Personal Deductions

• Author: William Kratzke
• Pages: 442-473

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Chapter 7: Personal Deductions

In this chapter, we consider the

Code’s provisions for deductions and

credits for certain personal expen-

ditures. We select only a few164 such

provisions to examine, namely

§ 165's allowance of a deduction for

casualty losses, § 213's allowance of

a deduction for medical and dental

expenses, § 170's allowance of a

deduction for charitable contribu-

tions, § 164/275's allowance and dis-

allowance for payment of certain

taxes, and §§ 82/132/217's, allow-

ance of a deduction for moving ex-

penses or exclusion from gross

income.

Consider why there should be an allowable deduction of, exclusion of, or credit for

any personal expenses. We might preliminarily observe that there are three basic

purposes:

1. We want to encourage taxpayers to make a particular type of personal

expenditure. We may choose to make a “tax expenditure.” In this group, we

should place deductions, credits, or exclusions for charitable contributions, for

home mortgage interest, and for adoption expenses.

2. We want to provide some relief to those taxpayers whose personal

expenditures result – at best – from the exercise of choice among unappealing

alternatives. When discretion among consumption choices is absent, a court is

164 Among the provisions that we do not cove r are § 163(h)’s allowance of a ded uction for home

mortgage interest and §§ 221/62(a)(17)’s above-the-line deduc tion for interest paid on education loans.

We also do not consider deductions/ exclusions/deferrals on various pension-funding vehi cles. We do

not consider in detail the Hope and Lifetime Learning Credits, § 25A, the Earned Income Credit, § 32,

and the Adoption Expenses C redit, § 38. Obviously thes e are important topics, and t hey raise

interesting issues. Hopefully, a student can read the Code sections noted and gain sufficient

understanding of those topic s, at least for the time being.

The Tax Formula:

(gross income)

MINUS deductions named in § 62

EQUALS (adjusted gross income (AGI))

MINUS (standard deduction or

item ized ded uctions)

MINUS (personal exemptions)

EQUALS (taxable income)

Compute income tax liability from

tables in § 1 (indexed for inflation)

M IN US (credits against tax)

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less likely to find that a taxpayer’s accession to wealth is in fact gross income.

Cf. Gotcher; Benaglia, supra. Conversely, when taxpayers may spend an

accession to wealth any way they choose – as when they receive cash – they

have realized gross income. See Kowalski, supra. However, taxpayers must on

occasion make some expenditures that we feel do not result from meaningful

choices. The Code names some occasions when the absence of such discretion

entitles a taxpayer to deduct (or exclude) an expenditure from her gross income.

Examples include casualty losses and medical expenses.

3. We want to enlarge the tax base. Some taxpayer expenditures are not

necessarily trade or business expenses, but they in fact enhance a taxpayer’s

ability to generate taxable income. If they do that, they would also increase tax

revenues. We should encourage taxpayers to make such expenditures. In this

group, we place the Code’s provisions for moving expenses and child care.

I. “Tax Expenditures”

Congress may use the tax code to encourage165 (at least not to discourage) taxpayers

to make certain types of expenditures. In § 170, Congress allows taxpayers a

deduction for charitable contributions. This, coupled with the exemption from

income tax that many charities enjoy,166 may provide sufficient incentive for some

taxpayers to support the good work certain charities do.

In § 164, Congress has allowed a deduction for certain taxes that taxpayer has paid

or accrued. Section 275 specifically disallows a deduction for certain taxes that

taxpayer may have paid or accrued. This pattern may encourage some taxpayers to

engage in activities subject to a deductible tax, most notably, owning property.

With respect to both charitable contributions and payment of taxes, a taxpayer may

try to characterize payments that provide a benefit for the taxpayer as either a

charitable contribution or as payment of a tax. For example, a taxpayer might

contribute money to a university on the condition that the university grant a

165 See National Federation of Business v. Sebelius, 567 U.S. 519, 567 (2012) (Congress may shape

individual decisions throug h exercise of taxing power).

166 See § 501(a).

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scholarship to taxpayer’s daughter. Or a taxpayer may pay her share of a

condominium-owners’ association’s assessment to remodel the association’s

common areas. In neither case should taxpayer be permitted to claim a deduction.

Instead the taxpayer has simply “purchased something.” These are easy cases. How

do we determine whether taxpayer has merely bought something – or has made a

charitable contribution or paid a tax?

A. Charitable Contributions

Section 170(a)(1) permits taxpayers to deduct charitable contributions that they

make within a taxable year. Section 170(c) defines a “charitable contribution” to be

a gift “to or for the use of” certain specified types of organizations.

Such organizations include any political subdivision of a state, so long as the

“contribution is made for exclusively public purposes.” § 170(c)(1). Consider:

Taxpayers entered into an agreement to purchase certain property contingent on the

City Council rezoning it to permit use for a trailer court and shopping center. To

assure access to the portion intended for a mobile home development, the rezoning

proposal provided for dedication of a strip of the property for a public road. The

road would also provide access or frontage for a public school, for a church, and

for a home for the aged. Taxpayers completed their purchase and made the

contemplated transfer to the city. The City Council formally adopted the rezoning

ordinance.

•Should taxpayers be permitted a charitable deduction for the value of the

land it donated to the city to be used for a road?

•Should the fact that the City of Tucson benefitted from taxpayer’s

having provided the land, irrespective of taxpayer’s motive in

making the donation, be sufficient in itself to permit taxpayer a

deduction?

•Would it matter if the dedication of the land to the City did not in

fact increase the value of Taxpayers’ property?

•See Stubbs v. United States, 428 F.2d 885 (9th Cir. 1970), cert. denied, 400

U.S. 1009 (1971).

If a charitable contribution deduction turns on a weighing of benefits against the

taxpayer’s cost, whose benefit should be relevant – benefit to the public or benefit

to the taxpayer?