© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Corporations, Partnerships, Estates & Trusts 1 Chapter 1 Understanding and Working With the Federal Tax Law

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2 Competing Objectives Result in a Complex Law Structure Revenue Needs Economic Considerations Social Considerations Equity (Fairness) Considerations Political Considerations

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3 Economic Considerations (slide 1 of 2) Control the economy (e.g., favorable depreciation deductions for purchase of business property) Encourage certain activities (e.g., research and development deductions and credits)

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4 Economic Considerations (slide 2 of 2) Encourage certain industries (e.g., agriculture and natural resources incentives) Encourage small business (e.g., ordinary loss deduction on stock in small business)

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5 Social Considerations (slide 1 of 2) Tax-free medical coverage provided by employers to encourage health insurance Deferred tax treatment of certain retirement funds to encourage saving for retirement

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6 Social Considerations (slide 2 of 2) Deduction for charitable contributions to encourage funding of socially desirable programs by private individuals and companies Disallowed deductions for expenditures against public policy (e.g., illegal bribes, kickbacks)

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7 Equity Considerations (slide 1 of 4) Alleviate the effect of double taxation: –Deduction for state and local taxes –Credit or deduction for certain foreign taxes –Deduction for dividends received by corporations to prevent triple taxation

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8 Equity Considerations (slide 2 of 4) Wherewithal to Pay concept –Defers taxation when a taxpayer’s economic position has not changed –e.g., Exchange of assets might result in gain but no cash, so some tax may be deferred

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9 Equity Considerations (slide 3 of 4) Annual accounting periods –In some cases, e.g., start-up businesses, a revenue- generating cycle may be greater than the 12 month maximum tax reporting period. –To accommodate this, net operating loss rules allow losses from one year to be used in another year. This minimizes the adverse impact of arbitrary reporting periods.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10 Equity Considerations (slide 4 of 4) Inflation adjustments are included in tax rate schedules. If earnings increase solely by cost- of living amounts, taxes will not be imposed at higher rates on the increase.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11 Political Considerations Special interest legislation Response to public opinion (political expediency) State and local influences

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12 Agencies Influencing Tax Law (slide 1 of 4) Internal Revenue Service (IRS) –Works to get Congress to “close loopholes” –Publishes “statutory regulations” authorized by Congress and given force of law –Publishes other regulations which outline the IRS’ position on certain issues

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13 Agencies Influencing Tax Law (slide 2 of 4) Aids to IRS in collecting revenue: –Tax Return Audits – Information reporting (W-2s and 1099s) –Withholding –Interest and penalty assessments

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14 Agencies Influencing Tax Law (slide 3 of 4) Courts –Judicial concepts Substance over form Arm’s length Continuity of interest Business purpose

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15 Agencies Influencing Tax Law (slide 4 of 4) Courts –Judicial rulings Some rulings highlight undesirable aspects of present law, which may lead Congress to adopt a change in law

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16 Statutory Sources of Tax Law Internal Revenue Code –Codification of the Federal tax law provisions in a logical sequence –Have had three codes: 1939, 1954, 1986

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17 Legislative Process For Tax Bills

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18 Joint Conference Committee Process

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19 Arrangement of the Code Subtitle A—Income Taxes –Chapter 1. Normal Taxes and Surtaxes Subchapter A. Determination of Tax Liability –Part I. Tax on Individuals Sections 1 to 5 (Various Titles) –Part II. Tax on Corporations Sections 11 to 12 (Various Titles)

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20 Example Code Citation § 2(a)(1)(A) – § = Abbreviation for “Section” – 2 = Section number – (a) = Subsection – (1) = Paragraph designation – (A) = Subparagraph designation

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21 Administrative Sources of Tax Law Treasury Department Regulations Revenue Rulings Revenue Procedures, and Various other administrative pronouncements

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22 Regulations (slide 1 of 4) –Issued by U.S. Treasury Department –Provide general interpretations and guidance in applying the Code

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23 Regulations (slide 2 of 4) Issued as: –Proposed: preview of final regulations Do not have force and effect of law –Temporary: issued when guidance needed quickly Same authoritative value as final regulations –Final: Force and effect of law

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24 Regulations (slide 3 of 4) Example of Regulation citation: –Reg. § 1.2 Refers to Regulations under Code § 2 Subparts may be added for further identification The numbering patterns of these subparts often have no correlation with the Code subsections

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25 Regulations (slide 4 of 4) Example of Proposed Regulation citation: Prop. Reg. § 1.2 Example of Temporary Regulation citation: Temp. Reg. § 1.482–7T(b)(4)

