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77 Cards in this Set
- Front
- Back
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Revenue Neutrality
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any changes neither increase nor decrease the net revenues raised under the prior rules
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Sunset Provision
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End of period, this new law will expire
-law terminates after a new period of time and the law that was in place previously will begin again |
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Economic Considerations
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1. Control of the economy
2. Encourage certain activities 3. Encourage certain industries 4. Encourage small business |
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Control the Economy
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favorable depreciation deductions for purchase of business property
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Encourage Certain Activities
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research and development deductions and credits
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Encourage Certain Industries
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agriculture and natural resources incentives
DPAD |
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Encourage Small Business
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ordinary loss deduction on stock in small business
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Social Considerations
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Socially Desirable Incentives/Benefits
-Tax-free medical coverage provided by ers -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 Socially Undesirable Disincentives -Disallowed deductions for expenditures against public policy §162(c) -illegal bribes, kickbacks |
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Equity Considerations
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-Alleviate the effect of double taxation
-Wherewithal to Pay concept -Annual accounting periods -Inflation adjustments |
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Alleviate the effect of double taxation
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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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Wherewithal to Pay concept
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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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Annual Accounting Periods
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In some cases, ( e.g., start-up businesses,) a revenue-generating cycle may be > the 12 mo. max. tax reporting period.
To accommodate this, net operating loss (NOL) rules allow losses from 1 yr to be used in another yr. This minimizes the adverse impact of arbitrary reporting periods. |
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Inflation adjustments
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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
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-Special interest legislation- political influence
-Response to public opinion (political expediency) -AMT (Ch 3)- (Alternative Minimum Tax) enacted when the public found out certain large and profitable corporations were able to avoid the corporate income tax - tax reform proposals rise and fall in favor depending upon the shifting moods of the American public -State and local government influences |
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Influence of the Internal Revenue Service
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-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 -Protector of the Revenue -Administrative Feasibility |
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Aids to IRS in Collecting Revenue
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Tax Return Audits- IRS is aided by provisions that reduce the chance of taxpayer error or manipulation and therefore simplify the audit effort that is necessary.
Withholding procedures applied to wages Interest and penalty assessments |
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Influence of the Courts
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-Formulation of judicial concepts that serve as guides in the application of various tax provisions
Judicial Concepts: 1. Substance Over form 2. Arm's Length Concept 3. The continuity of interest 4. The business purpose concept Judicial rulings: -Some rulings highlight undesirable aspects of present law, which may lead Congress to adopt a change in law -Congress may be compelled to add certainty to the law by enacting statutory provisions specifying when a particular tax consequence will or will not materialize |
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Substance over Form
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Refer to Example 14
-also called telescoping, collapsing or step transaction approach -involves determining the true substance of what occurred. In a transaction involving many steps, any one step may be collapsed to arrive directly at the result reached |
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Arm's Length Concept
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Refer to Example 15
transactions can be tested by questioning whether the taxpayers acted in an "arm's length" manner. |
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Continuity of Interest
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Primarily concerned with business readjustments, the concept permits tax-free treatment only if the taxpayer retains a substantial continuing interest in the property transferred to the new business. Due to the continuing interest retained, the transfer should not have tax consequences because the position of the taxpayer has not changed.
