Constitutionand

Legislative SourcesChapter 3Chapter 3

TAX POLICY

Who establishes “Tax Policy?”Who establishes “Tax Policy?”

PRINCIPLES OF GOOD TAX POLICYAnnette Nellen, San Jose State UniversityAnnette Nellen, San Jose State UniversityPresented to Tax Section of AICPA at Section Presented to Tax Section of AICPA at Section

meeting in Van Couver, B.C., June 15, 2001meeting in Van Couver, B.C., June 15, 2001 1. Similarly situated taxpayers should be 1. Similarly situated taxpayers should be

taxed similarlytaxed similarly 2. Tax rules should specify when the tax is 2. Tax rules should specify when the tax is

to be paid, how it is to be paid, and how the to be paid, how it is to be paid, and how the amount to be paid is to be determinedamount to be paid is to be determined

Tax Policy (cont’d)

3. A tax should be due at a time or in a 3. A tax should be due at a time or in a manner that is most likely to be convenient manner that is most likely to be convenient for the taxpayerfor the taxpayer

4. The costs to collect a tax should be kept 4. The costs to collect a tax should be kept to a minimum for both the government and to a minimum for both the government and taxpayers.taxpayers.

Tax Policy (cont’d)

5. The tax law should be simple so that 5. The tax law should be simple so that taxpayers can understand the rules and taxpayers can understand the rules and comply with them correctly and in a cost- comply with them correctly and in a cost- efficient mannerefficient manner

6. The effect of the tax law on a taxpayer’s 6. The effect of the tax law on a taxpayer’s decisions as to how to carry out a particular decisions as to how to carry out a particular transaction or whether to engage in a transaction or whether to engage in a transaction should be kept to a minimumtransaction should be kept to a minimum

Tax Policy (cont’d)

7. The tax system should not impede of 7. The tax system should not impede of reduce the productive capacity of the reduce the productive capacity of the economyeconomy

8. Taxpayers should know that a tax exists 8. Taxpayers should know that a tax exists and how and when it is imposed upon them and how and when it is imposed upon them and othersand others

Tax Policy (cont’d)

9. A tax should be structured to minimize 9. A tax should be structured to minimize noncompliancenoncompliance

10. The tax system should enable the 10. The tax system should enable the government to determine how much tax government to determine how much tax revenue will likely be collected and whenrevenue will likely be collected and when

What do We Need to Know About “Authorities” What they areWhat they are Their sourceTheir source Where to find themWhere to find them How to use themHow to use them

What We Must Determine

TheirTheir

reliabilityreliability

Primary Sources of Federal Tax Law

First: Statutory sourcesFirst: Statutory sources The U.S. ConstitutionThe U.S. Constitution Tax TreatiesTax Treaties The Internal Revenue Code (IRC)The Internal Revenue Code (IRC)

Second: Administrative sources Second: Administrative sources (next chapter)(next chapter) Treasury RegulationsTreasury Regulations Revenue RulingsRevenue Rulings

Third: Judicial sources Third: Judicial sources (chapter 5)(chapter 5) The Court systemThe Court system

Secondary Sources of Federal Tax Law

Tax servicesTax services Tax journals and newslettersTax journals and newsletters Tax textbooks and treatisesTax textbooks and treatises

The U.S. Constitution (First Primary Source) ConstitutionalityConstitutionality

Sixteenth Amendment: Sixteenth Amendment: The Congress shall The Congress shall have the power to lay and collect taxes on have the power to lay and collect taxes on incomes, from whatever source derived, without incomes, from whatever source derived, without apportionment among the several States, and apportionment among the several States, and without regard to any census or enumeration.”without regard to any census or enumeration.”

Tax protestorsTax protestors PenaltiesPenalties

Penalties

Frivolous return - Frivolous return - §6702 - $500 (there is a §6702 - $500 (there is a proposal under current consideration to proposal under current consideration to increase this to $5,000)increase this to $5,000) Argument that tax is “Unconstitutional” Argument that tax is “Unconstitutional” Don’t like how tax $$ are being spentDon’t like how tax $$ are being spent Don’t believe in supporting military and Don’t believe in supporting military and

violenceviolence

Penalties (Cont’d) Frivolous Petition (to Tax Court) - Frivolous Petition (to Tax Court) - §6673§6673

$25,000$25,000 Applied by the Tax CourtApplied by the Tax Court

Petition filed primarily to delay Petition filed primarily to delay revenue collection processrevenue collection process

Petitioner’s grounds are frivolousPetitioner’s grounds are frivolousTP unreasonably failed to pursue TP unreasonably failed to pursue available administrative remedies available administrative remedies

Tax Treaty, or “Convention”

What is it? A negotiated agreement What is it? A negotiated agreement between two countries that between two countries that attemptsattempts to to determine the tax treatment of entities determine the tax treatment of entities subject to tax in both countries.subject to tax in both countries.

Purpose? Purpose? Attempt to avoidAttempt to avoid “double “double taxation,”taxation,” - taxing an entity on the same - taxing an entity on the same income in both countries.income in both countries.

