administration of the criminal justice system. In other cases, courts have not upheld that right. In Georgia, for example, a prisoner’s right to privacy includes the right to starve to death (Zant v. Prevatte, 248 Ga. 832, 286 S.E.2d 715 [1982]). The United States imprisons more people per capita than any other country. By 2009, 2.3 million people were behind bars. The record prison population figures were driven by tough policies that mandate long terms for drug offenders and other criminals. Many critics of the increase in incarceration argue that confine- ment serves only to “dehabilitate” convicts and breed more crime. According to these critics, incarceration too often turns individuals capa- ble of rehabilitation into angry, vindictive persons. By the time many inmates are released from incarceration, they have been deprived of a means of self-support. Stripped of self-respect and resources, many ex-convicts find it nearly impossible to lead anything other than a life of crime and despair. Other critics of wholesale incarceration point out that jail and prison inmates are disproportionately African American. In 2009, one in nine African American men between the ages of 20 and 34 were incarcerated, compared to one in 30 other men of the same age. Still other critics emphasize the unfairness reflected in the disparity between the tremen- dous number of drug offenders in jail and prison, compared with the small number of white-collar criminals incarcerated. For exam- ple, in 1991 the federal courts sentenced more than 14,000 defendants to prison terms for drug offenses, compared with fewer than 5,500 persons for FRAUD, embezzlement, and RACKETEERING crimes. Following the SEPTEMBER 11TH ATTACKS in 2001, the federal government mobilized to fight a WAR ON TERRORISM. President GEORGE W. BUSH authorized the indefinite detention of enemy combatants in a 2002 military order. One person captured by U.S. forces in Afghanistan was Yaser Esam Hamdi, who claimed he was a U.S. citizen. Hamdi sought his release from indefinite incarceration in a military prison. The U.S. Court of Appeals for the Fourth Circuit ruled that Hamdi could be held as an ENEMY COMBATANT and that his citizenship did not change his status. The Supreme Court over- turned this decision in Hamdi v. Rumsfeld, 542 U.S. 507, 124 S.Ct. 2633, 159 L.Ed.2d 578 (2004), ruling that U.S. citizens held as enemy combatants may challenge their detention in U.S. courts. In a series of cases, the Supreme Court considered the rights of enemy combatants incarcerated at Guantanamo Bay, Cuba, who were not U.S. citizens. The Bush Administration claimed that they had no legal rights. The Court disagreed. In Rasul v. Bush 542 U.S. 466, 124 S. Ct. 2686, 159 L. Ed. 2d 548 (2004), the Court ruled that the federal habeas statute applied to non-citizen detainees. Congress responded with the Detainee Treatment Act of 2005, stripping the federal courts of jurisdiction over HABEAS CORPUS petitions filed by the Guantanamo detainees. The Supreme Court, in Boumediene v. Bush, 553 U.S.__, 128 S.Ct. 2229, 171 L.Ed.2d 41(2008), ruled that the act and a similar 2006 statute were unconstitutional. FURTHER READINGS Palmer, John. 2006.Constitutional Rights of Prisoners.8th ed. New York: Anderson Pub. Co. Pew Center on the States.2008. One in 100: Behind Bars in America 2008.Washington, D.C. Potts, Jeff. 1993. “American Penal Institutions and Two Alternative Proposals for Punishment.” South Texas Law Review 34. Richardson, Louise. Ed. 2006.The Roots of Terrorism.New York: Routledge. Sturm, Susan P. 1993. “The Legacy and Future of Corrections Litigation.” University of Pennsylvania Law Review 142. CROSS REFERENCES Juvenile Law; Sentencing. INCEST The crime of sexual relations or marriage taking place between a male and female who are so closely linked by blood or affinity that such activity is prohibited by law. Incest is a statutory crime, often classified as a felony. The purpose of incest statutes is to prevent sexual intercourse between individuals related within the degrees set forth, for the furtherance of the public policy in favor of domestic peace. The PROHIBITION of intermar- riage is also based upon genetic considerations, since when excessive inbreeding takes place, undesirable recessive genes become express ed and genetic defects and disease are more readily perpetuated. In addition, the incest taboo is universal in human culture. GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 388 INCEST RAPE and incest are separate offenses and are distinguished by the fact that mutual consent is required for incest but not for rape. When the female is below the AGE OF CONSENT recognized by law, however, the same act can be both rape and incest. The proscribed degrees of incest vary among the different statutes. Some include parent and child, brother and sister, uncle and niece, or aunt and nephew, and first cousins. In addition, intermarriage and sexual relations are also frequently prohibited among individuals who are related by half-blood, including brothers and sisters and uncles and nieces of the half-blood. In a number of jurisdictions, incest statutes extend to relationships among individuals relat- ed by affinity. Such statutes proscribe sexual relations between stepfathers and stepdaughters, stepmothers and stepsons, or brothers- and sisters-in-law, and such relations are punishable as incest. It is necessary for the relationship of affinity to exist at the time the intermarriage or sexual intercourse occurs in order for the act to constitute incest. In the event that the relation- ship has terminated prior to the time that the act takes place, the intermarriage or sexual inter- course is not regarded as incest. Affinity ordinarily terminates upon the divorce or death of the blood relation through whom the relationship