SURVEY OF INCOME TAX SLIDES BRIEF HISTORY CODE STRUCTURE COURT SYSTEM

INTRODUCTION TO TAX SCHOOL TOP 40 TAX DOCTRINES

TOP 100 CODE SECTIONS TOP 100 TAX CASES TOP 100 TERMS TAX ETHICS

ON-LINE TAX AUTHORITIES OFFICIAL TAX AUTHORITIES TAX LL.M. PROGRAMS 10 SUGGESTED READINGS

INTRODUCTION TO TAX SCHOOL

TOP 40 TAX DOCTRINES

(ALPHABETICAL ORDER)

1. Acceleration of Income Doctrine: A taxpayer that carves out the

income component of “property” – such as mineral royalty rights – and
sells it separate from the “property” has ordinary income in the year of
sale with no basis recovery. He has thus accelerated the income from
a future year to the present. Commissioner v. P.G. Lake Inc., 356 U.S.
260 (1958). This doctrine applies to income and not to deductions;
hence, the sale of the non-income component and retention of the
income component will not result in a deductible loss. Also, taxpayers
who seek to take advantage of the Acceleration of Income Doctrine
may be restricted by the Substance Over Form Doctrine: the
transaction may be characterized as a loan secured by a future income
stream.

2. Accounting Method Definition: If a taxpayer treats an item or a type of

item erroneously in multiple tax years, this behavior amounts to an
accounting method, albeit an erroneous one. As a result, the taxpayer
may not change to a proper method of accounting without satisfying
the appropriate procedures for doing so, which include the application
of §481. Rev. Proc. 97-27. In Rev. Proc. 2006-12 stated: “if a
taxpayer uses an erroneous method of accounting for two or more
consecutive taxable years, the taxpayer has adopted a method of
accounting. . . . [A] taxpayer may not, without the Commissioner's
consent, retroactively change from an erroneous to a permissible
method of accounting by filing an amended return.” Diebold v. U.S.,
891 F. 2d 1597 (Fed. Cir. 1989). The application of this Accounting
Method Definition remains controversial. When applied, it is a powerful
tool for the government.

© 2007 by Steven J. Willis. All Rights Reserved. 1

INTRODUCTION TO TAX SCHOOL TOP 40 TAX DOCTRINES

3. Arrowsmith Doctrine: The character of a transaction is a function of

the transaction as a whole, even if it transcends multiple years.
Arrowsmith v. Commissioner, 344 U.S. 6 (1952). Thus an event in one
year may receive capital loss treatment, even without a sale or
exchange, if the item, when viewed as part of a continuing transaction,
would have had such treatment had it occurred in the year of the
primary transactions. The doctrine clearly applies to losses (which is
disadvantageous to taxpayers); whether it also applies to gains is
uncertain.

4. Assignment of Income Doctrine: Income from services is taxed to the

one who performs the services. Lucas v. Earl, 281 U.S. 111 (1930).
Income from property is taxed to the owner of the property. Helvering
v. Horst, 311 U.S. 112 (1940).

5. Burgess/Battlestein Scenario: A taxpayer may not “pay” an amount

with funds borrowed from the creditor immediately prior to the
attempted “payment.” Battlestein v. Commissioner, 631 F.2d 1182 (5th
Cir. 1980) (en banc). A taxpayer, however, may borrow funds from a
third party and then effectuate a “payment” using those funds.
Economically, the two transactions are identical. Legally, however,
they are different. Under the Burgess decision, a taxpayer may borrow
from a creditor, commingle the funds with other funds, wait some
period of time (see the Old and Cold Doctrine) and then successfully
“pay” the creditor/lender.

6. Business Purpose Doctrine: If a transaction has no Substantial

Business Purpose other than tax avoidance or reduction of income tax,
the law will not respect the transaction. This doctrine arose from
Gregory v. Helvering, 293 U.S. 465 (1935), which also addressed the
Substance Over Form Doctrine.

