Basic Income Tax 2015-2016 William Kratzke
II. Denial of Discretion in Choosing How or What to Consume
Download 2.25 Mb.
|
- Navigate this page:
- III. Creating a More Efficient and Productive Economy
- Wrap-Up Questions for Chapter 7
II. Denial of Discretion in Choosing How or What to ConsumeA. Medical and Dental Expenses Section 213(a) allows a taxpayer to deduct expenses of medical care “paid during the taxable year, not compensated for insurance or otherwise” to the extent such expenses exceed 10% of the taxpayer’s adjusted gross income. This includes the expenses of prescription drugs. § 213(b). Section 213(d)(1)(A) defines “medical care” expenses to include expenditures “for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.” Medical care expenses also includes the expenses of transportation “primarily for and essential to medical care,” certain long-term care services, and insurance that covers “medical care” as so defined. •Why should there be a floor on the deductibility of medical expenses? Why should the determinant of that floor be a taxpayer’s adjusted gross income? See William P. Kratzke, The (Im)Balance of Externalities in Employment-Based Exclusions from Gross Income, 60 The Tax Lawyer 1, 24-25 (2006). •Think: What is the profile of taxpayers most likely to claim a medical expense deduction? See id. What type of medical expenditures are such taxpayers likely to make? We are met once again by the chicken-and-egg question of when taxpayer’s personal circumstances can support a deduction for certain expenditures. Why did taxpayer have little choice in making the expenditure? Ochs v. Commissioner, 195 F.2d 692 (2d Cir.), cert. denied, 344 U.S. 827 (1952) The question raised by this appeal is whether the taxpayer Samuel Ochs was entitled under § [213] of the Internal Revenue Code to deduct the sum of $1,456.50 paid by him for maintaining his two minor children in day school and boarding school as medical expenses incurred for the benefit of his wife. ... The Tax Court made the following findings: ‘During the taxable year petitioner was the husband of Helen H. Ochs. They had two children, Josephine age six and Jeanne age four. ‘On December 10, 1943, a thyroidectomy was performed on petitioner’s wife. A histological examination disclosed a papillary carcinoma of the thyroid with multiple lymph node metastases, according to the surgeon’s report. During the taxable year the petitioner maintained his two children in day school during the first half of the year and in boarding school during the latter half of the year at a cost of $1,456.50. Petitioner deducted this sum from his income for the year 1946 as a medical expense under § [213] ... ‘During the taxable year, as a result of the operation on December 10, 1943, petitioner’s wife was unable to speak above a whisper. Efforts of petitioner’s wife to speak were painful, required much of her strength, and left her in a highly nervous state. Petitioner was advised by the operating surgeon that his wife suffered from cancer of the throat, a condition which was fatal in many cases. ... Petitioner became alarmed when, by 1946, his wife’s voice had failed to improve ... Petitioner and his wife consulted a reputable physician and were advised by him that if the children were not separated from petitioner’s wife she would not improve and her nervousness and irritation might cause a recurrence of the cancer. Petitioner continued to maintain his children in boarding school after the taxable year here involved until up to the end of five years following the operation of December 10, 1943, petitioner having been advised that if there was no recurrence of the cancer during that time his wife could be considered as having recovered from the cancer. ‘During the taxable year petitioner’s income was between $5,000 and $6,000. Petitioner’s two children have not attended private school but have lived at home and attended public school since a period beginning five years after the operation of December 10, 1943. Petitioner’s purpose in sending the children to boarding school during the year 1946 was to alleviate his wife’s pain and suffering in caring for the children by reason of her inability to speak above a whisper and to prevent a recurrence of the cancer which was responsible for the condition of her voice. He also thought it would be good for the children to be away from their mother as much as possible while she was unable to speak to them above a whisper. ‘Petitioner’s wife was employed part of her time in 1946 as a typist and stenographer. On account of the impairment which existed in her voice she found it difficult to hold a position and was only able to do part-time work. At the time of the hearing of this proceeding in 1951, she had recovered the use of her voice and seems to have entirely recovered from her throat cancer.’ The Tax Court said in its opinion that it had no reason to doubt the good faith and truthfulness of the taxpayer ..., but it nevertheless held that the expense of sending the children to school was not deductible as a medical expense under the provisions of § [213] ... In our opinion the expenses incurred by the taxpayer were non-deductible family expenses within the meaning of § [262(a)] of the Code rather than medical expenses. Concededly the line between the two is a difficult one to draw, but this only reflects the fact that expenditures made on behalf of some members of a family unit frequently benefit others in the family as well. The wife in this case had in the past contributed the services – caring for the children – for which the husband was required to pay because, owing to her illness, she could no longer care for them. If, for example, the husband had employed a governess for the children, or a cook, the wages he would have paid would not be deductible. Or, if the wife had died, and the children were sent to a boarding school, there would certainly be no basis for contending that such expenses were deductible. The examples given serve to illustrate that the expenses here were made necessary by the loss of the wife’s services, and that the only reason for allowing them as a deduction is that the wife also received a benefit. We think it unlikely that Congress intended to transform family expenses into medical expenses for this reason. The decision of the Tax Court is further supported by its conclusion that the expenditures were to some extent at least incurred while the wife was acting as a typist in order to earn money for the family. ... The decision is affirmed. FRANK, Circuit Judge (dissenting). .... ... The Commissioner argued, successfully in the Tax Court, that, because the money spent was only indirectly for the sake of the wife’s health and directly for the children’s maintenance, it could not qualify as a ‘medical expense.’ Much is made of the fact that the children themselves were healthy and normal – and little of the fact that it was their very health and normality which were draining away the mother’s strength. The Commissioner seemingly admits that the deduction might be a medical expense if the wife were sent away from her children to a sanitarium for rest and quiet, but asserts that it never can be if, for the very same purpose, the children are sent away from the mother – even if a boarding school for the children is cheaper than a sanitarium for the wife. I cannot believe that Congress intended such a meaningless distinction, that it meant to rule out all kinds of therapeutic treatment applied indirectly rather than directly – even though the indirect treatment be ‘primarily for the *** alleviation of a physical or mental defect or illness.’ [footnote omitted]. The cure ought to be the doctor’s business, not the Commissioner’s. The only sensible criterion of a ‘medical expense’ – and I think this criterion satisfies Congressional caution without destroying what little humanity remains in the Internal Revenue Code – should be that the taxpayer, in incurring the expense, was guided by a physician’s bona fide advice that such a treatment was necessary to the patient’s recovery from, or prevention of, a specific ailment. .... In the final analysis, the Commissioner, the Tax Court and my colleagues all seem to reject Mr. Ochs’ plea because of the nightmarish spectacle of opening the floodgates to cases involving expense for cooks, governesses, baby-sitters, nourishing food, clothing, frigidaires, electric dish-washers – in short, allowances as medical expenses for everything ‘helpful to a convalescent housewife or to one who is nervous or weak from past illness.’ I, for one, trust the Commissioner to make short shrift of most such claims. [footnote omitted] The tests should be: Would the taxpayer, considering his income and his living standard, normally spend money in this way regardless of illness? Has he enjoyed such luxuries or services in the past? Did a competent physician prescribe this specific expense as an indispensable part of the treatment? Has the taxpayer followed the physician’s advice in most economical way possible? Are the so-called medical expenses over and above what the patient would have to pay anyway for his living expenses, i.e., room, board, etc? Is the treatment closely geared to a particular condition and not just to the patient’s general good health or well-being? My colleagues are particularly worried about family expenses, traditionally nondeductible, passing as medical expenses. They would classify the children’s schooling here as a family expense, because, they say, it resulted from the loss of the wife’s services. I think they are mistaken. The Tax Court specifically found that the children were sent away so they would not bother the wife, and not because there was no one to take care of them. Och’s expenditures fit into the Congressional test for medical deductions because he was compelled to go to the expense of putting the children away primarily for the benefit of his sick wife. Expenses incurred solely because of the loss of the patient’s services and not as a part of his cure are a different thing altogether. Wendell v. Commissioner, 12 T.C. 161, for instance, disallowed a deduction for the salary of a nurse engaged in caring for a healthy infant whose mother had died in childbirth. The case turned on the simple fact that, where there is no patient, there can be no deduction. Thus, even here, expense attributed solely to the education, at least of the older child, should not be included as a medical expense. See Stringham v. Commissioner, supra. Nor should care of the children during that part of the day when the mother would be away, during the period while she was working part-time. Smith v. Commissioner, 40 B.T.A. 1038, aff’d 2d Cir., 113 F.2d 114. The same goes for any period when the older child would be away at public school during the day. In so far as the costs of this private schooling are thus allocable, I would limit the deductible expense to the care of the children at the times when they would otherwise be around the mother. ... ...
