Income Tax Law Fundamentals Flashcards
1
Q
Primary Sources of Tax Law
A
- Divided into three groups that correspond with the three branches of government.
- The legislative branch passes the law (congress), the executive branch enforces the law (president and government agencies), and the judicial branch (federal courts) interprets the laws.
2
Q
Statutory Primary Sources
A
- legislative
- constitution of the united states, acts of congress and ta treaties
- the Internal Revenue Code (IRC) is the primary source of all tax law.
3
Q
Executive Primary Sources
A
- The executive branch has the responsibility for enforcing the laws that congress passes through regulations, revenue and letter rulings, revenue procedures and technical advice memoranda.
- These are all issued by the IRS
4
Q
Treasury Regulations
A
- have the highest authority when enforcing tax law.
- when the treasury department issues regulations to fill in the details of tax law, they have the force of law.
- They must be followed by taxpayers and the IRS.
5
Q
Revenue Rulings
A
- do not have the authority of regulations, but are issued by the national office of the IRS.
- they provide interpretations of tax law and give guidance to taxpayers.
- generally, they are binding on all taxpayers.
- usually issued after numerous questions have been filed in regards to a specific tax issue.
- Courts are not bound by revenue rulings.
6
Q
Private Letter Rulings
A
- these are a more specific interpretation by the IRS related to the tax consequences of a contemplated transaction at the request of the taxpayer.
- they are applicable only to the taxpayer that requested the PLR.
- the IRS does tend to adopt Letter Rulings as their official position on a tax matter.
7
Q
Revenue Procedures
A
- generally related to compliance matters such as tax tables, inflation indexed amounts, asset class lives, etc.
- similar to revenue rulings, but deal with procedural rather than substantive matters of the law.
8
Q
Tax Advice Memorandum
A
- serves the same purpose as a private letter ruling (to advise on the tax implications of a specific set of facts).
- unlike a private letter ruling, an employee of the IRS requests guidance from the national office rather than the taxpayer making the request.
9
Q
Court Interpretation of the tax code
A
- determine whether the executive branches interpretation is correct through various court decisions.
- Initially go to U.S. District or U.S Tax Court
- District Court has a jury trial and do have to pay deficiency up front. If not satisfied with the ruling, then you can go to the Court of Appeals.
10
Q
Secondary Sources of Authority
A
- consist mainly of books, periodicals, articles, newsletters, and editorial judgements in tax services.
- include multi-volume publications by the Research Institute of America (RIA), the Commerce Cleaning House (CCH), and the Bureau of National Affairs (BNA).
11
Q
Basic Steps in Researching a Tax Issue
A
- Obtain all the facts
- diagnose the problem
- locate the authority - through tax service to identify code sections
- evaluate the authority
- derive the solution
- communicate the answer
12
Q
Marginal Tax Rates vs. Average Tax Rates
A
- the marginal tax rate is the highest tax bracket in which they fall. It is the rate that will apply to the next dollar of earned income. When evaluating the after-tax return on investments, use the marginal rate
- The average tax rate factors in payments that are made at various marginal brackets.
13
Q
The Doctrine of Constructive Receipt
A
- a cash-basis taxpayer need not take physical possession of income in order for it to be treated as “received” for income tax purposes.
- Income is taxable in the year in which it is credited to the taxpayers account, set apart for the taxpayer, or otherwise made available to be drawn upon by the taxpayer at any time during the tax year.
- example is reinvestment of capital gains in a mutual fund distribution.
- If however, the taxpayers control of the receipt of income is subject to substantial limitations or restrictions, income is not constructively received, and is not taxed at the time.
14
Q
The Economic Benefit Doctrine
A
- applies to employee compensation and requires that the cash-basis taxpayer be taxed in the year in which they receive an absolute right to property or measurable value.
- may cause taxation in the current year if there is a non-forfritable right to receipt at some point in the future and the value of that is measurable right now.
15
Q
The Doctrine of Assignment of Income
A
- judicial doctrine designed to limit tax evasion.
- requires that a full transfer of ownership of property must take place in order to transfer taxation on the income.