Concept applies to transfers to controlled corporations, corporate reorganizations, and transfers to partnerships |
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The business purpose concept
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Refer to Example 16
-applies to transactions involving corporations. Some sound business reason that motivates the transaction must be present for the prescribed tax treatment to result (not just tax avoidance reasons, need sound business reasons) |
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Statutory Sources of the Tax Law
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Statutory (law)
Origins of the Internal Revenue Code: -All general & permanent laws of the U.S. are codified by broad subject matter into 50 categories called “titles” -Called the United States Federal Code -Title 26 is the Internal Revenue Code -Codification of the Federal tax law provisions in a logical sequence -Have had three Internal Revenue Codes: 1939, 1954, 1986 -Legislative Process -Arrangement of the Code -Citing the Code |
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Legislative Process
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House of Representatives and the Senate
-Bill involving tax or revenue will start out in the House of Representatives -First, it is considered in the House Ways and Means Committee, then referred to the entire House of Reps -Approved bills are sent to the Senate and first considered by the Senate Finance Committee and then to the entire Senate -Once passed by the Senate, it is referred to the President for approval or veto. If the bill is approved or if the President's veto is overridden by a two-thirds vote, the bill becomes law and part of the Internal Revenue Code -If the Senate version of the bill differs from the HOR's version, the Joint Conference Committee resolves these differences (has both HWM and SF committee members) -Referrals are accompanied by Committee Reports |
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Committee Reports
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accompany referrals by the House Ways and Means Committee, the Senate Finance Committee, or the Joint Conference Committee
-explain the provisions of the proposed legislation and are therefore a valuable source in ascertaining the intent of Congress. Because Regulations normally are not issued immediately after a statute is enacted, taxpayers often look to Committee Reports to ascertain congressional intent. |
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Arrangement of the Code
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Title 26 - Internal Revenue 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) Subpart Section Subsection Paragraph Subparagraph Clause Subclause Common Subchapters: Subchapter C, K and S |
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Administrative Sources of the Tax Law
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-Treasury Department Regulations
-Revenue Rulings and Revenue Procedures -Other Administrative Pronouncements |
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Treasury Department Regulations
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-Issued by U.S. Treasury Department
-Available in Code of Federal Regulations (CFR) -Published in the Federal Register -Provide general interpretations & guidance in applying the Code (IRC) -Arranged in same sequence as the Code How do they HAVE this authority? Treasury has authority provided by Congress Which has more authority/validity? Code or Regs? Code has more authority/validity than regulations Regulations are issued as: Proposed, Temporary, and Final |
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Example of Regulation citation
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Final Regulation : Reg. § 1.2-4
-(or Treas. Reg. § 1.2-4 Or 26 CFR §1.2-4 ) -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 -Prefixes: 1. refers to income tax regulations (20 – Estate Tax, 32 – E’ment Tax) -2 refers to the code section it is interpreting -4 refers to the fourth regulation on section 2 Proposed Regulation : Prop. Reg. § 1.2 Temporary Regulation : Temp. Reg. § 1.482–7T(b)(4) |
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Proposed Regulations
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Preview of final regulations
-Do not have force and effect of law -New regulations and changes in existing regulations usually are issued in proposed form before they are finalized. -The time interval between the proposal of a regulation and its finalization permits taxpayers and other interested parties to "comment" on the propriety of the proposal (Rulemaking process) |
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Rulemaking Process
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Administrative process of making a rule or regulation (Notice and Comment)
Notice-tells people to address approval of regulation Comment: taxpayers and interested parties give feedback and responses |
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Temporary Regulations
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-Issued when guidance is needed quickly
-Needed for recent legislation that takes effect immediately -Does not go through rulemaking process -Same authoritative value as final regulations -Cited as precedent for three years -Are also issued as proposed regulations and expire within 3 years after the date of issuance (these go under the rulemaking process) -Temp. Regs and the simultaneously prop. regs. carry more weight than traditional prop. regs. |
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Final Regulations
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-issued as Treasury Decisions
-Carry the force and effect of the law Tend to be of 3 types 1- Procedural: housekeeping-type instructions 2- Interpretive: rephrase what is in Committee Reports and the Code -Hard to get overturned 3- Legislative: allow the Treasury Dept to determine the details of law -Congress has delegated its legislative powers and these cannot generally be overturned |
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Revenue Rulings
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-Official pronouncements of the National Office of the IRS
-Provide specific interpretations & guidance in applying the Code -Less legal force than Regulations because rulings do not go through rulemaking process and regulations do -deal with more restricted problems -provide guidance to both IRS personnel and taxpayers in handling routine tax matters -Issued in IRB and accumulated in the CB (older than 6 months [permanent revenue ruling]) -usually results from a specific taxpayer's request for a letter ruling. If the IRS believes that a taxpayer's request for a letter ruling deserves official publication due to its widespread impact, the holding will be converted into a Revenue Ruling. In making this conversion, names, identifying facts, and money amounts are changed to disguise the identity of the requesting taxpayer. The IRS then issues what would have been a letter ruling as a Revenue Ruling |
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Treasury Decisions
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-Issued by the Treasury Department to promulgate new Regulations, to amend or otherwise change existing Regulations, or to announce the position of the Government on selected court decisions.
