter I. Introduction 81 results (showing 5 best matches)
- The Federal Income Tax employs a graduated rate structure, with several brackets. This graduated rate structure means that as a taxpayer’s taxable income rises, the rate of tax on the amounts of income is increased. I.R.C. § 1 contains the full rate schedules for married individuals filing joint returns, heads of households, unmarried individuals, and married individuals filing separate returns. See I.R.C. § 1(i) for rate reductions after 2000. The rates in I.R.C. § 1 are indexed each year for inflation. I.R.C. § 1(f). For example, in 2011 the rates applicable to unmarried individuals are:
- The Federal Income Tax serves a number of purposes. Of course, it is first viewed as a revenue collector, the largest in the Federal budget. In 2010, for example, it is estimated that the Federal government received total “income” of $2.1 trillion. Of the 2010, receipts, $898.5 billion (42%) were taken from the private sector of the economy, for disposition by the public sector, by the Federal Income Tax on individuals, compared to $858 billion in 2002. Another $191 billion (9%) were raised in 2010 by the Federal Income Tax on corporations, compared to $148 billion in 2002. Social security and other insurance and retirement contributions raised $865 billion (40%). Excise taxes raised $67 billion (3%). The remaining $140 billion of receipts (6.5%) in 2010 came from customs duties, estate and gift taxes, Federal Reserve deposits, and other miscellaneous receipts. Since 2010 federal spending is estimated to have been $3.6 trillion, the Government was left with a deficit of $1.5...
- The taxation of corporations as separate entities and the failure of any systematic plan to integrate the corporate and individual taxes have created a number of problems and complications. For example, corporate profits are subject to “double taxation”—the corporation must pay income tax on its profits, and its shareholders must also pay tax when these profits are distributed to them as dividends. At various times, slight relief has been afforded in the form of an exclusion for small amounts of dividends received. Under I.R.C. § 116, repealed in 1986, the amount excluded was $100. At one time, a 4% shareholder credit was allowed. Currently, most types of corporate dividends received by individuals are taxed at a maximum rate of 15%, a lower rate that provides some relief from the pure double tax. See § 106,
- In general, every individual who has gross income in excess of the applicable standard deduction plus personal exemption of $2,000 per taxpayer (indexed for inflation) must file an annual tax return (form 1040) in which he or she makes a self-assessment of income tax. In addition, an individual may also be subject to the alternative minimum tax. See § 108,
- As the foregoing examples demonstrate, the value of money depends on when it is received—hence, the term “time value of money.” Taxpayers usually have a strong incentive to accelerate income and to defer taxation. This incentive will become particularly apparent with the Individual Retirement Account (I.R.A.), which operates similarly to option 2 in the preceding paragraph and is discussed in § 74, Appendix A in this book.
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Title Page 4 results
Chapter VII. Annual Accounting: When Is Income Taxable? 145 results (showing 5 best matches)
- The requirement of a realization, considered earlier in Chapter II (§ 19, .) is even more a rule bearing on something is income. In Eisner v. Macomber, the receipt of a stock dividend was held not to be income.
- The self-employed or employee taxpayer may follow another route to provide himself or herself with funds upon retirement—he may set up an individual retirement account (I.R.A.) or an individual retirement annuity, or he may invest in retirement bonds. These were among the more important changes for individuals (whether self-employed or not) made by ERISA. I.R.C. § 219 and § 408. An individual who is not covered by an employer-maintained retirement plan may deduct contributions to an individual retirement account (I.R.A.) in an amount up to the lesser of 100% of compensation includable in gross income or $5,000 (in 2011). Contribution limits are adjusted for inflation. I.R.C. § 219(b). A taxpayer who has attained the age of 50 may make an additional contribution of $1,000 (in 2011). ...5)(B). Other individuals who are participants in employer plans can make contributions to an I.R.A. within certain limits as well, but they may deduct all, part, or none of the contribution depending...
