Introduction: Why and How Flashcards
Introduction Topics
- Tax Authority
- Constitutional Challenges
- How Do Taxes Work?
- What Does the Government Use Taxes For?
- Sources of Tax Laws
- Tax Calculation
Art. 1, Sec. 8. Cl. 1
“The Congress shall have Power To lay and collection Taxes, Duties, Imposes and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States; but all Duties, Imposes and Excises shall be uniform throughout the United States…”
Art. 1, Sec. 2, Cl. 3
Direct taxes must be apportioned among the states in proportion to its respective population.
Can’t be shifted to another person. (income)
May be shifted/avoided. (sales tax)
- The Congress shall have 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.
- Art. I, Sec. 2 only requires geographic uniformity.
- Usually has a prospective effect.
* If not, are they constitutional?
Constitutional Challenges
Can’t bring a challenge for income tax.
- Every tax involves the application of a rate to a base.
* Rate x Tax Base = Tax
- Income Tax
* Consumption Tax
Consumption Tax
- You consume something so you owe taxes on it (not sales tax; consume the services of a bank teller when you go to the bank).
- No country uses this because it is impractical.
(1) Fairness
(2) Efficiency
(3) Neutrality
- Horizontal Equity
* Vertical Equity
- Balance between maximizing revenue and minimizing social costs.
- The more complex the law, the fairer (but less effective) it is.
• Tax law that doesn’t have an effect on a person’s behavior.
What Does the Government Use Taxes For?
- Sources of Government Revenue
* How Does the Government Spend
Sources of Government Revenue
- Personal Income Taxes
- Social Security, Medicare, Unemployment, and Retirement Taxes
- Borrowing to cover deficit
- Excise, Customs, Estate, Gift, and Miscellaneous
- Corporate Income Taxes
How Does the Government Spend?
- Social Security, Medicare, Retirement
- National Defense, Veterans, Foreign Affairs
- Social Programs
- New interest on the debt
- Physical, Human, and Community Development
- Law Enforcement and General Government
Sources of Tax Laws
- (1) US Code Title 26 –[IRC $___].
* Internal Revenue Code – [26 USC $].
Sources of Tax Laws – IRC Subtitles
A. Income Taxes –[Statues 1-1546].
B. Estate and Gift Taxes
C. Employment Taxes
D. Miscellaneous Excise Taxes
E. Alcohol, Tobacco, and Certain Other Excise Taxes
F. Procedure and Administration –[Section 6001-7874].
G. The Joint Committee on Taxation
H. Financing of Presidential Election Campaigns
I. Trust Fund Code
J. Coal Industry Health Benefits
K. Group Health Plan Requirements
Sources –(2) Legislative Sources
- History
- Tax Bills
- Committee Reports
- Debate Transcripts
- Prior Laws
- Tax Treaties
Sources –(3) Treasury Regulations
• Written by the Treasury Department
Citations for Treasury Regulations
- Treas. Reg. $___
- 26 C.F.R. $___
- Numbered in a way that corresponds to IRC sections
General Types of Treasury Regulations
- Final
- Temporary
- Proposed
Treasury Regulations are Entitled to Chevron Deference
Mayo Foundation v. U.S. – Should a medical student be considered a “student” for tax purposes?
Chevron Framework
(1) Has Congress directly addressed the precise question at issue?
• If yes, then the statute would control.
• If not, look at the agency rule.
(2) Court will not disturb the agency rule unless it is “arbitrary or capricious in substance or manifestly contrary to the statute.”
Sources – (4) IRS Revenue Rulings
Not as authoritative as Treas. Regs.
• Binding on the IRS.
• TP can rely on them in structuring transactions or taking a position on a return.
• Not necessarily binding on the TP.
Sources –(5) Revenue Procedures
• Usually statements of internal practices and procedures of the IRS.
Sources – (6) Other IRS Guidance
- Private Letter Rulings (PLR)
- IRS Notices, Publications, etc.
- Legislative History
Tax Calculation –Step 1: Determine Gross Income
All Income – Exclusion = Gross Income
TC – Step 2: Determine Adjusted Gross Income
Gross Income –Above-the-Line Deductions = AGI
TC –Step 3: Determine Taxable Income
AGI –Standard Deduction OR Itemized Deductions = Taxable Income
TC – Step 4: Determine Gross Tax Liability
Taxable Income x Tax Rates = Gross Tax Liability
TC –Step 5
Apply any Tax Credits and determine if you are owed a refund or need to pay tax.
