A Guide to Federal Income Tax Law

 

Administration

 

      The Internal Revenue Service (I.R.S.) is an administrative agency that acts within the Treasury Department and it is responsible for enforcing the tax laws.  It is the largest section of the Department of the Treasury.  The Internal Revenue Code (I.R.C.) is the codification of the federal tax laws and it is Title 26 of the United States Code.  When the text of the Code is ambiguous, the courts look to the "subjective" legislative intent.  If the courts cannot discern the "subjective" legislative intent, they will then look to "objective" intent.  The Treasury Regulations interpret and implement the Internal Revenue Code.  They are issued by the Treasury Department and drafted by the I.R.S.  The Regulation numbers correspond to the I.R.C. numbers.  The regulations corresponding with the Internal Revenue Code are Title 26 of the C.F.R.  The Regulations have the force of law. A Regulation is valid as long as it is not an unreasonable interpretation of a statute.  The courts determine the issue of reasonableness by analyzing the statutory text, the legislative history, the purpose of the law, the timing of the regulation in relation to the statute and any re-enactment of the statutory provision by Congress. 

 

      The Statutes and Regulations are interpreted by published revenue rulings.  These rulings are an official interpretation of the law by the I.R.S. for the benefit of the taxpayers.   They are published in the Internal Revenue Bulletin and in the Cumulative Bulletin. They have precedential value.  Private Letter rulings and technical advice memoranda are also submitted by the IRS but they are based on specific facts and they don't have any precedential value.  They are only binding to a particular taxpayer if the facts are accurate.

 

Tax Litigation

 

      The taxpayer can file a refund suit for an overpayment of taxes.  An individual who pays taxes owed by another under protest may sue for a refund.  The Taxpayer Bill of Rights (1996) allows the taxpayer to sue the I.R.S. for up to $1 million when the IRS abuses its collection privileges.  When a taxpayer is issued a 90-day letter, he can go to Tax Court without first paying the disputed tax.  Tax Court has the jurisdiction to review the deficiencies that are asserted by the I.R.S.  The Tax Court can order a payment or a refund but it cannot order equitable relief.  An individual can also pay the tax and litigate for a refund in U.S. District Court or he can litigate in the Court of Claims in Washington D.C.

 

      Cases may be appealed to the Circuit Courts of Appeals and to the U. S. Supreme Court.

 

Some Definitions:

 

                  Section 61 of the Internal Revenue Code defines Gross Income, which is the starting point for the computation of the tax base.  Section 61 says that income is not excluded from taxation and income is taxed from whatever source derived. Taxable income is defined as gross income less the deductions and is the income against which tax rates are applied to compute the tax paid. 

 

      Deductions are related to current or prior expenditure of money and they are items that directly reduce income.  Specifically, nothing is deductible unless it is provided for in the Internal Revenue Code.  Each taxpayer is entitled to one personal exemption and a deduction for a spouse and dependents. 

 

      Credits are a direct reduction in tax liability.  There is a child tax credit of $500 per child under 17.  There is an estate tax credit of $600,000.      Basis is a central concept in income taxation.  It generally refers to the taxpayer's cost.  It is adjusted to reflect subsequent events.  The basis equals the sum of nondeductible capital expenditures with respect to an asset and there is no gross income on the disposition if the proceeds are less than the basis. 

 

What is Gross Income?

 

      Gross Income is the addition to wealth after deducting the costs of goods sold and the basis of property sold before there is any reduction by expenses associated with acquiring the wealth unless a Code Section excludes it. Gross Income is not limited to cash received and there is no requirement that gross income be from the product of labor or capital.

 

Doing Your Own Legal Research

 

      If you are in a challenge with the Internal Revenue Service, there is a good chance that you will have to learn to do legal research.  The following discussion should be of help to you.

 

      The government issues Law and that is the primary authority.  The judicial branch interprets the statute or the constitution.  The executive branch issues rules or regulations to implement legislation.  Lower courts follow the rulings of higher courts in their jurisdiction. A court can consider reasoning of another court but is not bound by it.  In other words a decision by the Court of Appeals for the 9th Circuit would only be persuasive but not mandatory for another Court of Appeals. 

 

      The doctrine of Stare Decisis binds all courts to their own earlier decisions unless they are reversed by a higher court or themselves. The biggest problem in the Freedom Movement is that individuals follow the thinking of their Tax Guru and not the thinking of the courts.  In order to find out the meaning of a tax statute, you need to identify the legal issues and decide how the law relates to the facts of the case.  You can get a broad overview of the general subject matter categories by using treatises, encyclopdias, and legal periodicals. If the case or statute is known, the primary authority may lead to other primary and secondary authority. 

 

      The most widely used on-line services are Westlaw and Lexis.  You can also get information at no charge at www.findlaw.com.  The House of Representatives Law Library is located at www.house.gov.  The Senate Law Library is located at www.senate.gov.  You can check out the Virtual Law Library at Indiana University School of Law at www.law.indiana.edu/law. Supreme Court is located at http://supct.law.cornell.edu/supct. Most opinions of federal and state courts appear in West's National Reporter System.

