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Federal Taxation of Business Entities
UMKC School of Law
Hoyt, Christopher R.

I.       History/Purpose
a.      Purpose – raise revenue
b.      Types of Taxes (by region)
                                                              i.      Local / County
1.      Largest Expenditure – local education
2.      Largest revenue – property tax (cannot be avoided)
                                                            ii.      State
1.      Largest Expenditure – education and transportation (highways)
2.      Largest revenue – income tax and sales tax
a.       Note: 11 states do not have state income tax (includes FL, TX, WY, TN, SD, NV, NH, WA)
b.      NH does not have sales tax (high property tax)
                                                          iii.      Federal
1.      Largest Expenditure – pensions, poverty, and national defense
2.      Largest revenue – income tax (46% individuals, 12% corporations, 35% social security)
a.       Income Tax – progressive tax – little income = little tax; more income = more tax
c.       History of Tax Law
                                                              i.      Tax laws enacted as a result to rebellion against unfair taxes
                                                            ii.      Constitution
1.      As originally drafted, Congress only permitted to collect a “head tax” (collect same amount from each person)
                                                          iii.      1800’s
1.      Main source of revenue was seaport import duties
2.      Temporary income tax during Civil War, later repealed
                                                          iv.      1900’s
1.      16th Amendment (1913) – permitted Congress to collect income tax
2.      Revenue Act of 1913
3.      1916 – Estate Tax passed (tax estate upon death)
4.      1921 – Gift Tax
5.      1930’s – 6% of American’s paid income tax
6.      Taxes needed to fund WWII (by end of WWII, 75% of Americans were paying income tax)
7.      1939 – First Tax Code (26 U.S.C.)
8.      1954 – Internal Revenue Code of 1954 (first comprehensive code)
9.      1986 – Tax code overhauled during Reagan administration (said to be too complicated)
10. Tax code currently amended every year since 1986 (2009 – 3.7 million words in tax code)
d.      Criteria Used in Selection of Tax Structure
                                                              i.      Equality – fair and equitable to all taxpayers
1.      Horizontal Equity – two people with same income should pay same amount of tax
a.       Important to promote fairness, but not always true (married pay less than single)
2.      Vertical Equity – rich should pay more than poor
                                                            ii.      Convenience – simplicity in administration
1.      If not simple, it will lead people to think it is unfair
                                                          iii.      Achieve specific social or economic objectives
                                                          iv.      Economic Efficiency – minimal interference in public behavior
e.       Tax Structure
                                                              i.      Tax Base – amount to which the tax rate is applied (taxable income = gross income – deductions)
                                                            ii.      Tax Rate – applied to tax base to determine tax liability
1.      Proportional – rate of tax remains constant for any given income level (EX: FICA)
2.      Progressive – rate is higher as tax base increases
3.      Currently: 6 rates between 10% and 35%
II.    Enactment of Tax Laws
a.       All tax laws must start in House of Representatives
                                                              i.      Required by Constitution
                                                            ii.      Theory is since all of House is elected every 2 years, can change House easier and therefore make desired changes in tax law easier
b.      House Ways & Means Committee – tax writing committee (Chairman Rangel)
c.       Bill goes to Senate Finance Committee (Chairman Baucus)
d.      Tax laws structured to encourage certain activities/industries
                                                              i.      R&D – expenses can be deducted in year incurred or amortized over 60 months
                                                            ii.      Energy Crisis
1.      Alternative Fuel Vehicle credit
2.      Home Improvements
                                                          iii.      Agriculture
                                                          iv.      Small businesses
e.       Tax Statutes:
                                                              i.      101(a)(2)(A)(i)
1.      101 is section
2.      (a) is subsection
3.      (2) is paragraph
4.      (A) is subparagraph
5.      (i) is sub sub paragraph
f.       IRS Documents/Publications:
                                                              i.      Action on Decision
1.      Documents comments on why IRS lost a case, includes recommendation for appeal, how IRS will handle similar cases
2.      Golson Doctrine – type of case will not be tried again in this circuit, but could be attempted again in another circuit, unless there is an inter-circuit conflict
                                                            ii.      Private Letter Ruling
1.      Similar to an insurance policy from IRS
