Income Tax Fundamentals

Question 1

Types of Tax Authority

Answer 1

1. Internal Revenue Code - primary source of all tax law
2. Treasury Regulations- another source for tax law (explain law but not law itself)
3. Revenue Rulings and Procedures- administrative interpretation- may be cited as precedent
4. Congressional Committee reports - indicate the intent of congress - not used as precedent
5. Private Letter Rulings - apply to a specific taxpayer in a particular situation
6. Judicial Sources- court decision interpret law or facts

Question 2

Substance Over Form Transaction

Answer 2

Substance of the transaction and not form or type governs. IRS ignores legal formalities.

example- sell property owned by XYZ to ABC (owned by same person)

Question 3

Step Transaction

Answer 3

Ignores individual transaction and taxes the ultimate transaction. Interdependent transactions.

XYZ sell property to unrelated purchaser who then sells it to XYZ subsidiary.

Question 4

Assignment of Income

Answer 4

Income is taxed to the tree that grows the fruit. Similar to Gift transaction.

Question 5

Constructive Receipt

Answer 5

Technically received even though may not have physically received. Div income in insurance policy.

Question 6

Hobby Loss Rules

Answer 6

Expenses are allowed to the extent of income.
misc deduction subject to 2% of AGI

Any activity generating profit in 3 out of 5 years is business not a hobby

Horses - profit 2 out of 7 years

Question 7

Amended tax return

Answer 7

Form 1041

Question 8

Penalties

Answer 8

Frivolous Return - omits information, incorrect tax, desire to impede tax - $5000

Negligence- disregard of rules without intent to defraud. 20% penalty portion of underpayment. Includes failure to keep adequate books and records.

Fraud- intent to cheat. Penalty 75% of underpayment. ( on original deficiency, not interest)

Failure to pay above .5% per month - max 25%
Failure to file- 5% of tax due each month max 25%

Question 9

Estimated Tax

Answer 9

Lesser of:
90% current years liability
100% previous years liability
110% previous years liability if AGI exceeds $150k

Question 10

Major Tax Services

Answer 10

Research institute of America RIA

Commerce Clearing House CCH

Question 11

Estimated Tax Payments due

Answer 11

April 15
June 15 (+2)
September 15 (+3)
January 15 (+4)

Question 12

Extension

Answer 12

Extension to file October 15

• extension must show full amount of estimated tax for yr
• need not have payment
• if additional payments due-subject to penalty