Topic 2 Tax Laws, Administration, and Compliance Flashcards
What are the tax law sources in order of authority?
1) Statutory -
a) US Constitution
b) IRC (internal revenue code)
c) Congressional Committee Reports
2) Administrative -
a) Treasury Regulations
b) Revenue Rulings
c) Revenue Procedures
d) PLRs (private letter rulings)
e) TAMs (technical advice memorandum)
3) Judicial Decisions
4) Secondary Sources
Which sources are the primary source of tax law?
statutory, administrative, and judicial decisions
Treasury regulations can be ____________ or ___________. Which one carries more weight?
legislative or interpretive
legislative
(interpretive/legislative) treasury regulations interpret the IRC
interpretive
(interpretive/legislative) treasury regulations are those that the legislature has directed the IRS to put together
legislative
what are the 3 statuses of treasury regulations and level of authority for each?
proposed - no authority
temporary - has authority
final - more authority than temporary
Which administrative tax law source addresses the application of the IRS rules to a specific fact situation?
revenue rulings
Which administrative tax law source explains IRS practice and procedures and administrative tax law?
revenue procedures
Which administrative tax law source addresses an individual taxpayer specific fact situation?
PLR - private letter ruling
A PLR has authority for who?
the specific taxpayer it is addressing
Which administrative tax law source is issued by the IRS and requested by an IRS auditor to address a specific situation?
TAM - technical advice memorandum
What tax law source has the lowest authority?
Secondary Sources
Journal articles, review articles, newspaper articles or research facilities like BNA, RIA, or CCH are all what type of tax law source?
secondary sources
Describe the Tax Legislation Process
1) Proposed bill from House of Ways & Means Committee ➡ House of Representatives
2) House sends House Approved Act (HAA) ➡ Senate
3) Senate sends HAA ➡ Senate Finance Committee (SFC)
4) SFC sends Revised Act ➡ Senate
5) Senate has Senate Approved Act in a Joint Conference Committee with House of Representatives
6) Joint Conference Act ➡ House of Representatives
7) House sends Joint Conference Act ➡ Senate
8) Senate sends Joint Conference Act ➡ US President
9) President either
a) signs the act ➡ IRC 🔚
OR
b) veto’s the act ➡ Congressional Override?
10) 2/3 majority vote in Senate and House
YES ➡ IRC 🔚
NO ➡ RIP tax act💀
What are the lower courts in tax law?
Where do the each of the lower courts have the claims appealed to?
US District Courts - US Circuit Courts of Appeals (1st-11th circuits & D.C. circuit) - US Supreme Court
US Tax Court - US Circuit Courts of Appeals (1st-11th circuits & D.C. circuit) - US Supreme Court
US Court of Federal Claims - US Circuit Courts of Appeals (federal circuit) - US Supreme Court
US Tax Court Small Claims - no appeal
When choosing what court to take a claim to, first thing to consider is which on has the ________ that supports your tax position or the appeals court that has it.
precedent
Which court should you choose if you want a jury trial?
US District Court
If you don’t want to pay your deficiency first, which court do you need to choose?
US Tax Court
What court has the final rule of authority?
US Supreme Court
What is the judicial doctrine that states the court rules consistently with its previous rulings, and the rulings of the higher courts with the appellate jurisdiction.
stare decisis
Which court follows the ruling of the court to which the case would be appealed? What is it called?
Tax Court
Golsen Rule
When tax planning you need to plan for ___ and ___-___ factors
tax and non-tax
What is point of tax planning?
maximize taxpayer’s after-tax wealth while achieving their non-tax goals
Who is involved in each transaction?
taxpayer, other party, government
What are the basic tax planning strategies?
timing, income shifting, conversion
What strategy affects when income is taxed or an expense is deducted?
timing
What are the two primary timing stategies?
accelerate deduction OR defer income
Timing affects the _______ _____ of the taxes payable or savings on the deduction.
present value
When using a timing strategy, consider that tax costs or savings vary as ___ _____ change.
tax rates
When tax rates are ________ it makes sense to accelerate deductions and defer income.
constant
When tax rates are ______ we need to use the present value calculation to determine the best choice.
rising
Deductions that cannot be accelerated because the cash outflow that generates the deduction is not available is one of the ___________ of which strategy?
limitations
timing
Deferring income requires continued investment in an asset is one of the ___________ of which strategy?
limitations
timing
Deferring income may not be optimal if taxpayer has cash flow needs, if continuing investment generates low returns, or subjects taxpayer to unnecessary risk is one of the ___________ of which strategy?
limitations
timing
A taxpayer is deemed to have received income when it is made available to them is know as what?
constructive receipt doctrine
What strategy exploits the differences in tax rates across taxpayers or jurisdictions?
income shifting
How does a taxpayer use income shifting between family members?
shift income to children i.e. paying children a wage from family business
How does a taxpayer use income shifting between owners and businesses?
paying compensation to an owner interest expense or even rent
How does a taxpayer use income shifting between different jusidictions?
establish offices in a state with lower tax rates
What are the limitation of an income shifting strategy?
IRS scrutiny of related party transactions Implicit taxes the kiddie tax negative publicity assignment of income doctrine
What does the IRS look at when scrutinizing related party transactions?
if they are truly performed at arms length
Explain assignment of income docrine.
