Welcome back.
Recall that the three sources of tax law
follow the three branches of the US Federal Government.
First is the statutory source, which follows the legislative branch as
represented by the two houses of Congress:
the US House of Representatives and the US Senate.
Second is the administrative sources of tax law, which is represented by
the Executive Branch and includes
the President and 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'll 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 had 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.
They 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 researching 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 in hearings may provide
context for why a 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 discusses 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 the citation here,
section 62(a)(2)(A), we would interpret it as referring to section 62 subsection a,
paragraph two, 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 code sections come from?
Here's a figure of how a bill becomes a law, in the US system of government.
Here the discussion will focus on tax bills.
Usually, a tax bill is first proposed in
the US House of Representatives Ways and Means Committee.
After holding hearings in debates on the proposal,
the committee votes on the bill.
If it passes the committee,
the bill goes on to the full House of Representatives for
further debate, so that every representative can consider the bill.
If it's approved by the full US 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 US Senate for consideration.
If the US House of Representatives and the US
Senate both pass 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 US House of Representatives and the US 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.
Matthew HutchensLecturer of Accountancy
Petro Lisowsky, PhD, CPAAssociate Professor of Accountancy
