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Chapter 1. Understanding and Working With the Federal Tax Law. 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).

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Chapter 1

Chapter 1

Understanding and Working

With the Federal Tax Law

Competing objectives result in a complex law structure
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
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
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
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
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
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
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
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.

Equity considerations slide 4 of 4
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.

Political considerations
Political Considerations

  • Special interest legislation

  • Response to public opinion (political expediency)

  • State and local influences

Agencies influencing tax law slide 1 of 4
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
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
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
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
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

Arrangement of the code
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

Example Code Citation

Administrative sources of tax law
Administrative Sources of Tax Law

  • Treasury Department Regulations

  • Revenue Rulings

  • Revenue Procedures, and

  • Various other administrative pronouncements

Regulations slide 1 of 4
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
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
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
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
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
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
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
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
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
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
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
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
Other Administrative Pronouncements (slide 3 of 3)

  • General Counsel Memoranda

  • Technical Advice Memoranda

  • Field Service Advice

Judicial sources slide 1 of 2
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

Judicial sources slide 2 of 2
Judicial Sources (slide 2 of 2)

U.S. Court of

IssueU.S. Tax CourtU.S. District CourtFederal 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.


Appeals process
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
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
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 (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
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)


Supreme court decisions
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)

Tax treaties
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
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
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
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
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

Assessing the validity of tax law sources slide 1 of 4
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
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
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
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
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

Tax law sources slide 2 of 2
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

Tax planning
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 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

Chapter 1