Chapter 1

Question 1

Describe the procedure for the passage and adoption of tax bills.

Answer 1

A revenue bill becomes law, in most cases, through the following process:
• The bill is written by or referred to the House Ways and Means Committee.
• The committee conducts hearings on the bill and then sends the amended bill
with the committee’s report to the House for adoption.
• The adopted bill is then sent to the Senate Finance Committee for study and
amendments.
• The amended bill is then forwarded to the Senate for passage.
• A joint conference committee consisting of members from both the House and
Senate develops a compromise version of the bill if material differences exist
between the two versions.
• If the compromise version passes both the House and Senate, the bill is then sent to the president for his or her signature or veto.
• If the bill is vetoed, a two-thirds majority of both the House and Senate can revive the bill and make it law over the president’s veto.

Question 2

Revenue Rulings

Answer 2

Based on a stated set of facts that usually involve a problem common to a number of taxpayers.

Question 3

Under what circumstances would the Supreme Court review an appeal in a tax case?

Answer 3

Supreme Court review of tax cases is generally available only if the Court itself grants petitions for appeal. Reasons for review typically are that (1) there is a conflict between the courts of appeal for different circuits, or (2) an important and recurring problem in tax law administration is involved, or (3) many taxpayers are involved, or (4) the decision of a lower court conflicts with longstanding practice or existing legal authority.

Question 4

By whom are revenue rulings issued and where can the rulings be found?

Answer 4

Revenue rulings are issued by the IRS and are published in a weekly bulletin called the Internal Revenue Bulletin. The first number following “Rev. Rul.” is the year it was issued. The second number is in numerical sequence, denoting the order in which it was issued.

Question 5

The only trial court that allows jury trials is the _________.

Answer 5

U.S. District Court

Question 6

Describe the executive powers regarding tax law as well as the delegation of authority for enforcing the law and collecting taxes.

Answer 6

The president is the chief of the executive branch of the federal government. The Constitution gives him or her the duty to enforce the collection of taxes. The president has delegated this duty to the Department of the Treasury, which in turn has delegated this 37 responsibility to the Internal Revenue Service, one of its subdivisions. The Department of the Treasury also has the power, granted by Congress, to enact regulations to interpret the Code.

Question 7

If the conflict is not resolved, how may an appeal be taken to the courts?

Answer 7

If the taxpayer and the IRS are not able to resolve their conflict in Appeals, statutory notice of deficiency is issued by the IRS Commissioner. Following this notice, taxpayers have 90 days to file a petition with the U.S. Tax Court to have their cases heard. If the 90 days pass without either the tax being paid or suit being filed, the IRS can assess a tax deficiency, enter judgment, and seize the taxpayer’s property to collect the deficiency. However, no tax need be paid in advance for cases to be litigated in the Tax Court. Once a case has been docketed there, an appeals officer is assigned to the case and given exclusive authority to settle within a 4-month period. If no settlement is reached in that time, the case is scheduled for trial. Alternatively, the taxpayer may choose to pay the tax deficiency and then file a claim for a refund with the IRS. Unless a notice of claim disallowance is sent before 6 months expire, the taxpayer must wait that time period before he or she can file suit for a refund in either the U.S. District Court or the U.S. Court of Federal Claims.

Question 8

Explain how the income tax system can be used to help curb inflation or lessen the
adverse effects of a recession.

Answer 8

Greater taxes result in lower spending by consumers. By reducing consumer spending without increasing governmental expenditures, the income tax system helps curb inflationary pressures. Conversely, the use of tax incentives or lower tax rates leaves consumers with more cash that, in turn, translates into increased spending, saving, and investment. The hoped-for result is an increase in the national product that will increase the demand for new workers and hence reduce unemployment. Thus the tax system can prevent or reduce the impact of recessions.

Question 9

Private Rulings

Answer 9

(Private Letter Rulings) arise when a taxpayer requests an administrative interpretation on a prospective transaction or on completed transactions that are not involved in returns already filed.

