The American College: HS 321 Income Taxation

1
The American College HS 321Income Taxation

• Class 1 Chapters 13
• An Overview of the Income Tax System

2
Objectives

• Describe the major income tax services and
  identify several sources where new tax
  legislation is published and analyzed.
• Understand the origins and significance of the
  16th Amendment.

3
Objectives

• Describe the functions of the income tax system.
• Understand the three basic sources of income tax
  law today and the role played by each source.

4
Objectives

• Explain the meaning of the term gross income, the
  doctrine of constructive receipt, the
  economic-benefit theory, and the principle of
  assignment of income.

5
Functions of the Tax System
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Considerations That Affect Enactment of Tax Laws

• Economic
• stimulate savings and investment
• encourage certain industries
• stimulate small business development
• enhance U.S. competitive position

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Considerations That Affect Enactment of Tax Laws

• Social
• Equity
• wherewithal-to-pay
• alleviation of effects of
• annual accounting periods
• multiple taxation
• Political

8
More Tax Rate Terms

• Marginal Tax Rate Rate paid on last dollar of
  income
• Average Tax Rate Taxes paid/ Taxable income
• Effective Tax Rate Taxes paid/ Economic income

9
Sources of Tax Law Today
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Primary Tax Authority

• Legislative Authority
• IRC of 1986 (also 1939, 1954)
• Tax Treaties
• U.S. Constitution
• Committee Reports

11
Primary Tax Authority

• Administrative Authority (Executive
  Authority)
• Treasury Regulations
• Revenue Rulings
• Private Letter Rulings
• Determination Letters

12
Primary Tax Authority

• Judicial Authority
• U.S. Supreme Court
• Appeal Courts
• Trial Courts Small Claims Court (of Tax Court)

13
Tax Authority

• Secondary Sources of Authority
• Tax Services (CCH, RIA, BNA, WGL)
• Periodicals
• Texts
• Newsletters

14
Tax Legislation Process

• All Revenue Bills begin with House of
  Representatives
• 1. House Ways Means Committee
• 2. Amended bill sent to the House for adoption
• 3. Adopted bill sent to the Senate Finance
  Committee
• 4. Forwarded to the Senate for Passage
• Then . . . .

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Tax Legislation Process

• 5. A joint conference develops a compromise
  version.
• 6. Compromise version is passed by both Houses.
• 7. Legislation is sent to the President.
• 8. Signed into law.

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Quiz Questions
17
Quiz 1

• Congress has the power to tax all income from
  whatever source derived, whether by corporations,
  individuals, or estates and trusts.
• True
• False

18
Quiz 1

• Regulations are written by the Internal Revenue
  Service and serve as the official Treasury
  interpretation of the Internal Revenue Code.
• True
• False

19
Quiz 1

• The Internal Revenue Service is under the
  authority of Congress.
• True
• False

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Legislative
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Organization of IRC of 1986

• Subtitles (9)
• Chapters
• Subchapters
• Parts
• Sections

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Organization of IRC of 1986Example

• Subtitle A Income taxes
• Chapter 1 Normal taxes surtaxes
• Subchapter A Determination of tax liability
• Part I Tax on individuals (Sections 15)
• Part I I Tax on corporations (Sections 1112)
• Subchapter C (Corporations)
• Subchapter K (Partners Partnerships)

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Executive
24
Treasury Regulation

• Official Interpretation of the IRC 26 CFR
  (Treas. Decision)

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Treasury Regulation

• Ex. Treas. Reg. Sec. 1.1245 2(a)(3)(ii)
• I. Part
• 1. Income taxes
• 20. Estate taxes
• 25. Gift taxes
• 31. Employment taxes, etc.
• II. Section
• III. Outline breakdown of Reg.

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Treasury Regulation

• Statutory vs. Interpretive Regulations

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Administrative Authority

• Treasury Regulations
• Revenue Rulings
• Revenue Rulings (Natl Office of IRS)
• Letter Rulings (Natl Office of IRS)
• Determination Letters (Dist. Dir., IRS)
• Revenue Procedures
• Technical Advice Memoranda
• Etc., about 20 other types

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Revenue Rulings

• Nature of Revenue Rulings
• IRB (Internal Revenue Bulletin) CITATIONRev.
  Ruling 79-194, 1979-26 IRB 13 orRev. Ruling
  79-194, IRB no. 26, 13
• Cumulative Bulletin CITATIONRev. Rul. 79-194,
  1979-1 CB 145

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Quiz Questions
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Quiz 2

• Which of the following statements concerning a
  taxpayer who wishes to contest a statutory notice
  of deficiency assessed against him/her is correct?

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• (A) He may petition for a jury trial in the U.S.
  Court of Federal Claims without prepaying the
  deficiency.
• (B) He may petition the U.S. Tax Court to hear
  his case without prepaying the deficiency but is
  not entitled to a jury trial.
• (C) He may file a petition to have his case heard
  before a jury in the U.S. District Court without
  prepaying the deficiency.
• (D) He may petition for a jury trial in the U.S.
  Tax Court without prepaying the deficiency.

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Quiz 2

• U.S. Supreme Court interpretation of tax law is
  the law of the land until which of the following
  happen(s)?
• I. Congress enacts a new statute, tantamount to
  overturning a Court decision.
• II. The Court overrides its own prior decision.
• A. I only C. Both I and II
• B. II only D. Neither I nor II

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Judicial
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The Court System for Tax Cases
Supreme Court
U.S. Court of Appeals11 CircuitsWashington, D.C.
U.S. Court of AppealsFederal Circuit
U.S. Tax CourtRegular Memo
U.S. DistrictCourt
U.S. ClaimsCourt
Small Claims DivisionLess than 50,000
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Steps in the Tax Research Process

• Establish Facts
• Determine Tax Issues
• Locate Authority
• Determine Appropriate Conclusion
• Communicate Results
• Follow-Up

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Four Basic Income Tax Concepts

• Gross Income
• Doctrine of Constructive Receipt
• Cash v. accrual basis of accounting
• Timing Issues
• Economic Benefit Theory
• Assignment of Income