Question

1. Jim Harvey, your client, owns a life insurance policy on his own life. He has paid $6,500 in premiums, and the cash surrender value of the policy is $25,000. Jim Harvey borrowed $25,000 from the insurance company, using the cash surrender value as collateral. He is considering canceling the policy in payment of the loan. Jim Harvey would like to know the federal income tax consequences of canceling his insurance policy. Discuss the tax implications.

2. As we know, Congress devised a very broad definition of income and codified this definition in Section 61 of the Internal Revenue Code. Explain the Code's definition of income and how it is generally applied to taxpayers. In particular, explain how the Code's definition of income is different than other potential definitions of income, such as the economic concept of income, and use an example to illustrate the difference between the two systems.

3. In terms of revenue neutrality, comment on a tax cut enacted by Congress that also contains revenue offsets, a tax cut enacted by Congress that is phased in over a period of years, a tax cut enacted by Congress that contains a sunset provision & a tax cut enacted by Congress that includes a stealth tax feature

4. Should funds borrowed against your insurance policy be taxable? Why? Why not?

5. What are the tax implications when the taxpayer gets monies from insurance companies? Discuss.

6. Explain the function of Temporary Regulations.Compare a determination letter with a letter ruling.

7. Discuss the advantages and disadvantages of the Small Cases Division of the U.S. Tax Court.

Answer 1

1. When Jim Harvey cancels his insurance policy he will get his premiums back but the amount will not draw any tax consequence as he has paid the premiums with after tax money. Taxing the money which ia already taxed will attact double taxation and IRS doesnot want to double tax. As there is no Investment gain as well there is no immediate income tax effect.

2. Code 61 defines gross Income from all sources wherefrom Income is received, but doesnot limit itself to the following:

Dividend,

rent,

Alimony,

Income from interest in estate or trust,

Annuities.

Here in code 61 income basically means gains from all the sources which has been realized , whereas economic concept of Income concept is a way of accounting the unrealized gains with the realized gains.

example: Rent received of $10,000 is an income defined under sec61, where as increase in price of a owned land by $10,000 which is yet to be realised as the property is still held by me is an economic concept of income.

3.a. A tax cut must be accompanied by a revenue offset(can be termed as dynamic scoring) , will help brining the revenue neutrality. It shold also be kept in mind that there should be sufficient growth to offset the losses.

b. A tax cut is strongly recommedned with revenue offser, without revenue offset revenue neutrality cannot be acheived. Phased in and over tax cut can merely delay the revenue loss caused by some years.

As per the answering policy first 4 questions are answered including subparts.