Tax Accounting Test 1

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abatements

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A property tax exemption granted by a government for a limited period of time

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activity based tax

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A tax imposed on the results of an ongoing activity in which persons or organizations engage

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ad valorem tax

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A tax based on the value of property

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brackets

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The portion of a tax base subject to a given percentage rate in a graduated rate structure

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Cumulative Bulletins (CBs)

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Semiannual compilation of weekly Internal Revenue Bulletins

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earmarked tax

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A tax that generates revenues for a designated project or program rather than for the government's general fund

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employment taxes

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A tax based on wages, salaries, and self-employment income. Federal employment taxes are earmarked to fund Social Security and Medicare

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event or transaction based tax

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A tax imposed on the occurrence of a certain event or transaction

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excise tax

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A tax levied on the retail sale of specific goods or services. An excise tax may be in addition to or instead of a general sales tax

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flat rate

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A single percentage that applies to the entire tax base

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graduated rate

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Multiple percentages that apply to specified brackets of the tax base

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incidence

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The ultimate economic burden represented by a tax

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income tax

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A tax imposed on the periodic increases in wealth resulting from a person's economic activities

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Internal Revenue Bulletins (IRBs)

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The IRS's weekly publication containing revenue rulings and revenue procedures

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Internal Revenue Code of 1986

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The compilation of statutory tax laws written and enacted by the Congress of the United States

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Internal Revenue Service (IRS)

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The subdivision of the U.S. Treasury Department responsible for the enforcement of the federal tax laws and the collection of federal taxes

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jurisdiction

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The right of a government to levy tax on a specific person or organization

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personalty

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Any asset that is not realty

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real property taxes

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A tax levied on the ownership of realty and based on the property's assessed market value

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realty

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Land and whatever is erected or growing on the land or permantly affixed to it

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revenue

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Total tax collected by the government and available for public use

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revenue procedure

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An IRS pronouncement advising taxpayers how to comply with IRS procedural or administrative matters

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revenue ruling

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An IRS pronouncement explaining hor the IRS applies the tax law to a particular set of facts

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sales tax

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A general tax levied on the retail sale of goods and services

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section

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Numberically labeled subdivision of the Internal Revenue Code. Each section contains an operational, definitional, or procedural rule relating to one of the federal taxes

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tax

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A payment to support the cost of government. A tax is nonpenal but compulsory and is not directly related to any specific benefit provided by the government

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tax assessors

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An elected or appointed government official responsible for deriving the value of realty located withing a taxing jurisdiction

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tax base

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An item, occurrence, transaction, or activity with respect to which a tax is levied. Tax bases are usually expressed in monetary terms

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tax law

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The body of legal authority consisting of statutory laws, administrative pronouncements, and judicial decisions

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taxpayer

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Any person or organization required by law to pay tax to a governmental authority

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transfer taxes

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A tax levied on the transfer of wealth by gift or at death and based on the market value of the transferred assets

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Tresury regulations

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The official interpretation of a statutory tax rule written and published by the U.S. Treasury

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unemployment tax

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A tax levied by both the federal and state governments on compensation paid by employers to their employees. Unemployment taxes are earmarked to fund the national unemployment insurance program

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use tax

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A tax levied on the ownership, possession, or consumption of goods if the owner did not pay the jurisdiction's sales tax when the goods were purchased

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value-added tax (VAT)

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A tax levied on firms engaged in any phase of the production or manufacture of goods and based on the incremental value added by the firm to the goods

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ability to pay

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Economic resources under a person's control from which he or she can pay tax

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average rate

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The tax rate determined by dividing total tax liability by the total tax base

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convenience

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The second standard for a good tax. A tax should be convenient for the government to administer and for people to pay

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declining marginal utility of income

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The theory that the financial importance associated with each dollar of income diminishes as total income increases

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dynamic forecast

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A projection of revenue gain or loss resulting from a tax rate change that assumes that the change will affect the tax base

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efficiency

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The third standard for a good tax. Classical economic theory holds that an efficient tax is neutral and has no effect on economic behavior. In contrast, Keynesian theory holds that an efficienct tax is a fiscal policy tool by which the government can affect economic behavior

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horizontal equity

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One aspect of the fourth standard of a good tax: A tax is fair if persons with the same ability to pay (as measured by the tax base) owe the same tax