1. Is the rationale offered by the court consistent with the tax rules concerning imputed income? •Does the rationale seem a bit reminiscent of the rationale in Smith? 2. What caused taxpayer to have to incur the expenses on his relatively modest income of sending the children to boarding school? •Would taxpayers have had to bear these expenses if they did not have children? •Would taxpayers have had to bear these expenses if Mrs. Ochs did not have throat cancer?
•Should the legal expenses for establishing, conducting, and terminating the guardianship be deductible as medical expenses? For whose benefit were the expenses incurred? •See Gerstacker v. Commissioner, 414 F.2d 448 (6th Cir. 1969).
5. Do the CALI Lesson, Basic Federal Income Taxation: Medical Expense Deductions. Do not worry about question17. The floor is now 10%. B. Casualty Losses Read § 165(c)(3), § 165(e), § 165(h), § 165(i). Losses caused by “fire, storm, shipwreck, or other casualty, or from theft” do not usually result from personal consumption choices. Hence, a deduction seems appropriate. From the beginning, a problem has been to distinguish between a “bad hair day” and the type of damage that represents such a deprivation of consumption choice that a taxpayer should be permitted to share his/her burden with other taxpayers. This has not proved to be an easy line to draw – and one does not have to search the digests very hard to find contradictory results. Courts have had great difficulty defining “casualty,” and there is no definition in the regulations. Certain considerations seem relevant: •Not every loss should be treated as resulting from a casualty. We drop a plate, and it breaks. It’s called “life,” not a casualty. •There are certain risks that we may willingly assume. When something untoward materializes, we are in no position to complain. We own a cat and an expensive vase and put both of them in the same room at the same time. The cat knocks the vase over, and it breaks. See Dyer v. Commissioner, T.C. Memo. 1961-141, 1961 WL 424 (1961). •We certainly should not complain when the casualty is the result of our deliberate conduct. The arsonist should not be permitted to claim a casualty loss deduction when he burns down his own house, even though his loss was quite literally caused by “fire.” See Blackmun v. Commissioner, 88 T.C. 677, 681 (1987), aff’d, 867 F.2d 605 (1st Cir. 1988) (violation of public policy). •We engage in a business where a certain amount of breakage is predictable. Taxpayer operates a fleet of taxicabs, and a few of them are damaged in traffic accidents. •There are risks that we should be expected to address. When damage occurs over a period of time, perhaps taxpayer should be expected to take measures to address the problem. There are many cases involving damage that termites caused, and the results are not entirely consistent. What clues does the IRS provide in the following revenue ruling to help determine just what is a deductible casualty loss? Rev. Rul. 76-134 CASUALTY LOSS DUE TO FLOOD DAMAGE .... The questions presented are (1) whether losses from damage to property resulting from abnormally high water levels on bodies of water and (2) amounts expended for the construction of protective works or for moving homes back from their original locations to prevent probable losses from future storms are deductible as casualty losses under § 165 of the Internal Revenue Code of 1954. Section 165(a) of the Code provides the general rule that there shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. Section 165(c) provides, in part, that in the case of an individual, the deduction is limited to (1) losses incurred in a trade or business, (2) losses incurred in any transaction entered into for profit, though not connected with a trade or business, and (3) losses of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft. In respect of property not connected with a trade or business, a loss shall be allowed only to the extent that the amount of loss to such individual arising from each casualty, or from each theft, exceeds $100. Section 263 of the Code provides that no deduction shall be allowed for any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. Court decisions and revenue rulings have established standards for the application of the above provisions, and have developed the overall concept that the term ‘casualty’ as used in such provisions refers to an identifiable event of a sudden, unexpected, or unusual nature and that damage or loss resulting from progressive deterioration of property through a steadily operating cause would not be a casualty loss. [citations