U.S. Federal Income Taxation of Individuals

Over the last two-plus years (beginning in spring 2012), I have written (and revised multiple times) this new textbook for the first Federal Income Tax class in law school. To set the stage, I paste in below the Preface. As one, lone law professor, I have little direct ability to reduce tuition costs for my students. When writing this textbook, however, I decided to decline expressions of interest from the legacy legal publishers in favor of making this textbook available as a free download over the internet (in ePub format for iPads, Mobi format for Kindles, and pdf format for laptops), with an at-cost, print-on-demand alternative for those who like a hard copy. Fortunately, eLangdell (a division of CALI, the Center for Computer-Assisted Legal Instruction) has been an ideal partner in this regard. In addition to eliminating (or lowering) student cost, this mode of publication will permit me to quickly and fully update the book each December or early January, incorporating expiring provisions, inflation adjustments for the coming calendar year, new Treasury Regulations, etc., in time for use in the spring semester, an approach that avoids cumbersome new editions or annual supplements. This publication method also makes the textbook suitable for use as a free study aid for students whose professors adopt another textbook, as this textbook walks the student through the law with many more fact patterns and examples than do many other textbooks. While this practice adds length, I believe that it also makes the book more helpful to students in confronting what can be daunting material. Finally, having the textbook easily accessible to foreign students enrolled in a course examining the U.S. Federal income taxation of individuals is important to me, and having the textbook available as a free internet download succeeds well in that regard. A Teacher’s Manual is available for professors who adopt the book (or parts of it) for use in their course. This textbook is not intended to be an exhaustive treatise; rather, it is intended to be far more useful than that for beginning tax law students by equipping the novice not merely with unmoored detail but rather with a rich blueprint that illuminates the deeper structural framework on which that detail hangs (sometimes crookedly). Chapter 1 outlines the conceptual meaning of the term “income” for uniquely tax purposes (as opposed to financial accounting or trust law purposes, for example) and examines the Internal Revenue Code provisions that translate this larger conceptual construct into positive law. Chapter 2 explores various forms of consumption taxation because the modern Internal Revenue Code is best perceived as a hybrid income-consumption tax that also contains many provisions—for wise or unwise nontax policy reasons—that are inconsistent with both forms of taxation. Chapter 3 then provides students with the story of how we got to where we are today, important context about the distribution of the tax burden, the budget, and economic trends, as well as material on ethical debates, economic theories, and politics as they affect taxation. Armed with this larger blueprint, students are then in a much better position to see how the myriad pieces that follow throughout the remaining 19 chapters fit into this bigger picture, whether comfortably or uncomfortably. For example, they are in a better position to appreciate how applying the income tax rules for debt to a debt-financed investment afforded more favorable consumption tax treatment provides tax arbitrage benefits, leading to tax shelter opportunities that Congress and the courts combat (sometimes ineffectively) with both statutory and common law weapons. And they are in a better position to appreciate how the tax system can sometimes be used to generate (or combat) unfair and economically inefficicient rent-seeking behavior. The term “economic rents” here has a special meaning to economists that has nothing to do with the common meaning of that word to those who pay money to a landlord to live in a flat. One way to define “rents” in this sense is to say that they are wealth accessions enjoyed by a person (the rentier) that would not have occurred in a perfectly competitive and transparent economy. Rent, in this special sense, represents the mere shift of wealth from others to the rentier (rather than the creation of new wealth) through a manipulation of the social or economic environment to enrich oneself or, in the pithy words of the The Economist magazine, “[c]utting yourself a bigger slice of the cake rather than making the cake bigger.” Blackmail is a form of illegal rent-seeking behavior, but much rent-seeking behavior is perfectly legal. In the tax environment, it can mean a “profit” that is nothing more than a transfer, in effect, from the Treasury (other taxpayers) to the rentier, a phenomenon that raises not only economic efficiency concerns but fairness concerns. Rent-seeking behavior is a significant problem in today’s economy—both inside and outside the tax system—but the tax system can also provide policy makers with a ready tool to combat such behavior (if they wish to use it). The underlying conceptual framework, context, and ethical and economic theories provided early on are then referenced throughout the book, providing the common thread with respect to every topic studied. In addition to providing a solid grounding in the conceptual and policy underpinnings of the income tax imposed on individuals, this textbook explores a sufficient amount of detail to teach students how to continue learning on their own. Indeed, so much of law school is guiding students in learning how to learn so that they can practice effectively over the course of their careers as the law ever evolves. Such an approach should well equip the students who go on to take upper-level tax classes (who will add even more detail to the structural framework learned here), as well as those who wish merely to be aware of the fundamental tax issues that might arise in their nontax practices (so that they know to do more research when the time comes or to seek help from a tax specialist where necessary). I also have a third