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income effect

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A behavioral response to an income tax rate increase: Taxpayers engage in more income-producing activities to maintain their level of disposable income

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marginal rate

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The tax rate that applies to the next dollar of taxable income

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negative externality

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An undersirable by-product of the free enterprise system

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progressive rate structure

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A graduated rate structure with rates that increase as the base increases

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proportionate rate stucture

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A rate structure with a single, or flat, rate

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regressive rate structure

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A graduated rate structure with rates that decrease as the base increases

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static forecast

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A projection of revenue gain or loss resulting from a tax rate change that will have no effect on the tax base

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substitution effect

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A behavioral response to an income tax rate increase: Taxpayers engage in fewer income-producing activities and more non-income-producing activities

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sufficiency

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The first standard for a good tax. A tax should generate enough revenue to pay for the public goods and services provided by the government levying the tax

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supply-side economic theory

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A decrease in the highest income tax rates should stimulate economic growth and ultimately result in an increase in government revenues

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Tax Expenditures Budget

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Part of the federal budget that quantifies the annual revenue loss attributable to each major tax preference

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tax policy

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A government's attitude, objectives, and actions with respect to its tax system

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tax preferences

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In the general context, provisions included in the federal tax law as incentives to encourage certain behaviors or as subsidies for certain activities; in AMT contxt, specific items added to regular taxable income in the computation of AMTI

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vertical equity

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One aspect of the fourth standard of a good tax: A tax is fair if persons with a greater ability to pay (as measured by the tax base) owe more tax than persons with a leser ability to pay

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annuity

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A cash flow consisting of a constant dollar amount for a specific number of time periods

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arm's-length transaction

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A transaction occurring between unrelated parties who are dealing in their own self-interest

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deduction

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An offset or subtraction in the calculation of taxable income

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discount rate

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The rate of interest used to calculate the present value of future cash flows

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market

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A forum for commercial interaction between two or more parties for the purpose of exchanging goods or services

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net cash flow

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The difference between cash received and cash disbursed

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net present value (NPV)

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The sum of the present values of all cash inflows and outflows relating to a transaction

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private letter ruling (PLR)

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The IRS's written response to a taxpayer's inquiry as to how the tax law applies to a proposed transaction

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private market

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A market in which the parties deal directly with each other and can customize the terms of their agreement to meet their respective objectives

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public market

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A market in which the parties deal indirectly through an intermediary such as a broker or a financial institution

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related party transaction

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A transaction between parties who share a common economic interest or objective and who may not be dealing at arm's length

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tax cost

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An increase in tax liability for any period resulting from a transaction

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tax savings

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A decrease in tax liability for any period resulting from a transaction

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time value of money

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A dollar available today is worth more than a dollar available tomorrow because the current dollar can be invested to start earning interest immediately

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assignment of income doctrine

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Income must be taxed to the entity that renders the service or owns the capital with respect to which the income is paid

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business purpose doctrine

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A transaction should not be effective for tax purposes unless it is intended to achieve a genuine and independent business purpose other than tax avoidance

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capital gain

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Gain or loss realized on the sale or exchange of a capital asset. Capital gain may be elegible for a preferential tax rate

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economic substance doctrine

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A transaction that doesn't change the taxpayer's economic situation except by the tax savings from the transaction should be disregarded for tax purposes

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explicit tax

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An actual tax liability paid directly to the taxing jurisdiction

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implicit tax

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The reduction in before-tax rate of return that investors are willing to accept because of the tax-favored characteristics of an investment

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ordinary income

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Any income that is not capital gain. Ordinary income is taxed at the regular indidvidual or corporate tax rates

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step transaction doctrine

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The IRS can collapse a series of intermediate transactions into a single transaction to determine the tax consequences of the arrangement in its entirety

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substance over form doctrine

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The IRS can look through the legal formalities to determine the economic substance (if any) of a transaction and to base the tax consequences on the substance instead of the form

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tax avoidance

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The implementation of legal strategies for reducing taxes

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tax evasion

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The willful and deliberate attempt to defraud the government by understating a tax liability through illegal means

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tax planning

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The structuring of transactions to reduce tax costs or increase tax savings to maximize net present value