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Taxing Income

29 July, 2015 - 16:58

The United States taxes the income of its citizens and permanent residents. This personal income tax accounts for about 50% of the United States Government’s revenues. 1 The Government’s reliance on the personal income tax as a source of revenue has increased, and the proportion of its revenue from other taxes such as the corporate income tax or the estate and gift taxes has contracted. These facts alone provide some reason for law students to study the law of individual income tax.

Beyond this, the whole of title 26 of the United States Code (the Internal Revenue Code), the title that provides the federal rules of taxation, is one of the most significant statements of policy in American law. It affects everyone with an income. It affects everyone who might die. Tax law is hardly the exclusive domain of accountants and number crunchers. 2 Tax law is also the domain of anyone who cares about such objectives as fairness, economic growth, social policy, and so on – in short, everyone. The Code defines broadly the income on which it imposes a tax. It provides exceptions to these rules for those taxpayers Congress has deemed deserving of exceptions. This legislative exemption from an otherwise universal tax implicitly states policies on many subjects.

Far more persons will be subject to the Code’s rules year after year than will be tort victims or defendants, parties to a contract dispute, or victims of crime – although many persons reading these lines consider those topics much more important to their legal studies and eventually their legal careers. Such persons may be right, but they might be surprised at how much the individual income tax will affect their practices for the simple reason that the individual income tax affects the lives of nearly all Americans. Federal taxation is about money. Those who claim that they will avoid tax issues in their practices will find that they work for and with people who do care about money, and they will find that avoidance of tax issues can make for some less-than-satisfied clients and colleagues.


In any law practice, there will be times when you can

A. Practice a little tax law.

B. Malpractice a little tax law.

There is no option C.

  • Consider: P was injured in an automobile accident. P sued D for damages, prevailed, and collected damages. Tax consequences? Does it make any difference if P recovers only for her emotional distress? Does it make any difference if P recovers because her employer discriminated on the basis of sex?
  • Consider: S is a law student. Her university awarded her a full tuition scholarship. Any tax issues?
  • Consider: H and W are divorcing. They will divide their property (including their investments), arrange for alimony, and arrange for child support. Any tax issues?
  • Consider: A sells Blackacre to B for $30,000 more than A paid for it. Any tax issues? Do the tax issues change if B agrees to pay A in ten annual installments?
  • Consider: A wants to save money for her pension. If she understands some tax law, can she save some money – or more directly, enlarge her pension?
  • Consider: The federal government has established a program whereby homeowners who owe money on a mortgage can have the principal of their loan reduced. Any tax issues?
  • Consider: E’s employer permits E to purchase items that it sells for a discount. Tax consequences?
  • Consider: R is an employer who mistakenly paid E, an employee, a bonus in December. After discovering the mistake, E repaid the bonus to R. Any tax issues?
  • Consider: For tax purposes, how should a businessperson treat the costs of generating income? What if the businessperson purchases a machine that will generate income for at least several years into the future? What if the businessperson sells from inventory that s/he purchased?
  • And so on.  Do you really think that you can avoid issues such as these by ignoring them?
SOI Tax Stats at a Glance: Summary of Tax Collections Before Refunds by Type of Return, FY 2012

Type of Return

Number of Returns

Gross tax Collections

(Millions of $)

Individual Income tax





C Corporation income tax





Employment taxes





Excise taxes





Gift tax





Estate tax





Selected Information from Returns Filed

Corporate Returns (TY 2010)


Number filed with assets $250 million (M) or more




Percent of total corporate net income reported by firms with assets $250M or more



S Corporation Returns (TV 2010)


Number of returns



Partnership Returns (TV 2011)


Number of returns



Individual Returns


Top 1% adj gross income (AGI) break (TY 2011)




Top 10-percent AGI break (TY 2011)



Median AGI (TY 2011)




Percent that claim standard deductions (TY 2011)




Percent that claim itemized deductions (TY 2011)




Percent e-filed (TY 2012) through 4/25/2013



Percent using paid preparers (TY 2011)



Number of returns with AGI $1M or more (TY 2011)



State with the highest number—California (TY 2011)



State with the lowest number—Vermont (TY 2011)




Number of individual refunds (TY 2011) (millions)




Total Individual refund amount (TY 2011) (billions of $)



Average individual refund amount (TY 2011)



Earned Income Tax Credit (TY 2011)


Number of returns with credit (millions)




Amount claimed (billions of $)



Taxpayer Assistance (FY 2012)


Number of customers that receive assistance as a result of calling or walking in