Income Tax Flashcards
What is the primary source of all tax law?
Internal Revenue Code (this is what Congress passes)
Step Transaction
Ignore the individual transactions and instead tax the ultimate transaction
- Property “steps out”, then steps back in
ex. XYZ sells property to unrelated purchaser, then that purchaser sells it to a subsidiary of XYZ
Sham Transaction
Transaction lacks a business purpose, and economic substance will be ignored for tax purposes
Substance over form
The substance of a transaction and not merely its form governs its tax consequences
ex. President of XYZ has company lend him money, with no intention of paying it back
- IRS ignores legal formalities to determine the economic outcome of a transaction
Assignment of Income
Income is taxed to the “tree that grows the fruit” although it may be assigned to another prior receipt
ex. Mr T owns XYZ, an S corp - He directs all income to be paid to son and then doesn’t report the income
Hobby Loss
If generate net income (profit) in 3 out of 5 consecutive years, it is a business, not a hobby
- For horses, profit necessary 2 out of 7 consecutive years
5 basic categories of taxpayers, and minimum income amount that requires filing for self-employed
ACIDS
1) Aliens
2) Children < 24 (kiddie tax)
3) Individuals
4) Dependents
5) Self-Employed
**If net earnings from self-employment are at least $400
Frivolous Return, penalty
One that omits information necessary to determine taxpayer’s tax liability, or is based on taxpayer’s desire to impede the collection of tax
- Penalty = $5,000
Negligence, penalty
Accuracy related penalty, but without intent to defraud
- Penalty = 20% of underpayment attributed to negligence
Fraud, penalty
Intent to cheat the government
- Penalty = 75% of the portion of a tax underpayment attributable to fraud
Failure to Pay
0.5%/month the tax is unpaid to max 25%
Failure to File
5% of the tax due each month to max 25%
Estimated Tax due
To avoid a penalty pay the lesser of:
1. 90% of current year’s tax liability
2. 100% of prior year’s liability (or 110% if prior year’s AGI > $150,000)
