Fed tax fall 2007 hoyt how to Read Statutes

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FALL 2007

How to Read Statutes

    • 101(a)(2)(A)(i)

      • 101 is section

      • (a) is subsection

      • (2) is a paragraph

      • (A) sub paragraph

      • (i) sub sub paragraph

History of Taxation

    • Type of taxes:

      • Local/county

        • Schools (#1), sanitation, police and fire

        • Largest source of revenue is property tax; another source is small sales tax

          • High sales taxes will cause people to shop elsewhere and discourages improvement

      • State

        • Education, highways, prisons, roads

        • Source - 50/50 between income tax and sales tax

          • income tax lower in cities b/c easy to avoid; retailers collect sales tax for govt

        • Sales tax is regressive: poor ppl pay proportionately more than rich people

        • Exception: NH has no income or property tax, but has high property tax

        • 9 states do not have income tax (FL, TX, WY, TN, SD, NV, WA, & NH)

      • Federal

        • Social security, military pensions, social service pensions, national defense, etc.

        • Source: Income tax (44%); Corp income tax (9%); Social security tax (40%); Excise taxes (3%); estate taxes (1%); Other (3%)

        • power given by clause in constitution

          • if taxes are levied on US population, must be proportionate to the population

            • have to have a head tax—meaning if VA and NY had same number of people must collect the same from each person

                • income taxes were’t allowed so govt got revenue from port taxes

                • until 1900’s there was no income tax, only tariffs

                • during Civil War there was an income tax, this was probably illegal

                • Constn said head tax had to be the exact same for every person, in proportion to population

                • Constn amended to remove head tax language (16th A in 1913)—only the rich were taxed

                  • 1916 revenue act—estate taxes enacted (hit rich people)

                  • 1921: 1st gift tax

                  • Pre-WWII only 6% paid income taxes

                  • Post-WWII—75% of people were paying taxes

          • 1921: tax statutes somewhat organized but were located throughout Code

          • 1939: dedicated the 19th title of code to taxes; Title 26 = The Tax Code

            • Consolidated existing taxes into one code (instead of being scattered)

          • 1954: during Cold/Korean War—finally got a comprehensive code, however everything thereafter was the 1954 code amended for 1960

          • 1985: Reagan said code was too complicated, so enacted code of 1986 and is amended every year

            • Tax Reform act of 1986 – amended every year and this is what we now use today

How is tax law enacted

    • It is different from any other law

    • Constitution gives special rules for tax law

      • Constn requires that every tax law start in House of Representatives (cannot start in Senate)

        • Theory: since Reps are replaced every 2 years, you can vote out people you didn’t like to change the tax law

        • US legislature is based on 2 part model of VA House and Senate (Madison drafted this)

          • CT (small state) objected, proposed 2 amendments that passed

            • Every state had 2 senators and

            • Must start in house

      • BEGINS in Ways and Means Committee: House Committee that controls things; drafts tax bill

      • House approves it then it goes to Senate Finance Committee

      • Senate Finance Committee: Takes bill once it has been approved by House and change/modify/edit the bill, then it goes to Joint Committee

      • Joint Conferences committee of Ways & Means and Senate Finance – 5 House and 3 Senate and they hash it out (go over it line by line), compromise to one package

      • Goes to House, then Senate for approval

        • If passes both House and Senate, then goes to Pres for veto/approval (he’s never vetoed)

      • Executive Branch (Sec’y of Treasury) administers the law through the IRS (biggest of their departments)

Who is involved in the tax-making process?

