Chapter 1
Understanding and Working
With the Federal Tax Law
Corporations, Partnerships,
Estates & Trusts
Copyright ©2010 Cengage Learning
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Competing Objectives Result in a
Complex Law Structure
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•
•
•
•
Revenue Needs
Economic Considerations
Social Considerations
Equity (Fairness) Considerations
Political Considerations
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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)
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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)
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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
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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)
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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
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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
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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.
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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.
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Political Considerations
• Special interest legislation
• Response to public opinion (political
expediency)
• State and local influences
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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
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Agencies Influencing Tax Law
(slide 2 of 4)
• Aids to IRS in collecting revenue:
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–
–
–
Tax Return Audits
Information reporting (W-2s and 1099s)
Withholding
Interest and penalty assessments
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Agencies Influencing Tax Law
(slide 3 of 4)
• Courts
– Judicial concepts
•
•
•
•
Substance over form
Arm’s length
Continuity of interest
Business purpose
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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
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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
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Legislative Process For Tax Bills
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Joint Conference Committee
Process
House Version
Amortization of goodwill and other
intangible assets over 14 years
Senate Version
Amortization of only 75% of
goodwill and other intangible
assets over 14 years
Joint Conference Committee Result
Straight-line amortization of goodwill and
other intangible assets over 15 years
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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)
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Example Code Citation
• § 2(a)(1)(A)
–
–
–
–
2
(a)
(1)
(A)
-
Section number
Subsection
Paragraph number
Subparagraph designation
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Administrative Sources of Tax Law
•Treasury Department Regulations
•Revenue Rulings
•Revenue Procedures, and
•Various other administrative pronouncements
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Regulations (slide 1 of 4)
– Issued by U.S. Treasury Department
– Provide general interpretations and
guidance in applying the Code
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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
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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
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Regulations (slide 4 of 4)
• Example of Proposed Regulation citation:
Prop. Reg. § 1.2
• Example of Temporary Regulation citation:
Temp. Reg. § 1.199–8T
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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
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Revenue Rulings (slide 2 of 2)
• Example of Temporary Revenue Ruling citation
– Rev.Rul. 2008–16, I.R.B. No. 11, 585
• Explanation: Revenue Ruling Number 16, appearing
on page 585 of the 11th weekly issue of the Internal
Revenue Bulletin for 2008
• Example of Permanent Revenue Ruling citation
– Rev.Rul. 2008–16, 2008–1 C.B. 585
• Explanation: Revenue Ruling Number 16, appearing
on page 585 of Volume 1 of the Cumulative Bulletin
for 2008
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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
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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
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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
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Letter Rulings (slide 2 of 2)
• Example of Letter Ruling citation
– Ltr.Rul. 200804004
• 4th ruling issued in the 4th week of 2008
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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
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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
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Other Administrative
Pronouncements (slide 3 of 3)
• General Counsel Memoranda
• Technical Advice Memoranda
• Field Service Advice
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Federal Judicial System
FIGURE 1.1
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Judicial Sources (slide 1 of 2)
• There are four courts of original jurisdiction
(trial courts)
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U.S. Tax Court: Regular
U.S. Tax Court: Small Cases Division
Federal District Court
U.S. Court of Federal Claims
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Judicial Sources (slide 2 of 2)
U.S. Court of
Issue
Number of judges
per court
U.S. Tax Court
19*
U.S. District Court
1
Federal Claims
16
Payment of deficiency
before trial
No
Yes
Yes
Jury trial
No
Yes
No
Types of disputes
Tax cases only
Most criminal and
civil issues
Claims against the
United States
Jurisdiction
Nationwide
Location of Taxpayer
Nationwide
IRS acquiescence policy Yes
Yes
Yes
Appeal route
Appeals
U.S. Court of
Appeals
U.S. Court of
for the Federal Court
U.S. Court of
Appeals
*There are also 14 special trial judges and 9 senior judges.
CONCEPT SUMMARY 1.1
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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
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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
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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.
government
• CRSO, 128 T.C. 153(2007)
• Summary opinions
– Issued in small tax cases and may not be used as
precedent in any other case
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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)
– Walter H. Johnson, T.C.Memo. 1975–245
• The 245th Memorandum decision issued by the Tax Court in
1975
– Walter H. Johnson, 34 TCM 1056
• Page 1056 of Vol. 34 of the CCH Tax Court Memorandum
Decisions
– Walter H. Johnson, P-H T.C.Mem.Dec. ¶ 75,245
• Paragraph 75,245 of the P-H T.C. Memorandum Decisions
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Trial and Appellate
Court Decisions
• Examples of citations
– Simmons-Eastern v. U.S., 73-1 USTC ¶9279
(D.Ct. Ga., 1972) (CCH citation)
– Simmons-Eastern v. U.S., 31 AFTR2d 73-640
(D.Ct. Ga., 1972) (RIA citation)
– Simmons-Eastern v. U.S., 354 F. Supp. 1003
(D.Ct. Ga., 1972) (West citation)
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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)
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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
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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
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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
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Tax Services
• May be in electronic or paper form
– Key research tools for the tax practitioner
• The major tax services available include:
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–
–
–
–
–
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Standard Federal Tax Reporter, CCH
United States Tax Reporter, RIA
Federal Tax Coordinator 2d, RIA
Tax Management Portfolios, BNA
Federal Income, Gift and Estate Taxation, WG &L
CCH’s Tax Research Consultant, CCH
Mertens Law of Federal Income Taxation, Callaghan
and Co.
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Electronic Tax Research
(slide 1 of 3)
• CD-ROM Services
– CCH, RIA, and WESTLAW offer vast tax
libraries
– Provide search and browsing capabilities for
various tax databases and links to tax
documents
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Electronic Tax Research
(slide 2 of 3)
• On-Line Systems
– Lexis/Nexis, CCH, RIA, and WESTLAW
provide virtually instantaneous use of tax law
sources
– May be expensive but provides extremely
current information
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Electronic Tax Research
(slide 3 of 3)
• The Internet provides a wealth of tax
information
– Information available on web pages of
accounting and consulting firms, publishers, tax
academics, libraries, and governmental bodies
– Newsgroups and email capabilities provide
opportunities to exchange tax information
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Tax Research Process
FIGURE 1.3
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Tax Research
• Tax research is the method by which an
interested party determines the best solution
to a tax situation
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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
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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
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Assessing the Validity of Tax
Law Sources (slide 3 of 4)
• Revenue Rulings
– Carry less weight than Regulations
– Not substantial authority in court disputes
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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
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Tax Law Sources (slide 1 of 2)
• Primary sources of tax law include:
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–
–
–
–
–
–
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
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Tax Law Sources (slide 2 of 2)
• Secondary Sources include:
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–
–
–
–
Legal periodicals
Treatises
Legal opinions
General Counsel Memoranda, and
Written determinations
• In general, secondary sources are not
authority
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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
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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
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If you have any comments or suggestions concerning this
PowerPoint Presentation for South-Western Federal
Taxation, please contact:
Dr. Donald R. Trippeer, CPA
trippedr@oneonta.edu
SUNY Oneonta
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