1. Chapter 1 Legislative Sources ©2010 CCH. All Rights Reserved. 4025 W. Peterson Ave. Chicago, IL 60646-6085 1 800 248 3248 www.CCHGroup.com

2. Contemporary Tax Practice Three functions/services performed by the tax practitioner. –Research –Planning –Compliance Question: If you are preparing a client’s annual income tax return and they ask if they can contribute to their IRA for the current year, which services could you potentially perform on their behalf?

3. Contemporary Tax Practice Answer: –Preparing return = compliance –Determining deductibility of IRA contribution = research –Post year end IRA contribution = Planning

4. Primary Authorities Primary sources of tax law rules: –Legislative Constitution Internal Revenue Code Treaties –Administrative Regulations Revenue Rulings Revenue Procedures Other IRS pronouncements –Judicial Tax Court, U.S. District Courts, Court of Claims – trial courts Circuit Courts, Supreme Court – appeals courts

5. Secondary Authorities These are not the law – locate, explain, interpret –Tax services – RIA, CCH –Textbooks –Legal Periodicals and Journals –Question: A client asks you whether he may exclude from his income the reimbursement he receives from his employer for public parking? The employer provides the reimbursement because there is not enough space for all employees in the employer provided parking lot. How do you find your answer? On what authority may you rely for your answer?

6. Locating the Answer Answer: Start with Secondary authorities – CCH Tax Service – Federal Tax –Tax Research Consultant – perform search – “Employer provided parking” COMPEN: 36.356 – Iemployer provided parking is a Qualified Transportation Fringe. What is employer provided parking and does it include cash reimbursement – Per TRC editor/author - “Parking provided by an employer includes parking that the employer pays for, either directly to a parking lot operator or by reimbursement to the employee, or provides on premises it owns or leases.93 “parking 93 Footnotes 89 and 93 cite to Code and Regulations – access them and read: 132(f)(3) CASH REIMBURSEMENTS. --For purposes of this subsection, the term "qualified transportation fringe" includes a cash reimbursement by an employer to an employee for a benefit described in paragraph (1). Reg. Sec. 1.132-9, Q&A 4(d) Parking is provided by an employer if -- (1) The parking is on property that the employer owns or leases; (2) The employer pays for the parking; or (3) The employer reimburses the employee for parking expenses (see Q/A-16 of this section for rules relating to cash reimbursements See Q&A 16 - A-16. (a) In general. The term qualified transportation fringe includes cash reimbursement by an employer to an employee for expenses incurred or paid by an employee for transportation in a commuter highway vehicle or qualified parking. …The reimbursement must be made under a bona fide reimbursement arrangement which meets the rules of paragraph (c) of this Q/A-16. Note: The answer must always be traced to the Code & Regs but a tax service is an excellent way to start.. Note: the regulations tell you what may not constitute qualified employer provided parking.

7. Tax Defined A payment that is remitted to the government and which: –Is not a penalty or fine –Is compulsory –Is to be used for the public good and not in exchange for a specific benefit.

8. Legislative History – The Power To Tax Income U.S. Constitution – Article 1, Sec. 4, Cl. 1 – power to tax to provide for common defense and general welfare 2 types of taxes –Direct – required to be apportioned among the states in accordance with a census Tax on ownership of property –Indirect – must be uniform throughout the states. Tax on an event/transaction Is an income tax a direct tax and is it constitutional per Article 1, Sec. 4, Cl. 1?

9. Income Tax – Constitutional A direct tax is either a capitation tax (based on head count) or a tax imposed on the ownership of property (real property tax). –In a 1895 Supreme Court decision, Pollock v. Farmers’ Loan and Trust Co., the court held that a tax on the income derived from the ownership of property (just as a tax on the property itself) is a direct tax, and therefore, unconstitutional unless apportioned. An apportioned tax is one based on census. As a tax on the income derived from the ownership of property was not based on a census of the States – it was unconstitutional Enter the 16 th amendment.

10. The Legislative Process Bill introduced to House – Ways and Means Committee –Ways and Means Committee – public hearings and debate on merits Bill approved by simple majority of committee sent to floor of House –Bill voted on floor of House after closed rule debate If approved sent to Senate Senate version of bill – Finance Committee – Finance Committee – public hearings and debate on merits If approved sent to floor of Senate for full vote –Bill voted on floor of Senate after open rule debate If approved and Senate and House versions similar – Senate version sent to House for concurring vote and then onto President for signature If approved and Senate and House versions different – sent to Conference Committee to draft compromise legislation. –Compromise legislation – voted on by both House and Senate and if approved off to President for signature.

