Taxation Case Brief

DOCTRINES, CONCEPTS AND RULES

ABILITY OR WHEREWITHAL TO PAY—Tax should be assessed when the taxpayer
has means to pay. As stated—certain provisions allow postponement of
gain when the TP does not have the ability to pay—like kind exchanges.

ALL-INCLUSIVE INCOME—Gross income includes all income unless
specifically excluded by Code. Code Sec. 61—Income = Income from all
sources, wherever derived.

ASSIGNMENT OF INCOME—FRUIT AND TREE DOCTRINE—Owner must report
income if income is transferred but interest in income producing
property is retained. Have check for interest on savings drawn in
son’s name, interest belongs to parent if savings retained in his or
her name.

BUSINESS PURPOSE—Requirement of motive beyond tax avoidance. Must be
a reason for expenditure—not luxury trips to Hawaii paid with business
account and deducted—not merger with another company to take losses of
the other company.

CLAIM OF RIGHT—Taxpayer realizes income when unrestricted claim
exists. Similar to constructive receipt—below.

CONSTRUCTIVE RECEIPT—Cash basis taxpayer realizes income when income
is controlled even though not actually received and is the equivalent of
cash, i.e., amount is readily available to TP and TP is not subject to
any restrictions. Bonus mailed after Christmas each year. In Colorado
on skiing trip and return Jan. 2 = income in year mailed. Dec. 31,
employer gives bonus check but asked you to hold for few days till
company can make deposit. Not income—restricted.

ENTITY—Separate reporting and record keeping requirements per
classification by statutes. Ex. Code states business is separate from
personal income—must be recorded and reported separately whether on
“C” 1065 or 1120.

INTEGRITY OF TAX YEAR—(Annual accounting period)—Each tax year
stands on its own.

LEGISLATIVE GRACE—Provisions that provide relief (deductions and
exclusions) to taxpayer are the result of legislative acts and should be
narrowly interpreted. Exclusions are found in Secs. 101-150—if not
there, not excluded—very specific.

REALIZATION CONCEPT—The most basic to the recognition concept for tax
purposes is the realization concept. This concept holds that no income
is recognized for tax purposes until it has been realized. Realization
occurs in most cases in arms-length transactions. The concept of
capital recovery also comes into play. This holds that gain is only
realized in excess of asset recovery base.

RECOVERY OF CAPITAL—Simply put, sellers can reduce their gross
receipts (selling price) by the adjusted basis of the property sold in
determining taxable income. Example: sell rental house for $150,000.
Purchased $125,000 and took depreciation during rental years of $25,000.
Gain = $50,000.

STATUTE OF LIMITATIONS—Expiration of period of time in which the IRS
may assess additional tax deficiencies. Under the general rule, the IRS
may assess or impose additional tax liability against a taxpayer within
3 years of the filing of the income tax return. However, if a taxpayer
omits an amount of gross income in excess of 25% of the gross income
reported on the return, the statute of limitations is increased to 6
years. A claim for refund by the taxpayer is subject to the same 3-year
statute of limitations, which is the general rule. Finally, there is no
statute of limitations on assessments of tax if no return is filed or if
a fraudulent return is filed (claim dependents not in existence).

SUBSTANCE OVER FORM—Reality of a transaction as opposed to the
appearance. What was real intent—even if followed every step of the
law—does the result support the intent of the law?

TAX BENEFIT RULE—Recovery of items previously deducted is income to
the extent that a tax benefit was derived.

FORMAT FOR BRIEFING JUDICIAL TAX CASES

Facts: Establish and briefly state the facts of the case. Who, What,
Why, Where, How?? Research requires distinguishing facts from
assumptions and conclusions. Facts are provable. Facts support
assumptions and conclusions. Ex: Tax entity – individual,
corporation, partnership? Open or closed transaction? TPs motivation?
Domestic, foreign?

Issues: Determine the critical tax question(s) or issue(s). Pay
attention to details of the case. Be careful not to phrase questions
using conclusions rather than facts. State with the general rules of
taxation and move to the more specific. Is this taxable income or some
other form of receipt, which is not taxable?

Decision: State the resolution or decision.

Reasoning: Based on the question(s) and issues(s), look for authority
to support

specific tax treatment. Authority may be Legislative/Statutory (IRC),
Administrative (Regulations, Procedures), or Judicial (Courts).
Evaluate the authority – make sure your source is not out-of-date,
repealed, overturned, amended. Reasoning for your decision should be
based on a sound and thorough interpretation and assessment of the
authority. Only primary authority may be cited, although secondary
authority may be used to guide your research.

Doctrine(s): Using the list of doctrines handed out during the first
class meeting, state which appears most applicable to the present case.