Introduction: Why and How

Question 1

Introduction Topics

Answer 1

• Tax Authority
• Constitutional Challenges
• How Do Taxes Work?
• What Does the Government Use Taxes For?
• Sources of Tax Laws
• Tax Calculation

Question 2

Art. 1, Sec. 8. Cl. 1

Answer 2

“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…”

Question 3

Art. 1, Sec. 2, Cl. 3

Answer 3

Direct taxes must be apportioned among the states in proportion to its respective population.

Answer 4

Can’t be shifted to another person. (income)

Answer 5

May be shifted/avoided. (sales tax)

Answer 6

• 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.

Answer 7

• Usually has a prospective effect.

* If not, are they constitutional?

Question 8

Constitutional Challenges

Answer 8

Can’t bring a challenge for income tax.

Answer 9

• Every tax involves the application of a rate to a base.

* Rate x Tax Base = Tax

Answer 10

• Income Tax

* Consumption Tax

Question 11

Consumption Tax

Answer 11

• 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.

Answer 12

(1) Fairness
(2) Efficiency
(3) Neutrality

Answer 13

• Horizontal Equity

* Vertical Equity

Answer 14

• Balance between maximizing revenue and minimizing social costs.
• The more complex the law, the fairer (but less effective) it is.

Answer 15

• Tax law that doesn’t have an effect on a person’s behavior.

Question 16

What Does the Government Use Taxes For?

Answer 16

• Sources of Government Revenue

* How Does the Government Spend

Question 17

Sources of Government Revenue

Answer 17

• Personal Income Taxes
• Social Security, Medicare, Unemployment, and Retirement Taxes
• Borrowing to cover deficit
• Excise, Customs, Estate, Gift, and Miscellaneous
• Corporate Income Taxes

Question 18

How Does the Government Spend?

Answer 18

• 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

Question 19

Sources of Tax Laws

Answer 19

• (1) US Code Title 26 –[IRC $___].

* Internal Revenue Code – [26 USC $].

Question 20

Sources of Tax Laws – IRC Subtitles

Answer 20

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

Question 21

Sources –(2) Legislative Sources

Answer 21

• History
• Tax Bills
• Committee Reports
• Debate Transcripts
• Prior Laws
• Tax Treaties

Question 22

Sources –(3) Treasury Regulations

Answer 22

• Written by the Treasury Department

Question 23

Citations for Treasury Regulations

Answer 23

• Treas. Reg. $___
• 26 C.F.R. $___
• Numbered in a way that corresponds to IRC sections

Question 24

General Types of Treasury Regulations

Answer 24

• Final
• Temporary
• Proposed

Question 25

Treasury Regulations are Entitled to Chevron Deference

Answer 25

Mayo Foundation v. U.S. – Should a medical student be considered a “student” for tax purposes?

Question 26

Chevron Framework

Answer 26

(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.”

Question 27

Sources – (4) IRS Revenue Rulings

Answer 27

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.

Question 28

Sources –(5) Revenue Procedures

Answer 28

• Usually statements of internal practices and procedures of the IRS.

Question 29

Sources – (6) Other IRS Guidance

Answer 29

• Private Letter Rulings (PLR)
• IRS Notices, Publications, etc.
• Legislative History

Question 30

Tax Calculation –Step 1: Determine Gross Income

Answer 30

All Income – Exclusion = Gross Income

Question 31

TC – Step 2: Determine Adjusted Gross Income

Answer 31

Gross Income –Above-the-Line Deductions = AGI

Question 32

TC –Step 3: Determine Taxable Income

Answer 32

AGI –Standard Deduction OR Itemized Deductions = Taxable Income

Question 33

TC – Step 4: Determine Gross Tax Liability

Answer 33

Taxable Income x Tax Rates = Gross Tax Liability

Question 34

TC –Step 5

Answer 34

Apply any Tax Credits and determine if you are owed a refund or need to pay tax.