The document discusses the complex structure of the US federal tax law, which results from competing objectives in developing tax policy. It outlines various economic, social, equity and political considerations that influence tax law. It also describes the key agencies and sources that shape tax law, including the IRS, Treasury Department, courts, Internal Revenue Code, regulations, revenue rulings and other administrative pronouncements.

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