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Publishing as Prentice Hall 1-1

 AN INTRODUCTION TO
TAXATION (1 of 2)
 History of taxation
 Types of tax rate structures
 Other types of taxes
 Criteria for a tax structure
 Objectives of Federal income tax law
 Entities in Federal income tax system

©2010 Pearson Education, Inc. Publishing as Prentice Hall 1-2

 AN INTRODUCTION TO
TAXATION (2 of 2)
 Tax law sources
 Enactment of a tax law
 Administration of the tax law and tax
practice issues
 Components of a tax practice
 Computer applications in tax practice

©2010 Pearson Education, Inc. Publishing as Prentice Hall 1-3

 History of Taxation
 First Federal income tax in 1861
 Repealed after Civil War
 Reinstated in 1894
 Supreme Court ruled unconstitutional in
1895
 16th Amendment on March 1, 1913
 Revenue acts prior to codification in 1939

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 Manner in Which Tax Law Is
Changed or Modified
 Federal income tax is changed on an
incremental basis rather than a complete
revision
 The tax law has been referred to as a
quiltwork of tax law

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Revenue Sources

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 Types of Tax Rate Structures
 Structure of individual income tax rates
 Structure of corporate tax rates
 Marginal, average, and effective tax
rates for taxpayers
 Determination of taxable income and tax
due

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 Structure of Individual
Income Tax Rates (1 of 2)
 Tax Base
Amount to which tax rate is applied to
determine tax due
E.g., individual’s tax base for Federal income
is taxable income,
Tax base for property tax generally FMV of
property subject to tax
 Tax Rate
Percentage(s) applied to tax base
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 Structure of Individual
Income Tax Rates (2 of 2)

Progressive
Rate increases as tax base increases
E.g., individual income tax
Proportional or flat tax
E.g., sales tax
Regressive
Rate decreases as tax base increases
E.g., FICA tax
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 Structure of Corporate Tax Rates
(1 of 2)

 Stair-step pattern of progression

Tends to benefit small corporations
 Benefitof graduated tax rates phased
out between $100K and $335K, and
$15M and $18.33M

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 Structure of Corporate Tax Rates
(2 of 2)

First $50K 15 % of Taxable Inc

> $50K But Not > $75K $7,500 + 25% of Taxable Inc
> $75K But Not > $100K 13,750 + 34% of Taxable Inc > $75K
> $100K But Not > $335K $22,250 + 39% of Taxable Inc > $100K
> $335K 34% of Taxable Inc
> $10M But Not > $15M 3.4M + 35% of Taxable Inc > $10M
> $15M But Not > $18,333,333 $5.150M + 38% > $15M
> $18,333,333 35% of Taxable Inc

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Marginal, Average, and Effective Tax
Rates for Taxpayers
 Marginal tax rate
Tax rate applied to incremental amount of taxable
inc that is added to tax base
 Average tax rate
Total tax liability divided by amount of taxable
income
 Effective tax rate
Total tax liability divided by total economic
income

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Determination of Taxable Income and
Tax Due
Gross Income
- Deductions for AGI
= AGI
- Deductions from AGI
= Taxable Income
x Individual Tax Rate
= Gross Tax Due
- Credits & Payments
= Tax or Refund Due
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 Other Types of Taxes
 State and local income taxes
 State and local franchise taxes
 Wealth transfer taxes
Estate tax
Gift tax
 Other types of taxes
Property, excise, sales, & employment taxes

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 Criteria for a Tax Structure
(1 of 3)

 Equity
Vertical
equity
Horizontal equity
 Certainty
Stable
source of gov’t revenues
Amount of liability for taxpayers

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 Criteria for a Tax Structure
(2 of 3)

 Convenience
Easilyassessed, collected, and
administered
 Simplicity
Should not be overly complex

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 Criteria for a Tax Structure
(3 of 3)