2.      Indication from IRS as to how they would handle a potential transaction
3.      Protects only the requesting party
4.      No. 8637058 = 58th decision of 37th week of 1986
III.Tax Research
a.       Tax Laws / Rules – updated weekly
                                                              i.      CCH
                                                            ii.      RIA (Thompson)
1.      US Tax Reporter (used primarily for researching)
2.      Federal Tax Coordinator (written in plain English)
                                                          iii.      Publications are organized by Code section, then by regulation
1.      Legal History
2.      Analysis
3.      Annotation
                                                          iv.      Tax-related Court opinions other than US Tax Court decisions are also published (Circuit Courts, US Supreme Court
                                                            v.      Do NOT use West Key number system in tax law
b.      US Tax Court
                                                              i.      400 decisions/year
                                                            ii.      Typically 8000 cases pending, most settle
                                                          iii.      Regular Opinion
1.      Issued for decision on previously-undecided issue
2.      Published by Government Printing Office
                                                          iv.      Memo Decision
1.      Issued for decisions on previously-decided issues
2.      Published by private firms (CCH, RIA)
3.      Decision usually written by one judge
c.       Internal Revenue Bulletin (IRB)
                                                              i.      Issued weekly
                                                            ii.      Published IRS notices, decisions
                                                          iii.      Twice per year, all IRB’s are compiled into a cumulative bulletin
d.      Tax Management Portfolios
                                                              i.      Booklets on isolated tax topics
                                                            ii.      Good for using when need to quickly familiarize self with a specific topic
e.       Priority of  Tax Law
                                                              i.      Code (Congress / Legislative Branch)

    Filing Status
                                                              i.      Test: Were you married on last day of the year?
1.      If married at end of the year, can file jointly for whole year
2.      If married whole year, but divorced at end of the year, cannot file as jointly
3.      Defense of Marriage Act: For federal filing purposes, marriage is defined as between a man and woman
                                                            ii.      Single
1.      Highest tax rate
2.      Get to 35% higher if single, then if married
3.      Basic deduction for 2009 = $5700
4.      Each additional deduction $1400 (EX: over 65, blind)
                                                          iii.      Married Filing Jointly
1.      lowest tax rates
2.      General Rule: both spouses sign form and are responsible (liable for actions of your spouse)
a.       Exception: Request for Innocent Spouse Relief: only used when spouse did not know their spouse was cheating on their taxes (EX: forced to sign joint return)
                                                                                                                                      i.      50,000 forms received every year, 21% allowed
3.      Basic standard deduction for 2009 = $11,400
4.      Each additional standard deduction = $1150?
5.      Marriage Tax Penalty
a.       When both spouses are working, combined income can rise to tax rate that is greater than if each spouse were to file individually
                                                          iv.      Married filing separately
1.      highest tax rates
2.      file you own return, only liable for your own return (report your own income, exemptions, deductions, etc.)
3.      Basic standard deduction for 2009 = $5700
4.      Each additional standard deduction =  $1400
5.      Limitations:
a.       If either itemizes, both must itemize
b.      Cannot claim earned income credit & credit for child and dependent care expenses
c.       No deduction for interest paid on loans
6.      use when one spouse has a lot of medical bills or one spouse works overseas
                                                            v.      Head of Household
1.      Middle range of tax
2.      EX: single parent raising a child
3.      Basic deduction for 2009 = $8350
4.      Each additional standard deduction = $1400
5.      Test
a.       Unmarried at end of year
b.      Pays more than ½ cost of maintaining household
c.       Dependent (qualifying child or relative) lives with you
                                                                                                                                      i.      Exceptions:
1.      child does not have to live with parent, abandoned spouse (one spouse must have left more than 6 months before end of year)
2.      dependent parent does not live with you (EX: children taking care of elderly parent)
                                                          vi.      Qualifying Widower / Surviving Spouse (for 2 yrs after death of spouse)
1.      same rates as married filing jointly
2.      Basic standard deduction for 2009 = $11,400