Chapter 1 presentation


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Chapter 1 presentation

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