Notes to accompany Chapter 1

Sources of Tax Law

The Constitution

The Constitution is the basic law of the land, and the statutes passed by Congress are valid only if they are consistent with it. For much of the history of the United States there was no income tax and there was some controversy over whether the Constitution permitted one. This controversy was resolved when the Sixteenth Amendment was passed in 1913.

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

U.S. Constitution, Amendment XVI (1913)

Congress: The Internal Revenue Code

Congress implemented power granted to it by the Constitution by enacting the Internal Revenue Code, sec. 61 of which provides

Sec. 61. Gross Income Defined.

(a) General Definition. - Except as otherwise provided in this subtitle, gross income means income from whatever source derived, including (but not limited to) the following items:

(1) Compensation for services, including fees, commissions, fringe benefits, and similar items; (2) Gross income derived from business; (3) Gains derived from dealings in property; (4) Interest; (5) Rents; (6) Royalties; (7) Dividends; (8) Alimony and separate maintenance payments; (9) Annuities; (10) Income from life insurance and endowment contracts; (11) Pensions; (12) Income from discharge of indebtedness; (13) Distributive share of partnership gross income; (14) Income in respect of a decedent; and (15) Income from an interest in an estate or trust.

The Department of Treasury: Regulations and Rulings

The legislative branch of government (Congress) enacts the law, but it does not administer, or execute it. That task falls to the executive branch, specifically to the Department of Treasury and its subdivision the Internal Revenue Service. The Treasury writes regulations informing taxpayers how it interprets and intends to administer the laws passed by Congress. In some cases, it fills in what it perceives as gaps in the law. For example, if you find $1 on the floor of the Metro, is that income? Sec. 61 of the Code provides a non-exclusive list of items of income (“including (but not limited to)”), but found money is not on the list. The Treasury provides its answer in the regulations:

Regs. 1.61-14. Miscellaneous items of gross income. - (a) In general. In addition to the items enumerated in section 61(a), there are many other kinds of gross income. For example, punitive damages such as treble damages under the antitrust laws and exemplary damages for fraud are gross income. Another person's payment of the taxpayer's income taxes constitutes gross income to the taxpayer unless excluded by law. Illegal gains constitute gross income. Treasure trove, to the extent of its value in United States currency, constitutes gross income for the taxable year in which is it reduced to undisputed possession.

The “1” in 1.61-14 means the regulation concerns the income tax, as opposed to the estate and gift tax, or some other tax. The “.61” means that it interprets sec. 61 of the Code.

The Courts

If the taxpayer and the IRS disagree about the amount of tax owed and are unable to resolve their differences through negotiation, they may take the matter to court. The decision of the court regarding the issue in question sets a precedent and becomes another source of tax law.

Tax Base and Tax Rate

Any tax is the product of the rate and the base (the thing that is taxed), but what will the base be? We might tax a particular transaction, like the sale of an item at retail, and most states do indeed impose a sales tax.1 The base is the price of the thing sold2 and the rate varies from state to state. If you buy a pair of shoes in the District of Columbia for $100, the sales tax is

Rate x Base = Tax
.06 x $100 = $6.00

In addition to taxing