- One advantage to a taxpayer in setting up such an I.R.A. account, rather than a Keogh plan, is that the individual need not meet any of the requirements relating to the vesting of benefits, minimum funding, or participation of employees, which must be met to defer taxation and to allow the deductions for Keogh plans.
- Section 453 states that a seller (who fits the description given in that section) shall return as income that proportion of each installment payment actually received each year that the gross profit, realized or to be realized when payment is completed, bears to the total contract price. To illustrate, suppose that a car is sold for a price of $10,000, to be paid in the amounts of $2,500 per year, for four years, plus interest, without any down payment. If the auto seller’s basis in the property is $8,000, the gain eventually to be realized will be $2,000. If the installment method applies to a seller in this situation, four fifths of each annual payment of principal, or $2,000, will be considered to be return of capital and one fifth ($500) will be reported as income. The result is that all the gain does not have to be reported in the year of sale, either by an accrual-method taxpayer or by a cash-method taxpayer, when the installment sale method rules apply. Consequently tax need...
- Section 83 is the provision that generally offers statutory guidance to the taxation of such plans. Section 83 applies whenever (including stock of the employer corporation or of any other corporation, but not I.S.O.s) is transferred to in connection with the performance of services by the recipient Regs. § 1.83–3(c). Under § 83, when the recipient’s rights in the property first become transferable or are not subject to a substantial risk of forfeiture, must recognize income immediately. Thus income will be reportable in the year in which the rights of the person having the beneficial interest in the property are either transferable or no longer are subject to a substantial risk of forfeiture (with a few exceptions)—but the income will be taxed to the person who rendered the services, whether or not he is the actual recipient of the property.
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Chapter VI. Personal Deductions and Other Allowances 107 results (showing 5 best matches)
- Personal deductions will affect the taxpayer’s taxable income only if, and to the extent that, they exceed the taxpayer’s standard deduction. This result occurs because the taxpayer can elect either to itemize personal deductions or to take the standard deduction. I.R.C. § 63. (Credits against tax can be taken in any event, of course.) In 2011, the standard deduction exempts from taxation $5,800 on a tax return of a single individual, $11,600 for a married couple filing a joint return, and $5,800 for a married individual filing separately.
- Section 32 provides a refundable “earned income credit” to certain lower-income taxpayers who are “eligible individuals.” “Eligible individuals” under § 32 include any individual who has a “qualifying child”—as defined in § 32(c)(3)—and any individual who does not have a qualifying child, if (1) the individual’s principal place of abode is in the United States for more than one-half of the taxable year, (2) the individual has attained age 25 but not age 65 by the close of the taxable year, and (3) the individual is not a dependent for whom a deduction is allowable under § 151 to another taxpayer during the same taxable year. Married persons must file a joint return in order to be eligible for the credit.
- Section 24 provides a child-tax credit of $1,000 for each child under the age of 17 who is a dependent of the taxpayer. The total credit allowed to a taxpayer is phased out at a rate of $50 for each $1,000 by which the taxpayer’s modified adjusted gross income (defined in § 24(b)(1)) exceeds the threshold amount. The threshold amount is $75,000 for an unmarried individual, $110,000 for a joint return, and $55,000 for a married individual filing separately. Thus, the $1,000 credit for a married couple filing jointly would be phased out for income levels between $110,000 and $130,000.
- Congress also has blocked taxpayers from claiming the earned-income credit if their aggregate amount of “disqualified income” exceeds $2,200 (adjusted for inflation to §3,150 in 2011). “Disqualified income” includes the sum of interest (taxable and tax-exempt), dividends, net rent and royalty income (if greater than zero), capital-gain net income, and net passive income (as defined in § 469), if greater than zero, that is not self-employment income. I.R.C. § 32(i). Congress believed that individuals with substantial assets could use proceeds from the sale of those assets in place of the earned-income credit to support consumption in times of low income.
