INTRODUCTION

Income is: salary, sale proceeds.

● § 61: salary, bonuses, interest, dividends, royalties, annuities, gains from dealing
w/property (difference what you bought and sold for), discharge of indebtedness income
○ Paid with a ton of oranges, it is income because you can resell them for $$$
○ Interest received from $$ in a bank account → income
Income is not: gifts (accession to wealth not income)
● § 102: gifts and bequests
● § 132: fringe benefits
Deductible: cost of doing business.
● Above the line
○ § 162: alimony (§§ 71, 215), moving expenses, business related expenses
● Below the line
○ Personal deduction
○ § 151: Dependency deduction
○ § 63: Standard deduction
■ OR itemized deduction: charitable (§ 170), medical (§ 213)
Not deductible: personal expenses.

Calculating Tax Liability: Income

- Deductions____ “the line”
Taxable Income
* Rate__________ comes from statute
Net Taxable Income
- Tax Credits_____
Amount owed to IRS

Net Income: Gross income – expenses of producing that income.

Personal expenses are not the expenses incurred in producing income, therefore would not be
a deductible in an ideal income tax.
All other things being equal, a tax credit is more “valuable” than a deduction of the same
amount.

Basic Sources of Law

● Law: Constitution – Treaties – Court Decisions – IRC – Treasury Regulations
(procedural)
○ Procedural treasury regulation have force of law: e.g., pay taxes April 15
● Not Law: Legislative History – Treasury Regulations (substantive) – Revenue
Procedures – Private Letter Rulings
○ Revenue procedure statements made by the IRS are public statements about
how the IRS intends to treat a particular issue
○ Private letter rulings are specific to the individual TP, cannot officially be relied on
by another taxpayer (and cost $9,000)
Judicial Pathway of a Tax Case:
● Refund Case: Taxpayer tells IRS he paid too much.
○ Case goes to Fed D.Ct. OR Court of Fed. Claims
○ Appeal from D.Ct. goes to Cir Ct. of Appeals
○ Appeal from Ct of Fed. Claims goes to Court of Appeals for Federal Circuit
● Deficiency Action: IRS tells the taxpayer that he owes money
○ Case goes to the U.S. Tax Court, rarely D.Ct. (when 2 cases combined)
○ Appeal from Tax Court does to Circuit Court of Appeals

History of U.S. Income Tax

● Uniformity: Article 1, Section 8, Clause 1
○ “The Congress shall have Power to lay and collect taxes, duties, imposts and
excises, to pay debts and provide for the common Defense and general welfare
of the United States; but all duties, imposts and excises shall be uniform
throughout the United States”
○ Tax at uniform rate if similarly situated
○ Only Constitutional requirement of tax
● Apportionment: Article 1, Section 2, Clause 3
○ “Representatives and direct taxes shall be apportioned among the several states
which may be included within this Union, according to their respective Numbers”
○ Pollack case had to do w/apportionment. Sole “Barbie” in juris. 2 had to pay all
the taxes that were apportioned between many ppl in juris. 1.
● 16th Amendment (1913): Congress shall have power to lay and collect taxes on income,
from whatever source derived, without apportionment among several states, and without
regard to any census or enumeration.
○ Eliminates the apportionment requirement.
■ Without apportionment, the aggregate amount of tax collected from a
state does not reflect the population of said state.
○ This is the constitutional definition of income.
○ The 16th Amendment has a broad scope – Congress could tax more than it
does.
Tax Variations
● Types of tax:
○ Head tax: Divides how much the government spend by population (man, woman,
child)
○ Benefit tax: Taxing people on a benefit they receive from the government (using
highway)
○ Ability to pay: If you can pay more tax, then you should and you do. (Income not
always a good measure of one's ability to pay though)
● Types of systems:
○ Progressive Tax System: The last dollar earned by an individual for high income
individuals is taxed higher than the 1st dollar earned
 ■ Those who make more, pay more
■ Break into chunks of income
■ US has a progressive Tax System
○ Flat Tax System: All taxpayers pay the same % of their income. (all pay 10%)
■ Regardless of income earned, pay tax at the same rate
○ Regressive tax: Those who earn the least, pay the most in taxes
● Rate of Taxation: (it fluctuates, right now around 30%)
○ Horizontal Equity: People in similar ($) circum. should be treated similarly
○ Vertical Equity: Idea that those who have more should pay more (embedded in
this is the progressive tax system)

Deduction v. Credit
● A deduction is an expense that can be subtracted from an individual or married couple's
gross income in order to reduce the amount that is subject to income tax.
● A tax credit is an amount taxpayers can subtract from taxes owed. Unlike deductions,
which reduce amount of taxable income, tax credits reduce actual amount of tax owed.