Federal Income Taxation – Prof. Mazza
A. Sources of tax law (4)
a) Congress: power to lay and collect taxes. Art 1, § 8.
b) Congress: power to lay and collect taxes on incomes, from whatever source derived. 16th Amend. (1913).
a) Internal Revenue Code (IRC) of 1986.
b) Where consistent, 1936 and 1954 versions of IRC are precedential.
c) Amendments can be found in looseleaf services.
d) Legislative history, especially House Ways & Means Committee reports.
3. Administrative Regulations
a) Treasury Regulations
(1) Approved by the Sec. of Treasury
(2) Subject to notice and comment by the public.
(3) Authoritative, contain helpful examples, but take years to come out.
(4) May be challenged as contrary to meaning of a statute, but courts rarely find a problem.
(5) Format Example: §1.61-4, where “1” indicates it’s an income tax regulation, “61” indicates the IRC section to which it applies (i.e. 26 U.S.C. § 61), and “4” indicates the Treasury’s regulation number.
(6) Two Types
(i) Issued pursuant to specific grants of authority within the Code.
(ii) Rarely overturned as they are given significantly more weight.
(b) Interpretive (§7805)
(i) IRS has general authority to adopt all needful regulations.
(ii) May be overturned if Taxpayer (TP) can show that the regulation is contrary to Congressional intent.
(1) Revenue Ruling
(a) /def/ Interpretive pronouncement that gives the IRS’ position on the application of the law to certain facts.
(b) Precedential value is similar to that of case law (but less than Reg’s); challengeable.
(c) Not subject to notice and comment, nor approved by Treasury Secretary.
(d) TP may rely on RRs until revoked or overruled.
(e) Format Example: “Revenue Ruling 94-1,” where 94 is year issued, numbered sequentially from 1 (1st).
(2) Revenue Procedure
(a) Deals with internal IRS administration, but impacts the way a TP’s issue may be handled.
(b) Published in Cumulative Bulletin, prefixed by year.
(c) Format Example: “Rev. Proc. 2000-1,” where 2000 is year issued, numbered sequentially from 1 (1st).
(3) Private Letter Ruling
(a) IRS’ response to TP’s request for advice.
(b) Precedential only for requester.
(c) Expensive ($1500-25,000).
4. Judicial Process
a) Two ways to resolve tax dispute:
(1) Pay the deficiency IRS asserts, seek administrative refund, and if refused, sue the government to get it back. (95% of all controversies are resolved on appeal).
(2) Refuse to pay the tax and petition the tax court for a determination of the disputed issue.
b) Courts of Original Jurisdiction.
(1) Tax Court:
(a) “Poor Man’s Court,” which handles 90% of tax cases. Most sophisticated in tax matters. Sits in Washington, but hears cases around the country.
(b) One judge, no jury. Judge’s decision goes to Chief Judge for review, then to the entire court of 19 judges if necessary.
(c) Doesn’t require deficiency payment; may refuse to pay tax.
(d) When the Tax Court issues a ruling, the IRS commissioner issues either a notice of acquiescence or non-acquiescence. If it doesn’t acquiesce, the service will continue to challenge taxpayers even though it lost the issue.
(e) Appeals go to the Circuit Court of Appeals where the taxpayer resides. (Tax court doesn’t consider their decisions binding precedent, though, but follows them as a matter of policy, according to the Golsen rule (54 T.R. 742)).
(2) Federal District Court:
(a) May be tried before judge or jury.
(b) Must pay deficiency first; then seek recovery.
(c) No minimum amount in controversy.
(d) Bring to district where TP resides; if corporation, then district of principal place of business.
(e) Appeals go to the appropriate Circuit Court of Appeals, then Supreme Court.
(3) Claims Court:
(a) Headquartered in D.C., but sits around the country as necessary.
(b) Bench trials only.
(c) Must pay deficiency first; then seek recovery.
(d) Appeals go to the Federal Circuit in Washington—a specialized appellate jurisdiction.
B. Tax policy issues.
a) Collect revenue to fund government.
b) Allocate cost of services by ability to pay.
c) Social policy: encourage behaviors through deduction.
d) Economic policy: encourage business enterprises.
(1) Wealth tax: based on value of asset
(2) Consumption tax: based on power to consume
2. Definition of Income
a) Haig-Simons economic definition:
(1) I = C +/- ΔNW
(2) Income = Consumption plus/minus change in Net Worth
b) Any accession to wealth. (Eisner v. Macomber).
3. Criteria of a tax system
a) [Rationale: criteria may conflict, but the following ensure widespread compliance] b) Equity: basic fairness and achievement of distribution
part business and part personal, and may be treated variously:
(1) Allowable deduction,
(2) Denied deduction,
(3) Look to primary purpose of expense,
(4) Allocation between business and personal portions,
(5) Provide a cap for deductible amount.
7. Tax Expenditure Budget
a) Tax Expenditure /def/ reductions in individual and corporate income tax liabilities that result from “special tax provisions” or regulations that provide tax benefits to particular TPs.
(1) “Special tax provisions” are deviations from the “normal tax base” for reasons other than administrative feasibility.
(2) “Normal tax base” is economic income (EI = Consumption +/- NW)
(1) Identifies that tax expenditures are the functional equivalent of direct expenditures.
(2) Demonstrates the relative value of each expenditure.
(3) Allows gov’t to carry out certain policies.
(4) Purpose of Code is more than just to generate income.
c) Examples of tax expenditure items:
(1) Employer paid health insurance premiums
(2) Housing deduction
(3) Employer provided meals and lodging
(4) Fringe benefits (except de minimis b/c for administrative reasons)
(5) Imputed income is not a tax expenditure item b/c it exists for administrative reasons
(6) Note: items that do not cost gov’t more than $50 million are not included.
d) Associated problems:
(1) Only apply to persons who pay taxes
(2) Upside-down (deduction is worth more to those in higher brackets)
(3) No definitive definition of “normal tax base”
e) Credit vs. Direct Subsidy Program
(1) Cost of credit is usually cheaper and easier to target low income individuals b/c it can be capped
(2) However, cost control is easier w/ direct subsidy b/c IRS can limit number a TP can take.
(a) Also easier to repeal b/c change in Code must go through the entire legislative process.
Subsidy only goes through the budget process (thus harder to enact/repeal).