- The amount of the § 32 earned-income credit varies depending on the taxpayer’s income and on whether the taxpayer has one qualifying child, two or more qualifying children, or no qualifying children. For 2011, a taxpayer with one qualifying child is eligible for a credit equal to 34 percent of the first $9,100 of earned income (a maximum of $3,094). As the taxpayer’s adjusted gross income (or, if greater, earned income) exceeds $16,690, the “phaseout amount,” the credit is gradually phased out. At income levels of $36,052 and above, the credit is reduced to zero. A taxpayer with two qualifying children will receive a credit equal to 40 percent of the first $12,780 of earned income (a maximum of $5,112). The credit is phased out as modified adjusted gross income exceeds $16,690, until it is completely gone for income levels of $40,964 and above. A taxpayer with no qualifying children will receive a credit equal to 7.65% of the first $6,070 of income (a maximum of $464). Phaseout...
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Chapter IX. How Is Income Taxable? 147 results (showing 5 best matches)
- The minimum tax is based on the philosophy that a taxpayer who receives significant amounts of economic income should not be able to avoid all—or “too much”—tax liability through applicable exclusions, deductions and other allowances. Congress and the public were moved to act in part by the revelation that some very high income individuals paid no federal income tax at all because of allowances, preferences or “loopholes”—tax-favored income or special deductions. Everyone, it was thought, should have to pay some significant amount of tax on his or her economic income.
- Throughout most of the history of income taxation in the U.S., a distinction has been drawn between the rate of taxation on “ordinary income” (or ordinary loss) and “capital gain” (or capital loss). “Capital gain” refers to the income from certain transactions in some assets, called capital assets, or from other transactions that Congress has said should be taxed as capital gain. Similarly, capital losses are losses sustained on capital assets or other losses that Congress has decided to treat as if they were capital losses. The most common form of capital gain or loss transaction is a sale for cash of an asset, such as a share of stock or a parcel of land.
- Although Congress repealed the preferential treatment for long-term gain in the 1986 Act, it retained most of the pre-existing provisions for capital gains and losses. In 1990, these provisions became relevant again when Congress increased the maximum rate for ordinary income to 31% but capped the rate for capital gains at 28%. As of 2011, the maximum rate for most capital gains is 15 percent, while ordinary income can be taxed at a rate as high as 35%. I.R.C. § 1(a) & (h). The taxation of capital gains has also become much more complex. in § 95. Thus, because the Code still differentiates between capital gain and ordinary income, a particular taxpayer’s gain must be characterized as either capital gain or ordinary income. Both the taxpayer and the I.R.S. will care if the taxpayer is eligible for a lower rate of tax on capital gain. This characterization also is relevant because otherwise-deductible capital losses (of taxpayers other than corporations) continue to be allowed to
- Corporate income paid out to shareholders as dividends is subjected to two taxes. First, the corporation must pay tax on its taxable income under the rates in § 11. When the corporation’s net profits are paid out to its shareholders as dividends, the shareholders must include the dividends in taxable income and pay a second tax. In contrast, if a corporation borrows capital, the interest it pays on the borrowed funds will be deductible and reduce its taxable income. The tax distinction between corporate equity (double tax) and corporate debt (one tax paid by the recipient of the interest) has long been a feature of corporate taxation in the United States. However, income earned by partnerships and other pass-through entities ( , Subchapter S corporations) is taxed directly to the investors and therefore is subject to only one level of tax.
- Purely by way of comparison, Federal Income Tax on corporations as of 2011 is levied at the rate of 15% on the first $50,000 of corporate income, 25% on income over $50,000 but not over $75,000, 34% on corporate income above $75,000 but not over $10,000,000, and 35% on amounts over $10,000,000. Section 11(b) also provides for surcharges on high-income corporations (with a special surtax of 5% on income over $100,000, but only up to a surtax amount of $11,750 and a second surtax of 3% on income over $15 million, but only up to a surtax amount of $100,000). Since distributions of corporate income after tax, as dividends, are not deductible by the corporation and constitute income to the shareholders, corporate earnings have two toll gates to cross before ending up in the hands of human beings, unlike earnings of a proprietorship or partnership. However, dividends are taxed at a maximum rate of 15% under § 1(h)(11).
