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Chapter 1 presentation

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  • 1. Chapter 1 Understanding and Working With the Federal Tax Law
  • 2. Competing Objectives Result in a Complex Law Structure
    • Revenue Needs
    • Economic Considerations
    • Social Considerations
    • Equity (Fairness) Considerations
    • Political Considerations
  • 3. Economic Considerations (slide 1 of 2)
    • Control the economy (e.g., favorable depreciation deductions for purchase of business property)
    • Encourage certain activities (e.g., research and development deductions and credits)
  • 4. Economic Considerations (slide 2 of 2)
    • Encourage certain industries (e.g., agriculture and natural resources incentives)
    • Encourage small business (e.g., ordinary loss deduction on stock in small business)
  • 5. Social Considerations (slide 1 of 2)
    • Tax-free medical coverage provided by employers to encourage health insurance
    • Deferred tax treatment of certain retirement funds to encourage saving for retirement
  • 6. Social Considerations (slide 2 of 2)
    • Deduction for charitable contributions to encourage funding of socially desirable programs by private individuals and companies
    • Disallowed deductions for expenditures against public policy (e.g., illegal bribes, kickbacks)
  • 7. Equity Considerations (slide 1 of 4)
    • Alleviate the effect of double taxation:
      • Deduction for state and local taxes
      • Credit or deduction for certain foreign taxes
      • Deduction for dividends received by corporations to prevent triple taxation
  • 8. Equity Considerations (slide 2 of 4)
    • Wherewithal to Pay concept
      • Defers taxation when a taxpayer’s economic position has not changed
      • e.g., Exchange of assets might result in gain but no cash, so some tax may be deferred
  • 9. Equity Considerations (slide 3 of 4)
    • Annual accounting periods
      • In some cases, e.g., start-up businesses, a revenue-generating cycle may be greater than the 12 month maximum tax reporting period.
      • To accommodate this, net operating loss rules allow losses from one year to be used in another year. This minimizes the adverse impact of arbitrary reporting periods.
  • 10. Equity Considerations (slide 4 of 4)
    • Inflation adjustments are included in tax rate schedules. If earnings increase solely by cost-of living amounts, taxes will not be imposed at higher rates on the increase.
  • 11. Political Considerations
    • Special interest legislation
    • Response to public opinion (political expediency)
    • State and local influences
  • 12. Agencies Influencing Tax Law (slide 1 of 4)
    • Internal Revenue Service (IRS)
      • Works to get Congress to “close loopholes”
      • Publishes “statutory regulations” authorized by Congress and given force of law
      • Publishes other regulations which outline the IRS’ position on certain issues
  • 13. Agencies Influencing Tax Law (slide 2 of 4)
    • Aids to IRS in collecting revenue:
      • Tax Return Audits
      • Information reporting (W-2s and 1099s)
      • Withholding
      • Interest and penalty assessments
  • 14. Agencies Influencing Tax Law (slide 3 of 4)
    • Courts
      • Judicial concepts
        • Substance over form
        • Arm’s length
        • Continuity of interest
        • Business purpose
  • 15. Agencies Influencing Tax Law (slide 4 of 4)
    • Courts
      • Judicial rulings
        • Some rulings highlight undesirable aspects of present law, which may lead Congress to adopt a change in law
  • 16. Statutory Sources of Tax Law
    • Internal Revenue Code
      • Codification of the Federal tax law provisions in a logical sequence
      • Have had three codes:
        • 1939, 1954, 1986
  • 17. Legislative Process For Tax Bills
  • 18. Joint Conference Committee Process
  • 19. Arrangement of the Code
    • Subtitle A—Income Taxes
      • Chapter 1. Normal Taxes and Surtaxes
        • Subchapter A. Determination of Tax Liability
          • Part I. Tax on Individuals Sections 1 to 5 (Various Titles)
          • Part II. Tax on Corporations Sections 11 to 12 (Various Titles)
  • 20. Example Code Citation
    • § 2(a)(1)(A)
      • § = Abbreviation for “Section”
      • 2 = Section number
      • (a) = Subsection
      • (1) = Paragraph designation
      • (A) = Subparagraph designation
  • 21. Administrative Sources of Tax Law
    • Treasury Department Regulations
