Statutory Sources of Tax Law

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From the course by University of Illinois at Urbana-Champaign

Federal Taxation I: Individuals, Employees, and Sole Proprietors

56 ratings

University of Illinois at Urbana-Champaign

Federal Taxation I: Individuals, Employees, and Sole Proprietors

56 ratings

Course 1 of 5 in the Specialization U.S. Federal Taxation

This course is the first course in a five-course US Federal Tax Specialization. It covers and focuses on the U.S. federal tax system as it relates to individuals, employees, and sole proprietors. Key concepts covered include gross income and items that are statutorily included or excluded in it, personal and business expenses that qualify as tax deductions, and the differing tax treatments for employees versus self-employed taxpayers. Unlike many other introductory courses in tax and as part of this course’s comprehensive wrap-up, learners will be provided with practical and tangible experience reporting both income and expenses on the main individual tax return used in the US, Form 1040. If you have enjoyed this course, consider enrolling in our online graduate Accounting program. The University of Illinois at Urbana-Champaign, consistently ranked as one of the nation's top three accounting programs, now offers a master’s in accounting at a very affordable tuition rate and is completely online. The iMSA is a full Master of Accountancy program and students graduate with an MS that is highly recognized. Try an open course or two, then apply for admission into the credit-bearing version as you may be eligible to take credit-bearing courses during the application process. If you are missing any prerequisites for the full degree, you can complete Coursera courses to demonstrate readiness and strengthen your application for the iMSA. For more information on this exciting iMSA online program, refer to this link: https://www.coursera.org/degrees/imsa

From the lesson

MODULE 1: AN INTRODUCTION TO TAXATION

In this module, you will be introduced to the different kinds of taxes faced by U.S. Taxpayers and the U.S. Federal income tax structure. The origin of tax law and its constitutionality is discussed along with a brief history of the different changes in rates that have occurred since the 16th amendment was passed. Finally, we will discover what the three different sources of new tax laws are.

Statutory Sources of Tax Law6:35

Meet the Instructors

Petro Lisowsky, PhD, CPA
Associate Professor of Accountancy
College of Business: Department of Accountancy

Welcome back. Recall that the three sources of

tax law follow the three branches of the U.S. Federal Government.

First is the statutory source,

which follows the legislative branch as represented by the two Houses of Congress.

The U.S. House of Representatives and the U.S. Senate.

Second is the Administrative Source of Tax Law,

which is represented by the Executive branch and includes the President,

in various departments, importantly for tax,

the Department of Treasury and the IRS.

The third source of tax law is the judicial source.

This includes the various Federal Courts,

including the Tax court,

Federal Appeals Courts and the Supreme Court.

Here we look at the first source of tax law in more detail.

The Statutory Source of Tax Law is

the Internal Revenue Code or (IRC) which includes various provisions for income,

deductions, credits and other features of

the Federal Tax Law passed by Congress and signed by the President.

The provisions are organized in

a logical sequence according to the topic to facilitate research.

There have been three versions of the IRC: one in 1939,

one in 1954 and the most recent in 1986.

These years don't imply that these were the last time the tax laws

were changed since in fact they're changed all the time.

The only refer to the baseline of how the code has been organized or reorganized.

The current code uses the structure as passed in 1986 by Congress.

Fortunately, it has the same numbering system as the 1954 code,

which provides some continuity for research and tax topics.

However, the 1939 code is numbered somewhat differently from the two more recent codes.

You should know this as you need to research

various tax provisions and examine how they may have been treated in the past.

Technically, Congressional hearings and committee reports could also be

construed as a statutory source of law because Congress passes these laws.

However, these sources are not authoritative.

That is, a taxpayer cannot rely on these reports to defend

their position in a court of law if there were a dispute with the IRS.

The committee reports and hearings may provide context for why is certain provision was

passed but it does not have the force of law as the Internal Revenue Code does.

The Internal Revenue Code uses a referencing system that easily facilitates research.

For example, subchapter A discusses the determination of a tax liability.

Subchapter B discuss the computation of taxable income.

Subchapter C discusses corporate distributions.

And it goes on and on to subchapter Y.

The sections within the IRC fall within these subchapters.

For example, subchapter A is made up of IRC sections 1 to 59B.

While subchapter B is made up of sections 61 to 291.

Now in a citation here, section 62(a)(2)(A),

We would interpret it as referring to Section 62,

subsection a, paragraph 2, subparagraph A.

If we were to look up this portion of the IRC,

we would find that this subparagraph defines the reimbursed expenses of employees.

A formal citation will look as follows,

including language that references any code amendments since

the 1986 organization of the IRC that may have been updated in the last 30 years or so.

Where do these codes sections come from?

Here's a figure of how a bill becomes a law in the U.S. System of government.

Here the discussion will focus on tax bills.

Usually, a tax bill is first proposed in the U.S.

House of Representatives Ways and Means Committee.

After holding hearings and debates on the proposal,

the committee votes on the bill.

If it passes the committee,

the bill goes onto the full House of Representatives for further debate,

so that every representative can consider the bill.

If it's approved by the full U.S. House of Representatives,

the Senate Finance Committee will then consider the bill.

But in actuality the Senate Finance Committee might work in

parallel with the House Ways and Means Committee to draft the bill.

But even so, usually the two committees will develop different proposals.

Whatever proposals it considers,

the Senate Finance Committee also debates the bill.

If the bill is approved by the committee,

it goes to the full U.S. Senate for consideration.

If the U.S. House of Representatives and the U.S.

Senate both passed their versions of the bill,

but the bills are different,

then the bill must go to what's known as a Joint Conference Committee.

Here select senators and representatives negotiate and settle

the differences between their two bills so that only one bill is produced.

This agreed upon Bill is then reintroduced to both the

U.S. House of Representatives and the U.S. Senate for another vote.

If that version passes both the House and the Senate,

then the bill goes to the President for consideration.

If the President signs the bill, it becomes law.

If however the President vetoes the bill,

usually the bill is dead.

However, the House and Senate can override the president's veto

with a two-thirds majority vote in each chamber.

This of course is very difficult to achieve.

It's very rare for Congress to override a President's veto.

As you can see at any point in the process,

either at the committee level,

the full chamber level,

the joint conference committee level or on the president's desk,

the bill can die.

Therefore, passing tax legislation is the result of

a highly political process of deal-making and negotiations.

At the end of the day, taxes are as much a function of politics as they are of economics.

Once you realize this,

it helps rationalize many of the seemingly irrational provisions in the code.

You may think, "that doesn't make sense."

But then you think, "this was passed with the input of

535 members of Congress and a president."

It can be a very messy outcome but for better or for worse,

the tax law is enshrined in the Internal Revenue Code,

the primary and authoritative source of Statutory Tax Law.

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