Introduction to Federal Taxation and Understanding the Federal Tax Law
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Course
FEDERAL TAXATION
Institution
FEDERAL TAXATION
This chapter
presents information on
the magnitude of
federal taxes
collected and on
taxpayer
obligations.
Also, the history of U.S. federal taxation is
briefly summarized followed by a review of
the federal legislative process.
Fundamental
Aspects of Federal
T
axation
¶1
101 Sourc
...
introduction to federal taxation and understanding
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11/19/23, 12:41 PM 2020 COMP IM CH01 - Solution Manual
1 Instructor’s Manual
Chapter 1
Introduction to Federal Taxation and Understanding the Federal Tax Law
SUMMARY OF CHAPTER
This chapter presents information on the magnitude of federal taxes collected and on taxpayer
obligations. Also, the history of U.S. federal taxation is briefly summarized followed by a review of
the federal legislative process.
Fundamental Aspects of Federal Taxation
¶1101 Sources of Revenue
Types of federal taxes include (1) income taxes on corporations, individuals, and fiduciaries,
(2) employment taxes, (3) estate and gift taxes, and (4) excise and customs taxes. Also, revenues
are generated from state and local taxes. Consideration is given to the attractiveness of alternative
systems—the value-added tax and flat tax.
¶1121 Tax Collection and Penalties
Taxes are big business and figures are given to demonstrate just how vast and complex the
federal revenue collection system has become. In 1989, the civil tax penalty provisions were
extensively revamped to create a fairer, less complex and more effective penalty system. Changes
were made in the (1) document and information return penalties, (2) accuracy-related penalties, (3)
preparer, promoter, and protester penalties, and (4) penalties for failure to file or pay.
¶1131 Taxpayer Obligations
A clear understanding of tax avoidance versus tax evasion is necessary to achieve good tax
planning. Tax avoidance is legal and a legitimate pursuit of a business entity. Tax evasion requires
the presence of a tax liability. There is a legal obligation to disclose a tax liability based on
completed transactions and the refusal to report the tax liability is illegal.
¶1151 Brief History of the Federal Income Tax
The adoption of the Sixteenth Amendment to the Constitution enabled Congress to levy
"taxes on income, from whatever source derived." A brief chronological history of changes
affecting the tax law from 1913 to the present is presented.
• 16th Amendment (2/15/1913). Congress empowered itself to tax income.
• Revenue Act of 1913. Imposed income tax on individuals, corporations and other
entities, effective 3/1/1913.
• Internal Revenue Codes of 1939, 1954 and 1986. Recodified the numerical referencing
format of legislative tax law after significant tax law revisions had occurred.
Steps in the enactment of a revenue bill are (1) origination in the House of Representatives
Ways and Means Committee, (2) passage by the House, (3) passage by the Senate, (4) resolution of
differences in House and Senate versions by the Joint Conference Committee, composed of
members of both legislative bodies, (5) approval of the final version by both the House and the
Senate, (6) approval or veto by the President, and (7) incorporation into the Internal Revenue Code.
Both the Senate and the House must vote affirmatively by a two-thirds majority to override a veto.
¶1165 Tax Reform
The Tax Cuts and Jobs Act was the most significant tax legislation since the Tax Reform Act of
1986. Major features of the act are discussed below.
Underlying Rationale of the Federal Income Tax
¶1171 Objectives of the Tax Law
The federal income tax system is comprised of a complicated and continually evolving blend
of legislative provisions, administrative pronouncements, and judicial decisions. The primary
purpose of the tax law is obviously to raise revenue, but social, political, and economic objectives
are also important. These various objectives, which frequently work at cross-purposes with the
revenue-raising objective of the law, must be examined and understood to appreciate the rationale
underlying the immense multipurpose body of law known as the federal income tax.
¶1175 Economic Factors
Numerous provisions of the tax law have been employed to help stimulate the economy, to
encourage capital investment, or to direct resources to selected business activities. Examples
include the following: MACRS depreciation; the optional expensing election in lieu of
depreciation; percentage depletion; special farming elections to expense rather than to capitalize
expenses for soil and water conservation, land clearing, and fertilizers; the S corporation
provisions; the Section 1244 stock loss provision; and the tax rate structure for regular
corporations.
¶1181 Social Factors
Numerous tax provisions can best be explained in light of their underlying social objectives.
Examples include the following: the tax-free status accorded to employees on premiums paid by an
employer on group-term insurance, accident and health plans, and medical benefit plans; and the
tax-deferred status accorded to employees' current income under deferred compensation plans.
¶1185 Political Factors
Since the tax law is created by Congress, and Congress consists of several hundred elected
officials, political factors play a major role in the development of tax legislation. Additionally,
special interest groups and influential constituents have a definite impact on the legislative process.
For example, depletion under the percentage depletion method is limited to 50% of "taxable net
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