Chapter 1
Understanding and Working
With the Federal Tax Law
Corporations, Partnerships,
Estates & Trusts
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Competing Objectives Result in a
Complex Law Structure
•
•
•
•
•
Revenue Needs
Economic Considerations
Social Considerations
Equity (Fairness) Considerations
Political Considerations
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)
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)
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
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)
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
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
Equity Considerations
(slide 3 of 4)
• Annual accounting periods
– In some cases, e.g., start-up businesses, a revenuegenerating 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.
Equity Considerations
(slide 4 of 4)
• Inflation adjustments are included in tax rate
schedules. If earnings increase solely by costof living amounts, taxes will not be imposed at
higher rates on the increase.
Political Considerations
• Special interest legislation
• Response to public opinion (political
expediency)
• State and local influences
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
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
Agencies Influencing Tax Law
(slide 3 of 4)
• Courts
– Judicial concepts
•
•
•
•
Substance over form
Arm’s length
Continuity of interest
Business purpose
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
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
Legislative Process For Tax Bills
Joint Conference Committee Process
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)
Example Code Citation
• § 2(a)(1)(A)
§ = Abbreviation for “Section”
–
2 = Section number
– (a) = Subsection
– (1) = Paragraph designation
– (A) = Subparagraph designation
–
Administrative Sources of Tax Law
•
•
•
•
Treasury Department Regulations
Revenue Rulings
Revenue Procedures, and
Various other administrative pronouncements
Regulations
(slide 1 of 4)
– Issued by U.S. Treasury Department
– Provide general interpretations and guidance in
applying the Code
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
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
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)
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
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 28th 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
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
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
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
Letter Rulings
(slide 2 of 2)
• Example of Letter Ruling citation
– Ltr.Rul. 200916013
• 13th ruling issued in the 16th week of 2009
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
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
Other Administrative Pronouncements
(slide 3 of 3)
• General Counsel Memoranda
• Technical Advice Memoranda
• Field Service Advice
Federal Judicial System
FIGURE 1.1
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
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
Varies
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
U.S. Court of
Appeals
U.S. Court of
Appeals
U.S. Court of
Appeals for the
Federal Court
*There are also 14 special trial judges and 9 senior judges.
CONCEPT SUMMARY 1.1
.
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
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
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
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)
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)
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Supreme Court Decisions
• Examples of citations
– U.S. v. The Donruss Co., (USSC, 1969)
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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)
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
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
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
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
Tax Research Process
FIGURE 1.3
Tax Research
• Tax research is the method by which an
interested party determines the best solution to
a tax situation
• Tax research involves:
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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
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
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
Assessing the Validity of Tax Law
Sources (slide 3 of 4)
• Revenue Rulings
– Carry less weight than Regulations
– Not substantial authority in court disputes
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
Tax Law Sources
(slide 1 of 2)
• Primary sources of tax law include:
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–
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–
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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
Tax Law Sources
(slide 2 of 2)
• Secondary Sources include:
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–
–
–
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Legal periodicals
Treatises
Legal opinions
General Counsel Memoranda, and
Written determinations
• In general, secondary sources are not authority
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
Taxation on the CPA Examination
• Taxation is included in the 3-hour Regulation
section and covers:
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–
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Federal tax procedures and accounting issues
Federal taxation of property transactions
Federal taxation—individuals
Federal taxation—entities
• Knowledge is tested using both multiplechoice questions and case studies called
simulations
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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