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Income Taxation
University of South Carolina School of Law
Handel, Richard

 
INCOME TAX OUTLINE
Prof. HANDEL
Fall 2014
 
 
1.       INTRODUCTION – SOURCES OF TAX LAW, HYPOTHETICAL TAXPAYER, TAX PROCEDURE AND TAX POLICY
 
The Tax Practitioner’s Tools
 
·         2 steps to tax problems
o   The statutory law, all such law that bears on the problem must first be found
o   The proper meaning must be ascribed to such law
o   All the relevant facts must be ascertained
·         Awareness of legislative, administrative, and judicial procedures that affect federal taxes, identifying the products of such procedures
o   “products” we are referring to the primary materials of federal taxation
o   secondary unofficial materials.
·         Self-assessment system à taxpayers compute their own tax liability. 
 
Legislative Materials
·         Under Article 1 of the CXN, tax legislation originates in the House of Representatives. 
·         taxing power of the federal government is vested in Congress
·         Federal Statutes and Treaties à have equal power; for income tax purposes we don’t look at any treaties, the statute is Title 26 of U.S. Code à Internal Revenue Code.  There are a few tax sections in other places but not many. 
·         current statutory document is the IRC of 1986
o   all tax decisions and controversies center around the meaning of provisions of the Code
o   federal taxing statutes must square with the requirements of the CXN
·         some provisions affecting tax liability appear in other federal statutes, but this is highly unusual
·         House of Representatives à where bills for raising revenue are supposed to originate
o   Real origin is in the Treasury Department, but they enter the legislative branch when they are introduced by a member of the House
·         Hearings
o   House Ways and Means Committee à has jurisdiction over revenue, debt, customs, trade, health, welfare, and social security issues.  .  Conducts hearings at which various witnesses testify. 
o   After hearings are concluded, there are “mark-up” sessions during which the tax bill is drafted. 
§  Various parties, including the House Legislative Council, the staff on the Joint Committee on Taxation, the Treasury Department, and the staff of the Ways and Means Committee, are involved in drafting the bill. 
o   Finance Committee in the Senate
o   Not really that important
·         Committee Reports
o   When the Bill is completed, it is sent to the floor of the House with the House Report.   Explains the existing law and the reasons for making the changes included in the Bill. 
o   Seeks to explain to the other House members just what the bill is designed to do, usually with illustrations.  Later, when the Finance Committee reports its bill to the Senate another committee report emerges. 
o   Practitioners, the Treasury, and Courts often resort to them as guides to the meaning of the legislation
o   Debated on the floor of the House under procedural rules that limit amendment of the bill. 
o   House votes.
o   Pass senate -à starts in the Senate Finance Committee à has jurisdiction over taxation, foreign trade, health, social security, and other financial matters. 
§  Holds hearings and prepares its version of the bill and the Senate Report. 
§  Debate and vote on senate floor à the procedural rules in the Senate permit numerous amendments to the bill during the floor debate. 
o   If Senate approves the bill, conference committee of Senate & House members
§  Issue a report saying if they went with House or Senate version and will explain if they differed
§  Made up of a small number of members of the House Ways and Means and Senate Finance Committees. 
§  Reaches compromises on the provisions à sometimes even adds new provisions. 
§  Prepares Conference Committee Report
o   Report back to separate houses à both chambers then vote on the conference bill
§  If both approve then it goes to the President who either signs or vetoes the bill. 
§  Some provisions are phased in gradually over a number of years and some provisions are scheduled to sunset (automatically expire) in a future year. 
o   Permanent Joint Committee on Taxation (Internal Revenue)
§  Often publish what are called blue books, they are explanations of the law that Congress just made à not legislative history because they are done after the law has been enacted, but valuable. 
§  Made up of a small number of members of the House Ways and Means and Senate Finance Committee
§  Must review and approve or disapprove any large tax refunds;
§  Assist in drafting tax legislation and prepare the post-enactment explanation of the new tax act. 
§  Does not reprint but explains the new law à it is not legislative history, although many courts treat it like legislative history. 
o   More important than hearings à valuable legislative history if the code section is new.
·         Debates
o   Congressional proceedings, including such debates, are published in the Congressional Record
·         Prior laws
o   First, if we are not talking about tax liability for the current year (questions controlled by the Code most recently enacted or as most recently amended), what was the status of the statutory law as of the year with which we are concerned.
·         Treaties
A tax treaty, of which we now have many can supersede a provision of the IRC. 
 