-Published in the IRB Issued by Treasury Dept. to: -Promulgate new or amend existing Regulations -Announce position of the Gov’t on selected court decisions -Published in the IRB, then transferred to the CB |
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Example of Temporary Revenue Ruling Citation
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Rev. Rul. 2011–14, I.R.B. No. 27, 31
Explanation: Rev Rul # 14, on pg 31 of the 27th weekly issue of the Internal Revenue Bulletin for 2011 |
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Example of Permanent Revenue Ruling Citation
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Rev. Rul. 2011–14, 2011–2 C.B. 31
Explanation: Rev Rul Number 14, on pg 31 of Vol 2 of the Cumulative Bulletin for 2011 |
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Revenue Procedures
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-Issued by the National Office of IRS
-deal with the internal management practices and procedures of the IRS -Concerned w/the internal procedures of IRS -Issued similar to Revenue Rulings -Issued in IRB and accumulated in the CB -provide guidance to both IRS personnel and taxpayers in handling routine tax matters |
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Example of Revenue Procedure Citation
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Rev. Proc. 92-29, 1992-1 CB 748
29th Rev. Proc in 1992 in volume 1 of CB on pg 748 |
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Letter Rulings
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-responses to requests by taxpayers
-issued for a fee by the National Office of the IRS upon a taxpayer's request and describe how the IRS will treat a proposed transaction for tax purposes -Rulings are about likely or proposed transactions -Requested by taxpayer and only this taxpayer can rely on it -TP may request when a tax issue is controversial or involves significant tax $$$ -Issued by National Office of IRS -Provide written stmt/guidance to TP on how a transaction will be taxed by IRS 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 TP who asks for & obtains the ruling -As long as all material facts of the trx were accurately disclosed in request -Other TP may use the ruling as an indication of the IRS’ position on the matter -Post-1984 letter rulings may be substantial authority for purposes of the accuracy-related penalty -May be declared obsolete by the IRS for other taxpayers -Limited to restricted, preannounced areas of taxation -See 1st IRB of each year |
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TAM's
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Technical Advice Memoranda
-resemble letter rulings in that they give the IRS's determination of an issue -issued by the National Office of the IRS in response to questions raised by taxpayers or IRS field personnel during audits. -Deal with completed rather than proposed transactions and are often requested for questions relating to exempt organizations and employee plans. -Issued by the National Office to IRS personnel in response to a request by an agent, Appellate Conferee, or IRS executive -May be requested by TP when an issue in dispute is not treated by the law or precedent and/or published rulings or regulations -Also appropriate when there is reason to believe that the IRS is not administering the tax law consistently |
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Determination Letters
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Issued at the request of the taxpayers and provide guidance concerning the application of the tax law.
-The issuing source is the Area Director rather than the National Office of the IRS -Usually involve completed (as opposed to proposed) transactions -Are not published by the government and are made known only to the party making the request -Issued by Area Director at TP’s request -Provide guidance regarding a completed transaction that applies tax law -when the issue involved is covered by judicial or statutory authority, regulations, or rulings -Issued for various estate, gift, income, excise, and employment tax matters Not published -Made known only to party making the request |
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The Judicial Process
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After a taxpayer has exhausted some or all of the remedies available within the IRS, the dispute is first considered by a court of original jurisdiction (a trial court) with any appeal (either by the taxpayer or the IRS) taken to the appropriate appellate court.