audience in mind for this book, however: legislators, judges, policymakers, and those who simply wish to be better equipped as citizens in evaluating what they read about in the popular press about taxation in the U.S. Because this textbook does not merely recite and apply rules but explores the deeper internal logic (and evolution and policy) underlying the entire structure of the Federal income tax, readers should leave with a more sophisticated understanding of the often unspoken context underlying popular debates. In particular, Chapters 1, 2, and 3 may be good vehicles to use as an introductory unit in a Tax Policy Seminar course—especially because the book can be downloaded for free. Indeed, I think that one reason why taxation is such a fascinating subject (no sniggers, please) is that it affects literally everyone in society, whether directly or indirectly—everyone from the single mother trying to make ends meet, to the bright student putting herself through college and incurring large debts to do so, to the entrepreneur with a good idea, to the Fortune 500 company contemplating a merger. As Professor Michael Graetz (Columbia University) once observed, many more people file tax returns than vote in Presidential elections. How we choose to tax ourselves says a lot about how we view ourselves as a country and as members of a community that are inextricably interrelated, as tax dollars create the common physical and intangible infrastructure that permits the flourishing of both human capital and the economy. Fascinating stuff! In addition to text, cases, and other primary authority (and problems), this textbook is unusual in including not only charts and graphs but also links to a few New York Times articles that help to illuminate contrasting viewpoints, to provide relevant data or history in a very short space, or to reveal useful context surrounding the issue under study. I publicly thank the New York Times Company for permitting links to articles without charge. (I would have done the same with articles from other sources if they had similarly permitted such use without charge.) Case excerpts are often abbreviated to be more manageable as pedagogical tools (especially in light of the many demands on student time). Case footnotes that are included use their original numbering, indicated by being enclosed in brackets. My own original footnotes are unbracketed. ______________________________________ Senator Everett Dirksen is famously thought to have once said: “A billion here, a billion there, and pretty soon you’re talking about real money.” At different points in this book, some very large numbers are inevitably used, including millions, billions, and trillions. As they all use the same word ending, sometimes it is easy to lose sight of the magnitude of differences among them. For example, studies show that many people unconsciously estimate 1 billion to be about a third larger than 1 million because it contains three additional zeros when written in numerals (1,000,000,000 versus 1,000,000), but one billion is actually 1,000 millions (and 10 billion is 10,000 millions). The difference between a trillion and a billion is similar. Here is a helpful tool that aids in visualizing the vast differences among 1 million, 1 billion, and 1 trillion. One million seconds is only about 11.5 days. One billion seconds is almost 32 years. One trillion seconds is more than 31,688 years. _____________________________________ Finally, you will learn in the Introduction that Congress enacts our tax laws, as signed by the President. Here is one bit of context to keep in mind as you move through the course: in 2011 the average wealth (the value of assets less debt) of U.S. Senators was $11.9 million, and the average wealth of House members was $6.5 million. While a few outliers can skew averages, even median net worth exceeded $1 million in each of the House and Senate in 2012—a milestone. “If the idea of Congress was that you have the butcher, baker, candlestick maker representing the people, we’ve come to a system where we certainly don’t have that anymore.” ________________________________________ I would like to thank several tax law professors who served as peer reviewers for many of the chapters in this book. Their comments were substantive and insightful, and they resulted in material changes in the course of my final revisions that substantially improved the book. After working on this textbook for nearly two and one-half years, I was so close to it that I could no longer see some of the ways in which it could be improved, and I deeply appreciate the time and effort that they took in their careful reviews. In alphabetical order, they are Ellen Aprill, Neil Buchanan, Pat Cain, Adam Chodorow, Leandra Lederman, Roberta Mann, and Kerry Ryan. Many thanks! I would like to dedicate this textbook to the many, many Cleveland-Marshall College of Law students that I have had the pleasure of having in my classroom since I began teaching law in 1989. You rock! This 1.0 version of the textbook is current through May 2014. Happy journey! Deborah A. Geier Professor of Law Cleveland-Marshall College of Law Cleveland State University My bio can be found at: http://facultyprofile.csuohio.edu/csufacultyprofile/detail.cfm?FacultyID=D_GEIER This textbook delves more deeply into tax policy analysis than do most introductory tax textbooks. Indeed, one peer reviewer (Adam Chodorow of Arizona State) wrote: "This [text]book is amazing, a tour de force .... It is closer to a protracted scholarly article than a traditional casebook." Indeed, I feel as though I have written 22 scholarly articles (equal to each chapter in the book) with more than 850 footnotes (without counting case footnotes) over the last 2 and one-half years. After many false starts and dead ends, I have learned a lot along the way about where and how to obtain charts, graphs, and similar materials for use in Creative Commons work, such as government data (public domain) and Wiki Commons (containing Creative Commons material). The book should be formally published this summer. After I finish the final revisions later this month, I shall commence work on the accompanying Teacher's Manual. (No rest for the weary.)