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

transcript

Chapter 1Chapter 1

Understanding and WorkingWith the Federal Tax Law

Corporations, Partnerships, Corporations, Partnerships, Estates & TrustsEstates & Trusts

C1 - C1 - 22Corporations, Partnerships, Estates & TrustsCorporations, Partnerships, Estates & Trusts

Competing Objectives Result in a Complex Law Structure

• Revenue Needs

• Economic Considerations

• Social Considerations

• Equity (Fairness) Considerations

• Political Considerations

• 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)

• Control the economy (e.g., favorable depreciation deductions for purchase of business property)

• Encourage certain activities (e.g., research and development deductions and credits)

• Encourage certain industries (e.g., agriculture and natural resources incentives)

• Encourage small business (e.g., ordinary loss deduction on stock in small business)

• Encourage certain industries (e.g., agriculture and natural resources incentives)

• Encourage small business (e.g., ordinary loss deduction on stock in small business)

Economic Considerations(slide 2 of 2)

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

• Tax-free medical coverage provided by employers to encourage health insurance

• Deferred tax treatment of certain retirement funds to encourage saving for retirement

• 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)

• 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)

Social Considerations (slide 2 of 2)Social Considerations (slide 2 of 2)

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

• 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

• 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

• 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

• 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.

• 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.

• 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 ConsiderationsPolitical Considerations

• Special interest legislation

• Response to public opinion (political expediency)

• State and local influences

• 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

• 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

• Aids to IRS in collecting revenue: – Tax Return Audits– Information reporting (W-2s and 1099s)– Withholding– Interest and penalty assessments

• Courts– Judicial concepts

• Substance over form

• Arm’s length

• Continuity of interest

• Business purpose

• Courts– Judicial concepts

• Substance over form

• Arm’s length

• Continuity of interest

• Business purpose

• Courts– Judicial rulings

• Some rulings highlight undesirable aspects of present law, which may lead Congress to adopt a change in law

• 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 LawStatutory 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

• 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 BillsLegislative Process For Tax Bills

Joint Conference Committee Process

House VersionSenate Version

Amortization of goodwill and other intangible assets over 14 years

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

Arrangement of the CodeArrangement 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)

• 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 CitationExample Code Citation

• Section 2(a)(1)(A)– 2 - Section number– (a) - Subsection– (1) - Paragraph number– (A) - Subparagraph designation

Tax TreatiesTax 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•A taxpayer must disclose on the tax return any position where a treaty overrides a tax law

•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•A taxpayer must disclose on the tax return any position where a treaty overrides a tax law

Administrative Sources of Tax LawAdministrative Sources of Tax Law

•Treasury Department Regulations

•Revenue Rulings

•Revenue Procedures, and

•Various other administrative pronouncements

•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

– Issued by U.S. Treasury Department

– Provide general interpretations and guidance in applying the Code

• 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

• 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

• Example of Regulation citation: Reg. § 1.117-4(c)(1)

1 = income tax regulation

117 = code section to which regulation pertains

-4 = fourth regulation on section 117 issued

• Example of Regulation citation: Reg. § 1.117-4(c)(1)

1 = income tax regulation

117 = code section to which regulation pertains

-4 = fourth regulation on section 117 issued

• Example of Proposed Regulation citation: Prop. Reg. § 1.2

• Example of Temporary Regulation citation: Temp. Reg. § 1.274–5T(k)

• Example of Proposed Regulation citation: Prop. Reg. § 1.2

• Example of Temporary Regulation citation: Temp. Reg. § 1.274–5T(k)

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

• 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

Revenue Rulings (slide 2 of 2)Revenue Rulings (slide 2 of 2)

• Example of Temporary Revenue Ruling citation– Rev. Rul. 2004–18, I.R.B. No. 8, 509

• Revenue Ruling Number 18, appearing on page 509 of the 8th weekly issue of the Internal Revenue Bulletin for 2004

• Example of Permanent Revenue Ruling citation– Rev. Rul. 2004–18, 2004–1 C.B. 509

• Revenue Ruling Number 18, appearing on page 509 of Volume 1 of the Cumulative Bulletin for 2004

• Example of Temporary Revenue Ruling citation– Rev. Rul. 2004–18, I.R.B. No. 8, 509

