1. Congress’s Legislative Process – The Internal Revenue Code of 1986 (THE tax law)
a. Formal beginning: Tax bill introduced in House. Ways and Means Committee à committee reports back to house
b. Tax bill introduced in Senate. Finance committee à committee reports back to Senate.
i. Committee reports are the most useful tools of the “legislative history” of statute
c. Conference committee (made up of 5 Finance committee members & 5 Ways and means members).
i. Resolves the House and Senate differences
2. Tax Hierarchy (remember, courts flank/interpret all authority)
a. U.S. Constitution
b. Federal Statutes and Treaties
i. US Code Title 26 (Internal Revenue Code) – (#1 – begin here!)
1. Interpreting à look to legislative history (hearings, committee reports, conference committee reports, bluebooks (which explain the laws))
ii. There are other federal statutes on income tax, but not many.
i. Promulgated by the Treasury Dept. – (#2 – what does IRS say, what does code mean?)
ii. Format: § 1.61-1 (interprets § 61 of the Code).
1. “T” at end means temporary. “1” at the beginning means proposed.
iii. 2 types:
1. Interpretive regulations – to enforce
2. Legislative regulations – to explain
iv. Mayo case – says regulations may control. Ask: did the regulation correctly interpret the statute, did congress authorize the regulation?
i. Interpret Constitution, Code, Regs. (#3 – look here).
i. Promulgated by the IRS (#4 – look here).
ii. Revenue rulings
1. the Treasury’s answer to a specific question raised by a taxpayer concerning the taxpayer’s liability (published to provide precedents in similar cases).
2. General statements – any taxpayer may rely on these
iii. Revenue Procedure
1. a statement of the Treasury’s practice and procedures – usually deals with a broad subject – how to do something. (i.e. how to request a Revenue Ruling)
iv. Private Letter Rulings
1. Not officially published or precedential – a response to a taxpayer’s request for advice on a technical or procedural question. Only individual may rely.
f. Materials to be used by the tax practitioner
i. Internal Revenue Code, Treasury Regulations, Cases, Revenue Rulings, Announcements, Notices, Private Letter Rulings, Technical Advice Memoranda, Revenue procedures
ii. Secondary Sources – Treatises, articles, CCH master tax guide, RIA, People (tax attorneys, call the IRS)
g. Treasury (IRS) also issues Action on Decisions (AOD’s)
i. States its position when it has lost an issue in a tax court case – provides guidance as to whether IRS acquiesces or disagrees with determination.
h. Treasury performs a quasi-judicial function, as well
i. If a deficiency in tax is asserted by the Treasury, or taxpayer claims a refund, the initial decision of any controversy must be made by Treasury.
ii. But gives rise to no published opinions or reports.
3. Courts – 3 federal trial courts for tax matters
a. U.S. Tax Court
i. Article I court – one of 19 judges (all tax specialists) hears the case, then all vote – NO jury.
1. If the technicalities favor the IRS, stay away from tax court.
ii. Most Decisions come from here.
iii. Can go here if you have not paid tax yet (so only for deficiencies)
1. Petition in tax court is like filing a complaint, taxpayer has burden of proof.
2. If you owe $25k or less, can file in small claims division of tax court, less formal process, but you give up your right to appeal
iv. Golsen Rule – Must follow the precedent in the circuit they’re in.
v. There are:
1. tax court opinions (if it settles legal principles)
2. tax court memoranda (not officially published, cases depend on the facts of the case)
vi. Appeals go to Court of Appeals
b. U.S. Court of Federal Claims
i. Article I court – one of 16 judges hears the case. NO jury.
1. Judges have clerks that are tax specialists, but probably not much experience, so they are hyper technical, less forgiving of human error
ii. Case goes here only if you’ve already paid (i.e. if you file a refund, turned town, can bring suit here)
1. Can go here up to 2 years after they deny your claim
iii. Appeals go to Federal Circuit.
c. US District Court
i. Only place you can get a jury trial.
ii. Can only go here if you’ve paid (paid deficiency, asking for refund/refund denied or asserting an initial overpayment of tax.)
iii. All criminal cases go here.
iv. Appeals go to Court of Appeals.
4. Tax Procedure
a. File a return
i. It goes into the IRS computer, checks math accuracy
b. Audit – check on our self-assessment system
i. About 1% of returns are audited – risk is higher if no tax liability or high income
1. Most audits selected by computer program (Discriminate function system – DIF). Scores returns on which might be most likely to be a winner for gov’t.
