Chapter 1
Power to Tax
Article 1, Section 8, Clause 1
Very extensive power with two constitutional limitations:
- Direct taxes must be imposed by the rule of apportionment among the several states in accordance with their respective populations
- Indirect taxes by the rule of uniformity – geographic
16th Amendment
– “from whatever source derived”
Courts
Tax Court – no jury
District Court of Appeals – jury or non-jury; must pay a fee
– You can start in either court. Consider precedent/jury/fee
Statute of Limitations
- 3 years is normal
- 6 years if you omit 25% of your gross income
- Infinity if fraud or no file
Gross Income
Section 61
Gross income includes the receipt of any financial benefit which is:
- Not a mere return of capital, and
- Not accompanied by a contemporaneously acknowledged obligation to repay, and
- Not excluded by a specific statutory provision
Income is realized whenever there are “instances of:
- undeniable accessions to wealth,
- clearly realized, and
- over which the taxpayers have complete dominion.”
Cases:
Cesarini v. United States
Money found in an used piano; section 61 is broad, all-inclusive; treasure trove is included in GI to the extent of its value in US currency*
Old Colony Trust Co. v. Commissioner
Corporation agreed to pay income tax of directors; the taxes were paid based on the employees services to the employer
Commissioner v. Glenshaw Glass Co.
Exemplary/punitive damages are included in GI; compensatory damages are not GI because they return the individual to his original place
Charley v. Commissioner
Travel credits converted to cash; the taxpayer was wealthier from the sale of the travel credits = GI
*Fair market value: willing buyer, willing seller, neither of whom is under unusual compulsion
Gross Income (GI)
– (Deductions Toward AGI)
= Adjusted Gross Income (AGI)
– (Deductions From AGI)
= Taxable Income
(Credits)
__________________________
Amount Realized
– (Adjusted Basis)
= Gain Realized
Gain Recognized*
*Gain recognized is the full amount of Gain Realized unless some other Code section states that it is not recognized.
Income is taxable from both legal and illegal sources – “The wages of sin are not exempt from taxation.”
In order to have an Amount Realized: Must have a sale or an exchange
This Federal Tax Outline is keyed to Fundamentals of Federal Income Taxation, 15 edition, Foundation Press.