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26 Revenue Rulings (slide 1 of 2) Officially issued by National Office of IRS –Provide specific interpretations and guidance in applying the Code –Less legal force than Regulations –Issued in IRB and accumulated in the Cumulative Bulletins

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27 Revenue Rulings (slide 2 of 2) Example of Temporary Revenue Ruling citation –Rev.Rul. 2009–19, I.R.B. No. 28, 111 Explanation: Revenue Ruling Number 19, appearing on page 111 of the 28 th weekly issue of the Internal Revenue Bulletin for 2009 Example of Permanent Revenue Ruling citation –Rev.Rul. 2009–19, 2009–2 C.B. 111 Explanation: Revenue Ruling Number 19, appearing on page 111 of Volume 2 of the Cumulative Bulletin for 2009

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28 Revenue Procedures (slide 1 of 2) Concerned with the internal procedures of IRS –Issued similar to Revenue Rulings –Issued in IRB and accumulated in the Cumulative Bulletins

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29 Revenue Procedures (slide 2 of 2) Example of Revenue Procedure citation –Rev. Proc , CB th Rev. Procedure in 1992 found in volume 1 of Cumulative Bulletin on page 748

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30 Letter Rulings (slide 1 of 2) Provide guidance to taxpayer on how a transaction will be taxed before proceeding with it –Issued for a fee upon a taxpayer’s request –Describe how the IRS will treat a proposed transaction Apply only to the taxpayer who asks for and obtains the ruling –Post-1984 letter rulings may be substantial authority for purposes of the accuracy-related penalty Limited to restricted, preannounced areas of taxation

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31 Letter Rulings (slide 2 of 2) Example of Letter Ruling citation –Ltr.Rul th ruling issued in the 16th week of 2009

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32 Other Administrative Pronouncements (slide 1 of 3) Treasury Decisions-issued by Treasury Dept. to: –Promulgate new or amend existing Regulations –Announce position of the Government on selected court decisions –Published in the Internal Revenue Bulletin Then transferred to the Cumulative Bulletin

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33 Other Administrative Pronouncements (slide 2 of 3) Determination Letters –Issued by Area Director at taxpayer’s request –Usually involve completed transactions –Not published Made known only to party making the request

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34 Other Administrative Pronouncements (slide 3 of 3) General Counsel Memoranda Technical Advice Memoranda Field Service Advice

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35 Federal Judicial System FIGURE 1.1

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 36 Judicial Sources (slide 1 of 2) There are four courts of original jurisdiction (trial courts) –U.S. Tax Court: Regular –U.S. Tax Court: Small Cases Division –Federal District Court –U.S. Court of Federal Claims

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 37 Judicial Sources (slide 2 of 2) U.S. Court of IssueU.S. Tax CourtU.S. District CourtFederal Claims Number of judges19*Varies16 per court Payment of deficiencyNoYesYes before trial Jury trial NoYesNo Types of disputesTax cases onlyMost criminal andClaims against the civil issues United States JurisdictionNationwideLocation of TaxpayerNationwide IRS acquiescence policyYesYesYes Appeal routeU.S. Court ofU.S. Court of U.S. Court of Appeals AppealsAppealsfor the Federal Court. *There are also 14 special trial judges and 9 senior judges. CONCEPT SUMMARY 1.1

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 38 Appeals Process Appeals from District Court or Tax Court go to the U.S. Court of Appeals for circuit where taxpayer resides Appeals from Court of Federal Claims is to Court of Appeals for the Federal Circuit Appeal to the Supreme Court is by Writ of Certiorari –Only granted for those cases it desires to hear

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 39 Courts’ Weights as Precedents From high to low –Supreme Court –Circuit Court of Appeals –Tax Court (Regular), U.S. Court of Federal Claims, & U.S. District Courts Decisions of Small Cases Division of Tax Court have no precedential value and cannot be appealed

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 40 Tax Court (slide 1 of 2) Issues three types of decisions: Regular, Memorandum, and summary decisions –Regular decisions involve novel issues not previously resolved by the court Regular decisions are published by U.S. govt, e.g., Summary opinions –Issued in small tax cases and may not be used as precedent in any other case

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 41 Tax Court (slide 2 of 2) Tax Court Memorandum decisions –Memorandum decisions deal with situations necessitating only the application of already established principles of law Memorandum decisions are published by CCH and by RIA (formerly by P-H)

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 42 Examples Of District Court Decision Citations Turner v. U.S., 2004–1 USTC ¶60,478 (D.Ct. Tex., 2004) (CCH citation) Turner v. U.S., 93 AFTR 2d 2004–686 (D.Ct. Tex., 2004) (RIA citation) Turner v. U.S., 306 F.Supp.2d 668 (D.Ct. Tex., 2004)(West citation)