11. Legislative Process – Presidential Signature Bill delivered to President’s desk Interim period – 10 day period between date delivered to President and day signed into law. –Joint Committee on Taxation reviews law for errors and inconsistencies –Concurrent Resolution – vote of House and Senate to ratify corrections within that 10 day period Purpose – error free bill signed by President Presidential actions with respect to bill –Sign –Veto –Interim period lapse – bill becomes law Unless Congress adjourns within 10 day period – pocket veto

12. Approved Tax bill = Tax Law An approved bill becomes a law - legislation. This law is part of the U.S. Statutes – statutory law. The U.S. Statutes are broken down and codified (organized) according to topic and assigned a Title Number. –Federal Tax Law is in Title 26 of the U.S. Code, Title 26 further broken down into – subtitles, parts, subparts, paragraphs, subparagraphs, sections and subsections Title 26 of the U.S. Code is commonly known under what topical name? THE INTERNAL REVENUE CODE

13. Tax Code and Legislative Intent Provisions of the Tax Code difficult to understand and interpret: –Sec. 119 (a) Meals and lodging furnished to employee, his spouse, and his dependents, pursuant to employment There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him, his spouse, or any of his dependents by or on behalf of his employer for the convenience of the employer, but only if— –(1) in the case of meals, the meals are furnished on the business premises of the employer, or –(2) in the case of lodging, the employee is required to accept such lodging on the business premises of his employer as a condition of his employment. Query: What is meant by meals “furnished on the business premises”? Where does the tax professional look to interpret the words of a Code provision?

14. Tax Code and Legislative Intent (Cont’d) –Regulations –Judicial Decisions –Committee Reports – especially for new legislation Legislative intent –House Ways and Means Committee Report –Senate Finance Committee Report –Conference Committee Report –Joint Committee on Taxation Report – The Blue Book

15. What is meant by furnished on the business premises? Answer: CCH Tax Research Consultant – search “meals furnished business premises.” – Recall that all answers must be traced to the Code and interpretations of the Code. Refers to COMPEN: 36,504 – “Meals and lodging must be furnished on the employer's business premises to be excluded from the employee's gross income.22 Business premises generally means the place of the employee's employment.23” furnishedbusiness premises22Business premises23 Fn 23 - Reg. Sec. 1.119-1(c) - Business premises of the employer - (1) In general. --For purposes of this section, the term "business premises of the employer" generally means the place of employment of the employee. For example, meals and lodging furnished in the employer's home to a domestic servant would constitute meals and lodging furnished on the business premises of the employer.

16. What is meant by furnished on the business premises? (Cont’d) To be certain – refer to case law interpretations (see fn. 26) – Commr v. Charles N. Anderson, (CA- 6), 371 F2d 59, 12/23/66, Rev'g Tax Court, CCH Dec. 26,806, in which a motel manager was provided employer lodging and meals in a single family residence two blocks (a 4 minute) walk from the motel. The question was whether the taxpayer could exclude the value of the employer provided lodging and meals from income and whether they were provided on the business premises? The court states the following: (note reference to legislative intent in interpreting the Code provision)

17. What is meant by furnished on the business premises? (Cont’d) –“Returning to the decision of the Tax Court, we are of the opinion that the Tax Court arrived at an erroneous construction of the phrase "business premises". It has construed the phrase as requiring only that the meals be furnished or the lodging be provided upon property acquired by the employer from business motives, provided that such property is located in the vicinity of or "within two short blocks" of other property upon which the employer conducts his business…..

18. What is meant by furnished on the business premises? (Cont’d) –To make ownership by the employer from business motives the test of a "business premises" is to fail to provide for instances of meals furnished or lodging provided on non-owned premises, contrary to the expressed Congressional intent, while at the same time opening wide a tax loophole contrary to any expressed Congressional intent.

19. What is meant by furnished on the business premises? (Cont’d) –To make "two short blocks" or nearness to other business property of the employer the test is to disregard the word "on" as contained in the phrase "on the business premises of the employer", thereby rendering uncertain that which is certain and requiring litigation in each case to determine what may be sufficiently near under the circumstances of the particular case. Had Congress so intended, it would appear that it could readily have used the words "in the vicinity of" or "nearby" or "close to" or "contiguous to" or similar language, rather than say "on" the business premises.”

20. What is meant by furnished on the business premises? (Cont’d) Holding: The phrase "on the business premises of the employer", as used in Sec. 119, means that in order for the value of meals or lodging to be excluded from gross income, the meals or lodging must be provided either at a place where the employee performs a significant portion of his duties or on the premises where the employer conducts a significant portion of his business. Thus, the rental value of a house and the value of food furnished by taxpayer's employer at an employer-owned residence located "two short blocks" from the motel which taxpayer managed for the employer were includable in taxpayer's income.

21. Tax Acts – To codify or not to codify? Tax Legislation that becomes law is accorded an official name: –Tax Increase Prevention Act of 2007 All tax legislation generally is included in the Internal Revenue Code and may be found by Section Number. Some Tax Acts are not codified. –Why are these rules not included in the Internal Revenue Code and where does the tax practitioner find them if doing research? Transition Rules Sunset Provisions Effective Dates

22. Evaluating Primary Legislative Authorities All tax legislation must be constitutional to be valid. The hierarchy of authority in answering a tax question: –The ultimate authority – the Internal Revenue Code. –Tax Acts not included in the Code. –Tax Treaties. –Legislative Intent – Committee Reports.

23. Catching the Tax Practitioner/Preparer The importance of determining appropriate tax authority is reinforced by tax practitioner penalties A practitioner faces penalties for taking a position on a taxpayer’s return with respect to a tax item that results in a substantial understatement of the tax liability unless –For undisclosed positions, the preparer had a reasonable belief (>50% likelihood of success on the merits, if challenged) for taking the position on the return and position was not disclosed to taxpayer nor documented. –The position is disclosed and the preparer has a reasonable basis for taking the position which is disclosed to taxpayer and documented Or substantial authority exists for taking the position and the difference in preparer and taxpayer penalty standards has been disclosed to taxpayer and documented.