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Chapter V. Mixed (Personal and Profit Seeking) Deductions and Other Allowances 104 results (showing 5 best matches)
- To sum up the differences between individual and business taxpayers: the business taxpayer starts with gross sales or gross receipts and subtracts the cost of goods sold (beginning inventory plus additions to inventory minus closing inventory) to determine gross income. All available deductions must then be taken from gross income to derive taxable income. An individual, in contrast, must determine adjusted gross income as a step between gross income and taxable income. Adjusted gross income is gross income less the deductions outlined in I.R.C. § 62—trade or business and other cost-of-producing-income deductions and some others. From adjusted gross income, the individual taxpayer subtracts his or her allowable itemized deductions, if the amount allowed exceeds the standard deduction, and personal exemptions to determine taxable income. Again, the so-called “miscellaneous itemized deductions” are allowed only to the extent they exceed 2% of A.G.I. Since higher A.G.I. reduces the...
- Several reasons may be suggested for the I.R.C. § 164 deduction for taxes. First, constitutional shadows having to do with federalism may have fallen over suggestions that such taxes did not have to be allowed as deductions, as in the days when government salaries were exempted from tax for constitutional reasons. Secondly, many taxes amount to costs of producing income, such as when a business taxpayer pays real estate and sales taxes. Thirdly, and more importantly, the Federal deduction for payment of state taxes clearly assists states in raising revenue—at the expense of the federal treasury—by reducing the after-Federal-tax cost of paying deductible state income taxes. Fourthly, especially back in the days when Federal income tax rates went into the 90–percent range, state income taxes could possibly have extended the combined federal-state income tax rate over 100% were it not for the deduction. And, lastly, payment of state taxes does reduce the taxpayer’s “ability to pay” the
- The strange result produced by the Federal Income Tax allowance for a casualty loss in the form of a deduction is somewhat counteracted by the rule limiting the deduction to the excess of 10–percent of adjusted gross income (after reduction for the $100 floor on each loss). Since the benefit of a deduction is income-variant under a progressive tax rate system, greater relief is afforded to high income taxpayers than to lower ones—who, arguably, need it the most. For a 28% bracket taxpayer, the government is a co-insurer to the extent of 28% of the casualty loss. For a 15% bracket taxpayer, the government insures only a smaller portion (15%) of the loss. Yet in both instances the deduction form allows the taxpayer to replenish the loss of capital out of current income, tax-free. That simply relieves the first taxpayer of the higher tax burden the law would have placed on that income if no loss had been suffered. So the income-variant effect of the deduction merely is produced as a...
- The deduction for interest on gain-seeking borrowing treats that interest as a cost of generating income. Interest on business borrowing no doubt is deductible so that if an individual or corporation borrows to engage in purposive, (hopefully) profitable activity, he or it shall not fare worse from an income tax standpoint than one who finances the venture with capital that otherwise would have been yielding income (and which income he therefore foregoes). The interest-paying borrower may be compared to the renter of assets and both contrasted with the owner of assets whose imputed income is excluded from the owner’s tax base.
- The I.R.S. has frequently used the economic substance doctrine to challenge the tax results of corporate transactions. Congress has codified the economic substance doctrine in an effort to bring some uniformity to the standards that are to be applied. Section 7701( ) provides that in the case of any transaction to which the economic substance doctrine is relevant, a transaction must satisfy two requirements: (1) the transaction must change in a meaningful way the taxpayer’s economic position, and (2) the taxpayer must have a substantial purpose for entering into the transaction. The Federal income tax effects of the transaction are disregarded under both prongs of the test. I.R.C. § 7701( )(1). If the profit potential of the transaction is used to satisfy the tests, the present value of the reasonably expected pre-tax profit from the transaction must be substantial in relation to the present value of the expected net tax benefits that would be allowed if the transaction were respected...
