Federal Income Taxation: Principles and Policies

Federal Income Taxation: Principles and Policies

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This whole book is but a draught—nay, but the draught of a draught. Oh, Time, Strength, Cash and Patience!—Herman Melville, Moby Dick, Ch.32. March 1, 2013, the day this edition of the coursebook went to the printers marked the 100th anniversary of the effective date of the U.S. income tax. The first income tax act was signed by President Wilson on October 3, 1913, as part of the Underwood-Simmons Tariff Act, and was made retroactive. Congress has enacted tax legislation every year since then—sometimes one act and sometimes dozens of pieces of legislation in a single year. The Congress, the courts, and the Internal Revenue Service all collaborate to ensure that any book designed for teaching a basic course in Federal Income Taxation will never be more than a draft of a draft. Today, no area of law seems more susceptible to change than federal taxation. Consider the following: The first income tax act was fifteen pages and contained only a few provisions. “The Code” came into existence in 1939 when Congress codified previous acts. The Code currently contains more than 1800 provisions affecting individuals and businesses. As of March 2013, the Code numbered around 5240 pages, making it more than four times longer than War and Peace and considerably harder to parse. The regulations are over 15,000 pages long. During calendar year 2012, the Treasury and IRS published 43 Treasury Decisions (containing final and temporary regulations), 43 sets of proposed regulations, 33 Revenue Rulings, 49 Revenue Procedures, 78 Notices, 49 Announcements, over 2700 Private Letter Rulings and Technical Advice Memoranda, 3 Actions on Decisions, and a partridge in a pear tree. The first income tax form was released in 1914 and it was three pages with a single page of instructions. For 2012 an individual filing the income tax Form 1040 could file a return with 77 lines, with 12 additional schedules. The schedules refer you to 31 additional worksheets. The instructions to the Form 1040 filled 108 pages of rather small type. In addition to Form 1040, there are many additional forms that can be used by individuals, ranging from commonly used forms (e.g. Form 8283 for noncash charitable contributions) to the truly arcane (Form T for Forest Activities Schedule) and another 214 pages of instructions. Meanwhile, the courts have decided over 40,000 tax cases. In 2012 alone, several hundred tax bills were introduced in Congress. Most of them go nowhere, but since 2000, Congress has passed more than 25 major tax acts and dozens of pieces of legislation that amended the Internal Revenue Code in some way, not counting legislation affecting Social Security, railroad retirement, unemployment compensation, tariffs and customs duties, or the public debt limit. Since the last edition of this casebook was published, there have been significant changes to the Code. In response to the financial crisis in 2008, Congress enacted the Economic Stimulus Act, the Emergency Stabilization Act, and the American Recovery and Reinvestment Tax Act. Throughout 2012, the Internal Revenue Service promulgated a stream of guidance pursuant to the Patient Protections and Affordable Care Act (often known as Obamacare). With the Supreme Court’s decision to uphold the law and the re-election of President Obama, the new taxes associated with this legislation began to take effect in 2013. In the early hours of January 1, 2013, Congress reached an agreement to avoid the so-called “fiscal cliff” when a failure to act would have sharply increased taxes because of the sunsetting of tax cuts that Congress adopted in the previous decade. As this book went to press, Congress continued to debate additional tax measures as well as the possibility of tax reform. Obviously it is impossible—and we think unwise—for a course introducing the income tax to try to instruct students about each of these developments. This book is about the fundamental concepts and forces shaping the income tax, not current events. That is why this edition reflects a remarkable continuity with its ancestor edition, Griswold’s Cases on Federal Taxation. That book, initially published more than sixty-five years ago in 1940, was the first law school coursebook devoted exclusively to federal taxation. It appeared at a time when most of the operative statutory provisions were phrase in general terms and many of the basic concepts of federal taxation had not yet matured. Most law schools taught federal taxation only as part of a course that also covered state and local taxation. Nevertheless, this text retains the same overarching organization that Erwin Griswold first brought to the subject. The subsequent adoption of this structure by most income tax coursebooks is a great tribute to Griswold’s insights into how the subject of federal taxation should be taught. The mass of detail that has been added to the statute and the regulations and the burgeoning case law in the intervening seven decades has required a substantial rethinking of the purposes of an introductory course in federal taxation and, hence, of this coursebook. For one thing, these details have become so voluminous and the changes so frequent that the student must necessarily strive to understand the basic concepts rather than to memorize particular rules. The practice of tax law has become more specialized, and most law schools offer a number of advanced courses in taxation. The student in an introductory course therefore must attain some familiarity not only with the statute, the regulations, and the cases but also with the trends in the tax law, the prospects for change, and the