    • Revenue Rulings
    • Revenue Procedures, and
    • Various other administrative pronouncements
  • 22. Regulations (slide 1 of 4)
      • Issued by U.S. Treasury Department
      • Provide general interpretations and guidance in applying the Code
  • 23. Regulations (slide 2 of 4)
    • Issued as:
      • Proposed: preview of final regulations
        • Do not have force and effect of law
      • Temporary: issued when guidance needed quickly
        • Same authoritative value as final regulations
      • Final:
        • Force and effect of law
  • 24. Regulations (slide 3 of 4)
    • Example of Regulation citation:
      • Reg. § 1.2
        • Refers to Regulations under Code § 2
        • Subparts may be added for further identification
        • The numbering patterns of these subparts often have no correlation with the Code subsections
  • 25. Regulations (slide 4 of 4)
    • Example of Proposed Regulation citation: Prop. Reg. § 1.2
    • Example of Temporary Regulation citation: Temp. Reg. § 1.482–7T(b)(4)
  • 26. Revenue Rulings (slide 1 of 2)
    • Officially issued by National Office of IRS
      • Provide specific interpretations and guidance in applying the Code
      • Less legal force than Regulations
      • Issued in IRB and accumulated in the Cumulative Bulletins
  • 27. Revenue Rulings (slide 2 of 2)
    • Example of Temporary Revenue Ruling citation
      • Rev.Rul. 2009–19, I.R.B. No. 28, 111
        • Explanation: Revenue Ruling Number 19, appearing on page 111 of the 28 th weekly issue of the Internal Revenue Bulletin for 2009
    • Example of Permanent Revenue Ruling citation
      • Rev.Rul. 2009–19, 2009–2 C.B. 111
        • Explanation: Revenue Ruling Number 19, appearing on page 111 of Volume 2 of the Cumulative Bulletin for 2009
  • 28. Revenue Procedures (slide 1 of 2)
    • Concerned with the internal procedures of IRS
      • Issued similar to Revenue Rulings
      • Issued in IRB and accumulated in the Cumulative Bulletins
  • 29. Revenue Procedures (slide 2 of 2)
    • Example of Revenue Procedure citation
      • Rev. Proc. 92-29, 1992-1 CB 748
        • 29th Rev. Procedure in 1992 found in volume 1 of Cumulative Bulletin on page 748
  • 30. Letter Rulings (slide 1 of 2)
    • Provide guidance to taxpayer on how a transaction will be taxed before proceeding with it
      • Issued for a fee upon a taxpayer’s request
      • Describe how the IRS will treat a proposed transaction
    • Apply only to the taxpayer who asks for and obtains the ruling
      • Post-1984 letter rulings may be substantial authority for purposes of the accuracy-related penalty
    • Limited to restricted, preannounced areas of taxation
  • 31. Letter Rulings (slide 2 of 2)
    • Example of Letter Ruling citation
      • Ltr.Rul. 200916013
        • 13th ruling issued in the 16th week of 2009
  • 32. Other Administrative Pronouncements (slide 1 of 3)
    • Treasury Decisions-issued by Treasury Dept. to:
      • Promulgate new or amend existing Regulations
      • Announce position of the Government on selected court decisions
      • Published in the Internal Revenue Bulletin
        • Then transferred to the Cumulative Bulletin
  • 33. Other Administrative Pronouncements (slide 2 of 3)
    • Determination Letters
      • Issued by Area Director at taxpayer’s request
      • Usually involve completed transactions
      • Not published
        • Made known only to party making the request
  • 34. Other Administrative Pronouncements (slide 3 of 3)
    • General Counsel Memoranda
    • Technical Advice Memoranda
    • Field Service Advice
  • 35. Federal Judicial System FIGURE 1.1
  • 36. Judicial Sources (slide 1 of 2)
    • There are four courts of original jurisdiction (trial courts)
      • U.S. Tax Court: Regular
      • U.S. Tax Court: Small Cases Division
      • Federal District Court
      • U.S. Court of Federal Claims
  • 37. Judicial Sources (slide 2 of 2)
    • U.S. Court of
    • Issue U.S. Tax Court U.S. District Court Federal Claims Number of judges 19* Varies 16
    • per court
    • Payment of deficiency No Yes Yes
    • before trial
    • Jury trial No Yes No
    • Types of disputes Tax cases only Most criminal and Claims against the
    • civil issues United States
    • Jurisdiction Nationwide Location of Taxpayer Nationwide
    • IRS acquiescence policy Yes Yes Yes
    • Appeal route U.S. Court of U.S. Court of U.S. Court of Appeals Appeals Appeals for the Federal Court .