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Chapter VIII. To Whom Is Income Taxable? 120 results (showing 5 best matches)
- The U.S. Federal income taxation of trusts and estates is a large and sometimes immensely complicated subject. For present purposes, it must be reduced to an outline of simple principles.
- The fact that the individual is the taxable unit combines with the annual reporting system and the graduated rate scale to motivate some taxpayers to try to have their income taxed to someone else. Their aim is to reduce the total federal income tax on the same amount of income by splitting the income between two returns, shifting part of the income from the higher marginal brackets of one taxpayer to the lower marginal brackets, or exempt brackets, that apply to another individual under the graduated rate system, or to utilize otherwise wasted deductions, exemptions, credits, carryovers, or other allowances.
- In conclusion, the complex trust rules have been shaped by their purposes, which are to block attempts by high-income-tax-bracket taxpayers to shift their tax burden to low-tax-bracket trusts and to prevent such taxpayers and trusts from shifting the tax burden from high-tax-rate years to lower-rate years by delaying distributions of income or invading corpus rather than by distributing income. At the same time, the complex trust rules have sought to preserve the distinction between capital (property) and taxable income along the lines of the gift exclusion in I.R.C. § 102. Likewise, the complex trust rules have sought to avoid imposing a “double tax” on trust income—once to the trust and again to the beneficiary—and thus to preserve the “conduit” conception of a trust. To accomplish these ends, doctrines such as the throwback rule, which stands in the way of a trust distributing income every other year and thus splitting the taxation of ...income between the trust and beneficiary,...
- In general, if two parents are actively rendering services in a business, perhaps a partnership between the two of them, and if capital owned by the parents is also devoted to the production of income in the business, all the income from the business will be taxed to the partners, whether or not distributed, when earned. This is the general rule of partnership taxation; partnerships, unlike corporations, are not treated as separate taxable entities. Nonetheless, the partnership may employ persons, even the partners themselves, and pay salaries to them with a deduction from partnership gross income for the salary expenses. Such salaries are then taxable to the employees, of course. If the two equal partners are also equal employees, all the net profits of the business will be taxable to them, either in their capacity as partners or as employees. If they undercompensate themselves as employees, partnership income will grow and be taxable to them as partners and vice versa.
- The statute requires a trust to include in its income any income it receives, whether that income is to be paid out currently to a beneficiary, accumulated for later distribution, or either (at the discretion of the trustee or some other person). Much the same deductions may be taken as are allowed to an individual taxpayer. Special provisions substitute for the usual personal exemption, and the standard deduction may not be taken, so deductions must be itemized. In the case of an estate, some deductions may be taken either on the estate’s income tax return or as deductions against the estate tax. I.R.C. § 642(g). As will be seen later, estates and trusts are allowed an additional deduction for amounts they distribute to their beneficiaries, up to the distributable net income of the trust—which is more or less equal to the trust’s taxable income. Thus the trust, and the estate in most instances, will prove to be a rather transparent taxpayer, a conduit through which income passes with
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Chapter III. Statutory Inclusion and Exclusion From Gross Income 129 results (showing 5 best matches)
- An important and different set of rules, resembling rules of inclusion in gross income, lie in the Alternative Minimum Tax system found in I.R.C. §§ 55–59. Section 57 defines “items of tax preference,” items which are treated as income and subjected to a special tax, under § 55. ( , Ch. IX.) To be sure, not all the items to be included as tax preference income are described in terms of receipts or additions to net worth. Some tax preference items are receipts that escape taxation under the normal definition of taxable income because of exclusions or deductions. As to them, § 57 acts like a usual inclusion rule. Some tax preference items or adjustments, however, are defined in terms of expenditures, or costs, or are related to special deduction allowances. But they too increase income as if by a new rule of inclusion. See I.R.C. §§ 56, 58.
