What are the 3 sources of tax law and provide an example of each. Which has the highest authority?
1. Legislative: IRC (Internal Revenue Control); tax law signed by Congress
•primary, most authoritative source
•tax law sources: IRC & Congressional Committee Reports
a. Treasury Department
•Provide letter writing ruling: binding TP that requested ruling; cost $10k; binding on one TP
•Tax law source: Income tax regulations, Revenue Rulings, Revenue Procedures, & Letter Rulings
3. Judicial: court decisions (tax law source)
•tax court: tax judges, no pmt. required
•regular court: jury, innocent spouse, pay assessment & sue IRS for refund
What are the steps in the legislative process?
1. Treasury studies prepared on needed tax reform
2. President makes proposals to Congress
3. House Ways & Means Committee prepares House bill
4. Approval of House bill by the House of Representatives
5. Senate Finance Committee prepares Senate bill
6. Approval of Joint Conference Committee bill by both the House & Senate
7. Compromise bill approved by a Joint Conference Committee
8. Approval of Joint Conference Committee bill by both the House & Senate
9. Approval or veto of legislation by the President
10. New tax law & amendments incorporated into the Code.
Progressive Tax Rate
Structure is one where the rate of tax increases as the tax bases increases
•Federal income tax, state income tax, federal estate tax, federal corporate income tax, state corporate income tax
Proportional Tax Rate
(Flat tax) rate of tax is the same for all TPs regardless of the level of their tax base
•State corporate income tax, personal property taxes, real estate taxes, excise taxes (sin taxes), duties (export/import), local and state sales taxes
Regressive Tax Rate
decreases with an increase in the tax base
•not consistent with he fairness of the income tax
•FICA (SS), unemployment taxes
TPs who are not similarly situated should be treated differently
•provides that the taxation should be borne upon those who have the ability to pay the tax based on income or wealth
•progressive tax structure founded on vertical equity premise
Vertical equity means that
TPs with larger amounts of income should pay more tax than TPs with lower amounts of income
Which of the following taxes is progressive?
a. sales tax
b. excise tax
c. property tax
d. income tax
Gift Tax "transfer tax"
based on FMV of the transfer on the date of the transfer
Gift Tax paid on lifetime giving:
1.) giver can give $5M in their lifetime tax free (Oprah)
2. Giver has $13k annual exclusion per donor per donee
•once per year
•$14k gift--><$13k on annual exclusion
$1k taxable gift
$4,999,000 of lifetime exclusion
MFJ: $26k from couple donor
gift splitting: $26k to a married couple
married couple giving to married couple
•$52k gift tax free; FMV on date of gift
3. Basis for donee is the donor's basis
ex: Exxon stock: $10k FMV of gift: $100k
What is the taxable gift? $87 (100-13)
giver pays the tax; no tax due from the donee but must fill out a gift tax return
•When the donee sells the stock for $100k
$90k gain income upon sale
Who pays the taxes due on gifts and estates?
tax due is paid by the giver
•paid on a gift tax return or an estate tax return
•there is no income to the receiver bc gifts are not considered income
•5M exclusion (only living & deat; can't get second $5M at death; use what's left)
•Tax paid at FMV at death
•Step up basis: bais steps up to when a donee receives estate:
FMV at death:
Vincent is married. What are the total taxable gifts subject to the unified transfer tax?
$15k cash gift to wife
Gift of automobile valued at $25k to his adult son
Gift of golf clubs at $5k to a friend
$10k contribution to church
Car $12k taxable ($25k-13k)
tax applied to an incremental amount of taxable income that is added to the tax base
•applicable to next $1 of income or deduction for a TP
Average Tax Rate
computed by dividing the total tax liability by the amount of taxable income
•When calculating don't think about deductions, those are there to trick you.
Effective Tax Rate
total liability divided by total economic income
•total economic income is all types of income that a TP has for the year (tax exempt bonds, salary)
Helen, who is single, has a taxable income of $125,000 is considering purchasing a residence that will provide a $10,000 tax deduction for property taxes and mortgage interest. Use the tax tables provided to answer the following questions:
Her marginal tax rate is _________%.
Her average tax rate is ________%.
What is the amount of Helen's tax savings from purchasing the residence? $_______
Her marginal tax rate is ___28______%.
Her average tax rate is __28,617/12,5000 22.9_______%.
What is the amount of Helen's tax savings from purchasing the residence? $__10000*.28 = 2,800_____
The primary objective of the federal income tax law is to achieve various economic and social policy objectives.
The primary liability for payment of the gift tax is imposed upon the donee.
