Chapter 1 Flashcards
A History of the Income Tax Law and a Glance at the Sources of Current Law.
3 branches of government enacted by the founding fathers to create checks and balances?
Legislative, Executive & Judcial
Sources of Tax Law
Legislative (Enacts Law) - Article I section 8 16th Amendment - Internal Revenue Code Executive (Enforces Law) - Article II - Department of Treasury - IRS - Revenue Rulings Judicial (Interprets Law) - Article III - Court System - Supreme Court
Treasury Regulations
- written by IRS personnel and approved by the Treasury
- can be challenged by taxpayers
- seldom overturned by courts
- may be overturned if ambiguous or beyond the scope of statute
Revenue Rulings
Revenue rulings are based on a stated set of facts that usually involve a problem common to a number of taxpayers.
For example, suppose the law
is unclear as to whether a taxpayer can deduct the cost of moving a pet under the moving-expense deduction. If the Internal Revenue Service issues a revenue ruling to the effect that the cost of moving a pet is not deductible, all revenue agents will adhere to the ruling. The
What does Rev. Rul. 61-201 mean?
What does 61 stand for?
what does 201 stand for?
Rev. Rul. 61-201 would be a ruling issued in 1961 and
the 201st revenue ruling issued in that year. The citation in the Cumulative Bulletin would also include (1) the year, (2) the volume of the Cumulative Bulletin for that year, and (3) the page under which the ruling could be found. For example, Rev. Rul. 61-201, 1961-2 C.B. 46 means that the particular ruling in 1961 was the 201st of that year. It would be found in the second
volume of the Cumulative Bulletin for 1961 on page 46.
Private Rulings
Although private rulings are personal to the taxpayer,
they have been made available to the public in recent years. Although published private rulings can provide
valuable insight as to how the IRS would view a particular transaction (or set of transactions), they are also of limited use, as they may not be claimed by another taxpayer as a precedent.
Revenue Procedures
Revenue procedures describe internal practices and procedures within the IRS. Like revenue rulings, they are published in the Internal Revenue Bulletin. Generally revenue procedures state changes in techniques and administrative procedures used by the Internal Revenue Service. Revenue procedures are generally designated by the abbreviation “Rev. Proc.”
3 year statute of limitations
Another exception to the 3-year “normal” statute of limitations applies when fraud is involved. In such situations, there is unlimited time to audit.
Taxpayers who file incorrect returns may be subject to an accuracy-related penalty that is equal to 20 percent of the amount of the underpayment of tax actually due. The penalty applies to situations involving negligence or disregard of tax laws, substantial understatement of income tax, and substantial valuation misstatements. If fraud is involved, additional civil and criminal
penalties can be imposed.
Tax “Avoidance” VS Tax “Evasion”
Tax “avoidance” is generally thought of as the utilization of legitimate strategies and techniques in order to minimize the amount of money a taxpayer will owe to the government.
Tax “evasion,” on the other hand, refers to the violation of tax laws as a strategy to reduce income tax liability.
Judicial (Article III)
Article III of the U.S. Constitution states that judicial power shall be vested in one Supreme
Court and in such lower courts as Congress shall establish.
The court system that Congress has established comprises trial courts that decide issues of fact and law, appellate courts for a review of issues of law, and the Supreme Court, which is the ultimate reviewer of questions of law.
US Tax Court
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.
To expedite hearings on deficiencies of $50,000 and under, the Tax Court has a small tax case division. These cases are handled much less formally and much more quickly than other Tax Court cases.
Tax Court
- 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”
The U.S. District Court
The U.S. District Court is unique in that it is the only court in which a taxpayer may request a
jury trial.
The U.S. Court of Appeals
The U.S. Court of Appeals consists of 12 circuit courts located throughout the country. These courts hear appeals that are taken by either taxpayers or the Treasury from decisions rendered by the Tax Court or a district court. The U.S. Court of Appeals is the second highest level in the court system. Its importance is underscored by the fact that the only appeal from one of its decisions is to the Supreme Court itself.
