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INTRODUCTION TO THE FEDERAL INCOME TAX

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INTRODUCTION TO THE FEDERAL INCOME TAX Powered By Docstoc
					 Our First Objective:
Understand some basics of:
  – Primary Tax Authority
     • The tax legislative process
     • The organization of the IRC
     • Some of the more important
       administrative authorities
     • Judicial authority
  – Secondary authority
The Legislative Process for Tax Law
House Ways &                               Senate
                    House of
Means                                      Finance
                    Representatives
Committee                                  Committee


  Tax
  Law        IRC
                                             Senate


                   Back to the        Joint Conference
 President         House &            Committee
                   Senate
        Legislative Process

Bill Number (Chronological order)
  – HR 3838
  – S 2141


Public Law (Number & Name)
  – Tax Reform Act of 1986
  – P.L. 99 - 514
            Committee Reports
•   Ways and Means Committee
•   Senate Finance Committee
•   Joint Conference Committee
•   All Published in:
    – IRB (CB)
    – CCH & RIA
• The Blue Book
    – The General Explanation…
    – JCT
 A Bit of History
• 1913 - 1939:
  – Free standing revenue acts
• 1939 - 1954:
  – The IRC of 1939
• 1954 - 1986:
  – The IRC of 1954
• 1986 - ? :
  – The IRC of 1986
      Citing a Code Section
(Constructive Ownership of Stock)
Sec. 318(a)(1)(A)(i)

     Section number
        Subsection
            Paragraph
               Subparagraph
                    Clause
      Administrative Authority
• Treasury Regulations
  –   Statutory Regulations
  –   Interpretative Regulations
  –   Proposed Regulations
  –   Final Regulations
  –   Temporary Regulations
       Regulation Citation
Reg. Sec. 1.262-1(b)(2)
                      Type of regulation
                      Related Code Section
                      Regulation Number
                      Regulation Paragraph
                      Regulation Subparagraph
               Revenue Rulings
• Published Rulings
  –   Cumulative Bulletin (C.B)
  –   Precedent
  –   Rev. Rul. 94-79, 1994-2 C.B. 409
  –   Contents:
       •   Issue
       •   Facts
       •   Law & Analysis
       •   Holding
       Private Letter Rulings

• Not Precedent -
• PLR 9450056
                    Issued in 1994
                    Issued in the 50th week of the year
                    The 56th ruling issued that week
      Other Administrative
           Authority
• Revenue Procedure (Rev. Proc)
• Technical Advice Memorandum (TAM)
• General Chief Counsel Memoranda
  (GCM)
• IRS Internet Site
  http://www.irs.ustreas.gov
             Judicial Authority
                           U.S.
                         Supreme
                          Court
Appellate
Courts
                                        U.S. Ct. of
                                        Appeals for
                U.S. Circuit Courts     the Federal
                of Appeal               Circuit


Trial                         U.S         U.S.
Courts      U.S Tax
             Court           District    Claims
                             Court       Court
                 Tax Court
•   Trial court that hears only tax cases
•   National court with 19 judges
•   Regular Decisions
•   Memorandum Decisions
•   The Golsen rule
•   Small cases division
       Tax Court Citations
Regular Decision

DeCou, Charles H., 103 T.C. 80 (1994)
                                        Case Name
                                        Vol.# of Tax Court
                                          Reporter
                                         Tax Court Reporter
                                         Page number
                                         Year of opinion
          Tax Court Citations
Memorandum Decision
Nichols, Walter J., RIA T.C. Memo Dec. . ¶ 95,291

