Legal Precedents in Taxation and Capital Gains

Taxation of Illegal Trade and Embezzled Funds

Prostitution is regarded as a trade, and revenue law states that profits made from a trade are to be taxed (Mann v. Nash). Regarding money put in a constructive trust, the question arises: who should pay the tax? The claim of right doctrine does not exist in Australian law, so it is not applicable; furthermore, there was no claim of rights because the individual stole the money. The clean hands doctrine does not apply here because he cooperated and admitted he stole the money. Funds were held on constructive trust for the taxpayer's employer, and interest was not income derived by the taxpayer.

The James v. US Ruling on Embezzlement

The Wilcox ruling was overturned by James v. US, which addressed whether embezzled funds constitute gross income of the embezzler. For gains to be taxable, there must be a presence of a claim of right to the gain and an absence of the requirement to repay the gain. However, the 16th Amendment says there is no distinction between legal and illegal income. Consequently, James has to repay the misappropriated funds and pay tax upon those funds.

Deductibility of Professional Attire

In the case of Mallalieu, the court considered whether the clothes she had to buy were deductible from taxable income. Because the clothes had a mixed personal and business purpose, no deduction was allowed, with the specific exceptions of a wig, gown, and collar.

International Corporate Tax and Exit Fees

National Grid Indus and Freedom of Establishment

In National Grid Indus, the issue was whether a company is obliged to pay the tax imposed directly without a deferral. The company argued that this goes against Article 49 on the freedom of establishment and that the tax cannot be justified because it is charged on unrealized capital gains. It was ruled that the Netherlands can collect exit tax but must do so proportionally.

Lankhorst and Thin Capitalization Rules

The Lankhorst case asks: is it discriminatory that foreign corporations are not entitled to tax credits while native corporations are? In a scenario with two Dutch parent companies and a German subsidiary, because they are in different jurisdictions, they cannot pay it as debt; they have to pay it as dividends. The thin capitalization rule is not allowed because it goes against the principle of non-discrimination and the freedom of establishment.

Capital Gains and Government Incentives

Capital Gains (CG) treatment varies by region:

• United States: Taxed at a preferential rate.
• European Union: There is often no distinction between income and CG. When gains arise from business, they are taxed as ordinary income; gains in the private sphere are generally not taxed.

Special Rules and Depreciation

Special rules include roll-over relief (which allows a taxpayer to postpone the payment of tax), preferential rates (to encourage investment), depreciation (applied when making a profit on a depreciated asset), and capital loss provisions. Government incentives often include accelerated depreciation, granting certain taxpayers the possibility to recover capitalized costs in a shorter time. For example, Italy boosted depreciation by 150%.