was formed. Following the divorce or death of his spouse, it is not a violation of incest statutes for a man to marry or have sexual relations with his stepdaughter or his spouse’s sister. Certain statutes require that the individual accused of incest have knowledge of the relation- ship. In such cases, both parties need not be aware that their actions are incestuous in order for the party who does know to be convicted. When intermarriage i s prohibited by law, it need not b e proved that sexual intercourse took place in order for a conviction to be sustained, since the off ense is complete on intermarriage. In statutes that define incest as the intermarriage or CARNAL KNOWLEDGE of individuals within the prohibited degrees, incest can be committed either by intermar- riage or sexual re lations. Some state laws provide that the crime of incest is not committed unless both parties consent to it. When the sexual relations at issue were accomplished by force, the act constitutes rape, and the individual accused cannot be convicted of incest. It is no defense to incest that the woman had prior sexual relations or has a reputation for unchastity. Similarly, voluntary drunkenness, moral insanity, or an uncontrollable impulse are insufficient defenses. Punishment for a conviction pursuant to an incest statute is determined by statute. INCHOATE Imperfect; partial; unfinished; begun, but not completed; as in a contract not executed by all the parties. INCIDENT OF OWNERSHIP Some aspect of the exclusive possession or control over the disposition or use of property that demonstrates that the person with such exclusive rights has not relin quished them. A person who has kept the right to change the beneficiaries on his or her life insurance policy has retained an incident of ownership and is, therefore, considered the owner of the policy. INCIDENTAL Contingent upon or pertaining to something that is more important; that which is necessary, apper- taining to, or depending upon another known as the principal. Under workers’ compensation statutes, a risk is deemed incidental to employment when it is related to whatever a worker must do in order to fulfill the employment contract, but is not the primary function that the worker was hired to do. INCITE To arouse; urge; provoke; encourage; spur on; goad; stir up; instigate; set in motion; as in to incite a riot. Also, generally, in criminal law to instigate, persuade, or move another to commit a crime; in this sense nearly synonymous with abet. INCOME The return in money from one's business, labor, or capital invested; gains, profits, salary, wages, etc. The gain derived from capital, from labor or effort, or both combined, including profit or gain through sale or conversion of capital. Income is not a gain accruing to capital or a growth in the GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION INCOME 389 value of the investment, but is a profit, something of exchangeable value, proceeding from the property and being received or drawn by the recipient for separ ate use, benefit, and disposal. That which comes in or is received from any business, or investment of capital, witho ut refer- ence to outgoing expenditures. INCOME SPLITTING The right, created by provisions of federal tax laws, given to married couples who file joint returns to have their combined incomes subject to an income tax at a rate equal to that which would be imposed if each had filed a separate return for one-half the amount of their combined income. Income splitting was devised as a result of legislation enacted by Congress in 1948 to equalize the federal TAXATION of married couples who lived in common-law states and who paid higher taxes than couples who lived in COMMU- NITY PROPERTY states and, as a result, have the tax benefits of income splitting. INCOME TAX A charge imposed by government on the annual gains of a person, corporation, or other taxable unit derived through work, business pursuits, invest- ments, property dealings, and other sources deter- mined in accordance with the Internal Revenue Code or state law. Taxes have been called the building block of civilization. In fact, taxes existed in Sumer, the first organized society of record, where their payment carried great religious meaning. Taxes were also a fundamental part of ancient Greece and the Roman Empire. The religious aspect of TAXATION in Renaissance Italy is depicted in the Brancacci Chapel, in Florence. The fresco Rendering of the Tribute Money depicts the gods approving the Florentine INCOME TAX. In the United States, the federal tax laws are set forth in the INTERNAL REVENUE CODE and enforced by the INTERNAL REVENUE SERVICE (IRS). History TheoriginoftaxationintheUnitedStatescan be traced to the time when the colonists were heavily taxed by Great Britain on everything from tea to legal and business documents that were required by the STAMP TAX.Thecolonists’ disdain for this taxation without representa- tion (so-called because the colonies had no voice in the establishment of the taxes) gave rise to revolts such as the Boston Tea Party. However, even after the Revolutionary War and the adoption of the U.S. Constitution, the main source of revenue for the newly created states was money received from customs and excise taxes on items such as carriages, sugar, whiskey, and snuff. Income tax first appeared in the United States in 1862, during the Civil War. At that time, only about on e percent of the population was required to pay the tax. A flat-rate income tax was imposed in 1867. The income tax was repealed in its entirety in 1872. Income tax was a rallying point for the Populist party in 1892 and had enough support two years later that Congress passed the Income Tax Act of 1894. The tax at that time was two percent on individual incomes in excess of $4,000, which