Administrative Materials
·         The administrative branch of tax governance, the Treasury, issues a wide range of documents providing its interpretation of the IRC. 
o   The tax law is administered by the Treasury Department (headed by the Secretary of the Treasury), which in turn delegates most administrative responsibility to the IRS.  Commissioner is the head of the service.   à provide guidance to taxpayers as to interpretation of the law; usually in the form of regulations, revenue rulings, and revenue procedures
·         Regulations
o   The Secretary of the Treasury is given general authority to “prescribe all needful rules and regulations for the enforcement” of the IRC. 
o   2 kinds of distinctions (not all that important anymore)
§  interpretive  à promulgated under Code §7805, which grants to the Secretary of the Treasury the authority to enforce the provisions of the Code. 
§  legislative à when the section of the substantive code section says “and the Treasury will publish regulations to explain what we mean” à specifically authorized and it doesn’t really matter anymore because last year a case came out which said that regulations count
·         Did Congress directly answer the question à if yes you go with what the statute says.  If no, is the Treasury’s rule a reasonable interpretation à if the regulation is upheld and it is the equivalent of goods law.
·         When you see the regulations you will generally see 1.xxx – 2. 
o   If it has a T on the end à T means temporary. 
·         Congress typically grants authority to issue legislative regulations when a Code provision is incomplete and requires filling in. 
o   Proposed regulations à taxpayers and their counsel may formally comment on the regulation before it is finalized.  Published in the Federal Register.
o   A final regulation is promulgated in the form of a Treasury Decision à includes the text of the regulation and a preamble that gives the name and telephone number of the principal drafter of the regulation. 
·         Approach for problems
o   What Code provisions bear on the problem?
o   Do the regs shed any light on their meaning in the setting at hand?
·         In using the regulations it is important to remember that they are generally subordinate to the statue and, in any instance in which an exact answer must be achieved, it is entirely improper to rely on the regulations (or on instructions on a tax form, which generally have about the same status) as a substitute for the statute. 
o   They are not the “law.”  Instead, they represent the view of the Service as to the meaning of a Code section so a taxpayer may argue that a regulation is invalid.  However courts give interpretive regulations great deference and legislative regulations even more deference; they invalidate regulations only in unusual circumstance

ver 4 is 0, not -1. 
·         Individual = living human being; person =  any kind of entity i.e. person, corporation, trust, estate, etc (in the IRC). 
·         Assume for this course that all taxes are going to be in 2012 à ignore sections that aren’t applicable in 2012.
·         You use the sources in the following order:
o   US CXN
o   CODE (US Code Title 26) and Treaties
o   REGULATIONS
§  Interpretative regulations explaining the code
§  Statutory regulations
§  Typically 1.code section – number
o   CASES
o   RULINGS
o   IRS ANNOUNCEMENTS ETC.
o   SECONDARY SOURES
§  RIA TREATISE
o   PEOPLE
 
Hypothetical Taxpayer
·         Overview of the first 2/3 of the course
o   How should you value the gardening services and the kitchen utensils?  What about the stock he owned that went up in value that he didn’t sell or get dividends à is net worth went up but is that something that we tax or not? No. 
o   Code and Regs say tax these things at their fair market value and you go to the estate tax regulations to find what the definition of FMV is à what a buyer would pay a willing seller both basically having reasonable knowledge of the facts etc. 
§  As a practical matter that is not always done
o   New equipment for the office à should we allow him a deduction? If we do we encourage him to buy new equipment and that stimulates the economy and provides his patient with potentially better services
o   By giving him a deduction aren’t we forcing people with no dental problems to subsidize the people who do have dental problems. 
o   The idea of giving him a deduction is allowing him to pay less tax which lowers his cost of doing business which allows him to make a larger real profit. 
o   Other expenses
§  Rent for his office is deductible; if he owned the building he gets to depreciate the building but not the land the building is on because the theory is the land does not wear out.
§  We let him deduct salary for his dental assistant because it lowers cost to patients because otherwise he would be doing what the dental assistant is doing.  Encourages employment by giving deductions to the people who create the jobs.  The fact is that salaries that you pay employees are already deductible and in SC there are already so many benefits from hiring people if you have enough money to take advantage of it and if they are the right people etc.  As a practical matter it isn’t done because it sometimes creates employee unrest if that employee does nothing and most companies don’t make enough money to reap the benefits they get.
§  Interest on investment may be deductible
§  SC taxes –> can deduct income and property state taxes.
§  Used to be able to deduct gasoline taxes but you can’t anymore
o   Charitable contribution à also an itemized deduction à policy behind that is that charities lessen the burdens of government by helping people in ways the government might have to spend money to support them.  Some charities do in a sense more basic welfare work than other charities, every time there is a change in the rates or standard deduction there is a debate about it.  
o   Wall Street Journal à might be deductible because he bought it to follow his investments.  Didn’t save him any money but technically a deductible.