Joan, who is single, makes gifts of $40,000 to each of her three adult children who are all married. Identify who is liable for the tax and the total taxable gifts
A "good" tax has five characteristics. Briefly discuss the five characteristics and assess whether the federal income tax is a good tax
•penalty of 5% per month (or fraction thereof) subject to a maximum of 25% for failure to file a return
•penalty of .5% per month up to a maximum of 25% for failure to pay the tax that is due
•20% of the underpayment for items such as negligence or disregard of rules or regulations & substantial understatement of income tax, or any substantial misstatement of valuation
•75% penalty for fraud
In 2010, Janet, who is single, has taxable income of $120,000 and a tax liability of $27,000. She had withholding during the year of $22,000. Janet filed her income taxes on December 29, 2011 and did not file an extension of time to file the return. What is the amount of interest and penalties Janet owes for her 2010 taxes?
First 5 months late bc she did not file a return: 5,000 x .05 x 5 months
Next 3.5 months late 5,000 x .005 x 4
5000 x .03 x 8.5/12
Which level of government primarily uses which type of tax?
a. property tax
b. excise taxes
c. sales taxes
d. income taxes
e. employment taxes
a. Property taxes are primarily used by local governments and include both real property taxes (real estate) and personal property taxes (tangible and intangible property).
b. Excise taxes are primarily used by the federal government and are imposed on items such as alcohol, tobacco, telephone usage, and many other goods. While not as extensive as the federal government, many state and local governments impose similar types of taxes.
c. Sales taxes are primarily used by state governments and constitute a major revenue source for many states. Local governments are increasingly using sales taxes as well as states. The local governments frequently tack-on 1¢ or 2¢ to the existing state sales tax rather than imposing a separate sales tax.
d. Income taxes are the primary domain of the federal government and constitutes its major source of revenue. However, many state and local governments now use the income tax in their revenue structures.
e. Employment taxes are primarily used by the federal government. Social security (FICA) taxes are a major source of federal revenue. Unemployment taxes are used by states as a compliment to the federal unemployment compensation tax. pp. I:1-10 and I:1-11.
A "good" tax structure has 5 characteristics. a. Briefly discuss the 5 characteristics
b. Using the 5 characteristics, evaluate the 3 types of tax structures.
a. The five characteristics of a "good" tax are equity, certainty, convenience, economy, and simplicity. Equity refers to the fairness of the tax to the taxpayers. A certain tax is one that ensures a stable source of government revenue and provides taxpayers with some degree of certainty concerning the amount of their annual tax liability. Convenience refers to the case of assessment, collectible, and administration for the government and reasonable compliance requirements for taxpayers. An economical tax requires minimal compliance costs for taxpayers and minimal administration costs for the government. Simplicity means the tax system is simple to understand and to comply.
b. 1. The federal income tax meets the first four criteria reasonably well, even though many critics would suggest otherwise. The tax is reasonably fair in that the high-income taxpayers pay the most tax, the low-income taxpayers the least tax. While tax laws are constantly changing, most taxpayers have a pretty good idea of what their taxes are going to be for the tax year and the federal income tax does provide the government with a stable source of revenue. The tax is convenient to pay although compliance requirements for taxpayers have risen steadily over the years. The tax is economical for the government to collect; however, the cost of compliance for taxpayers is much too high as almost 60% of all taxpayers pay a tax preparer to prepare their tax returns. However, virtually no one would suggest that the federal income tax law is simple. In fact, complexity is one of the law's major flaws.
2. The state sales tax meets the criteria of certainty, convenience, economy and simplicity quite well. However, the sales tax is criticized as not being equitable as it tends to fall more heavily on lower and middle-income taxpayers.
3. Property taxes do not fare well according to the characteristics of a "good" tax. From equity standpoint, the property tax is imposed on property owners without regard to their income situation. Thus, a farmer may have substantial property but little income to pay the property
tax. Property taxes are certain but clearly not convenient in the sense that they are normally assessed in a lump-sum amount once a year. Property taxes do not meet the economy criteria. Property taxes are rather simple although differences in judgments as to valuation of property are a problem. pp. I:1-11 through I:1-14.
What is the statute of limitations for a fraudulently filed tax return? Be precise.
The statute of limitations remains open indefinitely for a fraudulently filed tax return.
In the tax legislative process, what is the next step after the House of Representatives approves a bill?
Goes to Senate Finance Committee
What is the statute of limitations for a disallowed tax deduction which reduces the tax liability by 2%? Be precise.
3 years from the later of the due date of the tax returned or the date the tax return was actually filed
What are the objectives of the federal income tax system?
Raise Revenue (BUT THIS IS THE PRIMARY ONE)
Provide investment incentives
Meet social objectives
if you do not pay sales tax you must pay use tax
•DE 0% Send KS 0%
•MO 6% send KS 2%
•IL 11% send KS 0%
•Streamline Sales Tax Project (SSTP): works toward changing tax base bc states differ on rate & tax base