1. Chapter 1 An Introduction to Taxation

2. 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

3. 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

4. History Of Taxation First Federal Income Tax in 1861 Repealed after the Civil War Reinstated in 1894

5. 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

6. Sixteenth Amendment 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.

7. 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

8. Revenue Sources

9. 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.

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

11. Corporate Tax Rates Stair-step pattern of progression – Tends to benefit small corporations

12. Corporate Tax Rates First $50,00015 % Of Taxable Income Over $50,000 But Not Over $75,000$7,500 + 25% Of Taxable Income Over $75,000 But Not Over $100,00013,750 + 34% Of Taxable Income Over $75,000 Over $100,000 But Not Over $335,000 $22,250 + 39% Of Taxable Income Over $100,000 Over $335,00034% Of Taxable Income Over $10,000,000 But Not Over 15,000,000 3,400,000 + 35% Of Taxable Income Over $15,000,000 But Not Over $18,333,333 $5,150,000 + 38% Over $15,000,000 Over $18,333,33335% Of Taxable Income

13. Marginal, Average, & Effective Tax Rate 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

14. Types Of Taxes State Income Tax Franchise Tax Wealth Transfer Taxes

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

16. Criteria For Tax Structure Equity Certainty Convenience Economy –Businesses spent an estimated 102.5 billion to comply with federal tax law and 80 billion to comply with state and local taxes –Cost individuals 86.1 billion

17. Objectives Of The Federal Income Tax Law Economic – Raise Revenues for Government Operations – Stimulate Private Investment – Reduce Unemployment – Mitigate Effects on Inflation – Encourage certain activities & industries – Social objectives

18. 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

19. Tax Law Sources Legislative Executive (Administrative) Judicial

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

21. 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

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

23. Administration Of Tax Law Organization of the Internal Revenue Service Enforcement procedures Selection of returns for audit –Self assessment and voluntary compliance –Discriminant Function System (DIF) DIF system generates a “score” for a return based on the return to generate additional tax revenue The returns are manually screened by experienced IRS personnel who decide which returns warrant further examination. Less than 1% of all individual returns are selected for examination each year

24. Administration Of Tax Law Statute of limitations –General rule 3 years from the later of the date the tax return was actually filed or it’s due date –Six year statue if taxpayer omits items of gross income that in total exceed 25% –Indefinite if a fraudulent return is filed or no return is filed Interest Penalties Administrative Appeal Procedures

25. Components Of A Tax Practice Tax compliance & procedure Tax research Tax planning and consulting Financial planning

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