    1. LEG – Make the laws and statutes

    2. EXE – Enact regulations

        1. Interpretive – EX agency “interprets” what the LEG meant; JUD usually accepts.

        2. Legislative

    3. JUD – Interprets the above in courts

        1. Tax Courts

        2. Bankruptcy Courts

        3. Must file a tax case in one of these courts

          1. Rare to actually go to court

          2. Most settle beforehand.


  • Two main books—CCH/RIA are about the same

    • CCH (Congress Clearing House)—Standard Fed Tax Reporter

      • Updated weekly, has most recent cases

      • Alphabetical index

      • Organized by Code section

    • RIA (Research Institute of America)

      • US Tax Reporter—updated weekly, has most recent cases

      • Fed Tax Coordinator—For people who have hard time reading legalese (not updated weekly, simplifies law)

        • A sort of treatise on the law, so it doesn’t have every case

        • Best for use by non-tax specialists

    • LexisNexis/Westlaw

      • Document retrieval

      • No essays/explanations

      • Lexis is better for tax stuff

    • BNA—Tax Management Portfolio

      • Little books on single subject—good to use for a new topic you aren’t familiar with

    • Tax Court Documents

      • Regular decisions

      • IRS Cumulative Bulletin

        • Updated twice/year; a compilation of IRS rulings

  • Hierarchy

    • Tax Code (passed by Congress)

      • the language of the statute as expressed by Congress

    • US SC decisions—very few decisions, aren’t very relevant to tax law practitioners b/c about constitutional issues

    • Regulations – issued by Dept. of Treasury (executive branch)—not IRS, secret service are agencies under it

      • types of regulations:

        • legislative regulations—IRS will generally defend to the SC, SC generally agrees w/ IRS

        • Interpretive regulations—IRS will always defend to SC, SC generally agrees w/ IRS

          • Ex § 451

        • Proposed Regulations—Congress passes a new statute and then Dept. of Treasury will interpret it

          • There is a Notice and comment period w/ proposed regulations and then issue final regulations (allows general public to write in and comment)—dept of treasury will collect these comments but doesn’t have to listen (but usually does

          • While waiting for final regulations, can follow these proposed regulations

          • Really aren’t law, it just tells what IRS is thinking

        • Temporary Regulations—says there is a new law and you need to know right away

    • Court of Appeals Decision

      • The IRS will feel bound only in jurisdiction where they lose a case (ex – HUNTSMAN CASE)

    • Trial Court Decision (3 courts have jurisdiction to hear federal tax cases)—can’t do in state court (these are in hierarchical order!)

      • US Tax Court is the most popular—can wait to pay taxes until you get the decision—no appeals

        • NOTE – US Dist. Ct. and Court of Claims can ONLY hear cases for refunds – YOU MUST PAY FIRST AND THEN SUE FOR A REFUND.

          • The Tax Court is the only court where they can stay the payment of taxes – can sue BEFORE you pay the taxes

        • Special court in Wash. DC has 19 judges—only hear tax cases—tour country 2X a year to hear cases

        • Don’t like litigations—strongly encourage no dispute in facts between IRS and tax payer

        • Two Types of decisions issued

          • Regular—important issues—published in US Tax Court Cases

          • Memo—routine cases, things that come up all the time—published in separate vol. of CCH or RIA

        • 80% of these cases are tried pro se (w/o lawyer)

        • S cases—small claims court of tax courts < $50,000

          • 50% of all tax court cases are S cases

            • no written opinion


            • not supposed to be used as precedent

      • US Federal District Court Case—can only handle refund litigation only—really needs to be worth it

      • US Court of Claims—(in DC) can only handle Refund litigation only

        • Is a commercial court for commercial dispute—patent issues, customs issues

        • Really has to be worth it

        • Appeal to federal circuit court of appeals in DC

    • Legislative History

      • look at committee reports because they will tell where the current law is and what the proposed law is and why they are changing it

    • IRS (agency in dept of Treasury that administers tax laws)

      • Public

        • Revenue Ruling—IRS must follow—come out every week in I.R.B. (Internal Revenue Bulletin)

        • Revenue Procedure

          • Get the IRS to do something you want

        • IRS notice

      • private

        • Private letter rulings (PLR)—not supposed to be cited as precedent but often is anyway

          • Tax payer is going to do a transaction in the future and you write to IRS to get their opinion

          • Costs $10,000 to do this

          • The Freedom of Information Act made private IRS tax documents public, but there is a 3 month lag time for PLRs

        • Technical Advice Memorandum (TAM) – Complicated memo

          • Same people that write the PLR write the TAM and will say whether transaction is taxable or tax free

