Chapter 1
Understanding and Working
With the Federal Tax Law
Corporations, Partnerships,
Estates & Trusts
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1

Competing Objectives Result in a
Complex Law Structure
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Revenue Needs
Economic Considerations
Social Considerations
Equity (Fairness) Considerations
Political Considerations

Economic Considerations
(slide 1 of 2)

• Control the economy (e.g., favorable depreciation deductions for purchase of business property)
• Encourage certain activities (e.g., research and development deductions and credits)

Economic Considerations
(slide 2 of 2)

• Encourage certain industries (e.g., agriculture and natural resources incentives)
• Encourage small business (e.g., ordinary loss deduction on stock in small business)

Social Considerations
(slide 1 of 2)

• Tax-free medical coverage provided by employers to encourage health insurance
• Deferred tax treatment of certain retirement funds to encourage saving for retirement

Social Considerations
(slide 2 of 2)

• Deduction for charitable contributions to encourage funding of socially desirable programs by private individuals and companies • Disallowed deductions for expenditures against public policy (e.g., illegal bribes, kickbacks) Equity Considerations
(slide 1 of 4)

• Alleviate the effect of double taxation:
– Deduction for state and local taxes
– Credit or deduction for certain foreign taxes
– Deduction for dividends received by corporations to prevent triple taxation

Equity Considerations
(slide 2 of 4)

• Wherewithal to Pay concept
– Defers taxation when a taxpayer’s economic position has not changed
– e.g., Exchange of assets might result in gain but no cash, so some tax may be deferred

Equity Considerations
(slide 3 of 4)

• Annual accounting periods
– In some cases, e.g., start-up businesses, a revenuegenerating cycle may be greater than the 12 month maximum tax reporting period.
– To accommodate this, net operating loss rules allow losses from one year to be used in another year. This minimizes the adverse impact of arbitrary reporting periods.

Equity Considerations
(slide 4 of 4)

• Inflation adjustments are included in tax rate schedules. If earnings increase solely by costof living amounts, taxes will not be imposed at higher rates on the increase.

Political Considerations
• Special interest legislation
• Response to public opinion (political expediency) • State and local influences

Agencies Influencing Tax Law
(slide 1 of 4)

• Internal Revenue Service (IRS)
– Works to get Congress to “close loopholes”
– Publishes “statutory regulations” authorized by
Congress and given force of law
– Publishes other regulations which outline the IRS’ position on certain issues

Agencies Influencing Tax Law
(slide 2 of 4)

• Aids to IRS in collecting revenue:
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Tax Return Audits
Information reporting (W-2s and 1099s)
Withholding
Interest and penalty assessments

Agencies Influencing Tax Law
(slide 3 of 4)

• Courts
– Judicial concepts
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Substance over form
Arm’s length
Continuity of interest
Business purpose

Agencies Influencing Tax Law
(slide 4 of 4)

• Courts
– Judicial rulings
• Some rulings highlight undesirable aspects of present law, which may lead Congress to adopt a change in law

Statutory Sources of Tax Law
• Internal Revenue Code
– Codification of the Federal tax law provisions in a logical sequence
– Have had three codes:
• 1939, 1954, 1986

Legislative Process For Tax Bills

Joint Conference Committee Process

Arrangement of the Code
• Subtitle A—Income Taxes
– Chapter 1. Normal Taxes and Surtaxes
• Subchapter A. Determination of Tax Liability
– Part I. Tax on Individuals Sections 1 to 5 (Various Titles)
– Part II. Tax on Corporations Sections 11 to 12 (Various
Titles)

Example Code Citation
• § 2(a)(1)(A)
§ = Abbreviation for “Section”
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2 = Section number
– (a) =