Chapter 1
An Introduction to
Taxation
Learning Objectives
? Discuss the history of taxation
? Differentiate between three types of
tax rate structures
? Describe the various types of taxes
? Discuss what constitutes a,good”
tax structure
?Describe the tax entities in the
federal income tax system
Learning Objectives
? Identify the various tax law sources
and understand their implications for
tax practice
? Describe the legislative process for
the enactment of the tax law
? Describe administrative procedures
under the tax law
? Describe the components of a tax
practice and understand importance
of research process and computer
applications in taxation
History Of Taxation In The
United States
? First Federal
Income Tax in
1861
? Reinstated in
1894
History Of Taxation In The
United States
? In 1895,the
Supreme Court
Ruled
Unconstitutional
? March 1,1913,
the Sixteenth
Amendment
? Revenue Acts
From 1913 to
Present
The Constitution Of The
United States
? The Congress Shall Have Power
to Lay and Collect Taxes on
Incomes,From Whatever Source
Derived,Without Apportionment
Among Several States,and
Without Regard to Any Census
or Enumeration,
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,quilt work”
of tax law
Revenue Sources
0%
10%
20%
30%
40%
50%
60%
1965 1975 1988 1999
I n d i v i d u a l
F I C A
C o r p o r a t e
O t h e r
Two Basic Parts Of Tax
Structure
? Tax Base
– The amount to which the tax rate is
applied to determine tax due,
? For example,an individual’s tax base for the
federal income is his or her taxable income,
? tax base for property tax is generally the fair
market value of property subject to tax,
? Tax Rate
– Is merely the percentage rate applied to
the tax base,
Rate Structures Can Be….,
?Progressive
?Regressive
?Proportional Or Flat Tax
Structure Of Corporate
Tax Rates
?Stair-step
pattern of
progression
– Tends to
benefit small
corporations
Corporate Tax Rates
First $50,000 15 % Of Taxable Income
Over $50,000 But Not Over $75,000 $7,500 + 25% Of Taxable Income
Over $75,000 But Not Over $100,000
13,750 + 34% Of Taxable Income Over
$75,000
Over $100,000 But Not Over $335,000
$22,250 + 39% Of Taxable Income Over
$100,000
Over $335,000 34% Of Taxable Income
Over $10,000,000 But Not Over
15,000,000
3,400,000 + 35% Of Taxable Income
Over $15,000,000 But Not Over
$18,333,333
$5,150,000 + 38% Over $15,000,000
Over $18,333,333 35% Of Taxable Income
Marginal,Average,& Effective
Tax Rates For Taxpayers
? Marginal tax rate - tax rate
applied to an incremental
amount of taxable income that
is added to a 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
Types Of Taxes
? State Income Tax
? Franchise Tax
? Wealth Transfer Taxes
Types Of Taxes
?Federal Gift Tax
? Other (Property,Federal
Excise,Sales,
Employment)
Criteria For Tax
Structure
? Equity
? Certainty
? Convenience
? Economy
Objectives Of The Federal
Income Tax Law
? Economic
– Raise Revenues for
Government Operations
– Stimulate Private
Investment
– Reduce Unemployment
– Mitigate Effects on
Inflation
Objectives Of The Federal
Income Tax Law
? Encourage certain activities &
industries
? Social objectives
Entities in the Federal
Income Tax System
? Tax Paying Entities
– Individuals
– Corporations
? Flow-through Entities
– Sole proprietorship
– Partnerships
– S Corporations
– LLC (Limited Liability Company)
– LLP (Limited Liability Partnership
– Trusts
Tax Law Sources
?Legislative
?Executive
(Administrative)
?Judicial
Tax Law Sources
? Legislative,
– Internal Revenue Code
– Congressional Committee Report
? Executive (Administrative),
– Income Tax Regulations
– Revenue Rulings
– Revenue Procedures
– Letter Rulings
? Judicial,
– Court Decisions
Tax Law Interpretations
Internal Revenue Code
(Statutory tax law)
Taxpayer Interpretations
(1) Taxpayer
(2) CPA representing taxpayer
(3) Attorney
(4) Non-licensed tax preparer
Governmental
Interpretations
Secretary of the Treasury
Regulations
(1) Proposed
(2) Temporary
(3) Final
Internal Revenue Service
(1) Revenue Rulings
(2) Private Letter Rulings
(3) Technical Advice
Memoranda
(4) Information Releases
Enactment Of Tax Law
? House of
Representatives
is responsible
for initiating
new tax
legislation,
? Referred to the
House Ways and
Means
Committee,
Administration
Of Tax Law
? Organization of the Internal
Revenue Service
? Enforcement procedures
? Selection of returns for audit
Administration
Of Tax Law
?Statute of limitations
?Interest
?Penalties
Components Of A Tax
Practice
? Tax compliance
& procedure
? Tax research
? Tax planning
? Financial
planning
Computer Applications
In Tax Practice
? Tax return
preparation
? Tax planning
– Project
depreciation
? Tax research
– CD-ROM,Lexis,
Internet Services