7. Cash Equivalence Doctrine: An unsecured promise to pay of a solvent

obligor, readily transferable, not subject to set-off, and not subject to a
discount substantially greater than the prevailing market rate is the
equivalent of cash. Cowden v. Commissioner, 289 F.2d 20 (5th Cir.
1961). As such, the fair market value of the promise is includible in
income upon receipt by a cash method taxpayer. Under the Schlude
Doctrine, it is also likely includible in the income of an accrual method
taxpayer.

© 2007 by Steven J. Willis. All Rights Reserved. 2

INTRODUCTION TO TAX SCHOOL TOP 40 TAX DOCTRINES

8. Chevron Deference: The judiciary must defer to an executive

agency's interpretation of a statute that the agency administers,
provided that the agency's interpretation is reasonable. Chevron,
U.S.A., Inc. v. National Resources Defense Council, Inc., 467 U.S. 837
(1984).

9. Commerciality Doctrine: Organizations which are overly commercial

are not entitled to exempt status under § 501(c)(3) and its
predecessors. Better Business Bureau of Washington, D.C., Inc. v.
United States, 326 U.S. 279 (1945).

10. Claim of Right Doctrine: When a taxpayer receives funds (which

represent earnings) with a contingent obligation to repay, either
because the sum is disputed or mistakenly paid, and no limitation on
the use of the funds exists, those funds are included in the taxpayer’s
income in the year they are received. North American Oil
Consolidated v. Burnet, 286 U.S. 417 (1932). This rule applies to cash
method taxpayers. Whether it also applies to accrual method
taxpayers is an issue of the Schlude Doctrine.

11. Cohan Rule: If a taxpayer cannot prove the amount of an expense, the
trier of fact may nevertheless estimate a reasonable amount. If an
amount has clearly been expended, to allow nothing because of
inadequate documentation is unreasonable. Cohan v. Commissioner,
39 F.2d 540 (2d Cir. 1930). Caution: Congress superseded this Rule
in many areas. E.g., § 274(d) disallows travel and entertainment
expenses (the type involved in Cohan) without adequate corroborating
records. Similarly, § 170(f)(11) requires documentation for most
charitable contributions.

12. Constructive Receipt Doctrine: A cash method taxpayer has income

when the proceeds are available to him, without substantial limitations,
and he refuses or neglects to accept them. Doctrine arises from Treas.
Reg. § 1.451-2(a). The Cowden v. Commissioner, 289 F.2d 20 (5th
Cir. 1961) gloss holds that a taxpayer may decline to enter into a
contract which would offer current receipt; hence, a taxpayer may
delay receipt without invoking the Constructive Receipt Doctrine if he
does so at the inception of the contract. Also, under Martin v.
Commissioner, 96 T.C. 814 (1991), a cash method taxpayer may
sometimes modify a contract, after partial performance, to defer receipt
of payments without triggering the Constructive Receipt Doctrine.

© 2007 by Steven J. Willis. All Rights Reserved. 3

INTRODUCTION TO TAX SCHOOL TOP 40 TAX DOCTRINES

13. Corn Products Doctrine: The § 1221 list of non-capital assets is

illustrative rather than exclusive. Corn Products Refining Co. v.
Commissioner, 350 U.S. 46 (1955). This doctrine was effectively
eliminated by the Arkansas Best exception pursuant to which the Corn
Products Doctrine applies only to hedging transactions. Arkansas Best
Corp. v. Commissioner, 485 U.S. 212 (1988).

14. Court Holding Company Doctrine: Under the assignment of income

doctrine, transferee completion of a transaction negotiated and fully
arranged by a transferor may be attributed to the transferor along with
an imputed transfer of the proceeds. Commissioner v. Court Holding
Co., 324 U.S. 331 (1945). This doctrine is related to the Substance
over Form Doctrine.

