Fed Tax Sys.

1. Goals
   1. Fairness
      1. Vertical equity based on ability 2 pay
      2. Hz'al equity based on similar tax 4 similar sit.'ed people
   2. Eff.
      1. Internal eff. 4 tax sys. 2 min. enforcing & complying w/tax
      2. External eff. so people not distort behav. by tax
   3. Noncyclical Tax Sys.
   4. Reliance Int. Protected
   5. Pvcy
   6. Acceptability
2. Tax 2 Raise $
   1. Income Tax
      1. Def'ed as consumption + / - change in net worth over given per. of X
      2. Arg. not save enough w/income tax b/c tax int. but
         1. Result oriented savers save regardless of int.
         2. Focus on last $ & may need high int. rate 2 cause save
         3. Tax only 1 factor in rate of return
         4. Can't know ideal mix of consume v. saving
         5. Wealthy not care
   2. Consumption Tax
      1. Taxed on spent / consumed $
      2. Categ's
         1. Sales
         2. Value added tax
         3. Indiv. consumption where consumption = income - savings, incl'ing consumption other than visible income
      3. Arg. save more but
         1. May need higher tax rate 2 get same tax amt
   3. Part Income & Consumption Tax Sys. Now
3. Rate Structure
   1. Prog. Tax
      1. Arg. shouldn't redist. mkt dist. but
         1. Mkt not reward merit consistently so govt should
      2. Arg. discourage people from working but
         1. People work 4 other values than $
         2. Low income earners try 2 earn as much $
      3. Shouldn't B 2 high b/c interfere w/indiv. dec. & incr. tax planning
      4. Arg. 2 have prog. tax
         1. Tax based on ability 2 pay
         2. Marginal utility of $ higher 4 low income earner
         3. Lots of reg. tax in sys.
   2. Flat Rate
4. Three Sources of Tax Making
   1. Leg.
      1. Orig. from House of Rep. then 2 Sen.
      2. After committees, debates, & vote then Pres. can sign / veto
   2. Exec.
      1. Reg's
         1. Official interp. of stt. so lots of wt.
      2. IRS
         1. Priv. letter ruling 4 indiv. quest's
         2. Gen. counsel memo 4 commonly asked quest.'s
         3. Technical advice memo binding IRS only 4 that case
         4. Revenue proced's
         5. Revenue ruling
         6. Reg's
            1. What IRS thinks means so given wt.
            2. Leg. reg. where Sec. of Treas. promulgate reg. 2 interp. rule so more wt.
   3. Jud'al
      1. T (taxpayer) can appeal 2 IRS then 2 ct
         1. T has b/p in civil cases, not IRS
         2. IRS has b/p beyond rsbl doubt in crim. cases
      2. US Tax Ct
         1. Not pay tax & litig.
         2. No jury trial & IRS rep. itself
         3. Can appeal 2 ct of appeals
         4. IRS loses
            1. Can not appeal & prod. acquiesce in dec. doc.
            2. Can appeal & prod. nonacquiesce
      3. Dist. Ct
         1. Pay tax & litig.
         2. Jury trial
         3. Appeal 2 ct of appeals
      4. Ct of Claims in Wash.
         1. Pay tax & litig.
         2. No jury trial
         3. Appeal 2 spec. Ct of Appeals in Fed. Cir.
         4. Expert judges
5. X Value of Tax
   1. Adv. 2 Defer Tax 4 Pension Plan
      1. Er contrib's 2 pension plan & nobody pays tax on in. until dist.
      2. Tax deferral is int. free loan from govt
6. Acct'ing Method
   1. Cash
      1. When get $, income
      2. Constructive receipt is exception so if could've gotten $ last yr., taxed by last yr.
   2. Accrual
      1. When do something, not when get paid report
7. Ethical Duty 2 Act Fairly 2 IRS by Tax Atty
   1. Returns
      1. Duty not 2 take wrong position even if good faith
      2. Range of stand.'s
         1. ABA orig'ly wanted rsbl 4 good faith belief then no need 2 discl.
         2. IRC 6694 penalty where rsbl possibility so advise client & discl.
         3. Circular 230 where need rsbl possibility but if not, discl. & report
   2. Planning
      1. Unethical 2 advise 2 break law
   3. Dispute Rsln
      1. As long as rsbl& plausible arg.
   4. Writing Opinions & Asking 4 IRS Rulings
      1. Spec. rules when atty write opinion 4 tax shelter