meant that it reached only the wealthiest members of the population. The Supreme Court struck down the tax, holding that it violated the constitutional requirement that direct taxes be apportioned among the states by population (Pollock v. Farmers’ Loan & Trust, 158 U.S. 601, 15 S. Ct. 912, 3 9 L. Ed. 1108 [1895]). After many years of debate and compro- mise, the SIXTEENTH AMENDMENT to the Constitu- tion was ratified in 1913, providin g Congress with the power to lay and collect taxes on income without apportionment among the states. T he objectives of the income tax were the equitable distribution of the tax burden and the raising of revenue. Since 1913 the U.S. income tax system has become very complex. In 1913 the income tax laws were contained in 18 pages of legislation; the explanation of the TAX REFORM ACT OF 1986 was more than 1,300 pages long (Pub. L. 99- 514, Oct. 22, 1986, 100 Stat. 2085). Commerce Clearing House, a publisher of tax information, released a version of the Internal Revenue Code in the early 1990s that was four times thicker than its version in 1953. Changes to the tax laws often reflect the times. The flat tax of 1913 was later replaced with a GRADUATED TAX. After the United States entered WORLD WAR I, the War Revenue Act of 1917 imposed a maximum tax rate for individuals of 67 percent, compared with a rate of 13 percent in 1916. In 1924 Secretary of the Treasury Andrew W. Mellon, speaking to Congress about the high level of taxation, stated, GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 390 INCOME SPLITTING The present system is a failure. It was an emergency measure, adopted under the pres- sure of war necessity and not to be counted upon as a permanent part of our revenue structure. The high rates put pressure on taxpayers to reduce their TAXABLE INCOME,tend to destroy individual initiative and enterprise, and seriously impede the development of productive business Ways will always be found to avoid taxes so destructive in their nature, and the only way to save the situation is to put the taxes on a reasonable basis that will permit business to go on and industry to develop. Consequently, the Revenue Act of 1924 reduced the maximum individual tax rate to 43 percent (Revenue Acts, June 2, 1924, ch. 234, 43 Stat. 253). In 1926 the rate was further reduced to 25 percent. The Revenue Act of 1932 was the first tax law passed during the Great Depression (Reve- nue Acts, June 6, 1932, ch. 209, 47 Stat. 169). It increased the individual maximum rate from 25 to 63 percent and reduced personal exemptions from $1,500 to $1,000 for single persons, and from $3,500 to $2,500 for married couples. The NATIONAL INDUSTRIAL RECOVERY ACT OF 1933 (NIRA), part of President Franklin D. Roose- velt’s NEW DEAL, imposed a five percent excise tax on dividend receipts, imposed a capital stock tax and an excess profits tax, and suspended all deductions for losses (June 16, 1933, ch. 90, 48 Stat. 195). The repeal in 1933 of the EIGHTEENTH AMENDMENT , which had prohibited the manufac- ture and sale of alcohol, brought in an estimated $90 million in new liquor taxes in 1934. The SOCIAL SECURITY ACT OF 1935 provided for a wage tax, half to be paid by the employee and half by the employer, to establish a federal retirement fund (Old Age Pension Act, Aug. 14, 1935, ch. 531, 49 Stat. 620). The Wealth Tax Act, also known as the Revenue Act of 1935, increased the maximum tax rate to 79 percent, the Revenue Acts of 1940 and 1941 increased it to 81 percent, the Revenue Act of 1942 raised it to 88 percent, and the Individual Income Tax Act of 1944 raised the individual maximum rate to 94 percent. The post-World War II Revenue Act of 1945 reduced the individual maximum tax from 94 percent to 91 percent. The Revenue Act of 1950, during the KOREAN WAR, reduced it to 84.4 percent, but it was raised the next year to 92 percent (Revenue Act of 1950, Sept. 23, 1950, ch. 994, Stat. 906). It remained at this level until 1964, when it was reduced to 70 percent. The Revenue Act of 1954 revised the Internal Revenue Code of 1939, making major changes that were beneficial to the taxpayer, including providing for CHILD CARE deductions (later changed to credits), an increase in the charitable contribution limit, a tax credit against taxable retirement income, emplo yee deduc- tions for business expenses, and liberalized depreciation deductions. From 195 4 to 1962, the Internal Revenue Code was amended by 183 separate acts. In 1974 the EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA) created protections for employees whose employers promised specified pensions or other retirement contributions (Pub. L. No. 93-406, Sept. 2, 1974, 88 Stat. 829). ERISA required that, in order to be tax deductible, the employer’s plan contribution must meet certain minimum standards as to employee participation and vesting and employer funding. ERISA also approved the use of individual retirement accounts (IRAs) to encourage tax-deferred retirement savings by individuals. The Economic Recovery Tax Act of 1981 (ERTA) provided the largest tax cut up to that time, reducing the maximum individual rate from 70 percent to 50 percent (Pub. L. No. 97- 34, Aug. 13, 1981, 95 Stat. 172). The most sweeping tax changes since WORLD WAR II were enacted in the Tax Reform Act of 1986. This bill was signed into law by President RONALD REAGAN and was designed to equalize the tax treatment SOURCE: Internal Revenue Service, Internal Revenue Gross Collections, by Type of Tax, Fiscal Years 1960–2008. Individual Income Taxes Collected, 1960 to 2008 0 200 400 600 800 1,000 1,200 1,400 1,600 44.9 1960 103.6 1970 287.5 1980 540.2 1990 1,137 2000 1,426 2008 Year IRS collections (in billions of dollars) ILLUSTRATION BY GGS CREATIVE RESOURCES. REPRODUCED BY PERMISSION OF GALE, A PART OF CENGAGE LEARNING. GALE