Basic Income Tax 2015-2016 William Kratzke
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Basic Income Tax 2015-2016 William Kratzke Professor of Law CALI eLangdell Press 2015 About the AuthorProfessor 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 third edition of this casebook, updated July 3, 2015. Visit http://elangdell.cali.org/ for the latest version and for revision history. 
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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. PrefaceThis 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. WPK
Memphis, Tennessee, July 2013 Table of Contents About the Author 3 About CALI eLangdell Press 5 Preface 6 Chapter 1: The Government Raises Money: Introduction to Some Basic Concepts of Taxes and Taxing Income 8 I. Introduction to Some Basic Concepts 8 II. Taxing Income 12 III. Some Definitions 15 IV. Not All Income Is Taxed Alike 20 V. Layout of the Code 21 VI. Illustration of the Tax Formula: 21 VII. Sources of Tax Law and the Role of Courts 25 VIII. Some Income Tax Policy and Some Income Tax Principles 27 IX. What Is Income? 28 Wrap-up Questions for Chapter 1 37
I. The Constitutional and Statutory Definitions of “Gross Income” 39 II. The Constitutional and Statutory Definitions of “Gross Income:” Accessions to Wealth 70 III. The Constitutional and Statutory Definitions of “Gross Income:” Realization 106 IV. The Constitutional and Statutory Definitions of “Gross Income:” Dominion and Control 118 Wrap-up Questions for Chapter 2: 124 Chapter 3: Exclusions from Gross Income 124 I. The Society and Government that We Want 125 II. Social Benefits 148 III. Employment-Based Exclusions from Gross Income 160 Wrap-up Questions for Chapter 3: 180
II. Cancellation of Indebtedness 182 III. Is It a Loan? Is There an Accession to Wealth? 187 IV. Section 108(a)'s Other Provisions 208 V. Transactions Involving Property Subject to a Loan 210 VI. Transactions Treated as Loans 228 Wrap-up Questions for Chapter 4 230
I. Compensation for Services 236 II. Income Splitting and the Joint Return 243 III. Income Derived from Property 247 IV. Interest Free Loans and Unstated Interest 259 Wrap-Up Questions for Chapter 5 261 Chapter 6: Deductions: Business Expenses 263 I. Expense or Capital 266 II. Deductibility Under §§ 162 or 212 339 III. Depreciation, Amortization, and Cost Recovery 402 Wrap-Up Questions for Chapter 6 415
I. “Tax Expenditures” 458 II. Denial of Discretion in Choosing How or What to Consume 470 III. Creating a More Efficient and Productive Economy 479 Wrap-Up Questions for Chapter 7 482
I. Introduction 484 II. Before Marriage 485 III. During Marriage 489 IV. After Marriage: Tax Consequences of Divorce 495 Wrap-Up Questions for Chapter 8 511 Chapter 9: Timing of Income and Deductions: Annual Accounting and Accounting Principles 512 II. Deferral Mechanisms 522 III. Basic Accounting Rules 526 Wrap-Up Questions for Chapter 9: 544 Chapter 10: Character of Income and Computation of Tax 545 I. Capital Gain 547 II. Sections 1245 and 1250: Depreciation Recapture 555 III. Section 1231: Some Limited Mismatching 559 IV. Some Basis Transfer Transactions: §§ 1031, 1033 561 V. More Matching 561 Wrap-Up Questions for Chapter 10 565
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