MGMT 227
CLASS ONE – Spring 2011
I.
COURSE STRUCTURE
A. Introduction
B. Syllabus & Assignments:
1.
2.
3.
4.
5.
II.
Description
Exams/Grades
Research Assignments
RIA Training
Introduce TA – Katie Hunter
INTRODUCTION TO TAXATION
A. History of Taxation
1. Pre-1913: No real individual taxation….government income primarily
obtained from:
 Custom duties
 Excise Taxes (certain utilities/consumables: e.g. Alcohol
2. Late 1800’s: 1895, USSC Declared federal income tax unconstitutional because Constitution required proportional taxation among states:
difficult to administer.
3. 1913: We amended our Constitution to add Sixteenth Amendment –
power to levy income tax.
4. Revenue Act of 1913: Flat Tax of 1% on Corporations,
2-6% on Individuals
But VERY HIGH EXEMPTIONS ( $ 3000)
5. 1940’s: Mass tax to finance the war….now most people had to pay.
6. Incrementalism: Since 40’s only incremental changes have been
adopted by Congress – no wholesale revisions
7. Reagan, Clinton, Bush & Obama Tax Changes:
B. TAX BASE & TAX RATE: what gets taxed and what percentage is applied
1. Tax Base: Amount on which taxes are to be determined
 income
 FMV on property
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2. Tax Rate: Percentage applied to Tax Base. This rate can be:
a. Progressive: rate increases as base increases (like our individual
taxation system)
b. Proportional: flat tax --- same for all income level
c. Regressive: rate decreases as base increases
C. TYPES OF TAXES:
1. STATE INCOME TAXES:
 Many states have (not all)
 mildly progressive
 based on Federal Adjusted Gross Income(AGI)
 Sometimes referred to as FRANCHISE TAX
(In California: Franchise Tax Board)
2. Unified Transfer Taxes: Used to be separate taxes, now combined
a. “Giver” pays the tax (Donor or Dead Guy)
b. During taxpayer’s lifetime, keep track of all gifts made (based on
Fair Market Value usually – applicable exclusions).
c. When Taxpayer Dies, calculate FMV of his/her estate.
d. Add Lifetime Gifts + Estate Value = Unified Transfer Tax Estate.
e. History:
2008 - $2M exemption – 45% rate – Step up basis
2009 - $3.5M exemption – 45% rate – Step up basis
2010 – Unlimited exemption – no tax – Carry over basis
2010 – Tax Relief Act of 2010 – in 2010 executor can elect…
a. Unlimited exemption – no tax – Carry over basis
--OR-b. $3.5M exemption – 35% rate – Step up basis
2011/2012 - $3.5M exemption (Gifts/estate) – 35% rate – step up
basis
2013 – $1M exemption – 55% rate
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3. Property (Ad Valorem) Taxes: E.g. – real property taxes in California.
4. Excise & Custom Duties: For imported and other special goods.
a. Excise tax targetted on special goods: gasoline, cigarettes, etc.
b. Customs Taxes: Protects local business, affects foreign relations.
5. Sales Tax: Retail sales usually (in California N/A to services or food)
a. Not deductible as taxable expenses item.
b. Based on consumption, regardless of income.
6. Employment Taxes;
 FICA (Social Security & Medicare)
Called the “Federal Insurance Contributions Act”
1. Employee pays 7.65% (6.2 for SS & 1.45 for Medicare, up to
$ 106,800 [in 2010] and 1.45% on income above that amount).
2. Employer matches contribution
3. Self Employed person pays “self-employment” tax of 15.3%
(but can deduct ½ as a business expenses) up to $106,800 and
2.9% after that
 Unemployment Taxes (FUTA) – Paid entirely by employer
 Disability Taxes - Certain states (like CAL) impose
7. Federal Income Taxes: Main focus of this course.
III.
The Tax Laws:
A. General Overview of Primary Sources of Law (see handout)
1.
2.
3.
4.
5.
6.
Constitution
Statute
Administrative Regulation
Case Law (precedent)
Treaties
Executive Orders
B. Tax Laws:
1. Constitution: Primarily in the 16th Amendment.
2. Statutes:
a. 1939: Congress adopted the Internal Revenue Code.
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b. Re-structured: In 1954 and 1986, with revisions since then
c. Format of Code:
(1) Title 26 of United States Code (USC)
(2) Refer to Section Numbers, e.g. Sec. 2 (a) (1)
(3) Lawyers/ CPA’s refer to Subchapters lf law
3. Treaties: Such as Double Taxation Treaties, can affect tax law.
4. Administrative Regulations: Very important source.
a. Treasury Department Regulations:
(1) Interpret unclear or very general Statutes
(2) Cite as “Reg. Sec. 1.2”
b. Revenue Rulings: Pronouncements by the IRS to interpret Code
and Regulations [often results from a TP requesting an
interpretation of the code.
c. Revenue Procedures: IRS dictates its intended /internal
procedures
d. Letter Rulings: For a fee, IRS will advise on a proposed
transaction.
e. Determination Letters: Issued by the District Office at Taxpayer’s
request. Published no where else.
f. Technical Advice Measures (TAMS): Now publicly available, these
address issues/questions raised by IRS personnel during an audit
of a TP.
