1. Constitutional and Legislative Sources
Chapter 3
Constitutional and Legislative Sources
William A. Raabe, Gerald E. Whittenburg, &
Debra L. Sanders
Copyright ©2006 Thomson South-Western, Mason, Ohio

2. CONSTITUTIONAL AND LEGISLATIVE SOURCES
Chapter Outline:
Sources of Law
History of U.S. Taxation
U.S. Constitution
Tax Treaties
The Legislative Process
Internal Revenue Code

3. Framework of Primary and Secondary Sources of Federal Tax Law

4. History of U.S. Taxation (1 of 3)
1861 Income Tax Act
to pay for Civil War, expired in 1872
1894 Income Tax Act
held unconstitutional by Supreme Court in 1895 (Pollock v. Farmer’s Loan & Trust Co.)

5. History of U.S. Taxation (2 of 3)
1909: Corporate Income Tax
Constitutional because it was an excise tax, not a direct tax (S.Ct.: Flint v. Stone Tracy Co.)
1913: 16th Amendment Ratified:
“The Congress shall have the power to lay and collect taxes on incomes, from whatever sources derived, without apportionment among the several states, and without regard to any census or enumeration.”
This was the beginning of our current income tax system.

6. History of U.S. Taxation (3 of 3)
Tax Protest Laws and Penalties
“Frivolous” tax return protest
$500 fine
“Frivolous” case brought before Tax Court
Up to $25,000 fine (§§6673, 6702)

7. U.S. Constitution (1 of 2) Source for all federal tax law
Requires uniform imposition of Congressional tax law throughout U.S.
Estate and gift taxes are excise taxes on transfer of property

8. U.S. Constitution (2 of 2)
Congress can impose import taxes, but not export taxes
Right to due process and privacy apply in tax

9. Tax Treaties (1 of 2)
Authorized by Article II, Sec. 2 of the Constitution
Definition
Agreements between countries concerning tax treatment of entities in both countries
Primary Purpose
Eliminate “double” taxation
Any tax matter may be covered

10. Tax Treaties (2 of 2) Weight of Authority
Treaty has equal weight as Code (§7852)
May have multiple treaties with same country
Conflict between Treaty and Code
The one enacted later prevails
Courts may attempt to give effect to both, to resolve the conflict

11. Article II, Sec. 2: Constitutional Authorization for Tax Treaties
President allowed to create treaties with advice and consent of Senate
Ways to terminate treaties
Expire (date proscribed in treaty)
Superceded
Mutual termination

12. The Legislative Process

13. The Legislative Process
Technical Corrections Acts can be used by Congress to correct errors in the original bill
Committee reports are produced at each step of legislative process

14. Committee Reports
Explain elements of proposed changes to Code and reasons for each proposal
Used by tax researchers to clarify meaning of statute or intent of Congress
Published in weekly Internal Revenue Bulletin
Comm. reports related to tax law changes
IRBs reorganized and published every six months in the Cumulative Bulletin

15. Internal Revenue Code: History
Pre-1939
Periodic Revenue Acts
Various Revenue Acts codified in 1939
Recodified in 1954
Current numbering system
Renamed in 1986 because of the extensive changes in the Tax Reform Act of 1986

16. Organization of the Internal Revenue Code
Title 26 of United States Code
Divisions
Subtitles
Chapters
Subchapters
Parts and Subparts
Sections and Subsections

17. Subtitles Identified by letter (A-I)
Well-defined area of tax law Subtitles commonly used
Examples:
A: Income Taxes
B: Estate and Gift Taxes
F: Procedure and Administration

18. Chapters Organized by unique number (1-98) Some key chapters:
1: Normal taxes and surtaxes
2: Self-employment tax
6: Consolidated returns
11: Estate Taxes
12: Gift taxes
61: Administration/information
79: Definitions

19. Subchapters Identified by Capital Letter
Subchapters in Chapter 1 (Normal Taxes) of Subtitle A (Income Taxes) commonly referred to by tax researchers
Frequently used subchapters:
C: Corporate Distributions and Adjustments
K: Partnerships and Partners
S: S Corporations & Shareholders

20. Parts & Subparts Parts Subparts
Groupings addressing essentially the same issue
Not all Subchapters are divided into parts
Examples of Parts in Ch. 1 of Subtitle A
Part 1: Tax on individuals
Part II: Tax on corporations
Part VI: Alternative minimum tax
Subparts
Large parts may be further divided

21. Sections and Subsections
Primary (and often quoted) unit of the Code
Section numbers used only once
Sections may be further subdivided
Subsection (lower case letter)
Paragraph (Arabic number)
Subparagraph (Capital letter)
Clause (lower case Roman numeral)
Some important Code sections are in Exhibit 3-11
The next slide shows how to interpret a Code Section Citation

22. Interpreting a Code Section Citation

23. Interpreting the Code When researching, be aware that there are:
The general rules
Exceptions to the general rules
Exceptions to the exceptions
Know the tax definitions of the terms you encounter; they may be different from the usual accounting definition
Know the appropriate effective dates and transition rules affecting your client’s situation

24. General Rules
These are the conditions that must be satisfied to apply the Code provisions to a taxpayer’s situation

25. Exceptions
Situations under which taxpayer is excepted from general rule
May be provided in another Code Section
Possible “exceptions to the exceptions”

26. Terms §7701 defines many terms throughout Code
May be superceded by specific Code section
Definitions may vary from one Code section to another
E.g., family attribution rules

27. Helpful Hints (1 of 2)
Do not overlook words that connect phrases, such as “and” and “or”
Connectors may be “hidden” at the end of the previous clause or subparagraph
“And” means that all phrases connected by the “and” must be true for the provision to apply
“Or” means that the provision will apply if any phrase connected by the “or” is true

28. Helpful Hints (2 of 2)
Be careful with words that modify percentage or dollar amounts, such as “less than,” “more than,” and “not less than”
Distinguish between terms such as “30 days” and “one month”

29. Effective Dates and Transition Rules
Effective date of a provision
Often different than the date the Tax Act was signed into law
Transition rules
Often associated with abrupt changes in the law (e.g., personal interest expense)