Federal Tax Law PDF

fertilizers and the election to defer the recognition of gain on the receipt of crop insurance proceeds. 2. To stimulate the research and production of alternative fuel sources, tax incentives are allowed with respect to operations and sales of certain solar and wind energy devices and of autos that...

fertilizers and the election to defer the recognition of gain on the receipt of crop insurance proceeds. 2. To stimulate the research and production of alternative fuel sources, tax incentives are allowed with respect to operations and sales of certain solar and wind energy devices and of autos that do not consume petroleum products. iv. Encouragement of Small Business. The belief that what is good for small business is good for the economy as a whole has led to special provisions in the tax law that favor small business. c. Social Considerations i. Some provisions of the Federal tax law, particularly those dealing with individuals, can be explained by a desire to encourage certain social results. 1. Certain benefits provided to employees through accident and health insurance plans financed by employers are nontaxable to employees. 2. A contribution made by an employer to a qualified pension or profit sharing plan for an employee may receive special treatment. 3. A deduction is allowed for contributions to qualified charities. 4. Various tax incentives are designed to encourage taxpayers to obtain or extend their level of education. 5. A tax credit is allowed for amounts spent to furnish care for certain minor or disabled dependents to enable the taxpayer to seek or maintain gainful employment. 6. A tax deduction is denied for certain expenditures deemed to be contrary to public policy (e.g., fines, penalties, illegal kickbacks, bribesto government officials, and gambling losses in excess of gains). d. Equity Considerations i. The concept of equity (or fairness) is relative. Lawmakers and others often consider whether a tax change is progressive or regressive to understand its impact on taxpayers and whether the change should be made. ii. If a tax represents the same percentage of the income of all taxpayers, it is a proportional tax. iii. The Wherewithal to Pay Concept. The wherewithal to pay concept recognizes the inequity of taxing a transaction when the taxpayer lacks the means to pay the tax. 1. This concept underlies a provision in the tax law dealing with the treatment of gain resulting from an involuntary conversion-which occurs when property is destroyed by casualty or taken by a public authority through condemnation. 2. If gain results from the conversion, it need not be recognized immediately if the taxpayer replaces the property within a specified time period. iv. Mitigating the Effect of the Annual Accounting Period Concept. The application of this annual accounting period concept can lead to dissimilar tax treatment for taxpayers who are, from a long-range standpoint, in the same economic position. e. Political Considerations i. A large segment of the Federal tax law is made up of statutory provisions. ii. Special Interest Legislation. Certain provisions of the tax law largely can be explained by the political influence some groups have had on Congress. iii. State and Local Government Influences. State law has had an influence in shaping our present Federal tax law. 1. One example of this effect is the evolution of Federal tax law in response to states with community property systems. 2. The difference between common law and community property systems centers around the property rights held by married persons. 3. At one time, the tax position of the residents of community property states was so advantageous that many common law states adopted community property systems. Political pressure placed on Congress to correct the disparity in tax treatment was considerable. 4. Congress changed the law to extend many of the community property tax advantages to residents of common law jurisdictions. (a) The law change allowed married taxpayers to file joint returns and compute the tax liability as if one-half of the income had been earned by each spouse. b The income-splitting benefits of a joint return are incorporated ( ) as part of the tax rates applicable to married taxpayers. 5. A similar motivation can be seen for the gift-splitting provisions of the Federal gift tax and the marital deduction of the Federal estate and gift taxes. f. Compliance Considerations i. A tax system generally includes rules to ensure proper compliance by taxpayers. 1. Due dates for returns and tax payments; 2. Procedures for and audit and collection activities of the IRS. ii. Numerous penalties also exist in the tax law to encourage proper compliance by taxpayers, as well as by their paid preparers. 1. Penalties can be assessed on taxpayers for failing to pay their taxes (or failing to pay on time), claiming improper deductions or misstating income, or not having substantial legal authority for claiming a deduction or credit. 2. Penalties imposed on return preparers include failing to furnish the taxpayer with a copy of the return, failing to sign the return as a preparer, failing to furnish an identification number, and failing to keep copies of returns or maintain a client list. g. Influence of the Internal Revenue Service (1.8, PPT Slides 73-77) i. One of the keys to an effective administration of our tax system is the audit process conducted by the IRS. ii. The IRS influences laws by suggesting changes to Congress based on compliance problems it discovers. iii. The U.S. Treasury Department and the IRS also affect tax laws via the Regulations and rulings they issue that explain and interpret Code provisions. h. Influence of the C:::ourts i. In addition to interpreting statutory provisions and the administrative pronouncements issued by the Treasury Department and the IRS, the Federal courts have influenced tax law in two other ways. 1. The courts have developed a number of judicial concepts that help guide the application of various tax provisions, going beyond the strict language of the Code and Treasury Regulations. 