Constitution

and
Legislative Sources
Chapter 3
TAX POLICY

 Who establishes “Tax Policy?”

PRINCIPLES OF GOOD TAX
POLICY
Annette Nellen, San Jose State University
Presented to Tax Section of AICPA at Section
meeting in Van Couver, B.C., June 15, 2001
 1. Similarly situated taxpayers should be
taxed similarly
 2. Tax rules should specify when the tax is
to be paid, how it is to be paid, and how the
amount to be paid is to be determined
Tax Policy (cont’d)
 3. A tax should be due at a time or in a
manner that is most likely to be convenient
for the taxpayer
 4. The costs to collect a tax should be kept
to a minimum for both the government and
taxpayers.
Tax Policy (cont’d)
 5. The tax law should be simple so that
taxpayers can understand the rules and
comply with them correctly and in a cost-
efficient manner
 6. The effect of the tax law on a taxpayer’s
decisions as to how to carry out a particular
transaction or whether to engage in a
transaction should be kept to a minimum
Tax Policy (cont’d)
 7. The tax system should not impede of
reduce the productive capacity of the
economy
 8. Taxpayers should know that a tax exists
and how and when it is imposed upon them
and others
Tax Policy (cont’d)
 9. A tax should be structured to minimize
noncompliance
 10. The tax system should enable the
government to determine how much tax
revenue will likely be collected and when
What do We Need to Know About
“Authorities”
 What they are
 Their source
 Where to find them
 How to use them
What We Must Determine
 Their

reliability
Primary Sources of Federal Tax Law
 First: Statutory sources
 The U.S. Constitution
 Tax Treaties
 The Internal Revenue Code (IRC)
 Second: Administrative sources (next chapter)
 Treasury Regulations
 Revenue Rulings
 Third: Judicial sources (chapter 5)
 The Court system
Secondary Sources of Federal Tax Law

 Tax services
 Tax journals and newsletters
 Tax textbooks and treatises
The U.S. Constitution (First
Primary Source)
 Constitutionality
 Sixteenth Amendment: The Congress shall

have the 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.”
 Tax protestors

 Penalties
Penalties
 Frivolous return - §6702 - $500 (there is a
proposal under current consideration to
increase this to $5,000)
 Argument that tax is “Unconstitutional”

 Don’t like how tax $$ are being spent

 Don’t believe in supporting military and

violence
Penalties (Cont’d)
 Frivolous Petition (to Tax Court) - §6673
 $25,000
 Applied by the Tax Court
Petition filed primarily to delay
revenue collection process
Petitioner’s grounds are frivolous

TP unreasonably failed to pursue

available administrative remedies

Tax Treaty, or “Convention”
 What is it? A negotiated agreement
between two countries that attempts to
determine the tax treatment of entities
subject to tax in both countries.
 Purpose? Attempt to avoid “double
taxation,” - taxing an entity on the same
income in both countries.
Treaty (Cont’d)
 Negotiated by the Executive Branch (U.S.
Constitution, Article II, Sec. 2)
 Need not be ratified by Congress
 IRC §894 (a)(1) “The provisions of this
title shall be applied to any taxpayer with
due regard to any treaty obligation …….
Treaty (Cont’d)
 Which takes precedence when treaty and
statute conflict? Treaty or IRC?
 Generally, the most recently adopted is
observed.
 “Competent Authority”
Treaty (Cont’d)
 IRC §894 (a)(1) “The provisions of this
title shall be applied to any taxpayer with
due regard to any treaty obligation …….
 IRC §7852(d) “For purposes of
determining the relationship between a
provision of a treaty and … (the IRC) …,
neither the treaty nor the law shall have
preferential status ….. .”
Treaty (cont’d)
Exception:
§7852(d): Any treaty negotiated before
August 16, 1954 that is still in effect (not
superceded or otherwise terminated) takes
precedence over any amendment to Title 26
enacted after that date.
Internal Revenue Code (IRC)
The Legislative Process
1. U.S. House of Representatives
1. House Ways and Means Committee
1. Full House
2. Unites States Senate
1. Senate Finance Committee
1. Full Senate
3. Joint Conference Committee
4. Both Houses again
5. President’s signature
Internal Revenue Code (cont’d)
 Bill passed by Congress is –
 Public Law 105-206

 105th Congress

 206th bill passed by that Congress

Internal Revenue Code (cont’d)
Reveals the intent of Congress, reason, logic
for the proposals.
 House, Senate, and Joint Conference

Committee each will all have their own

Committee Reports.
 (Can be found on the web)
IRC (Cont’d)
 Public Law – P.L. 105-206
 H.R. 2676, Internal Revenue Service

Restructuring and Reform Bill passed 6/25/98,

preceded and revised became
 P.L. 105-206 , Internal Revenue Service

Restructuring And Reform Act of 1998

 Effective date
 Committee Reports
 Legislative History
Internal Revenue Code (cont’d)
“Title 26 of the United States Code” – the
IRC
1. Subtitles
A. Income Taxes
B. Estate and Gift Taxes
C. Employment Taxes
D. Etc.
2. Parts
3. Chapters
Internal Revenue Code (cont’d)
2. Parts
I. Tax on Individuals
II. Tax on Corporation
III. Changes in Rates during a Taxable Year.
Etc.
3. Chapters
4. Subchapters
Internal Revenue Code (cont’d)
3. Chapters
1. Normal Taxes and Surtaxes
2. Self-Employment Tax
11. Estate Taxes
4. Subchapters
5. Sections
Internal Revenue Code (cont’d)
4. Subchapters
A. Determination of Tax Liability
B. Computation of Taxable Income
F. Tax-Exempt Organizations
K. Partnerships and Partners
And, finally, the most important of all:
5. Section
Internal Revenue Code (cont’d)
5. Section
§61 Gross income defined
§151 Allowance of deductions for personal
exemptions
§162 Trade or business expenses
§212 Expenses for production of income
Questions?