    • *There are also 14 special trial judges and 9 senior judges .
    CONCEPT SUMMARY 1.1
  • 38. Appeals Process
    • Appeals from District Court or Tax Court go to the U.S. Court of Appeals for circuit where taxpayer resides
    • Appeals from Court of Federal Claims is to Court of Appeals for the Federal Circuit
    • Appeal to the Supreme Court is by Writ of Certiorari
      • Only granted for those cases it desires to hear
  • 39. Courts’ Weights as Precedents
    • From high to low
      • Supreme Court
      • Circuit Court of Appeals
      • Tax Court (Regular), U.S. Court of Federal Claims, & U.S. District Courts
    • Decisions of Small Cases Division of Tax Court have no precedential value and cannot be appealed
  • 40. Tax Court (slide 1 of 2)
    • Issues three types of decisions: Regular, Memorandum, and summary decisions
      • Regular decisions involve novel issues not previously resolved by the court
    • Regular decisions are published by U.S. govt, e.g.,
    • Summary opinions
      • Issued in small tax cases and may not be used as precedent in any other case
  • 41. Tax Court (slide 2 of 2)
    • Tax Court Memorandum decisions
      • Memorandum decisions deal with situations necessitating only the application of already established principles of law
    • Memorandum decisions are published by CCH and by RIA (formerly by P-H)
  • 42. Examples Of District Court Decision Citations
    • Turner v. U.S. , 2004–1 USTC ¶60,478
    • (D.Ct. Tex., 2004) (CCH citation)
    • Turner v. U.S. , 93 AFTR 2d 2004–686
    • (D.Ct. Tex., 2004) (RIA citation)
    • Turner v. U.S. , 306 F.Supp.2d 668
    • (D.Ct. Tex., 2004)(West citation)
  • 43. Supreme Court Decisions
    • Examples of citations
      • U.S. v. The Donruss Co., (USSC, 1969)
        • 69-1 USTC ¶9167 (CCH citation)
        • 23 AFTR2d 69-418 (RIA citation)
        • 89 S. CT 501 (West citation)
        • 393 U.S. 297 (U.S. Government citation)
        • 21 L.Ed.2d 495 (Lawyer's Co-operative Publishing Co. citation)
  • 44. Tax Treaties
    • The U.S. signs tax treaties with foreign countries to:
      • Render mutual assistance in tax enforcement
      • Avoid double taxation
    • Neither a tax law nor a tax treaty takes general precedence
      • When there is a direct conflict, the most recent item will take precedence
  • 45. Tax Research (slide 1 of 2)
    • A crucial part of the research process is the ability to locate appropriate sources of the tax law
      • Both electronic and paper-based research tools are available to aid in this search
    • Unless the problem is simple (e.g., the Code Section is known, and there is a Regulation on point), the research process should begin with a tax service
  • 46. Tax Research (slide 2 of 2)
    • Computerized tax research tools have replaced paper resources in most tax practices
      • There are two chief ways to conduct tax research using computer resources:
        • Online and CD-ROM subscription services and
        • Online free Internet sites
  • 47. Tax Services
    • A partial list of the available commercial tax services includes:
      • Standard Federal Tax Reporter, CCH
      • Tax Research NetWork, CCH Internet service
      • United States Tax Reporter, RIA
      • RIA Checkpoint, RIA
      • ATX/Kleinrock Tax Expert, CCH/Wolters Kluwer Business services
      • Tax Management Portfolios, BNA
      • Mertens Law of Federal Income Taxation, West Group
      • Westlaw services (including access to Tax Management Portfolios)
      • TaxCenter, LexisNexis
      • Federal Research Library, Tax Analysts
  • 48. Tax Research Process FIGURE 1.3
