Contents

THE UNITED STATES TAX SYSTEM: AN OVERVIEWThe law in the United States concerning charitable giving is essentially a componentof the federal income tax law. The federal law of charitable giving is inextricablyintertwined with nearly all aspects of the federal law of income taxation,so much so that a full understanding of the law of charitable giving cannot beobtained without comprehension of the overall federal tax structure. This chapterprovides an overview of that structure, as a setting for the tax law subjectsthat are integral to the law of charitable giving.The U.S. income tax system has evolved into a comprehensive and complexbody of statutory law, regulatory law, and case law. 1 Within this labyrinth of taxlaw, however, is a basic structure. This fundamental framework incorporatesimportant concepts and terms that underpin the income tax system. This basicstructure, and the concepts and terms that make up this system, are examined inthis chapter. Given the facts that the Internal Revenue Code is close to 10,000pages in length (and growing), and that there are hundreds of volumes of taxregulations, tax rulings, and court opinions, this must be the most cursory ofsummaries.The U.S. income tax is a tax on the receipt of income. The tax is imposed onnearly all entities that receive income, and is computed and assessed on anannual basis. These taxpaying entities generally file annual returns with the IRS;these returns report income and other items used in the computation of theincome tax.§ 2.1 CONCEPT OF INCOMEBecause the federal income tax is imposed on income, what is or is not incomeis a threshold concern. The term income connotes the receipt or incurrence ofmoney or property (collectively, some form of economic benefit) as a result of anenterprise or investment. This is distinguishable from wealth, which is previouslyaccumulated money or property.The concept of what is or is not income initially seems straightforward andsimple. When one performs labor, one typically receives compensation in theform of wages, salary, bonuses, commissions, fees, and/or plan benefits. One mayalso receive goods, which are commonly considered as payment in kind. Bothforms of payment generally constitute income, as a return for services rendered.When one invests money or capital, one typically receives interest, dividends,rent, or a similar return as a result of the investment. One could alsoreceive property as a return on one’s investment. These forms of payment generallyare also forms of income, as a return on the investment.Some forms of payment, however, do not fit neatly within these concepts ofincome or profit. An award of compensatory damages and punitive damages ina civil action raises interesting questions. Compensatory damages repay a victimfor a loss suffered by payment of dollars of value relative to the loss sustained.The victim is being made whole for a loss, not receiving some sort ofprofit from his or her labor or capital. Punitive damages—money awarded to a1 A court observed that the Internal Revenue Code is a “vast and exceedingly complex statutory apparatus.”Judicial Watch, Inc. v. Rossotti, 2004-1 U.S.T.C. 50,115 (4th Cir. 2003). 28