 Case Name         Reference to RIA      Paragraph
                   Tax Court             Number
                   memorandum
                   Decision
            U.S. District Court
• General jurisdiction - Jury trial available
• Must pay tax and sue for refund
• Reporters:
   – Federal Supplement (F. Supp.)
   – Federal Reporter
   – American Federal Tax Reports (AFTR)
   – U.S. Tax Cases (USTC)
• Cite:
   – Simons-Eastern Co. v. U.S., 73-1 USTC ¶9279 (D.Ct.Ga.,
     1972)
   – Simons-Eastern Co. v. U.S., 31 AFTR2d 73-640 (D.Ct.Ga.,1972)
   – Simons-Eastern Co. v. U.S., Fsupp. 1003 (D.Ct.Ga., 1972)
           U.S. Court of Federal Claims
•   Jurisdiction - Claims against the U.S.
•   Must pay tax deficiency first
•   16 Judges
•   Cite:
    – Apollo Computer Inc v. U.S. 95-1 USTC ¶50,015(Fed. Cl. 1994)
    – Apollo Computer Inc v. U.S. 74 AFTR2d 94-7172 (Fed. Cl. 1994)
      Apollo Computer Inc v. U.S. 32 Fed. Cl. 334 (Fed. Cl. 1994)
           Circuit Court of Appeals
• 11 geographical circuits
• Circuit for D. C.
• Federal Circuit



Cite:
        Finkbohner, Jr. v. U.S., USTC ¶9393 (CA-11, 1986)
        Finkbohner, Jr. v. U.S., AFTR2d 86-1400 (CA-11, 1986)
        Finkbohner, Jr. v. U.S., 788 F.2d 723 (CA-11, 1986)
Circuit Courts of Appeals
               Supreme Court


Cite:
–   U.S. v. The Donruss Co. 69-1 USTC ¶9167 (USSC, 1969)
–   U.S. v. The Donruss Co. 23 AFTR2d 69-4128 (USSC, 1969)
–   U.S. v. The Donruss Co. 89 S.Ct. 501 (USSC, 1969)
–   U.S. v. The Donruss Co. 393 U.S. 297 (USSC, 1969)
–   U.S. v. The Donruss Co. 21 L.Ed.2d495 (USSC, 1969)
Working with the Internal
 Revenue Code of 1986

   Section 1201   Section 1202
           Organization of the IRC
•   Subtitles (A - I) A = Income Taxes
•   Chapters (1 - 98) 1 = Norman Taxes
•   Subchapters (A - V) in Chapter 1
•   Parts (Roman Numerals)
•   Subparts (Capital Letters)
•   Sections (Numbers*)
•   Subsections (small letters*) (a), (b), (c)
•   Paragraphs (Numbers)
• Subparagraphs (Capital Letters)
• Clause (i, ii, iii)
             IRC Subtitles
A Income Tax
B Estate Tax
C Employment Taxes & Collection of Income Tax
D Misc. Excise Taxes
E Alcohol, Tobacco, and Other Excise Taxes
F Procedure and Administration
G Joint Committee on Taxation
H Financing Presidential Elections
I Trust Fund Code
J Coal Industry Health Benefits
K Group Health Plans
  Reading the IRC
• Understand the format of the code
  – cross references, limitations, etc.
• General rule                            Sec. 1245

  – Exceptions and conditions
  – Definitions
• Little words mean a lot
  – more than -- less than -- before ….
• Don’t read the code in a vacuum
          Reading the Tax Code
• Determine the limitations and exceptions to a
  provision.
• Just because a section fails to mention an item
  does not mean that the item is excluded
• Read definitional clauses carefully
• Do not overlook small words such as and and
  or.
• Read the section completely; do not jump to
  conclusions.
            Reading the Code
• Watch out for cross-referenced and related
  provisions -- many sections of the code are
  interrelated
• Conflicts among sections do arise.
• Be alert for hidden definitions; a term in a
  particular section may be defined in the same
  section or in a separate section
• Not all answers can be found in the Code
• Note measuring words such as less than 50%,
  more than 50%, and at least 80%.
               Cross References
           In the Code Section Itself
Example: Sec. 302
(f) Cross references
    For special rules relating to redemption--
(1) Death Taxes.--Of stock to pay death taxes,
   see section 303.
(2) Section 306 Stock.--Of section 306 stock, see
   section 306.
(3) Liquidations.--Of stock in complete
   liquidation, see section 331.
        Cross Reference Example
  Tax Analysts One Disc (for each code section)
Cross References (for section 302)
Disposition of stock to which this section applies, see section 306
of this title.
Distribution of property, see section 301 of this title.
Earnings and profits, special rule for certain redemptions,
see section 312 of this title.
Partial liquidation defined, treatment of certain redemptions,
see section 346 of this title.
Redemption through use of related corporations,
see section 304 of this title.