ENCYCLOPEDIA OF AMERICAN LAW, 3 RD E DITION INCOME TAX 391 of various assets, elimin ate tax shelters, and lower marginal rates. Conservatives wanted the act to provide a single, low tax rate that could be applied to everyone. Although this single, flat rate was not included in the final bill, tax rates were reduced to 15 percent on the first $17,850 of income for singles and $29,750 for married couples, and set at 28 to 33 percent on remaining income. Many deductions were repealed, such as a deduction available to two- income married couples that had been used to avoid the “marriage penalty” (a greater tax liability incurred when two persons filed their income tax return as a married couple rather than as individuals). Although the personal exemption exclusion was increased, an exemp- tion for elderly and blind persons who itemize deductions was repealed. In addition, a special capital gains rate was repealed, as was an investment tax credit that had been introduced in 1962 by President JOHN F. KENNEDY. The Omnibus Budget Reconciliation Act of 1993, the first budget and tax act enacted during the Clinton administration, was vigo rously debated, and passed with only the minimum number of necessary votes (Pub. L. No. 103-66, Aug. 10, 1993, 107 Stat. 312). This law provided for income tax rates of 15, 28, 31, 36, and 39.6 percent on varying levels of income and for the taxation of SOCIAL SECURITY income if the taxpayer receives other income over a certain level. In 2001 Congress enacted a major income tax cut at the urging of President GEORGE W. BUSH. Over the course of 11 years, the law reduces marginal income tax rates across all levels of income. The 36 percent rate will be lowered to 33 percent, the 31 percent rate to 28 percent, the 28 percent rate to 25 percent. In addition, a new bottom 10 percent rate was created. (Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107-16, 115 Stat. 38.) Since the early 1980s, a flat-rate tax system, rather than the graduated bracketed method, has been proposed. (The graduated bracketed meth- od is the one that has been used since graduated taxes were introduced: the percentage of tax differs based on the amount of taxable income.) The flat-rate system would impose one rate, such as 20 percent, on all income and would eliminate special deductions, credits, and exclusions. Despite firm support by some, the flat-rate tax has not been adopted in the United States. Computation of Income Tax Regardless of the changes made by legislators since 1913, the formula for computing the amount of tax owed has remained basically the same. To determine the amount of income tax owed, certain deductions are taken from an individual’s gross income to arrive at an adjusted gross income, from which additional deductions are taken to arrive at the taxable income. Once the amount of taxable income has been determined, tax rate charts determine the exact amount of tax owed. If the amount of tax owed is less than the amount already paid through tax prepayment or the withholding of taxes from paychecks, the taxpayer is entitled to a refund from the IRS. If the amount of tax owed is more than what has already been paid, the taxpayer must pay the difference to the IRS. Calculating the gross income of restaurant employees whose income is partially derived from gratuities left by customers has led to disputes with the IRS and employers over how much they should contribute in Federal Insur- ance Contribution Act ( FICA) taxes. Although customers pay these tips directly to employees, federal law deems the tips to have been wages paid by the employer for FICA tax purposes. Employers are imputed to have paid large sums of money they never handled and for which they have no way of ascertaining the exact amount. The Supreme Court, in United States v. Fior D’Italia, 536 U.S. 238, 122 S. Ct. 2117, 153 L. Ed. 2d 280 (2002), upheld the IRS “aggregate method” of reporting tip income. Instead of requiring the IRS to make individual determi- nations of unreported tips for each employee when calculating FICA tax, the Court held that the IRS could make employers report their gross sales on a monthly statement to help determine tip income. Employees also must report their tip income monthly on a form. The IRS then uses these two pieces of information to calculate what the employer needs to contribute in FICA tax. Gross Income The first step in computing the amount of tax liability is the determination of gross income. Gross income is defined as “all income from whatever source derived,” whether from personal services, business activities, or capital assets (property owned for personal or business purposes). Compensation for services in the form of money, wages, tips, salaries, bonuses, fees, and commissions constitutes GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 392 INCOME TAX income. Problems in defining income often arise when a taxpayer realizes a benefit or compensa- tion that is not in the form of money. An example of such compensation is the fringe benefits an employee receives from an employer. The Internal Revenue Code defines these benefits as income and places the burden on the employee to demonstrate why they should be excluded from gross income. Dis- counts on the employer’s products and other items of minimal value to the employer are usually not consider ed income to the employee. These benefits (which include airline tickets at nominal cost for airline employees and mer- chandise discounts for department store employ- ees) are usually of great value to the employee but do not cost much for the employer to provide, and build good relationships between the employee and the employer. As long as the value to the employer is small, and the benefit generates goodwill, it usually is not deemed to be taxable to the employee. The