Tax Law

Tax Law Attack Outline

To approach a Tax Law exam, read each question carefully and identify the relevant tax issues. Apply the key tax rules to the facts provided, ensuring to analyze different sections of the Internal Revenue Code as applicable.

Gross Income

Issue Checklist

  • ✓ Determine what constitutes gross income under §61
  • ✓ Identify any exclusions (gifts, inheritances)
  • ✓ Evaluate if the taxpayer has realized income

Key Rules

Gross income is defined as all income from whatever source derived (IRC §61).

Certain items are expressly excluded from gross income (e.g., gifts under §102).

Common Issues

  • Taxpayer receives a gift: is it taxable?
  • Taxpayer is awarded a settlement: is it gross income?
Deductions

Issue Checklist

  • ✓ Differentiate between above-the-line and below-the-line deductions
  • ✓ Identify limitations on deductions (e.g., §262, personal expenses)
  • ✓ Evaluate whether expenses are ordinary and necessary

Key Rules

Deductions are allowed for ordinary and necessary expenses paid or incurred in carrying on a trade or business (IRC §162).

Personal expenses are generally not deductible (IRC §262).

Common Issues

  • Taxpayer claims business meal expenses: are they deductible?
  • Taxpayer incurs medical expenses: do they qualify for a deduction?
Tax Credits

Issue Checklist

  • ✓ Identify available tax credits (e.g., Child Tax Credit, Earned Income Credit)
  • ✓ Assess phase-out thresholds for credits
  • ✓ Determine if any limitations apply to the credit

Key Rules

Tax credits reduce tax liability dollar-for-dollar, unlike deductions which reduce taxable income.

Some credits are refundable, while others are non-refundable.

Common Issues

  • Taxpayer claims Child Tax Credit: is the taxpayer eligible?
  • Taxpayer faces income phase-outs for the Earned Income Credit.
Capital Gains and Losses

Issue Checklist

  • ✓ Differentiate between short-term and long-term capital gains
  • ✓ Identify losses that can be deducted against ordinary income
  • ✓ Evaluate the application of §121 exclusion on home sales

Key Rules

Short-term capital gains are taxed as ordinary income, while long-term gains benefit from preferential rates (IRC §1(h)).

Taxpayers can offset capital gains with capital losses (IRC §1211).

Common Issues

  • Taxpayer sells stock at a gain: how is it taxed?
  • Taxpayer sells a primary residence: does any exclusion apply?
Taxation of Corporations

Issue Checklist

  • ✓ Identify types of corporations (C vs. S Corporations)
  • ✓ Determine taxation implications for corporate distributions
  • ✓ Evaluate the impact of double taxation on corporate income

Key Rules

C Corporations are taxed on their income, and shareholders are taxed again on dividends (double taxation theory).

S Corporations are pass-through entities for tax purposes (IRC §1361).

Common Issues

  • C Corporation distributes dividends: how is the income taxed to shareholders?
  • S Corporation incurs losses: can shareholders deduct them?
Estate and Gift Tax

Issue Checklist

  • ✓ Identify applicable exemptions and limits on gifts
  • ✓ Determine if any transfers are taxable gifts
  • ✓ Evaluate the estate tax implications for decedents

Key Rules

Gifts above the annual exclusion amount ($16,000 in 2022) may incur gift tax liabilities (IRC §2503).

The estate tax applies to net taxable estates exceeding the exemption amount ($12.06 million in 2022).

Common Issues

  • Decedent's estate exceeds the exemption: will estate tax apply?
  • Gift of property given before death: what is the tax impact?
Tax Procedure and Administration

Issue Checklist

  • ✓ Identify different types of audits (compliance, correspondence)
  • ✓ Understand the statute of limitations for tax assessments
  • ✓ Evaluate taxpayers' rights during IRS audits

Key Rules

The general statute of limitations for tax assessments is three years from the filing of the return (IRC §6501).

Taxpayers have rights under the Taxpayer Bill of Rights during audits.

Common Issues

  • Taxpayer receives a notice of audit: what are their rights?
  • Situations involving omitted income: is the statute of limitations extended?
International Taxation

Issue Checklist

  • ✓ Identify residency status of taxpayers for international taxation
  • ✓ Evaluate tax implications of foreign income
  • ✓ Understand foreign tax credits and exclusions

Key Rules

U.S. citizens are taxed on worldwide income, while non-residents are taxed only on U.S.-sourced income.

Foreign tax credits help mitigate double taxation (IRC §901).

Common Issues

  • U.S. citizen incurs foreign earnings: what are the tax obligations?
  • Foreign tax payments: how do they impact U.S. tax liability?
Exam Approach

Structure your answer by identifying the relevant issues, articulating the applicable laws, applying the facts to the law, and concluding with a well-supported analysis. Be precise and organize your response logically.

Time Management

Allocate your time based on the number of questions and the complexity of each. Spend more time on questions that carry more weight and ensure you leave time for review.

Mnemonics
  • Gross Income = All Income - Exclusions
  • Deductions: AL (above-the-line) and BL (below-the-line)
  • CAPITAL: Categories of Capital Assets - Short vs Long-term gains and losses
Common Pitfalls to Avoid
  • Failing to mention exclusions when discussing gross income.
  • Confusing deductions with credits and their impacts on the tax bill.
  • Neglecting the statute of limitations in tax procedure questions.

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