Income Tax Law Fundamentals

Question 1

What is the federal income tax law used for?

Answer 1

To raise revenue for government operations: As a fiscal policy tool to stimulate private investment, reduce unemployment, and mitigate the effects on inflation on the economy.

Question 2

How is the IRC organized?

Answer 2

The IRC/foundation of all tax law, is comprised of Title 26 of the US Code, which is subdivided into subtitles (A: income taxes, B: estate and gift taxes), chapters, subchapters, parts, subparts, sections, subsections, paragraphs, sub-paragraphs, and clauses

Question 3

What qualifications are required to represent a client before the IRS on a tax matter?

Answer 3

CPA, EA, or attorney

Question 4

What are Treasury Regulations?

Answer 4

Regulations issued by the Treasury department that expound on the IRC, often containing examples/computations that assist in understanding the statutory language; however they may not be up to date with revisions since there are frequent statutory changes

Question 5

How are Treasury Regulations first issued?

Answer 5

To the public (tax accountants and tax attorneys) in proposed form, then to organizations such as the American Bar Association, Tax Division of the AICPA, and American Taxation Association who may comment and suggest changes

Question 6

What are temporary regulations?

Answer 6

Issued by the Treasury Department after a major statutory change that are effective upon publication and are effective for up to 3 years per TAMRA (Technical Amendments and Misc Rev Act f 1988)- and must be issued concurrently with a proposed regulation.

Question 7

When are final regulations effective?

Answer 7

As of the date proposed or as of date on which temporary regulations were published in the Federal Registrar. Can not be retroactive if enacted after 7/29/96.

Question 8

What are interpretive regulations?

Answer 8

Make the statutory language easier to understand and apply- and are issued under the general authority of IRC Section 7805

Question 9

What are legislative regulations?

Answer 9

Where Congress delegates its rule-making authority to the Treasury Dept to articulate substantive tax principles eg consolidated tax return regulations

Question 10

What purpose do citations serve?

Answer 10

Substantiate propositions and enable reader to locate underlying authority (subject matter of the regulation.IRC section being interpreted; for Temporary Regulations, the numbering system 1following the IRC section number begins the the number of the regulation and “T”)

Question 11

Who is responsible for initiating new tax legislation?

Answer 11

Per US Constitution, the House of Representatives. Tax bills are usually introduced in the House of Rep and are referred to the House Ways and Means Committee; however tax bills may also originate in the Senate as riders to non-tax legislative proposals.

Question 12

What are the steps in the legislative process?

Answer 12

1) Tax bill is introduced in the House of Rep and referred to the House Ways and Means Committee
2) House Ways and Means Committee considers proposal and public hearings are held with testimony from professional and special interest groups
3) House Ways and Means Committee votes on tax bill, if approved, it is forwarded to the House of Rep to be voted on (amendments from House of Rep ind members are generally not allowed)
4) Bill is forwarded to the Senate for consideration by the Senate Finance Committee and public hearings are held
5) Senate Finance Committee may approve tax bill that is substantially different from the HoR version
6) Sen Fin Comm reports the bill to the Senate for consideration, which permits amendments to be offered on the Senate floor
7) If approved by the Senate, both Senate and House Bills are sent to the Joint Conference Committee, which has an equal number of members from Senate and House
8) Senate and House bills are reconciled in the Joint Conf Committee, final bill is resubmitted to the House and Senate for approval
9) If approved, sent to President for approval/veto
10) Presidential veto may be overturned if a two-thirds majority vote is obtained in both the House and Senate
11) House of Ways and Means Committee, Senate Finance Committee, and Joint Conference Committee staff prepare committee reports to explain new law before Treasury Dept drafts regulations on tax law changes and intent of Congress in passing the new law

Question 13

What are administrative interpretations?

Answer 13

IRS’s interpretations of IRC. Tax advisors usually consult these pronouncements after consulting the IRC and Treasury Regulations

Question 14

What are revenue rulings?

Answer 14

IRS indicates tax consequences of a particular transaction engaged by taxpayer. Represents the IRS’s view of tax law and appears in weekly Internal Revenue Bulleting (I.R.B.) and semi-annually in the Cumulative Bulleting (C.B.) published by the US Government Printing Office

Question 15

What are revenue procedures?