value of meals and lodging provided to an employee and paid for by an employer is not considered income to the employee if the meals and lodging are f urnished on the business premises of the employer for the employer’s convenience (as when an apartment building owner provides a rent-free apartment for a caretaker who is required to live on the premises). However, a cash allowance for meals or lodging that is given to an employee as part of a compensation package is considered compensa- tion and is counted as gross income. An employer’s payment for a health club member- ship is also included in gross income, as are payments to an employee in the form of stock. An amount contributed by an employer to a pension, qualified stock bonus, profit-sharing, annuity, or bond purchase plan in which the employee participates is not considered income to the employee at the time the contribution is made, but will be taxed when the employee receives payment from the plan. Medical insurance premiums paid by an employer are generally not considered income to the employee. Al- though military pay is taxable income, veterans’ benefits for education, disability and pension payments, and veterans’ insurance proceeds and dividends are not included in gross income. Other sources of income directly increase the wealth of the taxpayer and are taxable. These sources commonly include interest earned on bank accounts; dividends; rents; royalties from copyrights, trademarks, and patents; proceeds from life insurance if paid for a reason other than the death of the insured; annuities; discharge from the obligation to pay a debt owed (the amount discharged is consid- ered income to the debtor); recovery of a previously deductible item, which gives rise to income only to the extent the previous deduc- tion produced a tax benefit (this is commonly referred to as the “tax benefit rule” and is most often used when a taxpayer has recovered a previously deducted bad debt or previously deducted taxes); gambling winnings; lottery winnings; found property; and income from illegal sources. Income from prizes and awards is taxable unless the prize or award is made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement; the recipient was chosen, without any action on his or her part, to enter the selection process; and the recipient is not required to render substantial future services as a condition to receiving the prize or award. For example, recipients of Nobel Pri zes meet these criteria and are not taxed on the prize money they receive. In some situations a taxpayer’s wealth di- rectly increases through income that is not included in the determination of income tax. For example, gifts and inheritances are excluded from income in order to encourage the TRANSFER OF ASSETS within families. However, any income realized from a gift or inheritance is considered income to the beneficiary—most notably rents, interest, and dividends. In addition, most scholarships, fellowships, student loans, and other forms of financial aid for education are not included in gross income, perhaps to equalize the status of students whose education is funded by a gift or inheritance, and of students who do not have the benefit of such assistance. Cash rebates to consumers from product manufacturers and most state UNEM- PLOYMENT COMPENSATION benefits are also not included in gross income. Capital gains and losses pose special con- siderations in the determination of income tax liability. Capital gains are the profits realized as a result of the sale or exchange of a capital asset. Capital losses are the deficits realized in such transactions. Capital gains and losses are deter- mined by establishing a taxpayer’s basis in GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION INCOME TAX 393 the property. Basis is generally defined as the taxpayer’s cost of acquiring the property. In the case of property received as a gift, the donee basically steps into the shoes of the donor and is deemed to have the same basis in the property as did the donor. The basis is subtracted from the amount realized by the sale or other disposition of the property, and the difference is either a gain or a loss to the taxpayer. Capital gains are usually included in gross income, with certain narrow exclusions, and capital losses are generally excluded from gross income. An important exception to this favor- able treatment of capital losses occurs when the loss arises from the sale or other disposition of property held by the taxpayer for personal use, such as a personal residence or jewelry. When a capital gain is realized from the disposition of property held for personal use, it is included as income even though a capital loss involving the same property cannot be excluded from in- come. This apparent discrepancy is further magnified by the fact that capital losses on business or investment property can be exclud- ed from income. Consequently, there have been many lawsuits over the issue of whether a personal residence, used at some point as rental property or for some other income producing use, is deemed personal or business property for income tax purposes. Taxpayers age 55 or older who sell a personal residence in which they have resided for a specific amount of time can exclude their capital gains. This is a one-time exclusion, with specific dollar limits. Consequently, if future, greater gains are anticipated, a taxpayer age 55 or older may choose to pay the capital gains tax on a transaction that qualifies for the exclusion but produces smaller capital gains. Even though a capital gain on a personal residence is realized, it may be temporarily deferred from inclusion in gross income if the taxpayer buys and occupies another home two years before or after the sale, and the new home costs the same as or more than the old