Professor William Kratzke is a Cecil C. Humphreys Professor of Law at the University of Memphis. He received his B.A. in Political Science and the Far Eastern & Russian Institute from the University of Washington in 1971. This naturally caused him to be interested in attending law school. He received his J.D. from Valparaiso University in 1974 and was a member of the Valparaiso University Law Review’s editorial board. He received his LL.M. from Georgetown University in 1977.
Professor William Kratzke teaches tax law courses at the University of Memphis. He has been a faculty member there since 1979. He has taught courses across the curriculum. In addition to tax courses, he has taught trademarks, torts, civil procedure, world trade law, economic analysis, and other courses. He visited Santa Clara University and the University of Mississippi. He received Fulbright Teaching Awards in 1997 (Moldova) and 2001-2002 (Russia).
Professor Kratzke has written in the areas of tax law, trademark law, tort law, and antitrust law.Notices
This is the first version of the first edition of this casebook, updated May 29, 2013. Visit http://elangdell.cali.org/ for the latest version and for revision history.
This work by William Kratzke is licensed and published by CALI eLangdell Press under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License. CALI and CALI eLangdell Press reserve under copyright all rights not expressly granted by this Creative Commons license. CALI and CALI eLangdell Press do not assert copyright in US Government works or other public domain material included herein. Permissions beyond the scope of this license may be available through firstname.lastname@example.org.
In brief, the terms of that license are that you may copy, distribute, and display this work, or make derivative works, so long as
you give CALI eLangdell Press and the author credit;
you do not use this work for commercial purposes; and
you distribute any works derived from this one under the same licensing terms as this.
Suggested attribution format for original work:
William Kratzke, Basic Income Tax 2013, Published by CALI eLangdell Press. Available under a Creative Commons BY-NC-SA 3.0 License.
CALI® and eLangdell® are United States federally registered trademarks owned by the Center for Computer-Assisted Legal Instruction. The cover art design is a copyrighted work of CALI, all rights reserved. The CALI graphical logo is a trademark and may not be used without permission.
Should you create derivative works based on the text of this book or other Creative Commons materials therein, you may not use this book’s cover art and the aforementioned logos, or any derivative thereof, to imply endorsement or otherwise without written permission from CALI.
This material does not contain nor is intended to be legal advice. Users seeking legal advice should consult with a licensed attorney in their jurisdiction. The editors have endeavored to provide complete and accurate information in this book. However, CALI does not warrant that the information provided is complete and accurate. CALI disclaims all liability to any person for any loss caused by errors or omissions in this collection of information.
The author wishes to express thanks to his research assistants, Magdalene Smith and Jay Clifton.
About CALI eLangdell Press
The Center for Computer-Assisted Legal Instruction (CALI®) is: a nonprofit organization with over 200 member US law schools, an innovative force pushing legal education toward change for the better. There are benefits to CALI membership for your school, firm, or organization. ELangdell® is our electronic press with a mission to publish more open books for legal education.
How do we define "open?"
Compatibility with devices like smartphones, tablets, and e-readers; as well as print.
The right for educators to remix the materials through more lenient copyright policies.
The ability for educators and students to adopt the materials for free.
Find available and upcoming eLangdell titles at elangdell.cali.org. Show support for CALI by following us on Facebook and Twitter, and by telling your friends and colleagues where you received your free book.
This book is a basic income tax text. I intend this text to be suitable for a three-hour course for a class comprised of law students with widely different backgrounds.
Certain principles permeate all of tax law. I have found that certain axioms or principles will carry us a long way. For example, income is taxed once – or treated as if it has been taxed. Once it has been taxed, its investment gives the taxpayer basis – which I define not as cost but as money that will not be subject to tax again. Etc. The text returns to these principles throughout. I usually put these matters in text boxes.
At a minimum, I want students who have completed basic income tax to know these principles and to be able to apply them, i.e., to develop some “tax intuition.” This intuition will serve well the student who wishes to take more tax classes. I tried to identify what I want students to know before enrolling in corporate tax or partnership tax – and to make certain that I covered these principles in the basic course. Such intuition will also serve well the student for whom the basic course is a “one and done” experience. Like it or not, tax law affects most legal topics, and such intuition should at least give students working in other areas of the law an idea of when it is time to ask questions concerning lurking tax issues.
