Chapter 1 An Introduction to Taxation

Learning Objectives Discuss the history of taxation Differentiate between three types of tax rate structures Describe the various types of taxes Discuss what constitutes a “good” tax structure and the objectives of federal income tax law Describe the tax entities in the federal income tax system

Learning Objectives Identify the various tax law sources and understand their implications for tax practice Describe the legislative process for the enactment of the tax law Describe administrative procedures under the tax law Describe the components of a tax practice and understand importance of research process and computer applications in taxation

History Of Taxation In The United States First Federal Income Tax in 1861 Repealed after the Civil War Reinstated in 1894

History Of Taxation In The United States In 1895, the Supreme Court Ruled Unconstitutional March 1, 1913, the Sixteenth Amendment Revenue Acts From 1913 to Present

Sixteenth Amendment To The Constitution Of The United States The Congress Shall Have Power to Lay and Collect Taxes on Incomes, From Whatever Source Derived, Without Apportionment Among Several States, and Without Regard to Any Census or Enumeration.

Manner In Which Tax Law Is Changed Of Modified Federal income tax is changed on an incremental basis rather than a complete revision. The tax law has been referred to as a “quiltwork” of tax law

Revenue Sources

Two Basic Parts Of Tax Structure Tax Base – The amount to which the tax rate is applied to determine tax due. For example, an individual’s tax base for the federal income is his or her taxable income. tax base for property tax is generally the fair market value of property subject to tax. Tax Rate – Is merely the percentage rate applied to the tax base.

Rate Structures Can Be….. Progressive Regressive Proportional Or Flat Tax

Structure Of Corporate Tax Rates Stair-step pattern of progression – Tends to benefit small corporations

Corporate Tax Rates First $50,00015 % Of Taxable Income Over $50,000 But Not Over $75,000$7, % Of Taxable Income Over $75,000 But Not Over $100,00013, % Of Taxable Income Over $75,000 Over $100,000 But Not Over $335,000 $22, % Of Taxable Income Over $100,000 Over $335,00034% Of Taxable Income Over $10,000,000 But Not Over 15,000,000 3,400, % Of Taxable Income Over $15,000,000 But Not Over $18,333,333 $5,150, % Over $15,000,000 Over $18,333,33335% Of Taxable Income

Marginal, Average, & Effective Tax Rates For Taxpayers Marginal tax rate - tax rate applied to an incremental amount of taxable income that is added to a tax base Average tax rate - total tax liability divided by amount of taxable income Effective tax rate - total tax liability divided by total economic income

Types Of Taxes State Income Tax Franchise Tax Wealth Transfer Taxes

Types Of Taxes Federal Gift Tax Other (Property, Federal Excise, Sales, Employment)

Criteria For Tax Structure Equity Certainty Convenience Economy

Objectives Of The Federal Income Tax Law Economic – Raise Revenues for Government Operations – Stimulate Private Investment – Reduce Unemployment – Mitigate Effects on Inflation

Objectives Of The Federal Income Tax Law Encourage certain activities & industries Social objectives

Entities in the Federal Income Tax System Tax Paying Entities –Individuals –C Corporations Flow-through Entities –Sole proprietorship –Partnerships –S Corporations –LLC (Limited Liability Company) –LLP (Limited Liability Partnership –Trusts

Tax Law Sources Legislative Executive (Administrative) Judicial

Tax Law Sources Legislative: – Internal Revenue Code – Congressional Committee Report Executive (Administrative): – Income Tax Regulations – Revenue Rulings – Revenue Procedures – Letter Rulings Judicial: – Court Decisions

Tax Law Interpretations Internal Revenue Code (Statutory tax law) Taxpayer Interpretations (1) Taxpayer (2) CPA representing taxpayer (3) Attorney (4) Non-licensed tax preparer Governmental Interpretations Interpretations Secretary of the Treasury Regulations (1) Proposed (2) Temporary (3) Final Internal Revenue Service (1) Revenue Rulings (2) Private Letter Rulings (3) Technical Advice Memoranda Memoranda (4) Information Releases

Enactment Of Tax Law House of Representatives is responsible for initiating new tax legislation. Referred to the House Ways and Means Committee.

Administration Of Tax Law Organization of the Internal Revenue Service Enforcement procedures Selection of returns for audit –In 2002, the IRS launched the National Research Program (NRP) to select returns for audit –The NRP will update data compiled in the old TCMP Audits and develop new statistical models for identifying returns most likely to contain errors.

Administration Of Tax Law Statute of limitations Interest Penalties Administrative Appeal Procedures

Components Of A Tax Practice Tax compliance & procedure Tax research Tax planning Financial planning

Computer Applications In Tax Practice Tax return preparation Tax planning – Project depreciation Tax research – CD-ROM, Lexis, Internet Services