          • Agent contacts D.C. with facts, D.C. will analyze the issue and provides an answer

        • General Counsel Memorandum (GCM)

    • Tax Evasion v. Tax Avoidance (Page 2-33)

      • Tax Evasion—Illegal

        • ex: receiving payments for services and not reporting it

      • Tax Avoidance—legal tax planning

      • Reducing tax bill

Objectives of Tax Law:

    • Economic efficiency

      • Tax law should interfere as little as possible w/ the optimal allocation of resources

        • Taxes screw up economic behavior as people try to avoid them

      • High tax rates effect peoples behavior

    • Equity/Fairness

      • Horizontal Equity: Provides that 2 people in same economic circumstances should pay the same amount of income tax

        • Important b/c paying same amount will perceive the tax system as fair

        • Violated b/c you pay less taxes if you are married

      • Vertical Equity: Concept that the rich people should pay proportionally more than the poor

        • Best example is progressive tax rates/brackets; see inside cover of book

    • Simplicity

      • Is imp that tax law can be understood by people—is view of sales tax (income tax not as simple)

      • If not simple, it leads to people feeling that it’s unfair, which can cause people to cheat

      • If the IRS is giving refunds and charging people during an audit on a provision—shows that people are not understanding

    • To Promote Specific Economic and Social Objectives

      • Ie – encourage daycare through tax breaks, discourage smoking via high taxes, etc.

      • Two means

        • Tax Credits

        • Collecting tax for a program

        • Providing deductions for a particular service (day care tax break; homeowners exception)

          • In Canada, no deduction for homeownership—means more people rent

          • In US, deduction for homeownership—means more people own

      • Equity and Simplicity often conflict w/ one another


    1. Income – All the taxpayers income, both taxable and nontaxable. Does not include a return of capital or receipt of borrowed funds.

      1. Example – wages (taxable)

    2. Exclusions – Certain types of income excluded from the income tax base

      1. Accident insurance proceeds; child support payments; SS benefits; life insurance, gifts

    1. Gross Income – IRS definition: “Except as otherwise provided (i.e. exclusions)… All income from whatever source derived.”

      1. Alimony; Awards; back pay / bonuses / commissions; Interest; Rents; Salary; Severance; Essentially, EVERYTHING.

    2. Adjusted Gross Income (AGI) – Subtotal, that serves as the basis for computing limitations on itemized deductions.

    3. Itemized Deductions – Specific personal expenses Congress has allowed as deductions, reduces your income

      1. Medical expenses, certain taxes and interest, and charitable contributions.

    4. Standard Deduction – Specific amount, depending upon the status of the taxpayer, that can be deducted from tax liability.

    5. Personal and Dependency Exemptions – Exemptions allowed for the taxpayer, spouse, and each dependent.

      1. Personal Exemptions – Idea that someone with little income shouldn’t be taxed; allows a specified amount of income to be exempt from tax.

      2. Dependent Exemptions – Exemption for each eligible individual (see below to determine who qualifies as a dependent).


  • Taxable Income Formula

    • AGI - standard deduction or itemized deduction – personal exemption (dependent) = taxable income

        • If Itemized deductions are less than standard deduction then use standard deduction

        • If over age 65 or blind add more to deduction

          • Blind = $1,100

          • Over 65 = $1,400

    • Tax return required when:

      • Must file if gross income is greater than standard deductions + exemptions

      • Table 3.6 Filing Levels (includes blindness & over 65)

      • Self-employed with net earnings of $400+ must file regardless of gross income

  • Standard Deduction 2009 - $5,700

  • Personal Exemption 2009 - $3,650 (this can be for you or your dependent)

    • 2009 gross income: $9,350 (must file)

  • After these 2 deductions (that you get right off the bat) you now have your TAXABLE INCOME

  • if your income is under this gross income amt ($9,350), then you don’t have to file a return

  • The second column is for inflation

  • For Dependents (exceptions for filing p 3-26)

    • Earned Income – labor, employed (social security taxes)

      • Must file if only have earned income and gross income > total std deduction

    • Unearned Income- investments, savings account (no taxes w/held)

      • If only have unearned income and gross income is > $950 + additional std deduction allowed for the yr, then you have to file; if < don’t have to file tax return

        • Child must file if earn more than $950

    • If child has both earned and unearned?