- Why are gifts excluded from gross income? Several effects and possible purposes of § 102 suggest themselves. Perhaps Congress was in doubt whether gifts are income, as the term is used in the Sixteenth Amendment or in common understanding. Perhaps Congress merely wanted to keep the income tax auditor away from the Christmas tree and birthday cake—to relieve intra-family, affectionate gifts from any tax cost or tax compliance flavor. Perhaps Congress wanted to encourage, or at least not to discourage, gifts and the redistribution of wealth they often entail; usually the richer give to the poorer, rather than vice versa. More simply, Congress may have concluded that a reallocation of wealth by gift is not an appropriate occasion to impose an income tax. Still other reasons occur to justify or explain § 102. It may be hard for a donee to pay an income tax on a gift, especially when the gift is in kind, not in cash. Also, another federal tax, the gift tax, is imposed on the donor of...
- Before 1997 the tax treatment of recoveries of damage for personal injuries was also an issue. Before 1996, § 104(a)(2) required inclusion in gross income of punitive damages from personal injuries escaped taxation under the § 104(a)(2) exclusion for “any” damages. The Supreme Court eventually resolved the issue by agreeing with the I.R.S. that such punitive damages were gross income under the pre–1997 version of § 104(a)(2). O’Gilvie v. United States, 519 U.S. 79 (1996).
- Another receipt excluded from income by statute is interest payments made to the holder of state and local government obligations (bonds) other than arbitrage bonds or certain private activity bonds. I.R.C. § 103(a). (In contrast, interest paid on most Federal Government obligations is fully taxable.) Grounded historically in notions of federalism, the independent sovereignty of the states, and in doubts about the constitutional power of the Federal Government to tax such interest (the doctrine of intergovernmental immunity), the § 103 exclusion serves now to provide a substantial subsidy from the Federal Government to states and municipalities. Their costs of government, and hence their taxes, are lower because they can borrow funds at lower interest rates. Lenders will accept such rates because the interest is tax free to them, by virtue of the § 103 exclusion, and hence yields an equal or higher after-tax rate of return than private bonds paying a higher (pre-tax) interest rate....
- Section 57 specifies tax preference items to be added back to recompute the taxable income for individual taxpayers. These tax preference items include: some depletion allowances, part of § 1202 excludable gains, and certain tax-exempt interest. Once the figure for alternative minimum taxable income is found, a fixed rate of 26% (28% for amounts over $175,000) for individual taxpayers (20% for corporations) is applied to so much of the taxpayer’s A.M.T.I. for the taxable year as exceeds the exemption amount, to compute tentative minimum tax. The taxpayer’s alternative minimum tax is the excess of tentative minimum tax over regular tax for the year. I.R.C. § 55(a). The taxpayer’s total tax for the year is the regular tax plus the alternative minimum tax. The exemption amount depends on the taxpayer’s filing status. For example, in 2011 it is $48,450 for a single taxpayer and $74,450 in the case of a married couple filing a joint return. I.R.C. § 55(d)(1). If the A.M.T.I. exceeds a...
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Chapter IV. What Is Deductible: Profit–Related Deductions and Other Allowances 152 results (showing 5 best matches)
- I.R.C. § 212 allows, in the case of an individual, a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in three ranges of activity: (1) expenses for the production or collection of income; (2) expenses for the management, conservation, or maintenance of property held for the production of income; or (3) expenses in the determination, collection, or refund of any tax. Section 212 applies only to individuals. Corporations and other business entities are regarded as falling within the trade or business category of I.R.C. § 162 in all their profit-oriented activities, at least as a general matter.
