Constitution and Legislative Sources

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Constitutionand
Legislative Sources

• Chapter 3

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TAX POLICY

• Who establishes Tax Policy?

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PRINCIPLES OF GOOD TAX POLICY

• Annette Nellen, San Jose State University
• Presented to Tax Section of AICPA at Section
  meeting in Van Couver, B.C., June 15, 2001
• 1. Similarly situated taxpayers should be taxed
  similarly
• 2. Tax rules should specify when the tax is to
  be paid, how it is to be paid, and how the amount
  to be paid is to be determined

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Tax Policy (contd)

• 3. A tax should be due at a time or in a manner
  that is most likely to be convenient for the
  taxpayer
• 4. The costs to collect a tax should be kept to
  a minimum for both the government and taxpayers.

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Tax Policy (contd)

• 5. The tax law should be simple so that
  taxpayers can understand the rules and comply
  with them correctly and in a cost- efficient
  manner
• 6. The effect of the tax law on a taxpayers
  decisions as to how to carry out a particular
  transaction or whether to engage in a transaction
  should be kept to a minimum

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Tax Policy (contd)

• 7. The tax system should not impede of reduce
  the productive capacity of the economy
• 8. Taxpayers should know that a tax exists and
  how and when it is imposed upon them and others

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Tax Policy (contd)

• 9. A tax should be structured to minimize
  noncompliance
• 10. The tax system should enable the government
  to determine how much tax revenue will likely be
  collected and when

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What do We Need to Know About Authorities

• What they are
• Their source
• Where to find them
• How to use them

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What We Must Determine

• Their
• reliability

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Primary Sources of Federal Tax Law

• First Statutory sources
• The U.S. Constitution
• Tax Treaties
• The Internal Revenue Code (IRC)
• Second Administrative sources (next chapter)
• Treasury Regulations
• Revenue Rulings
• Third Judicial sources (chapter 5)
• The Court system

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Secondary Sources of Federal Tax Law

• Tax services
• Tax journals and newsletters
• Tax textbooks and treatises

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The U.S. Constitution (First Primary Source)

• Constitutionality
• Sixteenth Amendment The Congress shall have the
  power to lay and collect taxes on incomes, from
  whatever source derived, without apportionment
  among the several States, and without regard to
  any census or enumeration.
• Tax protestors
• Penalties

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Penalties

• Frivolous return - 6702 - 500 (there is a
  proposal under current consideration to increase
  this to 5,000)
• Argument that tax is Unconstitutional
• Dont like how tax are being spent
• Dont believe in supporting military and violence

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Penalties (Contd)

• Frivolous Petition (to Tax Court) - 6673
• 25,000
• Applied by the Tax Court
• Petition filed primarily to delay revenue
  collection process
• Petitioners grounds are frivolous
• TP unreasonably failed to pursue available
  administrative remedies

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Tax Treaty, or Convention

• What is it? A negotiated agreement between two
  countries that attempts to determine the tax
  treatment of entities subject to tax in both
  countries.
• Purpose? Attempt to avoid double taxation, -
  taxing an entity on the same income in both
  countries.

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Treaty (Contd)

• Negotiated by the Executive Branch (U.S.
  Constitution, Article II, Sec. 2)
• Need not be ratified by Congress
• IRC 894 (a)(1) The provisions of this title
  shall be applied to any taxpayer with due regard
  to any treaty obligation .

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Treaty (Contd)

• Which takes precedence when treaty and statute
  conflict? Treaty or IRC?
• Generally, the most recently adopted is observed.
• Competent Authority

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Treaty (Contd)

• IRC 894 (a)(1) The provisions of this title
  shall be applied to any taxpayer with due regard
  to any treaty obligation .
• IRC 7852(d) For purposes of determining the
  relationship between a provision of a treaty and
  (the IRC) , neither the treaty nor the law
  shall have preferential status .. .

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Treaty (contd)

• Exception
• 7852(d) Any treaty negotiated before August
  16, 1954 that is still in effect (not superceded
  or otherwise terminated) takes precedence over
  any amendment to Title 26 enacted after that date.

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Internal Revenue Code (IRC)

• The Legislative Process
• U.S. House of Representatives
• House Ways and Means Committee
• Full House
• Unites States Senate
• Senate Finance Committee
• Full Senate
• Joint Conference Committee
• Both Houses again
• Presidents signature

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Internal Revenue Code (contd)

• Bill passed by Congress is
• Public Law 105-206
• 105th Congress
• 206th bill passed by that Congress

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Internal Revenue Code (contd)

• Reveals the intent of Congress, reason, logic for
  the proposals.
• House, Senate, and Joint Conference Committee
  each will all have their own Committee Reports.
• (Can be found on the web)

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IRC (Contd)

• Public Law P.L. 105-206
• H.R. 2676, Internal Revenue Service Restructuring
  and Reform Bill passed 6/25/98, preceded and
  revised became
• P.L. 105-206 , Internal Revenue Service
  Restructuring And Reform Act of 1998
• Effective date
• Committee Reports
• Legislative History

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Internal Revenue Code (contd)

• Title 26 of the United States Code the IRC
• Subtitles
• Income Taxes
• Estate and Gift Taxes
• Employment Taxes
• Etc.
• 2. Parts
• 3. Chapters

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Internal Revenue Code (contd)

• 2. Parts
• I. Tax on Individuals
• II. Tax on Corporation
• III. Changes in Rates during a Taxable Year.
• Etc.
• 3. Chapters
• 4. Subchapters

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Internal Revenue Code (contd)

• 3. Chapters
• 1. Normal Taxes and Surtaxes
• 2. Self-Employment Tax
• 11. Estate Taxes
• 4. Subchapters
• 5. Sections

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Internal Revenue Code (contd)

• 4. Subchapters
• A. Determination of Tax Liability
• B. Computation of Taxable Income
• F. Tax-Exempt Organizations
• K. Partnerships and Partners
• And, finally, the most important of all
• 5. Section

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Internal Revenue Code (contd)

• 5. Section
• 61 Gross income defined
• 151 Allowance of deductions for personal
  exemptions
• 162 Trade or business expenses
• 212 Expenses for production of income

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• Questions?