omitted]. Accordingly, losses due to physical damage to property, such as buildings, docks, seawalls, etc., as a result of wave action and wind during a storm are deductible as casualty losses under § 165 of the Code. Similarly, losses due to flooding of buildings and basements as a result of a storm and the complete destruction of buildings, occurring as a result of storm damage, are deductible casualty losses. However, there are situations in which damage or expenditures may be incurred due to high water on bodies of water that may not be casualty losses under § 165 of the Code such as damage or loss of value due to gradual erosion or inundation occurring at still water levels. The term ‘still water levels’ as used herein means normal seasonal variations in the water level of a body of water. These variations are not such sudden and identifiable events that the gradual erosion resulting therefrom may be attributed to a specific period of time. The rise and fall of the water levels of a body of water is a normal process, and damage resulting from normal high water levels alone lacks the characteristics of a casualty loss under § 165. Thus, where the taxpayer’s loss was due to progressive deterioration rather than some sudden, unexpected, or unusual cause, such loss is not a deductible casualty loss for Federal income tax purposes. Another situation involves expenditures by taxpayers for the construction of protective works or for moving their homes back from their original locations to prevent probable losses from future storms. In such cases, no casualty loss deduction is allowable under § 165 of the Code because § 165(c) expressly limits a casualty loss deduction to losses of property. Such expenditures are within the purview of § 263, which provides that no deduction shall be allowed for any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of the property. Where a casualty loss is allowed for the loss of property, the amount of loss deductible is measured by the excess of the value of the property just before the casualty over its value immediately after the casualty (but not more than the cost or other adjusted basis of the property), reduced by any insurance or compensation received. In the case of property not used in a trade or business, such amount is further reduced by $100 for each casualty. .... Notes and Questions: 1. For which of the following do you think there should be an allowable deduction for a casualty loss? •moth damage to a fur coat? •damage caused by a quarry blast? •freezing and bursting of water pipes? •damage from disease and insect attack to a tree? •damage to automobile engine caused by freezing conditions? •damage to automobile caused by taxpayer’s negligent driving? •damage to automobile caused by rusting and corrosion? See generally Standard Federal Income Tax Reporter (2011), ¶ 10,005.023. 2. Upon what narrow ground does Revenue Ruling 76-134 deny a casualty loss deduction? What tax treatment does the Revenue Ruling specify for such expenditures? 3. Calculation of the personal casualty loss deduction. •Section 165(h) limits the losses that an individual may deduct as casualty losses. •Reg. § 1.165-7(b)(1) limits all casualty losses – whether trade or business, transactions entered into for profit, or personal – to the lesser of the property’s fmv before the casualty reduced by the fmv of the property after the casualty OR the property’s adjusted basis. •If the property is used in a trade or business or held for the production of income AND it is totally destroyed by the casualty, the allowable loss is limited to the adjusted basis of the property. •What is the theoretical underpinning of these limitations? •Section 165(h)(1) limits the deductibility of the personal loss for each casualty to the amount by which the loss exceeds $100. •Section 165(h)(4)(A) defines “personal casualty gain” to be “recognized gain from any involuntary conversion of property” resulting from a casualty. Section 165(h)(4)(B) defines “personal casualty loss” to be a casualty loss after reduction by $100. •Section 165(h)(2) limits the deductibility of all personal casualty losses to the amount by which they exceed personal casualty gains and by which this net amount exceeds 10% of a taxpayer’s adjusted gross income. Taxpayer may reduce his/her adjusted gross income by the net personal casualty loss in making this 10% determination. § 165(h)(5)(A). •In the event personal casualty gains exceed personal casualty losses, taxpayer must treat all such gains and all such losses as if they resulted from the sales or exchanges of capital assets. § 165(h)(2)(B).