- The lines between a taxpayer’s trade or business and (a) his personal life and (b) his other income-seeking or income-producing life carry important tax consequences for the deduction of expenses, losses and bad debts, the taxation of capital and quasi-capital gains, and more. For present purposes, the lines are drawn mainly to determine the scope of § 162 and § 212 gain-seeking activities. To illustrate this point, a person who actively practices law and also owns an apartment house or office building (managed by another firm for a fee) probably would be deemed to have a § 162 trade or business in law and § 212 investment property in the form of the building. But if the lawyer discharges the management firm and spends a lot of time and energy in seeking tenants, managing and maintaining the premises, collecting rents, etc., she or he may then be deemed also to be actively engaged in the trade or business of rental property, not just investing in it. This crossing over a line may or...
- In our income tax, “costs of goods sold” are deducted from “gross receipts” to determine “gross income.” Regs. § 1.61–3(a). Other costs, expenses, and losses that serve to reduce a taxpayer’s net gain from profit-oriented (or profit-producing) activities are to be deducted from gross income (or from adjusted gross income in a few instances) to work toward adjusted gross income or “net income” (a term not actually used in the Internal Revenue Code) and eventually to “taxable income.” Such expenses, deductible as costs of producing income, include wages to employees, rent for business premises, advertising expenses, property or license taxes, postage, and all the other expenses of doing business or otherwise earning income.
- , like depreciation, bases the allowance on historic cost of the income-producing property. I.R.C. § 612. (Discovery value at one time was used as the measure of tax-free recovery.) If taxpayer buys rights to extract a pool of oil from the ground for $1,000,000, he should be allowed to recover his capital tax-free when he extracts and sells the oil. That is, the receipts from the depletable property should be regarded as containing a return of taxpayer’s capital investment. A proportionate part of receipts each year should be received free of taxation as income. Treating the oil as a “wasting asset,” cost depletion would allow annual deductions designed to permit him to receive $1,000,000 tax-free over the life of his pumping operations. To do so, the law allows taxpayer to divide his investment by the (estimated) number of recoverable units in the mineral or other deposit. This cost per unit is then multiplied by the number of units sold each year, and the result is the depletion...
- When a taxpayer uses income-producing assets such as machines, trucks, tools, a building or other property in business or gain-seeking activity, some of gross income is considered to be a return of capital. That is true because the machines, for example, have a limited useful life—they are wearing out and growing obsolete while generating income. (Land, in contrast, is thought to have an unlimited useful life.) The capital investment that the taxpayer made when he bought the machines is being used up to produce a flow of receipts and gross income. In effect, taxpayer is gradually selling those of his assets that have a limited useful life. Thus, part of his gross income should be seen as a return of his capital expenditure and investments, not as profit or “net income.” Accordingly, the tax law (as well as financial accounting) has developed rules to separate the return of capital amounts from income. Additional rules have evolved to protect against abuses of the basic allowance or...
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Appendix B. Income vs. Consumption Taxation—The Tax Burden on Saved Income 10 results (showing 5 best matches)
- Comparison of tax burdens on income saved at a 10% pretax rate of return for future consumption in worlds having: (1) No tax; (2) A 33% retail sales tax; (3) A 33% cash-flow or consumption-type income tax; (4) A 33% yield-exemption consumption tax; (5) An accretion-model income tax as in the United States in 2011, but at a 33 1/3% tax rate.
- Now look at Row 5. An accretion-type income tax at 33% will apply to the $100 when it is earned and will also apply to the taxable yield on funds that are saved, that yield interest, dividends, rents, royalties, and so forth, which constitute additional income taxable under such a plan. So the income earner in Row 5 can consume only $67 upon earning the before-tax $100; or he or she can save the $67, have his yield in effect reduced by about one-third each year by the 33% income tax, and then can spend the balance, $128.15, tax-free, upon withdrawal of the funds after Year 10. But now, the ratio between the nominal value of later consumption and earlier consumption has changed. The ratio now is $128.15: $67.33 or about 191.27%, not the 259.37% ratio found under the first four regimes! This illustrates the effect on the saving versus consumption choice that is introduced into an otherwise similar world by an accretion-type income tax (assuming no special saving allowances) as... ...a...a
- Note that all five horizontal lines (rows) presuppose an income earner of $100 who lives in a fixed 10% pre-tax rate-of-return world, and lines 2–5 add some kind of tax at a 33% rate into that world. In each world, the $100 income earner faces a choice between (a) immediately consuming everything he or she has earned (after taxes, if any) in the first year that $100 is earned, or (b) postponing consumption and saving whatever he can for ten years, after which he will consume all saved amounts and the yield left over after payment of applicable taxes.