In some areas, I have relied heavily on the CALI drills by Professor James Edward Maule (Villanova University). These drills both review and, in some instances, teach a little substance. Each zeroes in on a specific topic and should take a student about twenty minutes to complete if she has adequately prepared to do the drill. Of course, students can work through such drills at their own speed.
I have tried to make this text very readable – so that students can easily understand. I have aimed at law students who “know” they have no interest in income tax – but who may find that they in fact have a considerable interest in tax law. With my political science background, I was such a student. I am proof that one does not have to have an accounting background to find income tax law both important and interesting. Additionally, Magdalene Smith and Jay Clifton III were two such students; they assisted me greatly in making this text as accessible as possible to all law students. I thank them now for their work.
Memphis, Tennessee, July 2013
Table of Contents
About the Author 4
About CALI eLangdell Press 6
Chapter 1: The Government Raises Money: Introduction to Some Basic Concepts of Taxes and Taxing Income 9
I. Introduction to Some Basic Concepts 9
II. Taxing Income 13
III. Some Definitions 14
V. Layout of the Code 19
VI. Illustration of the Tax Formula: 20
VII. Sources of Tax Law and the Role of Courts 23
VIII. Some Income Tax Policy and Some Income Tax Principles 24
IX. What Is Income? 25
Wrap-up Questions for Chapter 1 33
Chapter 2: What Is Gross Income: Section 61 and the Sixteenth Amendment 33
I. The Constitutional and Statutory Definitions of “Gross Income” 34
II. The Constitutional and Statutory Definitions of “Gross Income:” Accessions to Wealth 60
III. The Constitutional and Statutory Definitions of “Gross Income:” Realization 92
IV. The Constitutional and Statutory Definitions of “Gross Income:”
Dominion and Control 103
Wrap-up Questions for Chapter 2: 108
Chapter 3: Exclusions from Gross Income 109
I. The Society and Government that We Want 113
II. Social Benefits 137
III. Employment-Based Exclusions from Gross Income 149
Wrap-up Questions for Chapter 3: 169
Chapter 4: Loans and Cancellation of Indebtedness 169
II. Cancellation of Indebtedness 170
III. Is It a Loan? Is There an Accession to Wealth? 176
IV. Section 108(a)'s Other Provisions 203
V. Transactions Involving Property Subject to a Loan 207
VI. Transactions Treated as Loans 242
Wrap-up Questions for Chapter 4 245
Chapter 5: Assignment of Income 246
I. Compensation for Services 293
II. Income Splitting and the Joint Return 300
III. Income Derived from Property 304
IV. Interest Free Loans and Unstated Interest 316
Wrap-Up Questions for Chapter 5 317
Chapter 6: Deductions: Business Expenses 319
I. Expense or Capital 321
II. Deductibility Under §§ 162 or 212 363
III. Depreciation, Amortization, and Cost Recovery 429
Wrap-Up Questions for Chapter 6 443
Chapter 7: Personal Deductions 443
I. “Tax Expenditures” 466
II. Denial of Discretion in Choosing How or What to Consume 479
III. Creating a More Efficient and Productive Economy 487
Wrap-Up Questions for Chapter 7 491
Chapter 8: Tax Consequences of Divorce and Intra-Family Transactions 492
I. Introduction 492
II. Before Marriage 493
III. During Marriage 497
IV. After Marriage: Tax Consequences of Divorce 503
Wrap-Up Questions for Chapter 8 520
Chapter 9: Timing of Income and Deductions: Annual Accounting and Accounting Principles 521
I. Annual Accounting 521
II. Deferral Mechanisms 532
III. Basic Accounting Rules 538
Wrap-Up Questions for Chapter 9: 556
Chapter 10: Character of Income and Computation of Tax 557
I. Capital Gain 559
II. Sections 1245 and 1250: Depreciation Recapture 567
III. Section 1231: Some Limited Mismatching 570
IV. Some Basis Transfer Transactions: §§ 1031, 1033 572