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 43 Supreme Court Decisions Examples of citations –U.S. v. The Donruss Co., (USSC, 1969) 69-1 USTC ¶9167 (CCH citation) 23 AFTR2d (RIA citation) 89 S. CT 501 (West citation) 393 U.S. 297 (U.S. Government citation) 21 L.Ed.2d 495 (Lawyer's Co-operative Publishing Co. citation)

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 44 Tax Treaties The U.S. signs tax treaties with foreign countries to: –Render mutual assistance in tax enforcement –Avoid double taxation Neither a tax law nor a tax treaty takes general precedence –When there is a direct conflict, the most recent item will take precedence

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 45 Tax Research (slide 1 of 2) A crucial part of the research process is the ability to locate appropriate sources of the tax law –Both electronic and paper-based research tools are available to aid in this search Unless the problem is simple (e.g., the Code Section is known, and there is a Regulation on point), the research process should begin with a tax service

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 46 Tax Research (slide 2 of 2) Computerized tax research tools have replaced paper resources in most tax practices –There are two chief ways to conduct tax research using computer resources: Online and CD-ROM subscription services and Online free Internet sites

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 47 Tax Services A partial list of the available commercial tax services includes: –Standard Federal Tax Reporter, CCH –Tax Research NetWork, CCH Internet service –United States Tax Reporter, RIA –RIA Checkpoint, RIA –ATX/Kleinrock Tax Expert, CCH/Wolters Kluwer Business services –Tax Management Portfolios, BNA –Mertens Law of Federal Income Taxation, West Group –Westlaw services (including access to Tax Management Portfolios) –TaxCenter, LexisNexis –Federal Research Library, Tax Analysts

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 48 Tax Research Process FIGURE 1.3

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 49 Tax Research Tax research is the method by which an interested party determines the best solution to a tax situation Tax research involves: –Identifying and refining the problem –Locating the appropriate tax law sources –Assessing the validity of the tax law sources –Arriving at the solution or at alternative solutions with due consideration given to nontax factors

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 50 Assessing the Validity of Tax Law Sources (slide 1 of 4) When assessing the validity of a Regulation, the following observations should be noted: –In a challenge, the burden of proof is on the taxpayer to show that the Regulation is wrong However, a court may invalidate a Regulation that varies from the language of the statute and has no support in the Committee Reports –If the taxpayer loses the challenge, the negligence penalty may be imposed This accuracy-related provision deals with the ‘‘intentional disregard of rules and regulations’’ on the part of the taxpayer

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 51 Assessing the Validity of Tax Law Sources (slide 2 of 4) Final Regulations tend to be of three types –Procedural: housekeeping-type instructions –Interpretive: rephrase what is in Committee Reports and the Code Hard to get overturned –Legislative: allow the Treasury Department to determine the details of law Congress has delegated its legislative powers and these cannot generally be overturned

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 52 Assessing the Validity of Tax Law Sources (slide 3 of 4) Revenue Rulings –Carry less weight than Regulations –Not substantial authority in court disputes

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 53 Assessing the Validity of Tax Law Sources (slide 4 of 4) Judicial sources –Consider the level of the court and the legal residence of the taxpayer –Determine whether the decision has been overturned on appeal

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 54 Tax Law Sources (slide 1 of 2) Primary sources of tax law include: –The Constitution –Legislative history materials –Statutes –Treaties –Treasury Regulations –IRS pronouncements, and –Judicial decisions In general, the IRS considers only primary sources to constitute substantial authority

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 55 Tax Law Sources (slide 2 of 2) Secondary Sources include: –Legal periodicals –Treatises –Legal opinions –General Counsel Memoranda, and –Written determinations In general, secondary sources are not authority

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 56 Tax Planning The primary purpose of effective tax planning is to reduce the taxpayer’s total tax bill –Must consider the legitimate business goals of taxpayer A secondary objective of effective tax planning is to reduce, defer, or eliminate the tax Tax avoidance vs. tax evasion –Tax avoidance is the legal minimization of tax liabilities and one goal of tax planning –Tax evasion is the illegal minimization of tax liabilities Suggests the use of subterfuge and fraud as a means to tax minimization Can lead to fines and jail

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 57 Taxation on the CPA Examination Taxation is included in the 3-hour Regulation section and covers: –Federal tax procedures and accounting issues –Federal taxation of property transactions –Federal taxation—individuals –Federal taxation—entities Knowledge is tested using both multiple- choice questions and case studies called simulations

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 58 If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact: Dr. Donald R. Trippeer, CPA SUNY Oneonta