The U.S. Supreme Court
The U.S. Supreme Court is the highest court in the land. Supreme Court decisions are required to be followed by taxpayers as well as by the Internal Revenue Service.
What 5 courts are talked about in Chapter 1?
What order of priority do they have in seeing cases?
U.S. Tax Court U.S. Court of Federal Claims U.S. District Court U.S. Court of Appeals U.S. Supreme Court
A regulation may be declared invalid by the courts if the regulation is ambiguous and without persuasive force in determining the true construction of a statute.
True
Acquiescence (acq.) is the IRS’s willingness to follow a decision in future similar cases.
True
The Ways and Means Committee of the House of Representatives generally performs the initial functions related to the introduction of a tax bill.
True
The U.S. Court of Appeals in one region must follow the decisions of a U.S. Court of Appeals in another region.
False.
A U.S. Court of Appeals for one circuit or region of the country need not follow the decisions of a U.S. Court of Appeals for another circuit.
After an initial IRS audit, the taxpayer will receive a letter stating the agent’s recommendation and giving him or her 30 days to appeal from the determination of any assessed deficiency.
True
The primary purpose of the income tax system is the regulatory function.
False.
The original purpose of income taxation is revenue generation. The bulk of the government’s funds are produced through the federal income tax. Although the regulatory function is important, it is not more important than revenue production.
Taxpayers who bring their cases before the U.S. Tax Court are entitled to a jury trial if they desire.
False.
The only trial court in which the taxpayer is entitled to a jury trial in a tax case is the U.S. District Court in the district in which the taxpayer resides. No jury trials are permitted either in the U.S. Tax Court or the U.S. Court of Federal Claims, which are the other two trial court tribunals.
Regulations are written by the Internal Revenue Service and serve as the official Treasury interpretation of the Internal Revenue Code.
True
Congress was given the power by the original Constitution to lay and collect taxes on all income without apportionment among the states and without regard to census or enumeration.
False.
The original Constitution enacted in 1789 actually limited the original taxing power of the federal government by its uniformity and apportionment clauses under Article I, Sections 8 and 9. The 16th Amendment to the Constitution, passed in 1909, gave Congress the power to tax income from whatever source derived.
The only source of tax law today is the Internal Revenue Code.
False.
Each of the three coequal branches of the federal government—the legislative, the executive, and the judicial—has a major role in shaping the federal income tax system.
Revenue rulings are written in response to a taxpayer’s request for an administrative interpretation as to the validity of a prospective transaction.
False.
This statement applies to private rulings. Revenue rulings state the IRS’s interpretation of an unclear point of law. They are usually based on a specific set of facts that involve a problem common to many taxpayers.
The statutory source of tax law today is the Internal Revenue Code of 1986, as amended.
True
Congress has the power to tax all income from whatever source derived, whether by corporations, individuals, or estates and trusts.
True
A taxpayer must first pay the amount of an assessed tax deficiency before filing suit in the U.S. District Court.
True
f a refund case is brought before the U.S. Court of Federal Claims and denied, the only avenue to appeal the decision lies with the U.S. Supreme Court.
False.
Appeals from the U.S. Court of Federal Claims are heard by the Court of Appeals for the Federal Circuit, which is an Appellate Court. It is no longer possible to take appeals from a trial court directly to the U.S. Supreme Court.
The Internal Revenue Service is under the authority of Congress.
False.
The Internal Revenue Service is under the authority of the Department of the Treasury and the Secretary of the Treasury. The Secretary of the Treasury is responsible to the President of the United States. Therefore the source of authority for the Internal Revenue Service and the Treasury Department lies in the executive branch. The Internal Revenue Service is not responsible to Congress.
The IRS is bound by all lower court decisions with respect to tax cases.
False.
The IRS does not consider itself bound beyond a particular case by court decisions other than those of the U.S. Supreme Court and those of a U.S. Circuit Court of Appeals with respect to cases arising in the same circuit.
In taking a position on a tax issue, the IRS is not bound by decisions of the U.S. Supreme Court.
False.
Decisions of the Supreme Court are binding on all lower courts and administrative agencies, including the IRS.