home. The gain is merely postponed. This type of transaction is called a “rollover.” The gain that is not taxed in the year of sale will be deducted from the cost of the new home, thereby establishing a basis in the property that is less than the price paid for the home. When the new home is later sold, the amount of gain recognized at that time will include the gain that was not recognized when the home was purchased by the taxpayer. Deductions and Adjusted Gross Income Once the amount of gross income is determined, the taxpayer may take deductions from the income in order to determine adjusted gross income. Two categories of deductions are allowed. Above-the-line deductions are taken in full from gross income to arrive at adjusted gross income. Below-the-line, or itemized, deductions are taken from adjusted gross income and are allowed only to the extent that their combined amount exceeds a certain threshold amount. If the total amount of itemized deductions does not meet the threshold amount, those deductions are not allowed. Generally, above-the-line deduc- tions are business expenditures, and below-the- line deductions are personal, or nonbusiness, expenditures. The favorable tax treatment afforded business and investment property is also evident in the treatment of business and investment expenses. Ordinary and necessary expenses are those incurred in connection with a trade or business. Ordinary and necessary business expenses are those that others engaged in the same type of business incur in similar circumstances. With regard to deductions for expenses incurred for investment property, courts follow the same type of “ordinary-and-necessary” analysis used for business expense deductions, and disallow the deductions if they are personal in nature or are capital expenses. Allowable business expenses include insurance, rent, supplies, travel, trans- portation, salary payments to employees, certain losses, and most state and local taxes. Personal, or nonbusiness, expenses are gen- erally not deductible. Exceptions to this rule include casualty and theft losses that are not covered by insurance. Certain expenses are allowed as itemized deductions. These below- the-line deductions include expenses for medical treatment, interest on home mortgages, state income taxes, and charitable contributions. Expenses incurred for tax advice are deductible from federal income tax, as are a wide array of state and local taxes. In addition, an employee who incurs business expenses may deduct those expenses to the extent they are not reimbursed by the employer. Typical unreimbursed expenses that are deductible by employees include union dues and payments for mandatory uniforms. Alimony payments may be taken as a deduction GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 394 INCOME TAX by the payer and are deemed to be income to the recipient; however, CHILD SUPPORT payments are not deemed income to the parent who has custody of the child and are not deductible by the paying parent. Contributions made by employees to an INDIVIDUAL RETIREMENT ACCOUNT (IRA) or by self- employed persons to Keogh plans are deductible from gross income. Allowable annual deduc- tions for contributions to an IRA are lower than allowable contributions to a Keogh account. Contributions beyond the allowable deduction are permitted; however, amounts in excess are included in gross income. Both IRAs and Keogh plans create tax-sheltered retirement funds that are not taxed as gross income during the taxpayer’s working years. The contributions and the interest earned on them become taxable when they are distributed to the taxpayer. Distribution may take place when the taxpayer is 59 and one-half years old, or earlier if the taxpayer becomes disabled, at which time the taxpayer will most likely be in a lower tax bracket. Distribution may take place before either of these occurrences, but if so, the funds are taxable immedia tely, and the taxpayer may also incur a substantial penalty for early withdrawal of the money. Additional Deductions and Taxable Income Once adjusted gross income is determined, a taxpayer must determine whether to use the standard deduction or to itemize deductions. In most cases, the standard deduction is used, because it is the most convenient option. However, if the amount of itemized deductions is substantially more than the standard deduction and exceeds the threshold amount, a taxpayer will receive a greater tax benefit by itemizing. After the standard deduction or itemized deductions are subtra cted from adjusted gross income, the income amount is further reduced by personal and dependency exe mptions. Each taxpayer is allowed one personal exemption. A taxpayer may also claim a dependency exemp- tion for each person who meets five specific criteria: the dependent must have a familial relationship with the taxpayer; have a gross income that is less than the amoun t of the deduction, unless he or she is under nineteen years old or a full-time student; receive more than one-half of his or her support from the taxpayer; be a citizen or resident of the United States, Mexico, or Canada; and, if married, be unable to file a joint return with his or her spouse. Each exemption is valued at a certain dollar amount, by which the taxpayer’s taxable income is reduced. Tax Tables and Tax Owed Once the final deductions and exemptions are taken, the result- ing figure is the taxpayer’s taxable income. The tax owed on this income is determined by looking at applicable tax tables. This figure may be reduced by tax prepayments or by an applicable tax credit. Credits are available for contributions made to candidates for public office; child and dependent care; earned income; taxes paid in another country; and residential energy. For each dollar of available credit, a taxpayer’s