5. Case Law: After exhausting your administrative remedies FIRST, then
TP can sue in court.
a. Small Cases Division (US Tax Court)
 & 50,000 or less in dispute
 Opinions Not published
b. US Tax Court: Hears only tax cases - most common forum.
c. Court of Federal Claims: Hears only tax cases (favorite place to
litigate a tax issue
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d. Federal District Court: Hears tax & non-tax civil or criminal cases.
Only place for TP to request jury trial.
e. PAY & SUE: To sue in Court of Federal Claims or Federal District
Court, TP must pay the tax and then sue for a refund.
f. APPEALS: Filed with the following courts…
(1) U. S. Court of Appeals (Regional Circuit) - for Tax Court &
District Court appeals
(2) U. S. Court of Appeals (Federal Circuit) – for Court of
Federal Claims appeals
(3) U. S. Supreme Court: From Court of Appeals
g. See Citations in sample memos or Textbook (Chapter 2)
IV.
TAX RESEARCH:
A. Steps:
1. Identify the Problem or issue.
2. Locate the Appropriate Source:
a. Tax Services: (See Library Handout)
CCH or RIA – We’ll be using RIA – Anderson Library database
b. Tax Periodicals: Excellent summaries of law/regs
c. Treatises: VERY GOOD source for specialized areas (e.g. estate
planning, family law, etc.). Don’t confuse “treaty” with “treatise”!!
d. Secondary Sources: These sources are Secondary Sources and
will lead you to the Primary Sources (statutes, regulations, etc.).
3. City the Primary Sources in your paper.
a. Statutes and Regulations are best.
b. Revenue Rulings can also be cited.
c. Judicial Cases (the higher the court the better)
B. Memorandum of Law: Prepare a Memorandum of Law in which you…
1. Restate the Problem/Issue
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2. Answer it by citing the applicable primary sources of law.
3. See SAMPLES in Course Reader
Individual Taxation: Tax Formula, Filing
I. BASIC FORMULA
A. BASIC TAX FORMULA (inside front cover of book):
-
-
-
X
+
Gross Income
Exclusions
-------------Gross Income
Deductions FOR AGI
--------------Adjusted Gross Income
Deductions FROM AGI (Standard or Itemized)
Exemptions (Personal & Dependents)
---------------Taxable Income
Tax Rate
---------------Preliminary Tax Due
Credits
Other Taxes (AMT, Self-Employment)
----------------TAX DUE
B. TERMINOLOGY:
1. INCOME:
Revenues earned or received
2. NOT INCOME:
some examples….
a. Unrealized Income: Home or Stock increases in value
b. Self-Help Income: Paint your own house
c. Gross Selling Price of Property:
 E.g. Ms. X buys house for $ 200,000, sells 2 yrs.
later for $ 250,000, = Tax will be on $50,000
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d. Statutory Exclusions: Things like Gifts, Emp. Benefits,
Personal Injury Awards, child support, interest on
Municipal Bonds -3. GROSS INCOME = Total Income - exclusions
4. DEDUCTIONS FOR A.G.I.: Usually business expenses &
some miscellaneous, like Alimony, IRA contributions.
 Deducted before AGI is determined
5. ADJUSTED GROSS INCOME: Falls between Gross Income
and Taxable Income
 Used to set limits for many deductions (e.g. medical,
casualty, charitable, etc.)
6. DEDUCTIONS FROM A.G.I. - these are personal deductions,
including:
a. TP claims the higher of a Standard Deduction or Itemized
Deductions.
(1) STP = $ 5,700 (2010)
(2) MTP = Now $ 11,400 (double) under new law
(3) Additional SD: For elderly (65 y/o) or blind they get
an additional SD of…
(a) $ 1,100 for married taxpayers (each spouse)
(b) $ 1,400 for single taxpayers
(4) Dependent: If a TP is claimed for exemption on
another TP’s tax return (e.g. Mom claims her
college age son as a dependent, but son also
works and has to file a return) – dependent’s SD
is…
THE HIGHER OF $ 950 –or– $ 300 + earned
income (but not to exceed $ 5,700)
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b. TP also gets an Exemption ($ 3,650) for him/herself +
dependents.