2. Certain key court decisions have led to changes in the Code and other sources of tax law. ii. Judicial Concepts and Doctrines Relating to Tax. In dealings between related parties, the courts test transactions by looking to whether the taxpayers acted in an arm's length manner. iii. Judicial Influence on Statutory Provisions. Some court decisions have been of such consequence that Congress has incorporated them into statutory tax law. VII. Summary i. Tax professionals must be adept in various skills to deliver expected levels of service to clients and the government. • Knowledge of technical tax law. • Productive with,technology and data analytics. • Strengths in business acumen and so-called soft skills, like listening and motivation. • Functional in problem solving and process improvement. • Valued contributor in project management and cost-benefit analysis. • Excellent verbal and written communication skills. ii. Tax planning is a means by which to manage the amount and timing of tax liabilities to accomplish one's long-term objectives. [return to top] iii. The conduct of tax practitioners is regulated by professional associations, lawmakers, and the taxing agencies. iv. In addition to its necessary revenue-raising objective, the Federal tax law has developed in response to several other factors. 1. Economic considerations. Tax provisions can help to regulate the economy and encourage certain activities and types of businesses. 2. Social considerations. Some tax provisions are designed to encourage (or discourage) socially desirable (or undesirable) practices. 3. Equity considerations. Tax provisions can alleviate the effect of multiple taxation, recognize the wherewithal to pay concept, and mitigate the effect of the annual accounting period concept. 4. Compliance considerations. Tax rules provide for examinations, penalties, and interest to help ensure proper compliance (timely filing of returns and payment of taxes) by taxpayers. 5. Political considerations. Tax provisions can carry out the desires of special interest groups or reflect the effect of state and local law. 6. Influence of the IRS. Many tax provisions are intended to aid the IRS in the collection of revenue and the administration of the tax law. 7. Influence of the courts. Court decisions have established a body of judicial concepts relating to tax law and have, on occasion, led Congress to enact statutory provisions to either clarify or negate their effect. Discussion Questions You can assign these questions several ways: in a discussion forum in your LMS; as whole­ class discussions in person; or as a partner or group activity in class. 1. Discussion 1 (1.3, 1.5, and 1.6, PPT Slides 16-47 and 55-70) Duration 15 minutes. a. James Corporation believes that it will have a better distribution location for its product if it relocates the corporation to another state. What considerations (both tax and nontax) should James weigh before making a decision on whether to make the move? i. Answer: Some tax and nontax considerations James should investigate include the following: • State and local income taxes. • State and local sales taxes. • State and local property taxes. • Employee implications of the move. (Will James lose current employees? Is the labor market better in the new location? Is cost of living lower or higher in the new location?) • Logistics/transportation of products to customers (specifically document lower costs). • State infrastructure (better in new location?). 2. Discussion 2 (1.3, PPT Slides 16-47) Duration 15 minutes. a. The Adams Independent School District wants to sell a parcel of unimproved land that it does not need. Its three best offers are as follows: from the State Department of Public Safety (DPS), $2,300,000; from Second Baptist Church, $2,200,000; and from Baker Motors, $2,100,000. DPS would use the property for a new state highway patrol barracks, Second Baptist would start a church school, and Baker would open a car dealership. As the financial adviser for the school district, which offer would you prefer? Why? i. Answer: Although the Baker Motors bid is the lowest, from a long­ term financial standpoint, it is the best. The proposed use of the property by the state and the church probably will make it exempt from the school district's ad valorem tax. This would hardly be the case with a car dealership. In fact, commercial properties (e.g., car dealerships) often are subject to higher tax rates. 3. Discussion 3 (1.3, PPT Slides 16-47) Duration 15 minutes. a. Franklin County is in dire financial straits and is considering a number of sources for additional revenue. Evaluate the following possibilities in terms of anticipated taxpayer compliance. 1. A property tax on business inventories. 2. A tax on intangibles (i.e., stocks and bonds) held as investments. 3. A property tax on boats used for recreational purposes. i. Answer: Additional pertinent tax issues include the following: 1. In terms of taxpayer compliance, an ad valorem tax on personalty is less desirable than one on realty. However, a tax on business personalty, such as inventory, is to be preferred over one on personal use (i.e., nonbusiness) personalty. 2. A tax on stock and bonds would be too easily avoided. The taxing authority would have no means of ascertaining ownership of these assets. 3. Poor taxpayer compliance is to be expected for any tax on personal use personalty. However, if boats had to be periodically licensed (e.g., safety inspection), this could provide the taxing authority with a means of discovering unreported boat ownership. 4. Discussion 4 (1.3, 1.4, and 1.6, PPT Slides 16-54 and 64-70) Duration 15 minutes. a. Mike Barr was an outstanding football player in college and expects to be drafted by the NFL in the first few rounds. Mike has let it be known that he would prefer to sign with an NFL team located in Florida, Texas, or Washington. Is Mike undertaking good income tax planning? Explain. i. Answer: If Mike is drafted by a team in one of the listed states, he will escape state income tax on income earned within that state (e.g., training camp, home games). He will not, however, escape the income tax (state and local) imposed by jurisdictions where he plays away games. Called the "jock tax," it is applied to out-of-state athletes and entertainers.