liability is reduced by one dollar. Refund or Tax Owed Finally, after tax pre- payments and credits are subtracted, the amount of tax owed the IRS or the amount of refund owed the taxpayer is determined. The taxpayer’s tax return and payment of tax owed must be mailed to the IRS by April 15 unless an extension is sought. Taxpayers who make late payments without seeking an extension will be charged interest on the amount due and may be charged a penalty. A tax refund may be requested for up to several years after the tax return is filed. A refund is owed usually because the taxpayer had more tax than necessary withheld from his or her paychecks. Tax Audits The IRS may audit a taxpayer to verify that the taxpayer correctly reported income, exemptions, or deductions on the return. The majority of returns that are audited are chosen by computer, which selects those that have the highest probability of error. Returns may also be randomly selected for audit or may be chosen because of previous investigations of a taxpayer for TAX EVASION or for involvement in an activity that is under investigation by the IRS. Taxpaye rs may repre- sent themselves at an audit, or may have an attorney, certif ied public accountant, or the person who prepared the return accompany them. The taxpayer will be told what items to bring to the audit in order to answer the questions raised. If additional tax is found to be owed and the taxpayer disagrees, he or she may request an immediate meeting with a supervi- sor. If the supervisor supports the audit findings, the taxpayer may appeal the decision to a higher level within the IRS or may take the case directly to court. GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION INCOME TAX 395 Tax Rebates The Economic Stimulus Act of 2008, P.L. 110-185, 122 Stat. 613 was intend ed to provide several forms of economic stimulus to individuals and businesses following a national recessive state in 2007 and 2008. Among other things, the act provided for tax rebates to low- and middle-income taxpayers and tax incentives to stimulate business invest- ments. Specifically, most taxpayers with quali- fying income received a rebate, in the form of a government-issued check, of $300 per person ($600 per married couple) as well as $300 per dependent under the age of 17. Moreover, with respect to businesses, the Act provided for a 50 percent special deprecia- tion allowance for property placed in service after December 31, 2007, but generally before January 1, 2009. It also created new deprecia- tion limits on business vehicles and special Section 179 expensing. FURTHER READINGS Adams, Charles. 1998. Those Dirty Rotten Taxes: The Tax Revolts that Built America. New York: Free Press. Cataldo, Anthony J., and Arline A. Savage. 2001. U.S. Individual Federal Income Taxation: Historical, Contem- porary, and Prospective Policy Issues. New York: JAI. Chirelstein, Marvin A. 2002. Federal Income Taxation: A Law Student’s Guide to the Leading Cases and Concepts. 9th ed. New York: Foundation Press. Internal Revenue Service. 2008. “2008 Economic Tax Benefits to Businesses.” Press release, February 21, 2008. Available online at http://www.irs.gov/news- room/article/0,,id=179227,00.html; website home page: http://www.irs.gov/newsroom/ (accessed September 20, 2009) Ivers, James F., ed. 2008. Income Tax Fundamentals 2009. 27th ed. Mason, OH: South-Western. Whittenburg, Gerald E., and Martha Altus-Buller. 1994. Income Taxes: Concise History and Primer. Baton Rouge, La.: Claitor’s. Willan, Robert M. 1994. Income Taxes: Concise History and Primer. Baton Rouge, La.: Claitor’s. CROSS REFERENCES Tax Avoidance; Tax Court; Taxpayer Bill of Rights. INCOMPATIBILITY The inability of a husband and wife to cohabit in a marital relationship. INCOMPETENCY The lack of ability, knowledge, legal qualification, or fitness to discharge a required duty or pro- fessional obligation. The term incompetency has several meanings in the law. When it is used to describe the mental condition of a person subject to LEGAL PROCEEDINGS , it means the person is neither able to comprehend the nature and consequences of the proceedings nor adequately able to help an attorney with his defense. When it is used to describe the legal qualification of a person, it means the person does not have the legal capacity to enter a contract. When it is employed to describe a professional duty or obligation, it means that the person has demonstrated a lack of ability to perform professional functions. Mental Incompetency A person who is diagnosed as being mentally ill, senile, or suffering from some other debility that prevents them from managing his own affairs may be declared mentally incompetent by a court of law. When a person is judged to be incompetent, a guardian is appointed to handle the person’s property and personal affairs. The legal procedure for declaring a person incompetent consists of three steps: (1) a motion for a competency hearing, (2) a psychiatric or psychological evaluation, and (3) a competency hearing. Probate courts usually handle compe- tency proceedings, which guarantee the allegedly incompetent person DUE PROCESS OF LAW. In CRIMINAL LAW a defendant’s mental com- petency may be questioned out of concern for the defendant’s welfare or for strategic legal reasons. The defense may request a competency hearing so that it can gat her informat ion to use in PLEA BARGAINING, to mitigate a sentence, or to prepare for a potential INSANITY DEFENSE. The prosecution may raise the issue as a preventive measure or to detain the DEFENDANT so that a weak case can be built into a stronger one. A motion for a competency hearing must be made before sentencing takes place. In federal court a motion for a hearing will be granted “if there is a reasonable cause to believe that the defendant may be