Answer 15

IRS pronouncements that deal with the procedurals aspects of tax practice. Initially published in the I.R.B., then C.B.

Question 16

What are letter rulings?

Answer 16

IRS’s explanation/ response to individual/corporate taxpayer request to explain tax consequence of a particular transaction.

Question 17

What are other interpretations?

Answer 17

Technical Advice Memoranda (T.A.M.), Information Releases (I.R.), and Announcements and Notices

Question 18

What are judicial decisions?

Answer 18

Important source of tax law, whereby judges decide questions of law and fact

Question 19

What are the options for a taxpayer for litigation?

Answer 19

If litigating at a US District Court (where there is a jury) or US Court of Federal Claims, the taxpayer must first pay the deficiency. If litigating in the Tax Court, then there is no need to pay the deficiency until the case has been decided, however interest and penalties must be paid if lost.
If trial is lost at US District Court or Tax Court, an appeal can be made to the Court of Appeals for the taxpayer’s circuit/geographical area. If appealing US Court of Federal Claims, then the only option is the Court of Appeals for the Federal Circuit, and then the Supreme Court by writ of certiorari

Question 20

What is the US Tax Court?

Answer 20

Court of national jurisdiction that only hears tax-related cases, created in 1942 to replace Board of Tax Appeals. The President with Senate’s consent appoints the 19 judges plus one chief judge for a 15 yr term. In most cases, only one judge will hear a particular case and will periodically travel to 100 cities to hear cases.
Issues regular (usually first time) and memorandum (factual variation of previously decided issue) decisions.

Question 21

What are US District Courts?

Answer 21

The only forum where the taxpayer my have a jury, also other cases aside from tax are also heard. District court decisions are reported in Federal Supplement (F.Supp) published by West Publishing Co. (West). Unreported decisions may be piblished in RIA (Research Institute of America)’s reporter American Federal Tax Reports (AFTR) and CCH(Commerce Clearing House)’s reporter US Tax Cases (USTC)

Question 22

What is the US Court of Federal Claims?

Answer 22

Trial court that addresses tax matters and has nationwide jurisdiction. Decisions are reported in the Claims Court Reporter, published by West from 1982-1992.

Question 23

Where are Circuit Court decisions published?

Answer 23

Federal Reporter, Third Series, published by West (F.3d). Tax decisions also appear in the American Federal Tax Reports and US Tax Cases

Question 24

Discuss Supreme Court decisions

Answer 24

Law of the land and supercede earlier cases, has the same effect as if its interpretive language was added to the IRC. All decisions are published in the United States Supreme Court Reports

Question 25

What tax law sources are generated from the legislative branch of the Federal government?

Answer 25

The IRC contains provisions governing income, estate, gift, employment, alcohol, tobacco and excise taxes- serves as the highest legislative authority for tax research, planning, and compliance activities

Question 26

What tax law sources are generated from the administrative branch of the Federal government?

Answer 26

Treasury Regulations /interpretations of the tax code by the Secretary of the Treasury may be issued in proposed, temporary and final forms, as well as interpretive or legislative; there are also IRS Rulings (Revenue Rulings: letter or published, Revenue procedures, information releases and Technical Advice Memoranda)

Question 27

What tax law sources are generated from the judicial branch of the Federal government?

Answer 27

Judicial doctrines are concepts that have evolved from Supreme Court cases that are used by the courts to decide tax issues

Question 28

What is tax research?

Answer 28

Process of solving a tax related problem by applying tax law to specific set of facts, and is often conducted to determine tax policy and tax consequences of specific transactions to a particular taxpayer

Question 29

In what contexts is tax research performed in?

Answer 29

Closed-fact/tax compliance situations or open-fact/tax-planning situations

Question 30

What points should a tax professional keep in mind when conducting research in a tax-planning context?