An Introduction to
Taxation
Learning Objectives
? Discuss the history of taxation
? Differentiate between three types of
tax rate structures
? Describe the various types of taxes
? Discuss what constitutes a,good”
tax structure
?Describe the tax entities in the
federal income tax system
Learning Objectives
? Identify the various tax law sources
and understand their implications for
tax practice
? Describe the legislative process for
the enactment of the tax law
? Describe administrative procedures
under the tax law
? Describe the components of a tax
practice and understand importance
of research process and computer
applications in taxation
History Of Taxation In The
United States
? First Federal
Income Tax in
1861
? Reinstated in
1894
History Of Taxation In The
United States
? In 1895,the
Supreme Court
Ruled
Unconstitutional
? March 1,1913,
the Sixteenth
Amendment
? Revenue Acts
From 1913 to
Present
The Constitution Of The
United States
? The Congress Shall Have Power
to Lay and Collect Taxes on
Incomes,From Whatever Source
Derived,Without Apportionment
Among Several States,and
Without Regard to Any Census
or Enumeration,
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,quilt work”
of tax law
Revenue Sources
0%
10%
20%
30%
40%
50%
60%
1965 1975 1988 1999
I n d i v i d u a l
F I C A
C o r p o r a t e
O t h e r
Two Basic Parts Of Tax
Structure
? Tax Base
– The amount to which the tax rate is
applied to determine tax due,
? For example,an individual’s tax base for the
federal income is his or her taxable income,
? tax base for property tax is generally the fair
market value of property subject to tax,
? Tax Rate
– Is merely the percentage rate applied to
the tax base,
Rate Structures Can Be….,
?Progressive
?Regressive
?Proportional Or Flat Tax
Structure Of Corporate
Tax Rates
?Stair-step
pattern of
progression
– Tends to
benefit small
corporations
Corporate Tax Rates
First $50,000 15 % Of Taxable Income
Over $50,000 But Not Over $75,000 $7,500 + 25% Of Taxable Income
Over $75,000 But Not Over $100,000
13,750 + 34% Of Taxable Income Over
$75,000
Over $100,000 But Not Over $335,000
$22,250 + 39% Of Taxable Income Over
$100,000
Over $335,000 34% Of Taxable Income
Over $10,000,000 But Not Over
15,000,000
3,400,000 + 35% Of Taxable Income
Over $15,000,000 But Not Over
$18,333,333
$5,150,000 + 38% Over $15,000,000
Over $18,333,333 35% Of Taxable Income
Marginal,Average,& Effective
Tax Rates For Taxpayers
? Marginal tax rate - tax rate
applied to an incremental
amount of taxable income that
is added to a 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
Types Of Taxes
? State Income Tax
? Franchise Tax
? Wealth Transfer Taxes
Types Of Taxes
?Federal Gift Tax
? Other (Property,Federal
Excise,Sales,
Employment)
Criteria For Tax
Structure
? Equity
? Certainty
? Convenience
? Economy
Objectives Of The Federal
Income Tax Law
? Economic
– Raise Revenues for
Government Operations
– Stimulate Private
Investment
– Reduce Unemployment
– Mitigate Effects on
Inflation
Objectives Of The Federal
Income Tax Law
? Encourage certain activities &
industries
? Social objectives
Entities in the Federal
Income Tax System
? Tax Paying Entities
– Individuals
– Corporations
? Flow-through Entities
– Sole proprietorship
– Partnerships
– S Corporations
– LLC (Limited Liability Company)
– LLP (Limited Liability Partnership
– Trusts
Tax Law Sources
?Legislative
?Executive
(Administrative)
?Judicial
Tax Law Sources
? Legislative,
– Internal Revenue Code
– Congressional Committee Report
? Executive (Administrative),
– Income Tax Regulations
– Revenue Rulings
– Revenue Procedures
– Letter Rulings
? Judicial,
– Court Decisions
Tax Law Interpretations
Internal Revenue Code
(Statutory tax law)
Taxpayer Interpretations
(1) Taxpayer
(2) CPA representing taxpayer
(3) Attorney
(4) Non-licensed tax preparer
Governmental
Interpretations
Secretary of the Treasury
Regulations
(1) Proposed
(2) Temporary
(3) Final
Internal Revenue Service
(1) Revenue Rulings
(2) Private Letter Rulings
(3) Technical Advice
Memoranda
(4) Information Releases
Enactment Of Tax Law
? House of
Representatives
is responsible
for initiating
new tax
legislation,
? Referred to the
House Ways and
Means
Committee,
Administration
Of Tax Law
? Organization of the Internal
Revenue Service
? Enforcement procedures
? Selection of returns for audit
Administration
Of Tax Law
?Statute of limitations
?Interest
?Penalties
Components Of A Tax
Practice
? Tax compliance
& procedure
? Tax research
? Tax planning
? Financial
planning
Computer Applications
In Tax Practice
? Tax return
preparation
? Tax planning
– Project
depreciation
? Tax research
– CD-ROM,Lexis,
Internet Services
