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Tax
University of Florida School of Law
Friel, Michael K.

Taxation: Chapter I

Appendix I:

– Primary source of tax law is the Internal Revenue Code of 1986, as amended. Based largely on the 1954 Code.
– Committee reports (i.e. legislative history) on the Revenue Reconciliation Act of 1993 are important for clarifying the impact of the Act on a particular transaction.
– 1) Treasury regulations (part of the executive branch)– critical to understanding Code provisions.
– Tax regs are promulgated by the Department of the Treasury of which the IRS is a part.
– §7805(a) of the IRC gives the Secretary of the treasury general authority to prescribe all necessary rules and regulations for the enforcement of the Code.
– 1) interpretive regulations 2) legislative regulations. The former asks the Secretary of the Treasure to interpret the Code, whereas the Latter asks the Secretary of the Treasury to prescribe Regulations.
– Regulations are promulgated under the Administrative Procedure Act and are initially published in the Federal Register. After this initial publication, a comment period ensues (unless enacted immediately as a temporary reg), after which the regs are published in final form as a Treasury Decision (T.D.)
– Each reg has a prefix – e.g. “1” for income tax regs, and the income tax regs on §61, gross income, are numbered “1.61 – .”
– 2) Rulings – issued by the IRS – Interpretive pronouncements, not approved by the Treasury. Indicates the Service’s position regarding the application of the tax law to a certain set of facts. Not published in proposed form, and no opportunity for comment.
– Revenue rulings – rulings determined by the IRS to be of general interest and published in the weekly. This is considered to be the Service’s litigation position on a point. Internal Revenue Bulletin and subsequently consolidated in the Cumulative Bulletin.
– Unless revoked, modified, or superceded, rulings may be relied upon by a taxpayer, and may be cited as precedent supporting a particular position (though without the support of a regulation).
– Revenue procedure – statements of the Service regarding its internal mangement operations. Compiled in the Cumulative Bulletin.
– Numbering – both rulings and procedures are numbered by year and then ruling/procedure number, e.g. 2004-1.
– Letter rulings – responsive to a particular taxpayer’s request for advice on the tax consequences (from the Service’s standpoint) of a specific transaction.
– Made public under the Freedom of Information Act. Easiest to access on Weslaw and Lexis, although may be found in CCH at times.
– IRS is not bound by its letter rulings in matters involving other taxpayers, but useful for guidance purposes. Cannot cite as an authority!
– 3) Tax Court Decisions – Published regularly in the Tax Court Reports and unofficially published by CCH, RIA and others.
– Notice of Deficiency (90 day letter) – this is what you receive first if the IRS believes you are delinquent.
– Other courts – US Federal District Courts, US Claims Court, Federal Courts of Appeal, and the US Court of Federal Claims.
– Two Types of decisions:
1. Regular decisions – Published officially in the Tax Court Reports (T.C.) and in its predecessor United States Board of Tax Appeals Reports (BTA) (1924-42). Generally involve important issues in tax that may not have been resolved previously
2. Memorandum decisions – generally involve application of settled points of the tax law to particular facts. Not officially published.
– Notice of acquiescence or nonacquiescence – published by the Commissioner in a Tax court decision in which the Commissioner has been ruled against.
– The former does not mean that the Service accepts the reasoning of the court underlying the conclusion, but it does accept the conclusion. The latter, however, indicates that the conclusion is not accepted by the Service and taxpayers will continue to be challenged by the service on the particular point.
– Not issued for decisions of Federal district or appellate courts or the US Claims Court, nor with respect to memorandum opinions of the Tax Court.
– Citator – used to update one’s research. Shepard’s Citators are the most widely used.

Chapter I

– 16th Amendment (1913) – The congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states and without regard to any census or enumeration.
– Withholding system – largely designed to alleviate the enormous administrative and compliance burdens associated with the collection of taxes on such an enormous scale.
– Purposes of tax system:
1. Revenue generation.
2. Social policy, for example::
– §163 – allows the deduction of home mortgage interest.
– §121 – exclusion for gain on sale of principal residence. Both 121 and 163 encourage home ownership.
– §170 – charitable deduction provision.
3. Economic policy implementation, for example:
– §168 – accelerated cost recovery system. Allows businesses to depreciate certain tangible property rapidly, thereby encouraging businesses to invest in new equipment.
– 2003 – first year bonus depreciation – allows for accelerated cost recovery in the first year. Spurs current expenditure on new equipment.
– progressive rate structure promotes the payment of public goods and services on an ability to pay basis.
– Identify what purpose a code section serves.