Treaty (Cont’d)

Negotiated by the Executive Branch (U.S. Negotiated by the Executive Branch (U.S. Constitution, Article II, Sec. 2) Constitution, Article II, Sec. 2)

Need not be ratified by CongressNeed not be ratified by Congress IRC IRC §894 (a)(1) “The provisions of this §894 (a)(1) “The provisions of this

title shall be applied to any taxpayer with title shall be applied to any taxpayer with due regard to any treaty obligation …….due regard to any treaty obligation …….

Treaty (Cont’d)

Which takes precedence when treaty and Which takes precedence when treaty and statute conflict? Treaty or IRC?statute conflict? Treaty or IRC?

Generally, the most recently adopted is Generally, the most recently adopted is observed.observed.

““Competent Authority”Competent Authority”

Treaty (Cont’d)

IRC IRC §894 (a)(1) “The provisions of this §894 (a)(1) “The provisions of this title shall be applied to any taxpayer with title shall be applied to any taxpayer with due regard to any treaty obligation …….due regard to any treaty obligation …….

IRC §7852(d) “For purposes of IRC §7852(d) “For purposes of determining the relationship between a determining the relationship between a provision of a treaty and … (the IRC) …, provision of a treaty and … (the IRC) …, neither the treaty nor the law shall have neither the treaty nor the law shall have preferential status ….. .”preferential status ….. .”

Treaty (cont’d)

Exception:Exception:

§7852(d): Any treaty negotiated before §7852(d): Any treaty negotiated before August 16, 1954 that is still in effect (not August 16, 1954 that is still in effect (not superceded or otherwise terminated) takes superceded or otherwise terminated) takes precedence over any amendment to Title 26 precedence over any amendment to Title 26 enacted after that date.enacted after that date.

Internal Revenue Code (IRC)

The Legislative ProcessThe Legislative Process1.1. U.S. House of RepresentativesU.S. House of Representatives

1.1. House Ways and Means CommitteeHouse Ways and Means Committee1.1. Full HouseFull House

2.2. Unites States SenateUnites States Senate1.1. Senate Finance CommitteeSenate Finance Committee

1.1. Full SenateFull Senate3.3. Joint Conference CommitteeJoint Conference Committee4.4. Both Houses againBoth Houses again5.5. President’s signaturePresident’s signature

Internal Revenue Code (cont’d)

Bill passed by Congress is –Bill passed by Congress is – Public Law 105-206Public Law 105-206

105105thth Congress Congress206206thth bill passed by that Congress bill passed by that Congress

Internal Revenue Code (cont’d)

Reveals the intent of Congress, reason, logic Reveals the intent of Congress, reason, logic for the proposals.for the proposals. House, Senate, and Joint Conference House, Senate, and Joint Conference

Committee each will all have their own Committee each will all have their own Committee Reports.Committee Reports.

(Can be found on the web)(Can be found on the web)

IRC (Cont’d)

Public Law – P.L. 105-206Public Law – P.L. 105-206 H.R. 2676, Internal Revenue Service H.R. 2676, Internal Revenue Service

Restructuring and Reform Bill passed 6/25/98, Restructuring and Reform Bill passed 6/25/98, preceded and revised becamepreceded and revised became

P.L. 105-206 , Internal Revenue Service P.L. 105-206 , Internal Revenue Service Restructuring And Reform Act of 1998Restructuring And Reform Act of 1998

Effective dateEffective date Committee ReportsCommittee Reports Legislative HistoryLegislative History

Internal Revenue Code (cont’d)

““Title 26 of the United States Code” – the Title 26 of the United States Code” – the IRCIRC

1.1. SubtitlesSubtitlesA.A. Income TaxesIncome TaxesB.B. Estate and Gift TaxesEstate and Gift TaxesC.C. Employment TaxesEmployment TaxesD.D. Etc.Etc.

2. Parts2. Parts3. Chapters3. Chapters

Internal Revenue Code (cont’d)

2. Parts2. Parts

I. Tax on IndividualsI. Tax on Individuals

II. Tax on CorporationII. Tax on Corporation

III. Changes in Rates during a Taxable Year.III. Changes in Rates during a Taxable Year.

Etc.Etc.

3. Chapters3. Chapters

4. Subchapters4. Subchapters

Internal Revenue Code (cont’d)

3. Chapters3. Chapters

1. Normal Taxes and Surtaxes1. Normal Taxes and Surtaxes

2. Self-Employment Tax2. Self-Employment Tax

11. Estate Taxes11. Estate Taxes

4. Subchapters4. Subchapters

5. Sections5. Sections

Internal Revenue Code (cont’d)

4. Subchapters4. Subchapters

A. Determination of Tax LiabilityA. Determination of Tax Liability

B. Computation of Taxable IncomeB. Computation of Taxable Income

F. Tax-Exempt OrganizationsF. Tax-Exempt Organizations

K. Partnerships and PartnersK. Partnerships and Partners

And, finally, the most important of all:And, finally, the most important of all:

5. Section5. Section

Internal Revenue Code (cont’d)

5. Section5. Section

§61 Gross income defined§61 Gross income defined

§151 Allowance of deductions for personal §151 Allowance of deductions for personal exemptionsexemptions

§162 Trade or business expenses§162 Trade or business expenses

§212 Expenses for production of income§212 Expenses for production of income

Questions?Questions?