5. Do CALI Lesson, Basic Federal Income Taxation: Deductions: Personal Casualty Loss Deduction: Computation, Limitations. III. Creating a More Efficient and Productive EconomyThere are some deductions that the Code permits that promote a more efficient or productive economy. Under this heading, we might include dependent care expenses incurred so that taxpayer can work. We have already examined such expenditures. We should also include provisions that give taxpayers credits against tax liability for investing in making themselves more productive, i.e., in education, and for working. Also under this heading are the expenses of moving to a better – and presumably more valuable – job. A. Moving Expenses Read §§ 82, 217, 62(a)(15), 132(a)(6), and 132(g). These provisions interlock to assure that a taxpayer does not pay income tax on certain moving expenses, as § 217 defines and limits them. •Section 82 provides that a taxpayer who receives, directly or indirectly, payment for or reimbursement of moving expenses must include such payment in his/her gross income. •Section 217 permits taxpayer to deduct certain expenses of moving. § 217(b). This deduction is above-the-line, i.e., it reduces taxpayer’s agi. § 62(a)(15). •Thus taxpayer must include in his/her gross income an employer’s payment of taxpayer’s moving expenses, but paying or incurring moving expenses named in § 217(b) entitles taxpayer to a deduction. These amounts could offset. •Of course, if an employer pays for expenses that are not included in the statutory definition of “moving expenses,” the net result is that those amounts will be included in taxpayer’s gross income as compensation income. •If an employer does not pay for all of the expenses that are included in the statutory definition of “moving expenses,” the net result is that taxpayer may deduct these unreimbursed amounts, and these deductions will reduce his/her adjusted gross income. •Sections 132(a)(6) and 132(g) exclude an employer’s direct or indirect payment of an individual’s moving expenses, to the extent those expenses are within § 217(b), from the individual’s gross income.
•Taxpayer’s new “principal place of work” must be “at least 50 miles farther from his former residence than was his former principal place of work,” § 217(c)(1)(A), OR if taxpayer had no former principal place of work, then his/her new “principal place of work” must be at least 50 miles from his/her former residence, § 217(c)(1)(B). •Taxpayer need not have a job in the place that s/he leaves. Moving expenses are deductible if incurred to travel to a new job or to become self-employed full-time. •The regulations also create a “reasonable proximity” requirement concerning the new residence with respect to both time and distance. Reg. § 1.217-2(a)(3)(i). •Moving expenses incurred within one year of the date of commencing work at the new location are presumed to be reasonably proximate. Reg. § 1.217-2(a)(3)(i). •Generally, a taxpayer’s commute at the new location may not be longer than his/her commute at the old location. Reg. § 1.217-2(a)(3)(i). •Taxpayer must be a full-time employee for at least 39 weeks during the 12-month period immediately following his/her arrival in the general location of his/her principal place or work, § 217(c)(2)(A), OR during the 24 month period immediately following his/her arrival, must be a full-time employee or self-employed on a full-time basis during at least 78 weeks, not less than 39 of which are during the 12-month period immediately following arrival in the general location of his/her principal place of work, § 217(c)(2)(B). •If a taxpayer has not fulfilled the employment requirements at the time of filing the return for the taxable year during which s/he paid or incurred moving expenses but may yet satisfy them, then taxpayer may elect to deduct them. § 217(d)(2). •However, if taxpayer makes such an election and later fails to fulfill the employment requirements, taxpayer must recapture the amount previously deducted as gross income. § 217(d)(3).