The taxpayer has a choice of any of four trial courts: a Federal District Court, the U.S. Court of Federal Claims, the Tax Court, or the Small Cases Division of the Tax Court |
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Difference Between the Tax Court and the Small Cases Division of the Tax Court
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There is no appeal from the Small Cases Division
-Jurisdiction of the Small Cases Division is limited to $50,000 or less. -The proceedings of the Small Cases Division are informal, and its decisions are not precedents for any other court decision and are not reviewable by any higher court. -Proceedings can be more timely and less expensive in the Small Cases Division. |
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Stare Decisis
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States that each case (except in the Small Cases Division) has precedential value for future cases with the same controlling set of facts
-a court must follow prior cases only when the issues and material facts of the current case are essentially the same as those involved in the prior decisions. |
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Appeals Process
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-From District Court or Tax Court
-go to the U.S. Court of Appeals for circuit where taxpayer resides -From Court of Federal Claims -Go to Court of Appeals for the Federal Circuit From Court of Appeals To Supreme Court -By Writ of Certiorari -Only granted for those cases it desires to hear -Rarely hears tax cases *If the IRS loses at the trial court level, it need not appeal -An appellate court may approve (affirm) or disapprove (reverse) the lower court's findings, and it also may send the case back for further consideration (remand) |
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Appealing from the Tax Court (also known as the Golsen Rule)
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The Tax Court will still decide a case as it believes the law should be applied only if the Court of Appeals of appropriate jurisdiction has not yet ruled on the issue or has previously decided a similar case in accordance with the Tax Court's decision.
-If the Court of Appeals of appropriate jurisdiction has previously held squarely on point otherwise, the Tax Court will conform even though it disagrees with the holding |
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Courts' Weights as Precedents
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From high to low:
-Supreme Court -Circuit Court of Appeals -Tax Court (Regular), Court of Federal Claims, & District Courts Small Cases Division decisions of Tax Court -no precedential value and cannot be appealed |
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Appeal to the U.S. Supreme Court
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Appeal to the U.S. Supreme Court is by "Writ of Certiorari"
-If the Court agrees to hear the case, it will grant the Writ, but most often it will deny jurisdiction -Usually grant the Writ when it must resolve a conflict among the Courts of Appeals (two or more appellate courts have assumed opposing positions on a particular issue) or when the tax issue is extremely important) -The granting of a Writ indicates that at least four members of the Supreme Court believe that the issue is of sufficient importance to be heard by the full court |
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U.S. Tax Court
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-Issues three types of decisions:
-Regular, Memorandum, and Summary decisions |
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Regular Decisions
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-Involve novel issues not previously resolved by the court
-Represent the position of the Tax Court and can be relied upon and used as precedents -Published by US Govt. in a series called Tax Court of the United States Reports (T.C.) -Decision can be located in either of the special Tax Court Services published by the Commerce Clearing House (CCH) and by Research Institute of America (RIA) -Morton L. Ginsberg, 130 T.C. ___, No. 7 (2008) -Temporary citation – page number left blank because not yet -Morton L. Ginsberg, 130 T.C. 88 No. 7 (2008) -Permanent citation – page number now known |
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Summary Opinions
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-Issued in small tax cases – “S” case
-May not be used as precedent in any other case -Published commercially |
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Memorandum Decisions
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-Deal with situations necessitating only the application of already established principles of law
-Represent the position of the Tax Court and can be relied upon and used as precedents -Published by CCH and by RIA (formerly by P-H) -Nick R. Hughes, T.C. Memo. 2009-94 -94th Memorandum Decision issued by Tax Court in 2009 -Nick R. Hughes, 97 TCM 1488 -Page 1488 of Vol 97 of the CCH Tax Court -Nick R. Hughes, 2009 RIA T.C. Memo. ¶2009,094 -Paragraph 2009,094 of the RIA T.C. Memorandum Decisions |
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District Court Decision Citations
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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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Acquiescence or nonacquiescence
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If the IRS loses in a decision, it may indicate whether it agrees or disagrees with the results reached by the court by publishing these
-published in the Internal Revenue Bulletin and the Cumulative Bulletin as an "Action on Decision" |
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Supreme Court Decisions
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-Rarely hears tax cases
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) -published by the Commerce Clearing House (CCH) in the USTCs and by Research Institute of America in the AFTRs. -The U.S. Government Printing Office also publishes these decisions in the United States Supreme Court Reports (U.S.) |
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Tax Treaties
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-treaties signed with foreign countries to render mutual assistance in tax enforcement and to avoid double taxation