Section Referred to in Other Sections (for section 302)
This section is referred to in sections 48, 301, 304, 306, 312, 318,
341, 562, 857, 1059, 1246, 1248, 1368, 1445 of this title.
 Interpreting Statutory Construction

• If a literal interpretation makes the statute
  absurd or ineffective -- so is the
  interpretation
• Subparts of a section should generally be
  read together
• In a list of items, any item not listed is
  generally deemed to be omitted purposely
• Words may have different meanings in other
  parts of the IRC
                    Section 302(a)
(a) General rule
If a corporation redeems its stock (within the meaning of section
317(b)), and if paragraph (1), (2), (3), or (4) of subsection (b)
applies, such redemption shall be treated as a distribution in part
or full payment in exchange for the stock.
                    Sec. 302(b)(1)
(b) Redemptions treated as exchanges
(1) Redemptions not equivalent to dividends
Subsection (a) shall apply if the redemption is not essentially
equivalent to a dividend.
                Sec. 302(b)(2)(A) & (B)
(2) Substantially disproportionate redemption of stock
(A) In general
Subsection (a) shall apply if the distribution is substantially
disproportionate with respect to the shareholder.
(B) Limitation
This paragraph shall not apply unless immediately after the
redemption the shareholder owns less than 50 percent of the total
combined voting power of all classes of stock entitled to vote.
                            Sec. 302(b)(2)(C)
C) Definitions
For purposes of this paragraph, the distribution is substantially disproportionate if-
-
(i) the ratio which the voting stock of the corporation owned by the shareholder
immediately after the redemption bears to all of the voting stock of the corporation
at such time,
is less than 80 percent of--
(ii) the ratio which the voting stock of the corporation owned by the shareholder
immediately before the redemption bears to all of the voting stock of the
corporation at such time.
For purposes of this paragraph, no distribution shall be treated as substantially
disproportionate unless the shareholder's ownership of the common stock of the
corporation (whether voting or nonvoting) after and before redemption also meets
the 80 percent requirement of the preceding sentence. For purposes of the
preceding sentence, if there is more than one class of common stock, the
determinations shall be made by reference to fair market value.
                     Sec. 302(b)(2)(d)



(D) Series of redemptions
This paragraph shall not apply to any redemption made pursuant
to a plan the purpose or effect of which is a series of redemptions
resulting in a distribution which (in the aggregate) is not
substantially disproportionate with respect to the shareholder.
                      Sec. 302(b)(3)

(3) Termination of shareholder's interest
Subsection (a) shall apply if the redemption is in complete
redemption of all of the stock of the corporation owned by the
shareholder.
                        Sec. 302(b)(4)


(4) Redemption from noncorporate shareholder in partial
liquidation
Subsection (a) shall apply to a distribution if such distribution is--
(A) in redemption of stock held by a shareholder who is not a
corporation, and
(B) in partial liquidation of the distributing corporation.
                      Sec. 302(b)(5)


(5) Application of paragraphs
In determining whether a redemption meets the requirements of
paragraph (1), the fact that such redemption fails to meet the
requirements of paragraph (2), (3), or (4) shall not be taken into
account. If a redemption meets the requirements of paragraph (3)
and also the requirements of paragraph (1), (2), or (4), then so
much of subsection (c)(2) as would (but for this sentence) apply in
respect of the acquisition of an interest in the corporation within
the 10-year period beginning on the date of the distribution shall
not apply.

				
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