2. Constitution and Legislative Sources Chapter 3

3. TAX POLICY Who establishes “Tax Policy?” Who establishes “Tax Policy?”

4. PRINCIPLES OF GOOD TAX POLICY Annette Nellen, San Jose State University Presented to Tax Section of AICPA at Section meeting in Van Couver, B.C., June 15, 2001 1. Similarly situated taxpayers should be taxed similarly 1. Similarly situated taxpayers should be taxed similarly 2. Tax rules should specify when the tax is to be paid, how it is to be paid, and how the amount to be paid is to be determined 2. Tax rules should specify when the tax is to be paid, how it is to be paid, and how the amount to be paid is to be determined

5. Tax Policy (cont’d) 3. A tax should be due at a time or in a manner that is most likely to be convenient for the taxpayer 3. A tax should be due at a time or in a manner that is most likely to be convenient for the taxpayer 4. The costs to collect a tax should be kept to a minimum for both the government and taxpayers. 4. The costs to collect a tax should be kept to a minimum for both the government and taxpayers.

6. Tax Policy (cont’d) 5. The tax law should be simple so that taxpayers can understand the rules and comply with them correctly and in a cost- efficient manner 5. The tax law should be simple so that taxpayers can understand the rules and comply with them correctly and in a cost- efficient manner 6. The effect of the tax law on a taxpayer’s decisions as to how to carry out a particular transaction or whether to engage in a transaction should be kept to a minimum 6. The effect of the tax law on a taxpayer’s decisions as to how to carry out a particular transaction or whether to engage in a transaction should be kept to a minimum

7. Tax Policy (cont’d) 7. The tax system should not impede of reduce the productive capacity of the economy 7. The tax system should not impede of reduce the productive capacity of the economy 8. Taxpayers should know that a tax exists and how and when it is imposed upon them and others 8. Taxpayers should know that a tax exists and how and when it is imposed upon them and others

8. Tax Policy (cont’d) 9. A tax should be structured to minimize noncompliance 9. A tax should be structured to minimize noncompliance 10. The tax system should enable the government to determine how much tax revenue will likely be collected and when 10. The tax system should enable the government to determine how much tax revenue will likely be collected and when

9. What do We Need to Know About “Authorities”  What they are  Their source  Where to find them  How to use them

10. What We Must Determine Their Theirreliability

11. Primary Sources of Federal Tax Law First: Statutory sources First: Statutory sources  The U.S. Constitution  Tax Treaties  The Internal Revenue Code (IRC) Second: Administrative sources (next chapter) Second: Administrative sources (next chapter)  Treasury Regulations  Revenue Rulings Third: Judicial sources (chapter 5) Third: Judicial sources (chapter 5)  The Court system

12. Secondary Sources of Federal Tax Law Tax services Tax services Tax journals and newsletters Tax journals and newsletters Tax textbooks and treatises Tax textbooks and treatises

13. The U.S. Constitution (First Primary Source) Constitutionality Constitutionality  Sixteenth Amendment: The Congress shall have the 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.”  Tax protestors  Penalties

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

15. Penalties (Cont’d) Frivolous Petition (to Tax Court) - §6673 Frivolous Petition (to Tax Court) - §6673  $25,000  Applied by the Tax Court  Petition filed primarily to delay revenue collection process  Petitioner’s grounds are frivolous  TP unreasonably failed to pursue available administrative remedies

16. Tax Treaty, or “Convention” What is it? A negotiated agreement between two countries that attempts to determine the tax treatment of entities subject to tax in both countries. What is it? A negotiated agreement between two countries that attempts to determine the tax treatment of entities subject to tax in both countries. Purpose? Attempt to avoid “double taxation,” - taxing an entity on the same income in both countries. Purpose? Attempt to avoid “double taxation,” - taxing an entity on the same income in both countries.

17. Treaty (Cont’d) Negotiated by the Executive Branch (U.S. Constitution, Article II, Sec. 2) Negotiated by the Executive Branch (U.S. Constitution, Article II, Sec. 2) Need not be ratified by Congress Need not be ratified by Congress IRC §894 (a)(1) “The provisions of this title shall be applied to any taxpayer with due regard to any treaty obligation ……. IRC §894 (a)(1) “The provisions of this title shall be applied to any taxpayer with due regard to any treaty obligation …….

18. Treaty (Cont’d) Which takes precedence when treaty and statute conflict? Treaty or IRC? Which takes precedence when treaty and statute conflict? Treaty or IRC? Generally, the most recently adopted is observed. Generally, the most recently adopted is observed. “Competent Authority” “Competent Authority”

19. Treaty (Cont’d) IRC §894 (a)(1) “The provisions of this title shall be applied to any taxpayer with due regard to any treaty obligation ……. IRC §894 (a)(1) “The provisions of this title shall be applied to any taxpayer with due regard to any treaty obligation ……. IRC §7852(d) “For purposes of determining the relationship between a provision of a treaty and … (the IRC) …, neither the treaty nor the law shall have preferential status …...” IRC §7852(d) “For purposes of determining the relationship between a provision of a treaty and … (the IRC) …, neither the treaty nor the law shall have preferential status …...”

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

21. Internal Revenue Code (IRC) The Legislative Process 1. U.S. House of Representatives 1. House Ways and Means Committee 1. Full House 2. Unites States Senate 1. Senate Finance Committee 1. Full Senate 3. Joint Conference Committee 4. Both Houses again 5. President’s signature

22. Internal Revenue Code (cont’d) Bill passed by Congress is – Bill passed by Congress is –  Public Law 105-206  105 th Congress  206 th bill passed by that Congress

23. Internal Revenue Code (cont’d) Reveals the intent of Congress, reason, logic for the proposals.  House, Senate, and Joint Conference Committee each will all have their own Committee Reports.  (Can be found on the web)

24. IRC (Cont’d) Public Law – P.L. 105-206 Public Law – P.L. 105-206  H.R. 2676, Internal Revenue Service Restructuring and Reform Bill passed 6/25/98, preceded and revised became  P.L. 105-206, Internal Revenue Service Restructuring And Reform Act of 1998 Effective date Effective date Committee Reports Committee Reports Legislative History Legislative History

25. Internal Revenue Code (cont’d) “Title 26 of the United States Code” – the IRC 1. Subtitles A. Income Taxes B. Estate and Gift Taxes C. Employment Taxes D. Etc. 2. Parts 3. Chapters

26. Internal Revenue Code (cont’d) 2. Parts I. Tax on Individuals II. Tax on Corporation III. Changes in Rates during a Taxable Year. Etc. 3. Chapters 4. Subchapters

27. 3. Chapters 1. Normal Taxes and Surtaxes 2. Self-Employment Tax 11. Estate Taxes 4. Subchapters 5. Sections

28. Internal Revenue Code (cont’d) 4. Subchapters A. Determination of Tax Liability B. Computation of Taxable Income F. Tax-Exempt Organizations K. Partnerships and Partners And, finally, the most important of all: 5. Section

29. Internal Revenue Code (cont’d) 5. Section §61 Gross income defined §151 Allowance of deductions for personal exemptions §162 Trade or business expenses §212 Expenses for production of income

30. Questions? Questions?