Answer 30

The objective is to maximize the after-tax return
tax ramifications for all parties are relevant
taxes are one cost of doing business, and that there are non-tax objectives
the time for tax planning extends through the life of the activity
keep in mind the financial accounting implications of proposed transactions

Question 31

The IRS interprets the Internal Revenue Code through various pronouncements that are referred to as

Answer 31

various pronouncements, referred to as administrative interpretations

Question 32

Temporary regulations may remain effective for up to

Answer 32

3 years

Question 33

Identify the trial courts within the Court System

Answer 33

the U.S. Tax Court,
the U.S. Court of Federal Claims (formerly the U.S. Claims Court), and
U.S. District Courts.

Question 34

___ of the United States Code, is the foundation of all tax law.

Answer 34

Title 26

Question 35

In ______________, the IRS indicates the tax consequences of a particular transaction in which taxpayers might engage.

Answer 35

revenue rulings

Question 36

The ­­­­­­­­­­­­­­­­­­______________ issues regulations that expound upon the IRC.

Answer 36

Treasury Department

Question 37

If a taxpayer begins litigation in the _________, he or she need NOT pay a tax deficiency until the case has been decided.

Answer 37

Tax Court

Question 38

Temporary regulations may remain effective for up to ____________.

Answer 38

three years

Question 39

A taxpayer must first pay the tax deficiency when beginning litigation in which of the following courts

Answer 39

U.S. District Courts
U.S. Court of Federal Claims

Question 40

The IRS interprets the Internal Revenue Code through various pronouncements that are referred to as ___________________.

Answer 40

administrative interpretations/ pronouncements

Question 41

In ______________, the IRS indicates the tax consequences of a particular transaction in which taxpayers might engage.

Answer 41

revenue rulings

Question 42

Identify the trial courts within the Court System

Answer 42

the U.S. Tax Court,
the U.S. Court of Federal Claims
U.S. District Courts

Question 43

Each of the following statements about the deduction for self-employed health insurance premiums are correct EXCEPT:

50% of health insurance premiums for self-employed individuals are deductible.
Applies to coverage for the self-employed individual, spouse, and dependents.
The available deduction is limited to earned self-employment income.
This deduction is only available if other health insurance coverage options are not available.

Answer 43

100% of health insurance premiums for self-employed individuals are deductible.

Question 44

The Wayne family rented out their vacation house in the Smoky Mountains for a total of 150 days. They spent a total of 14 days there on a summer vacation. Donnie, the father, visited the property for a total of 7 days to repair the windows and install a new dishwasher.

Based on this information, the property will be categorized as which of the following for tax purposes?

Answer 44

To be deemed a Rental Use Property, personal use cannot exceed the greater of: 14 days or 10% of the number of days the property is rented. The Wayne family rented the property for 150 days. 10% of 150 days creates a maximum of 15 personal use days.

Trips made to the rental property for maintenance and repairs do NOT count as personal usage. Therefore, the 7 days spent fixing the windows and replacing the dishwasher are not considered personal use days.

Question 45

Each of the following is a nonrefundable tax credit EXCEPT:

Earned Income Tax Credit
Child Tax Credit
Lifetime Learning Credit
Child and Dependent Care Credit

Answer 45

The Earned Income Tax Credit (EITC) helps low- to moderate-income workers and families get a tax break. If a taxpayer qualifies, they can use the credit to reduce the taxes owed and, since the credit is refundable, may be able to increase their refund.

Question 46

Yiting and Ryan are a married couple. They are both U.S. citizens current residing in Shanghai, China. They would meet the reporting threshold only if the total value of their specified foreign financial assets is more than ______ on the last day of the tax year or more than ______ at any time during the tax year.

Answer 46

Joint Income Tax Return (Non-U.S. Residents)

If you are married and you and your spouse file a joint income tax return, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year

Question 47

The above-the-line deduction available for educator expenses applies to which of the following unreimbursed items? (Select all that apply)

Answer 47

The educator expenses deduction applies to any unreimbursed expenses for classroom materials incurred by an eligible educator (i.e., teaches 900+ hours/year in K-12). Books, supplies, software, & services are all approved expenses.

Question 48

During periods where prices are falling, the LIFO accounting method normally results in _______ taxable income.

Answer 48

higher taxable income.