2. Related exams – audit one partner à audit the other
3. Special programs (i.e. tax shelter deal – audit everyone associated)
4. Manual selection – people report that someone should be audited for cheating
ii. 3 kinds of audits:
1. Correspondence audits – info doesn’t match. Send you a letter, asking you to pay.
2. Office Interview Audit – you have to go to IRS office, bring your records.
3. Field audit – most dreaded, IRS comes to you, more common for big businesses.
iii. If you don’t agree with auditor, District Review staff reviews audit, and assesses
1. If taxpayer owes money, send a 30 day letter. 3 options:
a. Execute agreement with letter, send the money
b. File a protest (I disagree). If < $2500, don’t have to explain why. c. Do nothing – you get a 90 day letter (notice of deficiency) i. Meeting is scheduled with appeals, tax experts within IRS can settle ii. Within the 90 days, you can pay or you can do nothing. 1. If you pay, you can still file for a refund. If IRS denies refund, can bring case in US District Court or Court of Federal Claims. 2. You could file a petition with the tax court. iii. After 90 days, they send you a bill, then come and get assets. 5. Litigating a Tax Issue a. Forum selection – consider precedent. i.e. 4th circuit court of appeals and the Federal Circuit (for Court of Federal Claims) may have different precedent. b. Statute of Limitations i. 3 years to notify you of deficiency, and for audit – can be waived. ii. You may want to waive it once, as gov’t will otherwise resolve all ambiguities in its favor. iii. SOL is 2 years from time tax is paid. 1. You could get audited after 2.5 years, pay deficiency, then have 2 years from payment to file claim for refund. iv. 6 year SOL if you left out 25% or more of your gross income v. No SOL if you didn’t file a return, or if the return is fraudulent, so you should always file. c. Interest
i. You own a building/home and use it yourself instead of renting it out. No income even though you got a benefit.
ii. Value of homemaking services – don’t pay taxes on the stuff you do for yourself (chores)
iii. Harvesting vegetables, building something in the garage, etc.
c. Helvering v. Ind. Life Ins. (1934)
i. Fair value of rent of a residence you own, but don’t rent out = not taxable.
ii. Defined as: a flow of satisfactions from durable goods owned and used by the taxpayer or from goods and services arising out of the taxpayer on his own behalf.
d. Revenue Ruling 79-24
i. For personal legal services performed by lawyer for housepainter, housepainter painted lawyer’s personal residence. Both part of a barter club.
1. FMV of services received by each includable in gross income under § 61.
2. A barter does not avoid income tax. If you exchange something, you have income when you exchange, or when you get credits from the barter club.
ii. An individual who owned apt. building received a work of art created by a professional artist in return for the rent-free use of an apartment for 6 months by the artist.
1. FMV of art and 6 mo. of rent are includable in gross income.
iii. Law: Reg. § 1.61-2(d)(1): if services are paid for other than in money, FMV of property/services taken in payment must be included in income.
7. Dean v. Commissioner (1951)
a. Wanted to borrow money for corporation, family had to put home into the corporation to secure a loan, but continued to live there.
b. Normally imputed income is not taxed when you own your home, but court says that fair rental value of the home is rental income to them.
i. The corp. owns the home, not the individuals. FMV of living in the home is taxable.
c. You cannot use a corp. to pay for your living expenses (i.e. have corp. buy car for personal use).
8. Expenditures by Lessee – Reg. § 1.61-8(c)
a. If a lessee pays any of the expenses of his lessor, such payments are additional rental income of the lessor.
b. Improvements made by lessee are income for lessor, if improvements constitute a substitute for rent.
c. Intent rules – look to terms of lease and surrounding circumstances.
d. § 109 – NO income on termination of lease from value of property attributable to buildings erected or other improvements made by the lessee.
Exclusion of Gifts and Inheritances
1. § 102 – Gifts and Inheritances
a. General rule: gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.
b. Should not exclude from gross income: income from property in (a) OR, where the gift, bequest, devise, or inheritance is of income from property, the amount of such income.
c. Employee gifts
i. (a) should not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee:
ii. For provisions excluding certain employee achievement awards, see 74(c)
iii. For provisions excluding certain de minimis fringes from gross income, see 132(e)