- In Row 1, a world without any tax, the income earner can either consume $100 at once or save all of it and have $259.37 left at the end of ten years. Assuming no price changes, the income earner can weigh the value to him of consuming all the $100 now or having the ability to consume 259.37% of that amount after 10 years. The taxpayer’s saving funds his future consumption.
- In Row 3, a cash-flow or consumption-type income tax at 33% allows a deduction for amounts saved. Thus, the $100 of income earned and received will not be taxable until Year 10, when it and The ratio between future and present consumption remains 259.37%, and the Year 10 consumption power would again be 173.78% of the Year 1 income.
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Outline 41 results (showing 5 best matches)
- Appendix B. Income vs. Consumption Taxation—The Tax Burden on Saved Income
- 84. Income in Respect of a Decedent
- 81. Gifts of Property; Gifts of Income From Property; Gifts of Personal Service Income
- Appendix A. Time–Value of Money, Deferral, Compound Interest and Individual Retirement Accounts
- 13. Income and Gross Income
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Appendix A. Time–Value of Money, Deferral, Compound Interest and Individual Retirement Accounts 5 results
- To see how money invested at a positive rate of return can increase very greatly and how early saving in a person’s lifetime can be especially beneficial, particularly so if it’s tax preferred, consider these two individuals. One of them, Alice, opens an I.R.A. at age 22 and begins contributing $2,000 to it each year. For illustrative purposes, suppose the account earns 12% per year in interest. Her contribution each year is deductible, and the interest earned in the account is not included in her income. She contributes for six years and then stops; she never contributes another penny, but instead just lets the account remain—earning 12% interest each year until she reaches age 65, when the balance will be the amount shown.
- TIME VALUE OF MONEY—COMPOUND INTEREST AT 12%, TAX–FREE IN AN I.R.A.
- Look how much each person has accumulated. Even assuming the withdrawal by each will be taxed, suppose at 40%, look how much each will have left for retirement. The amounts would be less if the rate of interest credited were lower or if the account were not tax-favored and some of each year’s interest had to be withdrawn to pay tax on the total amount of interest credited. But the principle remains the same, and the increase in the balance in the account in each case is impressive.
- The second person, Barclay, doesn’t start saving until later. He opens his account at age 28, just when Alice stops contributing. Barclay then has to contribute $2,000 each year for almost the rest of his working life to match the fund (of as-yet untaxed dollars) in Alice’s account. At age 60, Barclay’s account will for the first time equal Alice’s.
- APPENDIX A
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Index 220 results (showing 5 best matches)
Advisory Board 11 results (showing 5 best matches)
- Professor of Law, University of San Diego Professor of Law Emeritus, University of Michigan
- Professor of Law, Chancellor and Dean Emeritus, University of California, Hastings College of the Law
- Professor of Law, Pepperdine University Professor of Law Emeritus, University of California, Los Angeles
- Professor of Law and Dean Emeritus, University of California, Berkeley
- Professor of Law, Michael E. Moritz College of Law,
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- Publication Date: November 14th, 2011
- ISBN: 9780314927002
- Subject: Taxation
- Series: Nutshells
- Type: Overviews
- Description: How and when is income taxable? To whom is it taxable? This Nutshell summarizes U.S. federal income tax law, defines income, and identifies the different types of deductions. It explains statutory inclusion and exclusion from gross income, profit-related deductions, mixed deductions, personal deductions, and other allowances. It also inquires into the policy and purposes of, and alternatives to, existing legal rules.
