Frank and Barbara Biehl - Page 10

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          satisfy the “business connection” requirement of section                    
          62(a)(2)(A) and its 1939 Code predecessor, as that requirement              
          has been interpreted and continues to be applied.                           
               Statutory Framework                                                    
               Section 62 is entitled “Adjusted Gross Income Defined.”4               

               4The concept of “adjusted gross income” was introduced to              
          the Federal income tax by sec. 22(n) of the 1939 Code, enacted by           
          sec. 8(a) of the Individual Income Tax Act of 1944, ch. 210, 58             
          Stat. 235, as part of a package to increase revenues to finance             
          the war effort.  The package included an increase in marginal               
          rates which reached their highest historical level with the 1944            
          Act; also between 1939 and 1945, the personal exemption was cut             
          in half, from $1,000 to $500, to extend the reach of the Federal            
          income tax to more taxpayers.  The 1944 Act introduced the                  
          concept of “adjusted gross income” to implement the newly created           
          standard deduction, which was designed to simplify the return-              
          filing process for the majority of new taxpayers and ease the               
          administrative burden of examining the resulting increased number           
          of tax returns.                                                             
               The standard deduction simplified the process by providing             
          individuals the option of deducting a fixed statutory estimate of           
          their deductible nonbusiness expenses in lieu of itemizing each             
          expense they incurred.  The concept of adjusted gross income was            
          incorporated into the Internal Revenue Code to provide, before              
          the deduction of nonbusiness expenses, an income base to which              
          the standard deduction would be applied.  Adjusted gross income             
          is supposed to be a rough estimate of amounts that a taxpayer has           
          to pay for his nonbusiness expenses.  When a taxpayer has                   
          determined how much income is available for his nonbusiness                 
          expenses, he may decide whether to account for his deductible               
          nonbusiness expenses by claiming the standard deduction or by               
          itemizing his expenses.                                                     
               Under sec. 22(n)(1) of the 1939 Code and its successor in              
          subsequent Codes, sec. 62(a)(1), business owners, partners in               
          firms, and independent contractors could deduct all their                   
          business expenses from gross income in arriving at adjusted gross           
          income without limitation and then either avail themselves of the           
          standard deduction or itemize their nonbusiness expenses.  Under            
          sec. 22(n)(2) and (3) of the 1939 Code, as enacted by the 1944              

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