15. Crane Rule: The “amount realized” from a taxable event includes the
amount of the transferor’s debt assumed by the purchaser. It also
includes the amount of debt to which the property is subject, even if the
debt is not “assumed.” This rule applies both to recourse and non-
recourse liabilities. It applies to secured and unsecured debt. It also
applies even if the amount of the debt exceeds the fair market value of
the property. Crane v. Commissioner, 331 U.S. 1 (1947), as modified
by Commissioner v. Tufts, 461 U.S. 300 (1983). Many people
mistakenly cite the Crane Rule as: The basis of property acquired with
borrowed money includes an amount equal to the borrowed money
used. This corollary resulted from: Parker v. Delaney, 186 F.2d 455
(1st Cir. 1950).

16. Crummey Trust Doctrine: A grantor is allowed a § 2503(b) annual

exclusion amount for a gift of a future interest in trust to the beneficiary
if the beneficiary is granted a Crummey power. The Crummey power
entitles the beneficiary the right to demand ownership of the deposited
property for a limited period of time, which this 9th Circuit court found to
be equivalent to a present or completed interest for gift tax purposes.
Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968).

17. Davis/Kenan Gain: The use of appreciated property to satisfy an

obligation or to acquire something of value is a taxable event. United
States v. Davis, 370 U.S. 65 (1962). Kenan v. Commissioner, 114
F.2d 217 (2d Cir. 1940). Hence the taxpayer has gain or loss on the
transaction.

© 2007 by Steven J. Willis. All Rights Reserved. 4

INTRODUCTION TO TAX SCHOOL TOP 40 TAX DOCTRINES

18. Destination of Income Test: The purpose for which funds are expended
is irrelevant to whether the earning of the funds were related to an
exempt purpose. This test resulted from Congressional unhappiness
with the case of C. F. Mueller Co. v. Commissioner, 190 F.2d 120 (3rd
Cir.1951). The test appears in §§ 502 and 513.

19. Duty of Consistency: Arising from R.H. Stearns Co., 291 U.S. 54
(1934), the Duty is related to estoppel, as well as the Equitable
Recoupment (although it applies differently). The Court explained: “no
one shall be permitted to found any claim upon his own inequity or take
advantage of his own wrong.” A 1997 case listed the Duty’s factors as:
‘‘(a) The taxpayer made a representation of fact or reported an item for
tax purposes in one tax year; (b) the Commissioner acquiesced in or
relied on that fact for that year; and (c) the taxpayer desires to change
the representation previously made in a later tax year after the earlier
year has been closed by the statute of limitations.’’ Estate of Letts v.
Commissioner, 109 T.C. 290, 296 (1997). Often ignored, the Duty
exists as a potent, but ill-defined and underused government weapon.

20. Economic Benefit Doctrine: A cash method taxpayer has income when
he receives the economic benefit of the proceeds. This occurs even if
he lacks actual receipt, constructive receipt, or receipt of a cash
equivalent. It results when the payor irrevocably places funds for the
benefit of the taxpayer beyond the reach of the payor’s creditors.
Sproull v. Commissioner, 194 F.2d 541 (6th Cir. 1952). According to
most authorities, the Doctrine applies only to service income and
contest winnings; it does not apply to transactions involving the sale of
property. The government has consistently, but unsuccessfully,
disagreed with this limitation on the Doctrine.

21. Equitable Recoupment Doctrine: Parties timely litigating a tax claim –

income or deduction – may recoup a tax-barred related claim from the
same transaction which resulted in inconsistent treatment. Bull v.
United States 295 U.S. 247 (1935). Stone v. White, 301 U.S. 532
(1937). United States v. Dalm, 494 U.S. 596 (1990). Whether the
Doctrine applies in the Tax Court is controversial. Estate of Mueller v.
Commissioner, 107 T.C. 189 (1996) (en banc) (reversed by the Sixth
Circuit). This equitable doctrine is superseded by the seven
circumstances of adjustment found in § 1312 (even if the application of
mitigation fails for some reason other than the lack of a listed
circumstance). As a result, the doctrine typically applies when two
different types of taxes are involved, such as an income tax and an
estate, gift, excise, or alternative tax.