Do the CALI Lesson, Basic Federal Income Taxation: Deductions: Moving Expenses B. Credits Against Tax The Code provides that certain expenditures count as credits against the taxpayer’s tax liability. Some of these credits promote a more efficient or productive economy, i.e., the credit for dependent care services necessary for gainful employment (§ 21) and the Hope and Lifetime Learning Credits for some educational expenses (§ 25A). They are subject to income phasedowns (§ 21) or phaseouts (§ 25A). This implies that taxpayers with higher incomes do not need strong incentives or do not need incentives at all in order to incur such expenses. These credits are not refundable, meaning that they can reduce taxpayer’s tax liability to $0, but no more. Section 24 provides a “child tax credit” of $1000 for each qualifying child of the taxpayer who is 16 or younger and a resident or citizen of the United States. The credit is subject to a phaseout as taxpayer’s income increases. A portion of this credit is refundable through tax year 2017. The earned income credit (§ 32) is available to lower-income taxpayers who work. The tax credit first increases with earned income and then phases out completely. The idea here is to encourage lower-income taxpayers to work and to earn more. This credit is refundable, meaning that taxpayer is entitled to a refund if the credit is for more than taxpayer’s tax liability. Section 36B provides a refundable credit to low income taxpayers who purchase health insurance. Note about Tax Credits We should note that Congress can use credits to target tax benefits to certain taxpayers. Congress can target tax benefits by phasing out or phasing down entitlement to them as taxpayer’s adjusted gross income increases. Congress can also target greater benefits to those in certain tax brackets, even if a tax credit is not subject to a phasedown or phaseout. We earlier noted the “upside down” effect of progressive tax rates on deductions. Higher income taxpayers benefit more from a deduction than lower income taxpayers. A credit can reverse this. The amount of a tax credit can be dependent on the amount that taxpayer spends on a certain item, e.g., 20%. That percentage will provide a greater benefit to those taxpayers whose marginal tax bracket is lower than 20% than a deduction would. The converse is true for those taxpayers whose marginal tax bracket is above 20%; those whose tax brackets are more than 20% would have benefit more from a deduction. Consider this example: Taxpayer has $100,000 of taxable income on which s/he pays $20,000 of income tax. Congress wishes to “reward” Taxpayer for having spent the last $1000 that Taxpayer earned on a particular item. The net after-tax cost to the Taxpayer for having spent the money in this way would be the following for taxpayers in each of the current tax brackets with either a deduction or a credit.
You can see from the table that taxpayers in the 10% and 15% brackets should prefer a credit. Taxpayers in the brackets above 20% should prefer a deduction or exclusion. By setting the credit amount between the marginal tax rates, Congress can favor those taxpayers whose tax brackets are lower than the credit amount, and disfavor those taxpayers whose tax brackets are higher than the credit amount. Do you think that Congress should make more use of tax credits? Less use? Why? Limitations on Deductions: Floors, Phaseouts, and Phasedowns Section 67 limits so-called “miscellaneous deductions” to the amount by which they exceed 2% of taxpayer’s AGI. In addition, Congress recently reinstated a phasedown of high income taxpayers’ itemized deductions and a phaseout of high income taxpayers’ deduction for personal exemptions. Section 68 reduces the itemized deductions170 of taxpayers whose AGI is above a threshold amount by 3% of the excess, but no more than 80% of taxpayer’s itemized deductions. The threshold amount is $300,000 for a joint return or surviving spouse, ½ that amount for a married individual filing separately, $275,000 for a head of household, and $250,000 for all others. § 68(b)(1). These amounts are subject to adjustments for inflation after 2013. § 68(b)(2). Section 151(d)(3) phases down a taxpayer’s deduction for personal exemptions by a certain percentage, that percentage increasing in 2% increments for every $2500 by which taxpayer’s AGI exceeds the threshold of § 68, but no more than 100% of taxpayer’s deductions for personal exemptions. Wrap-Up Questions for Chapter 71. Describe how § 170(e)(1)(A), which permits a deduction of the fmv of gifts of property to charity rather than the adjusted basis of the property creates a “true” loophole. 2. Why should state and local property taxes and/or state and local income or sales taxes be deductible? What policies do such deductions pursue? 3. Congress recently increased the floor for medical deductions from 7.5% of agi to 10% of agi. The floor used to be 3%. The general trend of this floor has been upward. How are these movements in the floor likely to affect who may take the medical expense deduction and how big a deduction they may take? 4. When a taxpayer is entitled to deduct moving expenses, why should a taxpayer be permitted to deduct the expense associated with a move of kenneling a dog but not the cost of a meal while en route to taxpayer’s new home? 5. Should Congress implement its tax policy with greater use of credits against tax liability rather than deductions or exclusions from gross income? Why? What about phasedowns or phaseouts? Directory: sites -> default -> files files -> Answer True False 2 points Question 2 files -> Northern England’s set-jetting locations files -> Nstructions for Acquiring Excess Equipment online, through the 1033 Program files -> Occupational health and safety files -> The Black Panther Party’s Ten Point Program files -> International programs roel profile files -> Fermi Questions a guide for Teachers, Students, and Event Supervisors Lloyd Abrams, Ph. D. DuPont Company, cr&D/ccas experimental Station Wilmington, de 19880 files -> Personal Information Name: Maha Al-Ammari Nationality: Saudi Relationship Status Download 2.25 Mb. Share with your friends:
|