Question 10

Cases heard by the U.S. Court of Federal Claims may be appealed to the
_________.

Answer 10

Court of Appeals for the Federal Circuit

Question 11

The trial court in which a taxpayer can litigate without first paying an assessed
deficiency is the __________.

Answer 11

U.S. Tax Court

Question 12

Describe the effect of a particular regulation when it has been held invalid by

• trial or appeals court
• the Supreme Court

Answer 12

The IRS does not consider itself bound (beyond the particular case) where a regulation is held invalid by any court lower than the Supreme Court, although it now conforms to circuit (appeals) court decisions for the taxpayer’s circuit. Therefore, if a regulation is held invalid by a lower (trial) court, the IRS can and will continue to enforce it against other taxpayers.

If a regulation is held invalid by the Supreme Court, the IRS is bound by the decision for all cases and must cease enforcement of the regulation.

Question 13

What is the legal effect of the Code?

Answer 13

The Internal Revenue Code contains our income tax statutes. It must be followed by all taxpayers unless a provision is declared unconstitutional. The Code is subject to much interpretation but can be amended only by an act of Congress. The present Code is revised and updated almost annually. Parts of it can be amended or repealed through the passage of tax bills.

Question 14

How does a private ruling differ from a revenue ruling?

Answer 14

Private rulings arise when a taxpayer requests an administrative interpretation on a prospective transaction or on completed transactions that are not involved in returns already filed. Private rulings are personal to the taxpayer but, nonetheless, have been made available to the public in recent years and are now published. Even though published, however, they still may not be claimed by another taxpayer as a precedent.

Revenue rulings, on the other hand, usually involve a problem common to a number of taxpayers instead of just one. They are binding on officials of the IRS and may be relied upon by taxpayers who have cases with facts and circumstances substantially the same as those in the rulings.

Question 15

What is a revenue ruling and why is it important?

Answer 15

Revenue rulings are based on a stated set of facts that usually involve a problem
common to a number of taxpayers. They are binding on the IRS, which follows
them in the handling of issues arising in particular cases.

Question 16

Identify the functions of the income tax system, and describe generally the purposes that each function is designed to accomplish.

Answer 16

The four functions of the income tax system are the revenue-producing function, the economic function, the social function, and the regulatory function. The purpose of the revenue-producing function is to supply money for the administration and operation of the federal government. The economic function plays an important role in the management of the nation’s economy. The social function’s purpose is to effectuate government policy; the purpose of the regulatory function is to discourage socially undesirable activities by taxing them.

Question 17

Describe the historical evolution of the codified tax system that culminated in the current Internal Revenue Code.

Answer 17

The entire federal tax law was codified in 1939 as the Internal Revenue Code of 1939. The present statutory source of our income tax law is the Internal Revenue Code of 1986, as amended.

Question 18

Distinguish among the three courts that have original jurisdiction to hear tax matters.

Answer 18

The U.S. Tax Court was established for taxpayers who seek a redetermination of a deficiency asserted against them but do not wish first to pay the deficiency. Trial by jury is not available in the Tax Court. Questions of law and fact are decided by Tax Court judges.

The U.S. District Court can only hear tax cases in which the taxpayer has first paid the deficiency and has been denied a refund by the IRS. The District Court is the only court in which a taxpayer may request a jury trial. In a case where there is a jury, the jury decides questions of fact; the judge decides questions of law.

The U.S. Court of Federal Claims, like the U.S. District Court, can only hear tax cases in which the taxpayer has first paid the deficiency and has been denied a refund by the IRS. The Court of Federal Claims is a trial court that became operative on October 1, 1982, when the U.S. Court of Claims ceased to exist as such.

Question 19

Legislative

Answer 19

Enacts Law

• Internal Revenue Code

Question 20

Explain the function of a Treasury regulation.

Answer 20

The function of a regulation is to give a fuller explanation and interpretation of an Internal Revenue Code section. The Code specifically provides that the Secretary of the Treasury or his or her delegate will prescribe these regulations.