  • 49. Tax Research
    • Tax research is the method by which an interested party determines the best solution to a tax situation
    • Tax research involves:
      • Identifying and refining the problem
      • Locating the appropriate tax law sources
      • Assessing the validity of the tax law sources
      • Arriving at the solution or at alternative solutions with due consideration given to nontax factors
  • 50. Assessing the Validity of Tax Law Sources (slide 1 of 4)
    • When assessing the validity of a Regulation, the following observations should be noted:
      • In a challenge, the burden of proof is on the taxpayer to show that the Regulation is wrong
        • However, a court may invalidate a Regulation that varies from the language of the statute and has no support in the Committee Reports
      • If the taxpayer loses the challenge, the negligence penalty may be imposed
        • This accuracy-related provision deals with the ‘‘intentional disregard of rules and regulations’’ on the part of the taxpayer
  • 51. Assessing the Validity of Tax Law Sources (slide 2 of 4)
    • Final Regulations tend to be of three types
      • Procedural: housekeeping-type instructions
      • Interpretive: rephrase what is in Committee Reports and the Code
        • Hard to get overturned
      • Legislative: allow the Treasury Department to determine the details of law
        • Congress has delegated its legislative powers and these cannot generally be overturned
  • 52. Assessing the Validity of Tax Law Sources (slide 3 of 4)
    • Revenue Rulings
      • Carry less weight than Regulations
      • Not substantial authority in court disputes
  • 53. Assessing the Validity of Tax Law Sources (slide 4 of 4)
    • Judicial sources
      • Consider the level of the court and the legal residence of the taxpayer
      • Determine whether the decision has been overturned on appeal
  • 54. Tax Law Sources (slide 1 of 2)
    • Primary sources of tax law include:
      • The Constitution
      • Legislative history materials
      • Statutes
      • Treaties
      • Treasury Regulations
      • IRS pronouncements, and
      • Judicial decisions
    • In general, the IRS considers only primary sources to constitute substantial authority
  • 55. Tax Law Sources (slide 2 of 2)
    • Secondary Sources include:
      • Legal periodicals
      • Treatises
      • Legal opinions
      • General Counsel Memoranda, and
      • Written determinations
    • In general, secondary sources are not authority
  • 56. Tax Planning
    • The primary purpose of effective tax planning is to reduce the taxpayer’s total tax bill
      • Must consider the legitimate business goals of taxpayer
    • A secondary objective of effective tax planning is to reduce, defer, or eliminate the tax
    • Tax avoidance vs. tax evasion
      • Tax avoidance is the legal minimization of tax liabilities and one goal of tax planning
      • Tax evasion is the illegal minimization of tax liabilities
        • Suggests the use of subterfuge and fraud as a means to tax minimization
        • Can lead to fines and jail
  • 57. Taxation on the CPA Examination
    • Taxation is included in the 3-hour Regulation section and covers:
      • Federal tax procedures and accounting issues
      • Federal taxation of property transactions
      • Federal taxation—individuals
      • Federal taxation—entities
    • Knowledge is tested using both multiple-choice questions and case studies called simulations
  • 58.
    • If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact:
    • Dr. Donald R. Trippeer, CPA
    • [email_address]
    • SUNY Oneonta