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Income Taxation
Elon University School of Law
Haile, Andrew J.

1. Sources of Tax Law:

Tier 1

Tier 2

Tier 3

Internal Revenue Code

Interpretive Regulations

Legislative History

Legislative Regulations

Public Administrative Rulings (binding on all taxpayers)

Private Administrative Rulings (binding on requesting taxpayers)



a. Internal Revenue Code – “The Code”
i. Title 26 of the US Code
ii. Main focus will be on Subtitle A, Ch. 1
1. Treasury writes the Code but the US Treasury Department and IRS are charged with enforcing it.
b. Treasury Regulations – most authoritative statement of IRS & Treasury Positions
i. Proposed Regulations – Treas. Regs are first drafted by the IRS and then issued as proposed regulations, published as such in the Federal Register.
1. “Prop. Reg.”
a. Final Regulations – Under the Administrative Procedure Act, TPs are entitled to submit written comment or speak at hearings before final regulations are published in the Federal Register.
b. Temporary Regulations – identified by “T”
i. Used where Treasury wants a regulation to become effective more quickly, it will issue a proposed regulation simultaneously as a temporary regulation.
1. These are effective immediately upon publication in the Federal Register.
2. Interpretative Regulations – most help explain the operation of the statutes (issued pursuant to Code § 7805)
a. § 7805(a) of the Code gives the Secretary or the Treasury the power to “prescribe all needful rules and regulations for the enforcement of this title.”
3. Legislative Regulations – some are issued pursuant to specific statutory authority (e.g. Code § 108(c)(5))
4. Income Tax Regulations – Treas. Reg. § 1 [code section] – [reg. number].
c. Revenue Rulings – present the IRS’s position on substantive tax issues
i. Official interpretations of the Code
1. TPs who seek binding advice from the IRS as to the proper tax treatment of a transaction may, for a fee, request a private ruling from the IRS. The ruling binds only the IRS and the requesting party; a private ruling may not be cited or relied upon as precedent.
2. The IRS may, redact the text of a private ruling and issue a “revenue ruling” that is binding on all TPs and the IRS.
ii. Issues are presented in the context of a hypothetical fact situation.
iii. The numbering system for revenue rulings corresponds to the year in which they are issued (see, pp. 57-8).
d. Revenue Procedures – an official statement of procedure that affects the rights or duties of TPs under the Code or regulations.
i. While RR deal with substantive issues, RP provide instruction concerning procedural issues (e.g. the filing of returns, how to request a PLR).
ii. May be relied on and cited by TPs.
e. Private Letter Rulings (“PLRs”) – a written response issued to a taxpayer interpreting and applying tax laws to the taxpayer’s specific set of facts.
i. Allows a TP to establish with certainty the federal tax consequences of a particular transaction before the transaction is consummated.
ii. PLRs may only be relied on by the TP receiving the ruling.
iii. $11,500 filing fee.
f. Other Sources
i. Technical Advice Memos
ii. Internal Revenue Manual
iii. Field Service Advice Memos
iv. Cases
v. Income tax treaties
g. Last in Time Rule
i. If two authorities of equal weight contradict, the one issued later in time is controlling.
1. Look to 3 Tiers on pp. 4
2. Rule applies only where a conflict exists between two authorities in the same tier.

2. Courts:

a. US Tax Court
i. Established under Article 1 of the U.S. Const. in 1924.
ii. Allows TPs to litigate tax disputes with the IRS without having to pay the disputed amount in advance.
iii. Based in Washington, but the judges travel around the US to hear cases.
1. Cases are heard before a single judge with no jury.
2. Usually under $50K
iv. Appeals go to the Circuit in which the TP resides.
b. US District Courts
i. Must pay any deficiency to the IRS and then sue for a refund.
ii. Ability to request a jury.
c. US Court of Feder

3. “Marriage Bonus” – married couples with disparate incomes enjoy a benefit by filing a joint tax return. Unmarried TPs suffer a “singles penalty” because they are not married.
ii. Surviving Spouse:
1. Married filing jointly is available to surviving spouses.
2. Spouse must have died in either of the two prior years, and who maintains a home that is also the principal residence of his or her child or stepchild. § 2(a)
iii. Head of Household: § 1(b)
1. Unmarried; maintains house for qualifying child or other dependent. § 2(b)
2. Not a surviving spouse.
3. Need only maintain for at least one-half of the year; includes grandchildren and step-grandchildren.
iv. Unmarried and Not Head of Household: § 1(c)
1. Enjoy wider tax brackets, meaning they pay less tax on the same amount of income.
v. Married Filing Separately: § 1(d)
1. Tax tables are exactly half of the size of the brackets to joint returns. However, there are different tax brackets for unmarried TPs than for married TPs who file separately.
vi. § 1 – Normal Taxes or Surtaxes
vii. Inflation Adjustments are made by the Sec. of the Treas. Based on changes in the CPI over the past year.
c. Progressive Tax Rate
i. Defined: as a TP’s taxable income increases, so too does the rate of tax.
ii. Donaldson’s Arguments for:
1. Ensures that an individual’s tax liability is based on his or her ability to pay (declining marginal utility of money).
2. Wealthier individuals receive more benefits from the tax dollars they pay (more to lose)
3. Wealth redistribution
iii. Donaldson’s Arguments against:
1. Makes the tax system more complex (phase outs)
2. Distorts TP decisions (TP may decide to work less as the marginal tax rate increases)
3. Inequities b/t similarly situated TPs (TP1 pays tax on $50K in each of year 1 and 2; TP2 pays tax on $100K in year 1, $0 in year 2.)
d. Regressive Tax Rate