Paying Tax

1. Equation
   1. Gross Income (GI) - Deductions = Adj'ed Gross Income (AGI) - Itemized / Stand. Deduction - Pers'al Exemption = Taxable Income (TI)
   2. Exclusions
      1. Not in the equation 4 calc. income
      2. Could B stt'ry / C/L
2. GI
   1. Listed In § 61
      1. Incl's wages, int., alimony, busi. income, etc.
      2. Incl's annuity K
3. Above the Line Deduction 4 AGI
   1. Listed in § 62
      1. Busi. expense gen'ly 2 calc. GI
      2. Incl's IRA deductions, moving, self empl., etc.
4. Itemized Deduction v. Stand. Deduction
   1. Take Higher of Itemized / Stand. Deduction by § 63
   2. Stand. Deduction § 63)c
      1. Married then $5k ($5,000)
      2. Head of household $4,400
      3. Single $3k
      4. Married & sep. $2,500
      5. Blind, take $600 by § 63)f
         1. Can get $750 4 unmarried
         2. Higher if more than 65 yrs. old
   3. Itemized
      1. Indiv. misc. itemized deduction of § 67 only if more than 2% of AGI
         1. Busi. ee expense is imp. if large
      2. Med. if more than 7.5% of AGI
      3. State tax, etc., mortgage int., charity, & casualty losses
      4. Reduced if more than $100k by § 68 by lesser of
         1. Three % of excess AGI /
         2. Eighty % of amt of itemized deduction otherwise allowable
5. Pers'al Exemption 4 TI
   1. Def'ed in § 151
      1. Pers'al deduction 4 self & dep. of $2k
      2. Dep's incl. ch., steps, sibling, parents, etc. & indiv. w/princ. place of abode @ T's home & is member of household by § 152
      3. If being member of household viol. local law, not member by § 152)b)5
   2. Dep.
      1. Earn less than exemption amt /
      2. Is 19 yrs. old / in school & is less than 24 yrs. old
   3. Multiple Support Agmt § 152)c
      1. If people contrib. less than 1/2 2 support, then dec. among who gets exemption
   4. Pers'al Deduction 4 Married
      1. If file jt'ly, then T is both spouse & self so both get it by § 151)b
   5. Phaseout by § 151)d)3
      1. Reduces exemption by 2% 4 each $2,500 that T's AGI exceeds threshold amt but not exceed 100%
6. Tax Rate
   1. Marginal Tax Rate
      1. Shown in § 1
   2. Effective Tax Rate
      1. Gen'ly look @ AGI
7. Marriage Tax
   1. Policies
      1. All married couple w/ = amt should pay same tax
      2. Change in marital status shouldn't make dif.
      3. Single persons should pay same as married
   2. Marriage Penalty
      1. Married couple pay more than unmarried couple
      2. Single person w/same amt pay more than married / unmarried couple
      3. Prog. tax sys. creates marriage penalty
   3. Det'ing When Married by § 7703)a
      1. Last day of taxable yr.
8. Ch's Earning & Income Shifting
   1. Parent Not Taxed
   2. Stand. Deduction 4 Dep. § 63)c)5
      1. Larger of $500 /
      2. Dep's earned income
   3. By § 151)d)2, pers'al exemption disallowed 4 dep. if dep. can claim exemption
   4. If Ch. Less Than 14 Yrs. Old
      1. By § 1)g, tax is greater of tax imposed w/o regard 2 this sub§ /
      2. Sum of TI of ch. reduced by ch's net unearned income + ch's share of allocable parental tax
      3. Too complex so not have 2 report

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December 8, 1997

Ms. Haeji Hong