Tax Ch 1

Answer 1

FEDERAL INCOME TAXES: A TIMELINE

• U.S. Constitution - taxing authority limited by apportionment
  clauses
• 1894 Congress tried to impose an income tax
• Pollock v. Farmers’ Loan and Trust Company (1895)
   Federal income tax was held to be unconstitutional
• Tax on corporations levied in 1909
• The 16th Amendment

Answer 2

THE 16TH AMENDMENT

• Adopted February 25, 1913
• “The Congress shall have the power to lay and collect taxes on
  income, from whatever source derived, without apportionment
  among the several States, and without regard to any census or
  enumeration.”

Answer 3

THE 1913 DEBATE

A U.S. Senator opposed to the imposition of an income tax stated in debate:
“If they get away with 1% today, some day it may be raised to as high as 5%.”

Answer 4

U.S. GOVERNMENT RECEIPTS AND OUTLAYS
(in $ millions)

Answer 5

FUNCTIONS OF THE INCOME TAX SYSTEM
* Produce Revenue
* Management of the Economy
* Effectuate fiscal policy
* Encourage desired behavior
* Social Function
* Redistribution of wealth
* Regulatory Function
* Discourage undesirable activities

Answer 6

TAX STRUCTURE
* Tax Base: Amount to which tax rate is applied

• Tax Rate: Applied to Tax Base to determine tax liability
  –Proportional
  –Progressive
  – Regressive
• Incidence of Tax: Degree to which total tax burden is shared by
  taxpayers

Answer 7

2020 SHARE OF INCOME TAXES

Answer 8

TYPES OF TAXES
* Transaction (usually state tax)

Estate Planning
* Transaction (usually state tax)
* Estate and Gift

Income Tax Planning
* Income
* Employment
* Property (ad valorem)
* Other

Answer 9

U.S. FEDERAL TAX SYSTEM
3 Separate Tax Systems

Income

Estate Tax

Generation skipping Transfer Tax

Answer 10

NUMBER OF RETURNS FILED

Answer 11

INTERNAL REVENUE COLLECTIONS

Answer 12

BASIC RULES OF INCOME TAXATION
1. All accretions to wealth, from whatever source derived, constitute income
* Exceptions:
– Realization Principle
– Capital Recovery Doctrine
– Public policy exclusions

2. For every deduction taken, there must be an inclusion in income.
   * Implications:

– To claim a deduction on a tax return, that amount must have
been included in income.
– Every deduction claimed by one taxpayer should constitute
income to another taxpayer.

• Exceptions:
  –Qualified Retirement Plans
  –Charitable Planning

Answer 13

TRIADS OF INCOME TAXATION
* There are three:
* Tax systems
* Types of income
* Types of tax accounting
* Key tax principles
* Components for classifying gain
* Types of assets
* Types of rental real estate
* Methods of tax planning
* Anti-abuse provisions
* Administrative rulings
* Final regulations
* Courts to resolve disputes

Answer 14

ADDITIONAL TAX THOUGHTS!

• Thomas Jefferson
  The same prudence which in private life would forbid our paying our own money for unexplained projects, forbids it in the dispensation of the public monies.
• Benjamin Franklin, Poor Richard’s Almanac
  It would be a hard government that should tax its people one-tenth part of their income

Answer 15

Chapter 1 Test
* Number of questions: 3

• Authorization of the federal income tax
• Tax Reform Act of 1986
• Collections by the IRS

Answer 16

Significant Tax Legislation TEST

• 16th Amendment
• Revenue Act of 1913
• Economic Recovery Tax Act of 1981
• Tax Reform Act of 1986