Chapter
1
Types of Taxes and the
Jurisdictions that Use Them
Definitions
Tax = payment to support government
contrast with fine/penalty or user fee
Taxpayer = person or organization that pays tax
(includes individuals and corporations)
Incidence refers to ultimate economic burden of a
tax.
may not be person who pays tax
Jurisdiction is the right of a government to tax.
Tax formula
Tax revenue = rate x base
Rate can be flat or graduated (usually progressive)
Base may change in response to changes in rate
(see chapter 2)
Describe by frequency of levy or purpose of tax
Transaction (event) based taxes
Sales or excise tax
Estate or gift tax
Activity based tax
Income tax
Earmarked taxes: social security, superfund
State and local taxes
Property (ad valorem taxes)
Real property tax
Abatements often granted to entice new business
Personal property tax
Household tangibles (vehicles), business tangibles,
intangibles (securities)
State and local taxes
Sales/use
Broad-based but, typically excludes necessities (food,
drugs)
Personal responsibility for use tax
Effects of catalogs and internet purchases
Excise tax – special rates
Income tax (personal or corporation)
Federal taxes
Employment and unemployment taxes
Excise taxes (luxury, sin, transportation,
communication)
Transfer taxes (gift, estate, generation skipping)
Income taxes (individual and corporation)
Foreign taxes
Income taxes similar to U.S.
Value added tax VAT
like a sales tax on incremental value added by
manufacturing.
VAT is self-enforcing because taxpayer can claim a credit
for VAT paid to supplier with proof of payment.
Sources of tax law
Sixteenth Amendment ratified in 1913 created income tax.
Internal Revenue Code was created in 1939 and
subsequently revised in 1954 and 1986.
Statutory authority = Internal Revenue Code (Legislative)
Administrative authority (Executive)
Treasury regulations
IRS Revenue Rulings, Revenue Procedures
Judicial authority (Judicial)
Supreme Court
Appeal courts
Trial courts (Tax Court, District Court)
Research / Know your authorities
Tax Legislation – Chart – How tax legislation
generally occurs
Sources broken down into two types: Primary and
Secondary.
Where do primary and secondary sources of tax
material come from?
Primary Sources Pie Chart
Primary Sources of Tax Law - Legislative
Internal Revenue Code
Primary and most powerful source of Federal tax
law unless a U.S. treaty conflicts (most recent item
takes precedence)
Congress can override a U.S. Supreme Court
decision by amending the Code.
Congressional committee reports found in
cumulative bulletin are important in interpreting the
code
Citation of Code: Sec. #, subsection, paragraph,
subparagraph, clause: Sec 162(g) (1)(A)(i)
Administrative Sources of the Tax Law - Department of
Treasury - Executive
 Regulations (Legislative, Interpretive, Procedural,
Temporary - Interpretive in nature)
Force and effect of law
Numbered in same sequence as the Code with an
preceding numeral indicating type of tax covered by the
regs
 Revenue Rulings (pronouncement of IRS Nat’l Office)
provide guidance to both IRS and T/P
more restrictive
 Revenue Procedures:deal with IRS internal mgmt practices
 Other sources: letter rulings (proposed trans),determination
letters (completed trans), Technical Advice Memoranda
Judicial Sources - Primary Sources
Findings have precedential value (except for small
tax cases)
Trial courts - Tax Court (do not pay the deficiency),
District Court, U.S. Court of Federal Claims (pay
first, sue for refund), Small Cases Division
Appeals court - Regional Circuit, Federal circuit
and Supreme Court (hear very few tax cases)
All courts must follow SC decisions, not the case
for circuits
Tax Research – Chapter 5
Research is a process of finding a professional
conclusion to a tax problem (may involve
completed or proposed transactions).
Procedures;
Establish the facts
Identify the issues
Locate the authority (primary preferred)
Evaluate the authority
Develop conclusions/recommendations
Communicate the recommendations to the client
Technological Advances in taxes
Personal computers - facilitate use of tax research software,
tax research services, tax prep software
On-line services facilitate up to date research information.
World wide web - provides access to a multitude of tax
planning and compliance resources