Chapter

1Types of Taxes and the

Jurisdictions that Use Them

DefinitionsDefinitions

Tax = payment to support government contrast with fine/penalty or user fee

Taxpayer = person or organization that pays tax (includes individuals and corporations)

Incidence refers to ultimate economic burden of a tax. may not be person who pays tax Jurisdiction is the right of a government to tax.

Tax formulaTax formula

Tax revenue = rate x base Rate can be flat or graduated (usually progressive) Base may change in response to changes in rate

(see chapter 2)

Describe by frequency of levy or purpose of taxDescribe by frequency of levy or purpose of tax

Transaction (event) based taxes Sales or excise tax Estate or gift tax

Activity based tax Income tax

Earmarked taxes: social security, superfund

State and local taxesState and local taxes

Property (ad valorem taxes) Real property tax

Abatements often granted to entice new business Personal property tax

Household tangibles (vehicles), business tangibles, intangibles (securities)

State and local taxesState and local taxes

Sales/use Broad-based but, typically excludes necessities (food,

drugs) Personal responsibility for use tax Effects of catalogs and internet purchases

Excise tax – special rates Income tax (personal or corporation)

Federal taxesFederal taxes

Employment and unemployment taxes Excise taxes (luxury, sin, transportation,

communication) Transfer taxes (gift, estate, generation skipping) Income taxes (individual and corporation)

Foreign taxesForeign taxes

Income taxes similar to U.S. Value added tax VAT

like a sales tax on incremental value added by manufacturing.

VAT is self-enforcing because taxpayer can claim a credit for VAT paid to supplier with proof of payment.

Sources of tax lawSources of tax law

Sixteenth Amendment ratified in 1913 created income tax. Internal Revenue Code was created in 1939 and

subsequently revised in 1954 and 1986. Statutory authority = Internal Revenue Code (Legislative) Administrative authority (Executive)

Treasury regulations IRS Revenue Rulings, Revenue Procedures

Judicial authority (Judicial) Supreme Court Appeal courts Trial courts (Tax Court, District Court)

Research / Know your authoritiesResearch / Know your authorities

Tax Legislation – Chart – How tax legislation generally occurs

Sources broken down into two types: Primary and Secondary.

Where do primary and secondary sources of tax material come from?

Primary Sources Pie Chart

Primary Sources of Tax Law - LegislativeInternal Revenue CodePrimary Sources of Tax Law - LegislativeInternal Revenue Code

Primary and most powerful source of Federal tax law unless a U.S. treaty conflicts (most recent item takes precedence)

Congress can override a U.S. Supreme Court decision by amending the Code.

Congressional committee reports found in cumulative bulletin are important in interpreting the code

Citation of Code: Sec. #, subsection, paragraph, subparagraph, clause: Sec 162(g) (1)(A)(i)

Administrative Sources of the Tax Law - Department of Treasury - ExecutiveAdministrative Sources of the Tax Law - Department of Treasury - Executive

Regulations (Legislative, Interpretive, Procedural, Temporary - Interpretive in nature)

Force and effect of law Numbered in same sequence as the Code with an

preceding numeral indicating type of tax covered by the regs

Revenue Rulings (pronouncement of IRS Nat’l Office) provide guidance to both IRS and T/P more restrictive

Revenue Procedures:deal with IRS internal mgmt practices Other sources: letter rulings (proposed trans),determination

letters (completed trans), Technical Advice Memoranda

Judicial Sources - Primary SourcesJudicial Sources - Primary Sources

Findings have precedential value (except for small tax cases)

Trial courts - Tax Court (do not pay the deficiency), District Court, U.S. Court of Federal Claims (pay first, sue for refund), Small Cases Division

Appeals court - Regional Circuit, Federal circuit and Supreme Court (hear very few tax cases)

All courts must follow SC decisions, not the case for circuits

Tax Research – Chapter 5Tax Research – Chapter 5

Research is a process of finding a professional conclusion to a tax problem (may involve completed or proposed transactions).

Procedures; Establish the facts Identify the issues Locate the authority (primary preferred) Evaluate the authority Develop conclusions/recommendations Communicate the recommendations to the client

Technological Advances in taxesTechnological Advances in taxes

Personal computers - facilitate use of tax research software, tax research services, tax prep software

On-line services facilitate up to date research information. World wide web - provides access to a multitude of tax

planning and compliance resources