-Neither a tax law nor a tax treaty take general precedence -When there is a direct conflict, the most recent item will take precedence |
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Tax Research
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-Ability to locate appropriate sources of the tax law is crucial
-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 -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
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A partial list of the available commercial tax services includes:
Standard Federal Tax Reporter, CCH CCH IntelliConnect Tax Research NetWork, CCH 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 TaxCenter, LexisNexis Federal Research Library, Tax Analysts |
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Tax Research Procedures
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The method to determines the best solution to a tax situation
Tax research involves: 1.Identifying and refining the problem 2.Locating the appropriate tax law sources 3.Assessing the validity of the tax law sources 4.Arriving at the solution or at alternative solutions with due consideration given to nontax factors 5.Effectively communicating the solution to the taxpayer or the taxpayer's representative 6. Following up on the solution (where appropriate) in light of new developments |
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Identifying the Problem
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Starts with a compilation of the relevant facts involved.
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Locating the Appropriate Tax Law Sources
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Search the Internal Revenue Code and the Treasury Regulations
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Assessing the Validity of the Tax Law Sources (Treasury Regulation)
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-careful interpretation of the tax law and consideration of the law's relevance and validity
-In a challenge, the burden of proof is on the TP to show that the Regulation is wrong -However, a court may invalidate a Regulation that varies from the language of the statute & has no support in the Committee Reports -If the TP 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 Other Administrative Sources of the Tax Law
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-Revenue Rulings
-Carry less weight than Regulations -Not substantial authority in court disputes |
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Assessing the Validity of Judicial Sources of the Tax Law
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-Judicial sources
-Consider -the level of the court and -the legal residence of the TP -Determine whether the decision has been overturned on appeal |
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Primary Sources of the Tax Law
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The Constitution
Legislative history materials Statutes Treaties (do not confuse with term on next page) Treasury Regulations IRS pronouncements, and Judicial decisions In general, the IRS considers only primary sources to constitute substantial authority |
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Secondary Sources of the Tax Law
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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
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Tax research and tax planning are inseparable
-"Defer income and accelerate deductions" Avoidance-nontaxable fringe benefits over a fully taxable future pay or gain recognition of property transferred by death Deferral- retirement plans, appreciated property transferred (not by death), like-kind exchanges and involuntary conversions Acceleration of deductions- accrual basis for charitable deductions Shifting income- Gifts of appreciated property to lower-bracket family members Conversion- transfer of appreciated inventory to a controlled corporation -Effective tax planning requires consistency on the part of the taxpayers -The primary purpose of effective tax planning is to reduce the TP’s total tax bill -Must consider the legitimate business goals of TP -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 -Usually involves a proposed (as opposed to a completed) transaction and is based upon the continuing validity of the advice resulting from tax research |
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Key Components of Tax Planning
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1. Avoid the recognition of income (usually by resorting to a nontaxable source or nontaxable event)
2. Defer the recognition of income (or accelerate deductions) 3. Convert the classification of income (or deductions) to a more advantageous form (e.g. ordinary income into capital income) 4. Choose the business entity with the desired tax attributes 5. Preserve formalities by generating and maintaining supporting documentation 6. Act in a manner consistent with the intended objective |
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Speaker of the House of Representatives
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John Boehner
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President Pro Tempore of the Senate
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Leahy Patrick J.
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Chairman of the House Ways and Means Committee
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Dave Camp
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Chairman of the Senate Finance Committee
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Max Baucus
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Vice President
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Joe Biden
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Secretary of the Department of Treasury
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Jacob J. Lew
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Commissioner of the IRS
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Daniel I. Werfel
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Chief Counsel of the IRS
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William Wilkins
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Chief Justice of the U.S. Supreme Court
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John G. Roberts, Jr.
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