suffering from a mental disease or defect rendering him mentally incompetent” (18 U.S.C.A. § 4241 (a)). A psychiatric or psychological evaluation is then conducted, and a hearing is held on the matter. If the court finds that the defendant is incompetent, the defendant will be hospitalized for a reasonable period of time, usually no more than four months. The goal is to determine whether the defendant’s competence can be restored. GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 396 INCOMPATIBILITY This type of mental commitment is autho- rized by the U.S. Supreme Court only for defendants who “probably soon will be able to stand trial” (Jackson v. Indiana, 406 U.S. 715, 92 S. Ct. 1845, 32 L. Ed. 2d 435 [1972]). The possibility that a defendant committed a serious crime does not warrant an extended commit- ment period, because that would violate the defendant’s due process rights. At the end of a four-month commitment, if it appears that the defendant’s competence can be restored but more time is needed to do so, the defendant may be hospitalized for an additional 30 days to 18 months. The length of stay varies by state. If a hospital director certifies that the defendant’s competence has been restored, the court holds another hearing. If the court agrees the defendant is competent, they are released and a criminal trial date is set. Such a competency ruling cannot be used as evidence against the defendant if they later pleads insanity as a defense in the criminal trial. (An insanity defense refers to the defendant’s inability to kno w or appreciate right from wrong at the time of the alleged crime.) The Jackson ruling also specified that “treatment must stop if there is no substantial probability that the defendant will regain trial competence in the near future.” If that decision is reached, the defendant can continue to be detained only if they are declared permanently incompetent in a civil commitment proceeding. The development of powerful drugs has given the government the opportunity to medi- cate mentally incompetent defendants to the point whre they are competent to stand trial. By 2003, the federal government was medicating hundreds of defendants each year but a small number objected to medication. The Supreme Court, in Sell v. United States 539 U.S. ___, 123 S. Ct., 2174, 156 L. Ed. 2d 197 (2003), issued a major setback to prosecutors, when it placed strict guidelines on medicating defendants accused of less serious, nonviolent crimes. Legal Incapacity CIVIL LAW requires a person to be legally com- petent in order to enter a contract, sign a will, or make some other type of binding legal commit- ment. A person may be judged incompetent by virtue of age or mental condition. In contract law a person who agrees to a transaction becomes liable for duties under the contract unless they are legally incompetent. A person under the age of 18 or 21 (depending on the jurisdiction) is not bound by the legal duty to perform the terms of a contract he signed and is not liable for breach of contract. Public policy deems it desirable to protect an imma- ture person from liability for contracts that he or she is too inexperienced to negotiate. If a party does not comprehend the nature and consequences of the contract when it is formed, they are regarded as having mental incapacity. A distinction must be made between persons who have been adjudicated incompe- tent by a court and had a guardian appointed, and persons who are mentally incompetent but have not been so adjudicated. A person who has been declared incompetent in a court procee d- ing lacks the legal capacity to enter into a contract with another. Such a person is unable to consent to a contract, because the court has determined that he does not understand the obligations and effects of a contract. A contract made by such a person is void and without any legal effect. If there has been no adjudication of mental incompetency, a contract made by a mentally incapacitated individual is voidable by them. This means that the person can legally declare the contract void, making it unenforce- able. However, a voidable contract can be ratified by the incompetent person if the person recovers the capacity to contract. Contract law also holds that a contract made by an intoxicated person is voidable, as the person was incompetent at the time the contract was formed. A MARRIAGE contract may be annulled if one of the parties was legally incompetent. Grounds for incompetency include age (under the AGE OF MAJORITY ), mental incompetence such as insani- ty, and a preexisting marriage. A person who executes a will must be legally competent. The traditional recital in a will states that the testator (the maker of the will) is of “sound mind.” This language attempts to estab- lish the competency of the testator, but the issue may be challenged when the will is probated. Professional Obligation Lawyers, doctors, teachers, and other persons who belong to a profession are bound either by professional codes of conduct or by contracts that contain standards of conduct. A profes- sional person who fails to meet the duties GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION INCOMPETENCY 397 . billions of dollars) ILLUSTRATION BY GGS CREATIVE RESOURCES. REPRODUCED BY PERMISSION OF GALE, A PART OF CENGAGE LEARNING. GALE ENCYCLOPEDIA OF AMERICAN LAW, 3 RD E DITION INCOME TAX 391 of various. court. GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION INCOME TAX 3 95 Tax Rebates The Economic Stimulus Act of 2008, P.L. 110-1 85, 122 Stat. 613 was intend ed to provide several forms of economic. gain accruing to capital or a growth in the GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION INCOME 389 value of the investment, but is a profit, something of exchangeable value, proceeding from the property