 Economy
Minimal compliance and administration
costs
Businesses spent $148B to comply with
federal tax law and $80B to comply with
state and local taxes
Cost to individuals $111B

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 Objectives of Federal
Income Tax Law
 Economic objectives
 Encouragement of certain activities and
industries
 Social objectives
 Income tax reform proposals
Simplified
Income Tax Plan (SITP)
Growth and Investment Tax Plan (GITP)

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 Economic Objectives
 Raise Revenues for Government
Operations
 Stimulate Private Investment
 Reduce Unemployment
 Mitigate Effects on Inflation

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 Entities in Federal
Income Tax System (1 of 2)
 Taxpaying entities
Individuals
C corporations
Double taxation of C corp earnings
 Trusts
Hybrid entity
May be taxpaying entity or flow-through

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 Entities in Federal
Income Tax System (2 of 2)
 Flow-through entities
Sole proprietorship
Also known as a Schedule C business
Partnerships
SCorporations
LLC (Limited Liability Company)
LLP (Limited Liability Partnership)

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 Tax Law Sources
(1 of 2)

 Legislative
Internal
Revenue Code
Congressional Committee reports
 Executive (administrative)
Income tax regulations
Revenue Rulings
Revenue Procedures
Letter Rulings

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 Tax Law Sources
(2 of 2)

 Judicial
Court decisions
Trial courts
 District Court, Tax Court, U.S. Court of Federal
Claims
Appeals courts
 Circuit Courts
Supreme Court

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 Enactment of a Tax Law
(1 of 4)

1. House of Representatives responsible for

initiating new tax legislation
 President may make proposal to Congress with
studies on needed tax reform prepared by
Treasury
2. Referred to the House Ways and Means
Committee (HW&MC)

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 Enactment of a Tax Law
(2 of 4)

3. Voted on by HW&MC
 Forwarded to House of Representatives for a vote if
approved by HW&MC
4. Voted on by House of Reps
 If approved, sent to Senate Finance Committee (SFC)
5. Voted on by SFC
 If approved, sent to Senate for a vote
 Bill may be different than House version

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 Enactment of a Tax Law
(3 of 4)

6. Senate considers bill and may add

amendments
7. Voted on by Senate
 If approved, sent to Joint Conference Committee
(JCC) to reconcile bill
8. JCC produces final bill
 Sent back to House and Senate to vote on final bill

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 Enactment of a Tax Law
(4 of 4)

9. If JCC bill approved, sent to President

for approval or veto
10. Presidential veto may be overturned by
2/3 vote in both House & Senate
11. Committee reports prepared by staff of
HW&MC, SFC, and JCC

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Administration of the Tax Law
and Tax Practice Issues
 Organization of the IRS
 Enforcement procedures
 Selection of returns for audit
 Statute of limitations
 Interest
 Penalties
 Administrative appeal procedures

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 Selection of Returns for Audit
 Selfassessment & voluntary compliance
 Discriminant Function System (DIF)
DIF system generates “score” for return based on
return for add’l tax revenue
Returns manually screened by IRS
Decide which returns to examine further
Less than 1% of all individual returns are selected
for examination each year

©2010 Pearson Education, Inc. Publishing as Prentice Hall 1-29

 Statute of Limitations
 General rule 3 years from later of the date
tax return was actually filed or due date
 Six years if taxpayer omits items of gross
income that in total exceed 25%
 Indefinite if fraudulent return filed or no
return filed

©2010 Pearson Education, Inc. Publishing as Prentice Hall 1-30

Components of a Tax Practice
 Tax compliance and procedure
 Tax research
 Tax planning and consulting
 Financial planning

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 Computer Applications in
Tax Practice
 Tax return preparation
 Tax planning applications
E.g., project depreciation
 Tax research applications
RIA Checkpoint
CCH Tax Research Network
IRS web site

©2010 Pearson Education, Inc. Publishing as Prentice Hall 1-32

 Comments or questions about PowerPoint Slides?
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