Federal Taxation FYI:
· Regressive Tax: poor people pay more proportionally than rich people, for example: sales tax.
· Working with the 1986 law “as amended”
Tax Law Policy/Objectives of Tax Law:
Economic Efficiency
Interferes as little as possible with economic resources; resources must be allocated in best manner.
Equity (Fair)
Horizontal Equity: Two people in the same situation should pay the same amount of tax. Example: Marginal tax rates. Inside cover of book.
Vertical Equity: The rich people should pay more because they can afford it. Progressive rates – every additional dollar is taxed additionally at a higher rate.
Simplicity
Sales tax meets this objective – it is very simple.
Income tax is very complex, which discourages compliance b/c more sophisticated taxpayers are able to avoid taxes better.
Achieving Certain Economic/Social Policies
Drafting tax law in a way that will encourage certain social or economic behavior.
**Other: minimize non-compliance
Random FYI
Note that the regulations are codified to match the code from congress.
Department of Regulations issues two types of regulations
Interpretive – Congress never said issue regulations to explain what we meant. These regulations are not as persuasive in the tax court.
legislative – Congress passes a statute which instructs the Dept. to issue regulations. For example, “life expectancy tables will be issued by the Dept of Reg.”
Private Letter Rule – If you have a tax question, you call the IRS phone number. Verbal advice over the phone is not protection, if the IRS is wrong, you’re still liable for the taxes. But you can get a letter from the IRS, this is insurance on how your situation will be handled. However, this is expensive. It costs about $4,000 to $10,000 to get this private letter ruling. In the 80s it was free but the budget is bad now.
The letter is not precedent but is persuasive.
Tax Code has specific meaning which is important to know in some statutes like §461:
§ 461(h)(2)(A)(ii) à § section (subsection)(paragraph)(subparagraph)(subsubparagraph)
History and Legislative Process
1. History
(a) before the early 1900’s most revenue came from customs tax
(b) during Civil War income tax was used both by the Federal Union and the Confederate States of America to raise funds to finance the Civil War, but after the war ended the need for additional revenue disappeared and the income tax was repealed
(c) Const. said that tax should be in proportion to population (i.e., the same amt for everyone) => it was unconstitutional to tax the rich more than the poor
(d) ratification of 16th Amendment to the US Const. in 1913 sanctioned both t
ion of the Govt on selected ct decisions
(f) determination letters ® issued at the request of taxpayers and provide guidance on the application of the tax law
(i) usually involve completed, as oppose to proposed, transactions
(ii) not published and only made known to the party making the request
4. Hierarch or Law
(a) Code
(b) US Supr Ct decisions
(c) Regulations from Dept of Treasury
(i) legislative ® when Congress wants it to be part of law (almost as binding as Code itself)
(ii) interpretative ® when Congress says how they want to interpret it (this interpretation trumps individual interpretation)
(iii) procedural ® Congress just tells you how to do it
(iv) proposed (not really the law – just tell you what the law will be)
(v) temporary (the law)
(d) Ct of Appeals
(e) Trial Ct (must go to a fed ct about any fed tax issue – it will be thrown out from a state ct)
(i) US Tax Court (only 1 ct)
(1) regular decisions (published by the official report)
(2) memo (published by private reporters, but still as binding)
Small Cases Division → S case (≤$50,000) – like binding arbitration (no way to appeal)