fundamental policy issues that inform such changes. Successful tax layering inevitably will involve responding to new and unforeseeable rules and therefore will demand a basic conceptual understanding of income tax principles and policies. Likewise, the nonspecialist needs to be introduced to these fundamental concepts of income taxation, if only to be able intelligently to recognize and monitor his or her clients’ tax problems. The composition of this book has also been influenced by the increasing use of the tax law as an instrument of social and economic policy. The income tax is not merely a revenue-raising device to finance the goods and services provided by the government. The decisions as to what to tax, and when, increasingly affect the directions, growth, and overall conditions of our economy and the allocation and distribution of resources within our society. For these reasons, this volume devotes substantial attention to the general principles and policies of federal taxation. Thus, cases have been supplemented with excerpts from congressional reports, administrative pronouncements, and commentaries and analyses of tax issues. In addition, there are explanatory notes instructing fundamental concepts of tax law and shorter notes following the principal cases. This edition nevertheless continues to reflect the central pedagogical perspective developed in Erwin Griswold’s original volume, the preface of which stated: “Here is an opportunity, almost unique * * *, to study a complete and self-contained system. Here is an opportunity to come into contact with perhaps our most experienced administrative agency. Here is an opportunity to deal with a statute, not as some excrescence on the common law, but as the law, to trace its growth, to lean how it is given meaning and how that meaning changes. Here is an opportunity to deal with authoritative judicial decisions—or at least, and perhaps more important, to consider how far they are authoritative * * * Here as elsewhere it is understanding and knowledge of the process that is sought.” These opportunities are no less present in this volume than they were in its ancient predecessor. This edition retains the basic chapter organization of its predecessors. The first chapter contains the basic policy and procedural aspects of income taxation. This chapter includes a brief history of taxation in the United States, an introduction to income tax terminology, and a discussion of the roles of Congress, the executive, and the courts. Subsequent chapters explore the topics “What Is Income?,” “Deductions and Credits,” Whose Income Is It?,” “Capital Gains and Losses,” and “When Is It Income?”. Of course, tax problems rarely can be placed into such discrete categories. Hence, there is some overlap of subjects within the chapters. Chapter 7 provides a brief description of the individual minimum tax. Chapter 8 contains and introduction to corporate tax shelters as well as materials on the ethical responsibilities of tax lawyers, thereby providing an appropriate context for their analysis and discussion. The Appendix contains tables of present values. As every teacher of taxation knows, it has become increasingly difficult to teach an introduction to federal taxation in a single semester, even in a 60-hour course. Compromises between breadth of coverage and treating at least some materials in depth are ever more necessary. Most instructors have learned to maintain limited expectations as to what can reasonably be accomplished in the first course and to assume that students with a genuine interest in taxation will take additional courses in the subject. This volume continues the layered approach of the prior editions. By selecting from the materials available here, teachers can decide which aspects of income tax law and policy to emphasize and which to skim or even omit in an introductory course. This volume contains enough material to teach not only a four-hour basic course in federal income taxation, but also an additional three-hour course designed to pursue certain issues in greater detail than is possible in the basic course. This means that the instructor must exercise considerable selectivity in teaching any single course from this book. For example, one of us tends to emphasize Chapters 2 and 3, the first two sections of Chapter 4, the first three sections of Chapter 5, and a brief selection from Chapter 6. Another professor, who taught these materials in a two-semester course, skipped certain aspects of Chapters 2 and 3 and used only the introductory sections of Chapters 4 and 5 in the basic course, with the balance of materials used in the second course. Instructors who wish to cover more ground might consider relying on students to read some of the more straightforward materials without classroom discussion. Designing courses inherently involves personal priorities and choice. The precise materials assigned will depend upon the teacher’s individual choices of where to delve deeply into substantive law and policy issues as well as how to trade off in-depth discussions and general coverage. We have attempted here to provide sufficiently comprehensive, interesting, and flexible material to allow teachers to make a wide variety of successful selections. Federal income taxation is, of course, primarily a statutory course. In addition to this text, the student will need a current edition of the Internal Revenue Code and as well as certain section of the Income Tax Regulations. A number of publishers now produce one volume editions of selected statutory and regulatory provisions that may be used along with this text.

Publication Date

2013

Edition

7

Federal Income Taxation: Principles and Policies

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