© 2007 by Steven J. Willis. All Rights Reserved. 5

INTRODUCTION TO TAX SCHOOL TOP 40 TAX DOCTRINES

22. Erroneous Deduction Exception: Recovery of an item erroneously

deducted does not result in Tax Benefit Rule income: the Tax Benefit
Rule applies only to items previously properly deducted. The Tax
Court applies this controversial exception in cases appealable to
circuits other than the Fifth or Ninth. Hughes & Luce L.L.P. v.
Commissioner, 70 F.3d 16 (5th Cir. 1995). Unvert v. Commissioner,
656 F.2d 483 (9th Cir. 1981). Arguably, the Fifth and Ninth circuits
judicially repeal much of § 1312(7) by their rejection of the Exception.

23. Form Over Substance Rule: This is the corollary to the Substance
Over Form Doctrine. Sometimes, courts respect form, finding that
taxpayers are entitled to organize their transactions to reduce taxes.
Gregory v. Helvering, 293 U.S. 465 (1935). Also important, is the use
of this Rule to prevent a taxpayer from disavowing his own chosen but
detrimental formalities: “You made your bed, so lie in it.” Note that the
Gregory decision stands both for the Form Over Substance Rule and
the Substance Over Form Doctrine.

24. Family Hostility Rule: Family hostility may militate against the
application of statutory rules governing attribution of stock ownership.
This rule has applied in relation to § 318; however, it has not
traditionally applied in relation to §§ 267 and 4946.

25. Golson Rule: The Tax Court is bound to follow decisions of the Circuit
Court to which a case is appealable. Golson v. Commissioner 54 T.C.
742 (1970). This controversial Rule sometimes results in a Tax Court
Judge signing an opinion with which he disagrees and then issuing an
opposite ruling, appealable to a different Circuit, during the same term.
Because the Tax Court is a national court, opinions from which are
appealable to twelve Circuits, this anomaly results.

26. Idaho Power Rule: Depreciation expense and other material costs
must be capitalized to the extent the underlying assets contributed to
the cost of a long-term asset. Commissioner v. Idaho Power Co., 418
U.S. 1 (1974).

27. Integral Part Doctrine: This un-codified doctrine applies mostly in the
tax exempt arena. It holds that an entity may achieve exempt status if
its activities are an integral part of another exempt organization and
they further the exempt purpose of the other organization. The
Doctrine applies even though the separate entity’s activities do not by
themselves justify exempt status. See, Treas. Reg. § 1.502-1(b).

© 2007 by Steven J. Willis. All Rights Reserved. 6

INTRODUCTION TO TAX SCHOOL TOP 40 TAX DOCTRINES

28. Legislative Grace Doctrine: An income tax deduction is a matter of

legislative grace. The burden of clearly showing the right to the claimed
deduction is on the taxpayer. Interstate Transit Lines v. Commissioner,
319 U.S. 590 (1943). In contrast, § 61 broadly taxes all income.

29. Matching Principle: For Generally Accepted Accounting Principles, the

Matching Principle requires that income be matched in the same
period with the costs required to produce it. Very generally, this rule
applies for tax purposes as part of the Accrual Method of Accounting;
however, violation of the rule is common. See, the Schlude Rule. No
general Matching Principle of income and deduction timing or
character between taxpayers exists. But see, Albertson’s Inc. v.
Commissioner, 42 F.3d 537 (9th Cir. 1994). In some instances, such
as §§ 267 and 404, the code requires matching of income and
deductions for timing. This, however, is a legislative rule, not a general
principle of tax law. Indeed, its existence in some statutes supports
the proposition that it does not exist generally: otherwise, it would be
unnecessary to state in a statute.

30. Old and Cold Doctrine: This unstated rule is generally known to tax
practitioners. At some points, events are so old and cold that they
acquire reality by themselves and cease to be part of an overall plan or
transaction; hence, the Substance Over Form Doctrine would not
apply. How long this takes is unclear.