      • Pg. 3-26 go through test above, if they are more or less

      • If gross income > larger of: $950 or earned income + $300 (lmtn to basic std deduction), + additional std deduction allowed for the yr

      • Capped at 5,700

        • This means if the amount is over the $950 or EI+$300, and over $5,700, then the $5,700 is the deduction you can allow. If less than $5700, then deduct that amount.

1040 – B-6, 7

FILING STATUS (determined on the last day of the year)


  • highest tax rate

  • Get to 35% faster if single then do if you are married

  • basic Standard Deduction for 2009: $5,700

  • Each Additional Standard Deduction for 2009: $1,400

Married Filing Jointly

  • Lowest tax rates

  • Means both spouses sign form and both are responsible legally (liable for spouse)

  • basic Standard Deduction for 2009: $11,400

  • Each Additional Standard Deduction for 2009: $1,100

Married Filing Separately

  • highest tax rates

  • Means file own separate return, are only liable for own return

  • You might do this even if can file jointly if you do not trust the other spouse (cheat on taxes)

  • Usually don’t file this way

      • Basic Standard Deduction for 2009: $5,700

      • Each Additional Standard Deduction for 2009: $1,100

      • Each reports own income, exemptions, deductions & credits

      • Marriage Penalty – when it is more advantageous to file separate returns & be single, usually when both spouses have large incomes (Congress has taken steps to reduce the effect of this)

      • Limitations:

        • If either itemizes, both must itemize

        • Cannot claim earned income credit & credit for child and dependent care expenses

        • No deduction for interest paid on qualified education loans

        • Only $1500 of excess capital losses can be claimed

Head of Household

  • Generally single parent – this is the best way to think of it

  • Pay middle range of tax

  • Basic standard deduction for 2009:$ 8,350

  • Each additional standard deduction for 2009: $1,400

  • TEST:

  • 1. Unmarried individual at the end of the year

    • Exception to the UNMARRIED requirement

      • Abandoned Spouse—you are married w/ a QC and your spouse had not been a member of the household for the last 6 mos of the yr (July-December)

        • Spouse walks out in May and can’t find to sign joint return—can file HoH

        • Spouse walks out in Oct and Can’t find to sign joint return—can’t file

        • Must have a QC (not QR)

  • 2. Pays more than ½ the cost of maintaining a household for the dependent living with you

  • 3. Live w/ a dependent (QC or QR)

    • Exceptions to the DEPENDENT requirement

      • Child does not have to be your dependent (deals with divorce situations where non-custodial parent claims child as dependent)

        • Dad pays child support so he claims child as dependent, mom would claim head of household

        • If mom is unmarried, and daughter (age doesn’t matter) who is broken up w/ her husband and moves back in w/ mom, mom can claim head of household

        • If child is married then CANNOT be a dependent

      • Dependent parent does not have to live w/ you

        • Often kids take care of elderly parents, could take mom as a dependent even though she doesn’t live w/ you as long pay ½ of moms living expenses—qualifies if mom is living in nursing home

Qualifying Widower

(Surviving spouse)

  • Basic Standard Deduction for 2009: $11,400

  • Each Additional Standard Deduction for 2009: $1,100

  • qualify for the married filing jointly (lowest rates)

  • If spouse in married couple dies: Can file jointly in the yr of death; if have dependent child (next yr file as single); can file jointly for 2 yrs following yr of spouse’s death. After that, must file as per your current status (married/single/HofH)

Test for Filing Status

  • TEST: what were you on the last day of the year

  • If you get married on Dec. 31st, you were married all year

  • If you get divorced on Dec. 31st, you were single all yr

Defense of Marriage Act

  • Fed law defines marriage as b/t 1 man and 1 woman—even if state has exception for homosexuals, doesn’t apply for federal purposes

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