 Itemized or Standard Deduction PLUS
 Personal & dependency Exemptions
7. ITEMIZED DEDUCTIONS: Non-Business expenses
like…charitable cont., medical, casualty, tax planning & advise
8. TAXABLE INCOME:
 AGI minus Deductions From AGI
 This is what your taxes will be based on
9. TAX RATES: 5 Rates Set by Congress (expire in 2012)
10%, 15%, 25%, 28%, 33%, 35%
2013: 36% and 39.6% rate to be reinstated
Note: Different Rates for Capital Gains & Dividends (0% or 15%)
2013: 20% rate proposed for higher income TP’s
10. TAX CREDITS: After gross tax is computed, we deduct
these credits.
a. Credits are BETTER than Deductions: Let’s compare
what a $ 5,000 credit would do vs. a $ 5,000 deduction
on a TP with $ 55,000 in income and a tax rate of 20%
(imaginary)….
DEDUCTION:
$ 55,000
5,000 deduction
--------50,000 in taxable income
x
.20
--------$ 10,000 in taxes due
-------------------------------------CREDIT:
$ 55,000
x
.20
--------11,000 in prelim. Tax
- 5,000 tax credit
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---------$ 6,000 in taxes due
11.
Additional Taxes:
a. Alternative Minimum Tax: A 2nd way to compute taxes
b. Formula:
Taxable Income (from 1040)
+ Adjustments
+ Preferences
------------------AMT Income (AMTI)
- Exemption ($ 46,700 STP; $ 70,950 MFJ)
------------------- 2009 (New)
Final AMTI
x Tax Rates (26% up to $175K; 28% if >$175K)
------------------AMT
(pay higher of AMT or Regular Tax)
II. TAX FILING
A. Who Must File: Taxpayers who earn…
1. > than Standard Deduction ($ 5,700) + Exemption ($ 3,650)
(about $ 9,000 STP or $ 18,000 MTP):
2. Self Employed > $ 400
3. Dependents earning more than Standard Deduction
B. When to File:
4/15  10/15 (used to be 3 dates)
C. Filing Status: Usually measured by TP status on 12/31…
1. Single: Unmarried or legally separated
2. Married Filing Jointly (MFJ): Married at year’s end or married
and spouse died during the year.
3. Married Filing Separately (MFS): H & W can elect.
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4. Surviving Spouse: “Qualifying Widow(er) with dependent child
only. 3 year scenario….
a.
b.
c.
d.
Year of Death: MFJ
Year 2: Surviving Spouse
Year 3: Surviving Spouse
Year 4: Either Single or HOH
5. Head of Household (HOH): Requires…
a. Unmarried last day of year or an abandoned spouse
b. Resident or citizen
c. Pays ½ of household expenses for SELF +
 Unmarried Child (even if not dependent)
 Married Child (MUST be dependent)
 Parent (even if lives in another house)
 Dependent relative (not including cousin)
d. Abandoned Spouse: Married, but lived apart from spouse
last 6 months of year + dependent child at home
III. EXEMPTIONS & DEPENDENTS: Two types allowed…
A. Personal: Available to…
1. Filing TP for himself/herself (if alive any time during the year)
2. TP + Spouse (2) on MFJ Return or even on MFS return if other
spouse does not file.
3. Not Allowed: If claimed as Dependent on another’s return (e.g.
child works but claimed as dependent by parents on their tax return)
B. Dependency Exemption: Under 2004 Tax Act, 2 categories of
persons now qualify as a Taxpayer’s dependent, depending on their
level of support by TP.
1. OPTION 1: The Qualifying Child
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a. Relationship: Must be TP’s child, sibling or their
descendants (in laws don’t count).
b. Age: Must be a child (19 or younger, or 19-23 + student)
c. Residence: Must live with the TP (or away at school).
d. Not Self Supporting: Dependent does not provide > 50% of
their own support.
2. OPTION 2: The Qualifying Relative or Housemate
a. Support Test: TP provides > 50% support of dependent
b. Gross Income Test: Dependent earns < $ 3,650 (N/A to
unmarried “child” – therefore a “child” could qualify under
either option 1 or 2 depending which qualifier applies)
c. Relationship Test: Dependent is either of the following…
(1) Relative: Up to but not including cousins (in-laws count)
-OR(2) Housemate (lives with the TP)
3. Common Requirements for Options 1 and 2:
a. Citizenship Test: Dependent = Citizen/resident of US,
Mexico or Canada.
b. Joint Return Test: No joint return filed by Dependent and
his/her spouse (unless to get a full refund of all taxes paid)
4. Multiple Support Agreement: If a group of TP’s supports a
dependent, one of them can claim the exemption if
a. Claiming TP paid at least 10% of support
b. The Group as a whole pays > 50%
5. PHASEOUT: High income TP’s may not qualify for exemptions
(but this rule is itself being phased out).
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