• Revenue Ruling Number 18, appearing on page 509 of the 8th weekly issue of the Internal Revenue Bulletin for 2004

• Example of Permanent Revenue Ruling citation– Rev. Rul. 2004–18, 2004–1 C.B. 509

• Revenue Ruling Number 18, appearing on page 509 of Volume 1 of the Cumulative Bulletin for 2004

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

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

• 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

• 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. 200414039

• 39th ruling issued in the 14th week of 2004

• Example of Letter Ruling citation– Ltr.Rul. 200414039

• 39th ruling issued in the 14th week of 2004

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

• 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

• Determination Letters– Issued by Area Director at taxpayer’s request– Usually involve completed transactions– Not published

• Made known only to party making the request

• Determination Letters– Issued by Area Director at taxpayer’s request– Usually involve completed transactions– Not published

• Made known only to party making the request

• General Counsel Memoranda

• Technical Advice Memoranda

• Field Service Advice

• General Counsel Memoranda

• Technical Advice Memoranda

• Field Service Advice

Federal Judicial SystemFederal Judicial System

FIGURE 1–1

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 ofIssue U.S. Tax Court U.S. District Court Federal Claims Number of judges 19* 1 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 thecivil 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.

U.S. Court ofIssue U.S. Tax Court U.S. District Court Federal Claims Number of judges 19* 1 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 thecivil 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

Appeals ProcessAppeals 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

• 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 PrecedentsCourts’ 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

• 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 two types of decisions: Regular and Memorandum– Regular decisions involve novel issues not

previously resolved by the court

• Regular decisions are published by U.S. government

• Ismat M. Abeid, 122 T.C. 404 (2004)

• Issues two types of decisions: Regular and Memorandum– Regular decisions involve novel issues not

previously resolved by the court

• Regular decisions are published by U.S. government

• Ismat M. Abeid, 122 T.C. 404 (2004)

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 officially published in mimeograph form only

• Jack D. Carr, TC Memo 1985-19• Jack D. Carr, 49 TCM 507 (CCH citation)• Jack D. Carr, RIA TC Mem. Dec. ¶85, 019 (RIA

citation)

• Tax Court Memorandum decisions – Memorandum decisions deal with situations

necessitating only the application of already established principles of law

• Memorandum decisions are officially published in mimeograph form only

• Jack D. Carr, TC Memo 1985-19• Jack D. Carr, 49 TCM 507 (CCH citation)• Jack D. Carr, RIA TC Mem. Dec. ¶85, 019 (RIA

citation)

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)

• 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)

Supreme Court DecisionsSupreme 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)

• 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 Research ProcessTax Research Process

FIGURE 1–3

Tax ResearchTax Research

• Tax research is the method by which an interested party determines the best solution to a tax situation

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

• 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

• Secondary Sources include:– Legal periodicals– Treatises– Legal opinions– General Counsel Memoranda, and – Written determinations

• In general, secondary sources are not authority

Assessing the Validity of Tax Law Sources (slide 1 of 4)

• Regulations– IRS agents must give the Code and the Regulations

equal weight when dealing with taxpayers and their representatives

– Proposed Regulations are not binding on IRS or taxpayer

– Burden of proof is on taxpayer to show Regulation incorrect

• Regulations– IRS agents must give the Code and the Regulations

equal weight when dealing with taxpayers and their representatives

– Proposed Regulations are not binding on IRS or taxpayer

– Burden of proof is on taxpayer to show Regulation incorrect

• 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

• 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

• Revenue Rulings– Carry less weight than Regulations– Not substantial authority in court disputes

• Judicial sources– Consider the level of the court and the legal

residence of the taxpayer– Determine whether the decision has been

overturned on appeal

• 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 PlanningTax 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

and can lead to fines and jail

• 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

and can lead to fines and jail

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

• 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

• 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

• 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

• 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

• 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

If you have any comments or suggestions concerning this PowerPoint Presentation for West Federal Taxation, please contact:

Dr. Donald R. Trippeer, CPA TRIPPEDR@oneonta.edu

SUNY Oneonta

If you have any comments or suggestions concerning this PowerPoint Presentation for West Federal Taxation, please contact:

Dr. Donald R. Trippeer, CPA TRIPPEDR@oneonta.edu

SUNY Oneonta

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

Documents