Chapter 3 Copyright ©2003 South-Western/Thomson Learning, Cincinnati, Ohio William A. Raabe, Gerald E. Whittenburg, Debra L. Sanders, John C. Bost Constitutional and Legislative Sources

2 CONSTITUTIONAL AND LEGISLATIVE SOURCES  Sources of Law Sources of Law  History of U.S. Taxation History of U.S. Taxation  U.S. Constitution U.S. Constitution  Tax Treaties Tax Treaties  Legislative Process Legislative Process  Internal Revenue Code Internal Revenue Code

3 Sources of Law  Primary Sources Primary Sources  Secondary Sources Secondary Sources

4 Primary Sources  Statutory Statutory  Administrative Administrative  Judicial Judicial

5 Statutory Sources of Law  U.S. Constitution  Tax Treaties  Internal Revenue Code Language of the statute Legislative history and intent

6 Administrative Sources of Law  Treasury Regulations  Revenue Rulings  Revenue Procedures  Private Letter Rulings  IRS Publications

7 Judicial Sources of Law  Supreme Court  Courts of Appeals  Entry-Level Courts Tax Court Tax Court, Small Cases Division Claims Courts District Courts

8 Secondary Sources  Tax Services Annotated services Topical services  Tax journals and newsletters  Tax textbooks and treatises

9 History of U.S. Taxation (1 of 3)  1861 Income Tax Act to pay for Civil War  1894 Income Tax Act held unconstitutional by Supreme Court in 1895 (Pollock v. Farmer’s Loan & Trust Co.)

10  1909: Corporate Income Tax Constitutional because it was an excise tax, not a direct tax (S.Ct.: Flint v. Stone Tracy Co.)  1913: 16th Amendment Ratified16th Amendment History of U.S. Taxation (2 of 3)

11 16th Amendment “The Congress shall have the power to lay and collect taxes on incomes, from whatever sources derived, without apportionment among the several states, and without regard to any census or enumeration.”

12 U.S. Constitution (1 of 2)  Source for all federal tax law  Requires uniform imposition of Congressional tax law throughout U.S.

13 Tax Treaties (1 of 3)  Authorized by Article II, Sec. 2 of ConstitutionArticle II, Sec. 2 of Constitution  Definition Agreements between countries concerning tax treatment of entities in both countries  Primary Purpose Eliminate “double” taxation Any tax matter may be covered

14  Weight of Authority Treaty has equal weight as Code (§7852)  May have multiple treaties with same country  Conflict between Treaty and Code The one enacted later prevails Courts may attempt to give effect to both, to resolve the conflict Tax Treaties (2 of 3)

15 Article II, Sec. 2: Constitutional Authorization for Tax Treaties  President allowed to create treaties with advice and consent of Senate  Ways to terminate treaties Expire (date proscribed in treaty) Superceded Mutual termination

16 Legislative Process  Article 1 Section 7 – Origination Clause: All bills for raising revenues shall originate in H of R; but the Senate may propose or concur with amendments as on other bills.

17 Legislative Process (1 of 2)  House Ways and Means Committee  Voted by House  Senate Finance Committee  Voted by Senate  Joint Conference Committee  [look at timetable for TRA’86 and types of reports issued]

18  Revised Bill Voted by House and Senate  Signed by President (or override veto)  Incorporated into IRC  Technical Corrections Acts  Committee reports produced at each step of legislative process Committee reports What do they look like? When should tax adviser use? When do courts use? Legislative Process

19 Legislative Process  How much revenue will be raised or reduced? CBO JCT Treasury Dept.  Accurate?

20  Explain elements of proposed changes to Code and reasons for each proposal  Used by tax researchers to clarify meaning of statute or intent of Congress  Published in weekly Internal Revenue Bulletin Comm. reports related to tax law changes IRBs reorganized and published every six months in the Cumulative Bulletin Committee Reports

21 Internal Revenue Code  History History  Organization Organization  Interpretation Interpretation

22 History of the Internal Revenue Code  Pre-1939 Periodic Revenue Acts  Acts codified in 1939  Recodified in 1954 Current numbering system  Renamed in 1986

23 Organization of the Internal Revenue Code  Title 26 of United States Code  Divisions Subtitles Chapters Subchapters Parts and Subparts Sections and Subsections

24 Subtitles  Identified by letter (A-I) Well-defined area of tax law Subtitles commonly used A: Income Taxes B: Estate and Gift Taxes F: Procedure and Administration

25 Chapters  Organized by unique number (1-98) Key chapters  1: Normal taxes and surtaxes  2: Self-employment tax  6: Consolidated returns  11: Estate Taxes  12: Gift taxes  61: Administration/information  79: Definitions

26 Subchapters  Identified by Capital Letter Subchapters in Chapter 1 (Normal Taxes) of Subtitle A (Income Taxes) commonly referred to by tax researchers  C: Corporate Distributions and Adjustments  K: Partnerships and Partners  S: S Corporations & Shareholders

27 Parts & Subparts  Parts Groupings addressing essentially the same issue Not all Subchapters are divided into parts Examples of Parts in Ch. 1 of Subtitle A  Part 1: Tax on individuals  Part II: Tax on corporations  Part VI: Alternative minimum tax  Subparts Large parts may be further divided

28  Primary unit of the Code Section numbers used only once Sections may be further subdivided Subsection (lower case letter)  Paragraph (Arabic number)  Subparagraph (Capital letter)  Clause (lower case Roman numeral) Some important Code sections in Exhibit Sections and Subsections

29 Interpreting the Code  General rule General rule  Exceptions Exceptions  Terms Terms  Helpful hints Helpful hints  Effective dates and transition rules Effective dates and transition rules

30 General Rule  Conditions that must be satisfied to apply the provisions

31  Situations under which taxpayer is excepted from general rule  May be provided in another Section  Exceptions to exceptions Exceptions

32  §7701 defines many terms throughout Code May be superceded by specific Code section  Definitions may vary from one Code section to another E.g., family attribution rules Terms

33  Do not overlook words that connect phrases, such as “and” and “or” Connectors may be “hidden” at the end of the previous clause or subparagraph  “And” means that all phrases connected by the “and” must be true for the provision to apply  “Or” means that the provision will apply if any phrase connected by the “or” is true Helpful Hints (1 of 2)

34  Be careful with words that modify percentage or Dollar amounts, such as “less than,” “more than,” and “not less than”  Distinguish between terms such as “30 days” and “one month” Helpful Hints (2 of 2)

35  Effective date of a provision Often different than date of Act  Transition rules Often associated with abrupt changes in the law (e.g. personal interest expense) Effective Dates and Transition Rules