31. Old Colony Rule: The form of the income does not matter in terms of
“whether” an item is income; hence, a taxpayer may have income upon
the receipt of cash, property, services, or even when an obligation is
satisfied on his behalf. Old Colony Trust Co. v. Commissioner, 279
U.S. 716 (1929).

32. Open Transaction Doctrine: A taxpayer need not recognize gain in an

“open transaction” until he has recovered his capital. Burnet v. Logan,
283 U.S. 404 (1931). Open transactions are rare, particularly since
statutory changes to § 453 in 1980. Typically, they involve the receipt
of rights so speculative that they lack a determinable value. An
example might involve the transfer of property in exchange for a
percentage of revenue from a future transaction under circumstances
in which the future transaction cannot realistically be valued.

© 2007 by Steven J. Willis. All Rights Reserved. 7

INTRODUCTION TO TAX SCHOOL TOP 40 TAX DOCTRINES

33. Rabbi Trust Doctrine: A transfer of funds for the benefit of a taxpayer
which remain subject to the claims of the transferor’s creditors does
not trigger the Economic Benefit Doctrine. The doctrine arose from a
fact pattern involving a synagogue and a rabbi. Ltr. Rul. 8113107.

34. Realization Event Doctrine: Mere appreciation in value of an asset will

not generally result in income; instead, some “realization event” such
as a sale or exchange is typically necessary. See, Commissioner, v.
Glenshaw Glass, 348 U.S. 426 (1955). See also, Cottage Savings
Association v. Commissioner, 499 U.S. 554 (1991). After Glenshaw
Glass, most authorities presumed this requirement was of
constitutional significance; however, after Cottage Savings, the more
common view is that is it more for administrative convenience.

35. Res Judicata: Every year constitutes a separate cause of action for
tax law. Hence, a final decision that an item of income must be
reported in a particular year is not res judicata regarding whether the
same item must be reported in a different year: each year is a separate
cause of action. The decision may, however, collaterally estop a party
from acting inconsistently. The difference is important: while res
judicata is an absolute bar, collateral estoppel is equitable and can be
overcome by a change in law or jurisprudence. Commissioner v.
Sunnen, 333 U.S. 591 (1948).

36. Schlude Doctrine: Accrual method taxpayers that receive prepaid

amounts for services must include them in income upon receipt.
Schlude v. Commissioner, 372 U.S. 128 (1963). This Doctrine is
controversial, but well-settled. A few – but very few – judicial
exceptions exist. Several statutory exceptions exist, such as §§ 455
(subscriptions), 456 (dues), 467 (rent), and 1272 (interest).

37. Skelly Oil Doctrine: A deduction for repayment of an amount not fully
taxed in a prior year may be limited to the portion taxed. United States
v. Skelly Oil Co., 394 U.S. 678 (1969).

38. Sham Transaction Doctrine: “Sham” transactions are ignored for tax
purposes. Knetsch v. U.S., 364 U.S. 361 (1960). This is an extension
of the Substance Over Form Doctrine. It tends to apply to egregious
cases, including ones involving fraud.

© 2007 by Steven J. Willis. All Rights Reserved. 8

INTRODUCTION TO TAX SCHOOL TOP 40 TAX DOCTRINES

39. Substance Over Form Doctrine: The substance of a transaction

controls over its form. Effectively, only the government may make this
argument. Taxpayers – because they choose the form of their
transactions – rarely, if ever, successfully disavow their chosen form in
favor of the economic substance. Gregory v. Helvering, 293 U.S. 465
(1935). Note that the Gregory decision stands both for the Form Over
Substance Rule and the Substance Over Form Doctrine. The Integral
Part Doctrine is a rare example of taxpayers being able to apply the
Substance Over Form Doctrine.

40. Tax Benefit Rule: An event “fundamentally inconsistent” with a proper

beneficial deduction in an earlier year sometimes results in income.
Hillsboro National Bank v. Commissioner, 460 U.S. 370 (1983). A
corollary exclusionary aspect of the rule appears in many early cases
and is codified in § 111.

© 2007 by Steven J. Willis. All Rights Reserved. 9