Question 21

Judicial

Answer 21

Court Systems

• Supreme Court
  
  • U.S. Court of Appeals
    
    • District Court
    • Tax Court
  • Court of Appeals for Federal Circuit
    
    • Court of Federal Claims

Question 22

What avenues of appeal exist if a taxpayer loses a tax case in a trial court?

Answer 22

Appeals from the Tax Court by an unsuccessful taxpayer are heard by the U.S. Court of Appeals in the region of the country in which the taxpayer resides. If there is a difference of opinion in the various courts of appeal, the Tax Court follows the decisions of that Court of Appeals to which the taxpayer may appeal.
Appeals from the Court of Federal Claims are heard by the Court of Appeals for the Federal Circuit, while appeals from a U.S. District Court are heard by that particular court’s corresponding U.S. Court of Appeals. Appeals from a U.S. Court of Appeals or the Court of Appeals for the Federal Circuit are taken to the highest court in the land, the U.S. Supreme Court.

Question 23

When there is a conflict between a taxpayer and the IRS with regard to the amount of tax owed, explain the statutory procedure for resolution of the conflict.

Answer 23

If a taxpayer disagrees with the IRS concerning the amount of tax owed, he or
she may request a hearing before the IRS Appeals organization. While the dispute
with IRS is being considered, the appeals officers are not permitted to engage
in substantive discussions regarding the specific case with other IRS officials in
the absence of the taxpayer or his or her representative. In addition, the taxpayer
may request that the issue be referred to the National Office staff for technical
advice if there is a lack of uniformity in the disposition of the issue or if the issue is
significantly complex or unique. Dispute resolution methods in Appeals now also
include mediation and arbitration

Question 24

Executive

Answer 24

Enforces Law

• Department of Treasury
  
  • Treasury Regulations -> Internal Revenue Service
    
    • Revenue Rulings

Question 25

Tax Court

Answer 25

• Does not require prepayment of assessed deficiency
• No trial by jury available
• Appeals taken to U.S. Court of Appeals for taxpayer’s circuit
• IRS need not acquiesce

Question 26

Explain what is meant by a determination letter.

Answer 26

Determination letters are written by IRS officials within specific operating divisions.
They are written in regard to various transactions to be reflected on returns that will be filed by various types of taxpayers and organizations. They are issued only if the answer to the question presented is covered specifically by statute, Treasury decision, or regulation, or specifically by a court decision or ruling opinion published in the Internal Revenue Bulletin. Determination letters contrast with revenue rulings in that such letters are never issued about unclear points of law.

Question 27

When is the IRS bound to follow a court decision?

Answer 27

The IRS does not consider itself bound by a Tax Court decision, a Court of Federal
Claims decision, or a District Court decision (except for the particular case in which
an adverse decision has been rendered). The U.S. Supreme Court is the highest court in the land and its decisions are required to be followed by the IRS as well as by taxpayers.

Question 28

What powers does the 16th Amendment give Congress with regard to the collection of taxes?

Answer 28

The 16th Amendment, ratified in 1913, gives Congress the power to impose and collect taxes on all forms of income without apportionment among the states and without regard to census or enumeration. The all-encompassing language, “income, from whatever source derived,” gave Congress authority to pass the first broad income tax law known as the Revenue Act of 1913.

Question 29

Income tax has been used to perform

Answer 29

social, economic, and regulatory functions.

Question 30

Filing Tax Returns

Answer 30

Individuals must generally file returns by April 15th, or if they are fiscal taxpayers, by the 15th day of the fouth month after their fiscal year ends.

C Corporations must file tax returns by April 15th or the 15th day of the fourth month after their fiscal year ends.

Question 31

Describe the purpose of revenue procedures.

Answer 31

Revenue procedures describe internal practices and procedures within the IRS and are published in the Internal Revenue Bulletin. New revenue procedures are usually prompted by changes in techniques and administrative procedures used by the IRS.