C. Resolution of Tax Issues Through the Judicial Process

1. Trial Courts
– Three courts have original jurisdiction in federal tax cases: After receiving your “90 day letter,” you need to choose a forum.
1. Tax Court – Most important, referred to as the “poor person’s court.” – Tax payer commences an action for redetermination of a deficiency without first paying the asserted deficiency.
– If this action is not taken (i.e. the disputed amount is first paid), the taxpayer may then file an administrative claim for a refund, and upon denial of the claim, sue for a refund in the following two courts.
– Tax court has 19 members.
– 1969 Tax Reform Act named the court and gave it “constitutional status” under Art. 1, §8, cl. 9 of the Constitution, so it is now part of the judicial branch. May punish for contempt and issue writs to enforce its decisions.
– Tried without a jury by one judge, who submits an opinion to the chief judge for consideration.
2. US District Courts – jurisdiction in any tax case against the US seekign a refund, regardless of amount. May be tried before a jury. Person must file in district in which (s)he resides, or a Corporation in the district of principal place of business. Deficiency must be paid first.
3. US Claims Court – Created by the Federal Courts Improvement Act of 1982. Claims of all amounts ok, but no jury trial. Where one resides makes no difference. Deficiency must be paid first.

2. Appeals
– Appeals from the Tax Court are heard as a matter of right by the Federal Courts of Appea

eriod of years.
– Chapter Problem:
– $45m in wages and $5m in office supplies. Permitted by §162(a) – above the line.
– $250m building – 20 year life span, thus must be capitalized under §263 (General rule, no deduction allowed for capital expenditures). This building is a typical capital expenditure under Reg. §1.263(a)-2(a). §168 tells you how to depreciate pursuant to §167(a) which allows depreciation– 167 allows for exhaustion and wear and tear.
– 168b-3 uses the straight line depreciation method. If, however, you can accelerate this, you get a tax benefit.
– For purposes of this problem, assume that $5m may be taken this year.
– The §168 deduction is a business expense and is above the line.
– Matching principle – match a tax benefit (deduction) with a tax detriment (income inclusion). Depreciation better matches these two items up with one another. Since you will derive income from the structure over 20 years, the tax benefit will not be received in just the first year.
– §2,500 in commuting expenses – not deductible. This is a personal expense (§262). Reg. §1.162-2(e) and §1.262-1(b)(5).
– $500 bank fee for money management – not deductible under §162 as a trade or business expense. See Higgins v. Commissioner, 312 U.S. 212 (1941). Managing your investments is not a trade or business according to Higgins.
– §212 – since dividend income is taxable, Congress decided that expenses paid or incurred for the production or collection of income” are deductible ; thus the fee will be deductible as an investment activity expense. Below the line deduction. Because this is not a business expense, it is not above the line, and may be wasted if below the line deductions are not in excess of the standardized deduction.
– $12m mortgage – $2m principle, not deductible. This is a personal expenditure (payment on a personal residence), and falls under §262.
– $10m interest – deductible under §163(a). §163(h) qualifies 163(a)’s broad language, but interest in the problem falls under “qualified residence interest.” This is below the line!
– $500 Sales Tax & $2m property tax – although these appear to be personal expenses, and thus nondeductible under §262, the latter is in fact deductible under §164 and is taken below the line. Sales tax is only deductible, subsequent to 1986, in cases of business expense.
– §3,500 in state taxes ($3,000 paid) – §164(a)(3) allows a deduction for state income tax. Cash method – our taxpayers may only deduct the actual amount paid, i.e. $3,000.
– $5m to the church – §170 allows deductions for charitable contributions within limits. §170(b)(1)(A) limits the deduction to 50% of the “contribution base.” §170(b)(1)(F) defines “contribution base” as AGI. Thus the entire $5m is deductible below the line.