Service provided by a person must be paid to that person and not to someone in a lower tax bracket
What tax planning strategy uses that fact that tax law does not treat all income or deductions as equal?
conversion
What are the limitations of conversion strategies?
when the IRC prohibits a conversion implicit taxes business purpose doctrine step transaction doctrine substance-over-form doctrine economic substance doctrine
What is it called when the IRS can disallow expenses for transactions without a business purpose
business purpose doctrine
What is it called when the IRS has the power to collapse the series of transactions into one big transaction?
step transaction doctrine
What is it called that gives the IRS the ability to reclassify transactions according their substance and not to their form
substance-over-form doctrine
What is it called when the IRS can reverse certain transactions unless the meaningfully change the taxpayer’s economic position, and they have a substantial purpose other than tax avoidance for the transaction
economic substance doctrine
(avoidance/evasion) is using strategies to minimize tax within the confines of the law
avoidance
(avoidance/evasion) is the willful attempt to defraud the government and can result in jail time for both the taxpayer and their accountant
evasion
What are 3 types of income?
Income from services
Income from property
Flow-through entity income
Wages, salary, non-employee compensation, unemployment are all what type of income?
income from services
Dividends, interest, rents, royalties, annuities, gains/losses are all what type of income?
income from property
Business income from a partnership, LLC or S corporation are all what type of income?
flow-through entity income
What form is the income reported on for a flow-through entity? What rate is this income taxed at?
Schedule K-1
taxed at the owner’s individual tax rate
(true or false) income from a flow-through entity is the same as distributions to an owner
false-ish - not necessarily
(true or false) flow-through income is qualified for the 20% deduction for qualified business income
true-ish - if other qualifications have been met
(true or false) flow-through income is subject to the 3.8% net investment income tax
true-ish - it may be subject to it when the taxpayers AGI exceeds certain thresholds
(true or false) flow-through income is not subject to self-employment tax or .9% additional Medicare tax
false-ish - it may be subject to it if the income exceeds the thresholds
(true/false) An easy way to know if an item is ordinary income or a separately stated item is anything that would be reported somewhere other than page 2 of schedule E would be a separately stated item.
true
__________ ________ are considered separately stated, even though included in ordinary income calculation
guaranteed payments
_______ partners earnings are subject to self employment tax whereas _______ partners earnings and not typically subject to self employment tax.
general
limited
What are the business interest expense limitations?
sum of:
business interest income AND
30% of AGI for year
What is the Qualified Business Income (QBI) deduction?
a 20% deduction for QBI from a flow-through entity
Is the item below ordinary income or a separately stated item?
Sales
ordinary income
Is the item below ordinary income or a separately stated item?
Gross receipts
ordinary income
Is the item below ordinary income or a separately stated item?
Returns & Allowances
ordinary income
Is the item below ordinary income or a separately stated item?
Cost of Goods Sold
ordinary income
Is the item below ordinary income or a separately stated item?
Other ordinary income (loss) from other partnerships, estates and trusts
ordinary income
Is the item below ordinary income or a separately stated item?
Net Farm Profit (Loss)
ordinary income
Is the item below ordinary income or a separately stated item?
Net Ordinary Gain (Loss) from Sales of Business Property
ordinary income
Is the item below ordinary income or a separately stated item?
Other Income
ordinary income
Is the item below ordinary income or a separately stated item?
Salaries and Wages (other than to partners) (less employment credits)
ordinary income
Is the item below ordinary income or a separately stated item?
Guaranteed Payments to Partners
ordinary income & separately stated
Is the item below ordinary income or a separately stated item?
Repairs & Maintenance Expenses
ordinary income
Is the item below ordinary income or a separately stated item?
Bad Debt Expense
ordinary income
Is the item below ordinary income or a separately stated item?
Rent Expense
ordinary income
Is the item below ordinary income or a separately stated item?
Taxes & Licenses
ordinary income
Is the item below ordinary income or a separately stated item?
Interest Expense
ordinary income
Is the item below ordinary income or a separately stated item?
Depreciation
ordinary income
Is the item below ordinary income or a separately stated item?
Depletion
ordinary income
Is the item below ordinary income or a separately stated item?
Retirement Plans
ordinary income
Is the item below ordinary income or a separately stated item?
Employee Benefit Programs
ordinary income
Is the item below ordinary income or a separately stated item?
Net Rental Real Estate Income (Loss)
separately stated
Is the item below ordinary income or a separately stated item?
Other Net Rental Income (Loss)
separately stated
Is the item below ordinary income or a separately stated item?
Interest Income
separately stated
Is the item below ordinary income or a separately stated item?
Ordinary Dividends
separately stated
Is the item below ordinary income or a separately stated item?
Qualified Dividends
separately stated
Is the item below ordinary income or a separately stated item?
Royalties
separately stated
Is the item below ordinary income or a separately stated item?
Net Short-Term Capital Gain (Loss)
separately stated
Is the item below ordinary income or a separately stated item?
Net Long-Term Capital Gain (Loss)
separately stated
Is the item below ordinary income or a separately stated item?
Collectibles (28%) Gain (Loss)
separately stated
Is the item below ordinary income or a separately stated item?
Unrecaptured §1250 Gain
separately stated
Is the item below ordinary income or a separately stated item?
Net §1231 Gain (Loss)
separately stated
Is the item below ordinary income or a separately stated item?
§179 Deduction
separately stated
Is the item below ordinary income or a separately stated item?
Foreign Transactions
separately stated
Is the item below ordinary income or a separately stated item?
AMT items
separately stated
Is the item below ordinary income or a separately stated item?
Tax-Exempt Income & Nondeductible Expenses
separately stated
Is the item below ordinary income or a separately stated item?
Distributions
separately stated