 

      The reporting of cases is organized according to jurisdiction and geography.  Several states are combined to include a regional area.  For example TX, AR,  KY, MS, and TN make up the Southwest Reporter from West.     When the court makes a decision, it first publishes a slip opinion.  The slip opinion is available from the clerk of the court.  Then an advance sheet is published which are paperbound pamphlets containing cases from a jurisdiction.  The final published form is a bound volume that has a table of cases in alphabetical order according to state.

 

      If you want to use a case. you must Shepardize it.  This means that you must look in Shepard's Citations and find out if the case law is still good law and make sure that it has not been overturned.  At the Federal level, you will research cases from the federal courts.  The district court cases are found in the Federal Supplement and the Courts of Appeals cases are found in the Federal Reporter.  When you go to the law library, ask the librarian for the locations of these volumes.  To Shepardize, find a copy of Shepard's citations.  The volumes are not cumulative,  check through each bound volume and paper supplement.  When you find the number of your case, check to see if it has been quoted in subsequent cases.  If it has, then check to see if it was overturned.  Read cases under your case to see how it was cited.

 

      In dealing with the IRS, you may come up against decisions from the Tax Court and the Bankruptcy Court.  You can find Tax Court decisions in CCH and Prentice Hall publications.  You can find bankruptcy stuff in the Bankruptcy Reporter which is published by West.  It includes cases from the U.S. Bankruptcy Courts, U.S. District Courts, Courts of Appeals and U.S. Supreme Court. 

 

      The cases at the Supreme Court Level are published in the U.S. Reports, which is the official reporter.  They are also published in the U. S. Supreme Court Reports, Lawyer's Edition.  United States Law Week contains all the U.S. Supreme Court Actions. There is also a Supreme Court Bulletin.

 

      The Federal Reporter includes opinions of all Federal Appeals Courts. There are 13 Circuit Courts of Appeal.  The Federal District Court Cases are in the Federal Supplement. Federal Law is published in the U.S. Code and the U.S. Code Annotated.  You can look up statutes in the U.S. Code Annotated and read court cases under those statutes. 

 

      The research procedures involve the topic method and the descriptive word method.  With a known case you can check the index of the Notes of Decision.  Without a case refer to the U.S. Sup.Ct.Digest and the U.S. Sup.Ct. Reports Digest, Lawyer's Edition and Modern Federal Practice Digest and Federal Practice Digest 2d. 

 

      A federal statute is first created by the introduction of a bill in the legislature.  The number on the bill is preceded by S or H (Introduced by the Senate or the House).  The law is first a "slip law," then it is given a public law number such as P.L. 98-130: 130th law enacted during the 98th Congress. 

 

Civil Procedure

 

      If you wish to file a suit in the federal district courts, you must have jurisdiction.  A federal question can be litigated in federal courts 28 USC 1331.  Federal law creates the cause of action or the plaintiff's right to relief depends on the resolution of a substantial question of federal law. The federal courts have jurisdiction if the controversy is for more than $75,000 and there is a controversy between citizens of different states.  There must be complete diversity.  The plaintiff and defendant cannot be citizens of the same state.  The domicile determines diversity.  The domicile is defined as the place you are physically located in with the intent to remain there indefinitely.  The diversity must exist at the time that the complaint is filed with the clerk.  A defendant with counter-claims, cross-claims or third party claims may bring them in Federal court as long as the Federal court has jurisdiction over the original claims. A plaintiff with a valid federal question claim may bring along a state-based claim in Federal Court.

 

      Claims may be removed from state to federal court if the federal courts would have had original jurisdiction or if federal question jurisdiction existed at the time the action was filed or if diversity jurisdiction existed at the time the action was filed. In diversity cases, the case is tried in the judicial district where any defendant resides (28 USC 1391(a).

 

      To initiate a lawsuit against the government or any other entity, you must write a complaint.  The complaint is the initial pleading of a lawsuit and it is the plaintiff's statement of a cause of action.  The complaint must include a short and plain statement of the grounds on which the court's jurisdiction depends.  It should give a short, plain statement of the claim showing that the pleader is entitled to relief. It should demand the relief that the pleader seeks and it may demand alternative relief.  The defendant may set out affirmative defenses in his answer.  Allegations in a complaint are admitted when they are not denied; there should be specific answers, which admit those allegations that are true and refute those challenged as untrue.  The answer to a complaint must be served within 20 days except government entities have a longer period of time to respond. The defendant may raise various issues such as subject matter jurisdiction, lack of personal jurisdiction, insufficiency of process, failure to state a claim upon which relief can be granted. etc.  Parties may amend their pleadings once before a responsive pleading is served and at all other times permission must be granted by the court for an amendment of the Pleadings.

 

      The commencement of the suit requires the service of a summons which is issued by the clerk of the court.  The summons may be served by a U.S. Marshall or other individual other than the plaintiff.  Paperwork must be filed with the court to show that the summons was properly executed.

 

      Summary judgment motions may be filed. These motions rely on the issue that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law.  The movant includes affidavits made on personal knowledge stating only such facts that would be admissible at trial.   The movant bears the burden of coming forward and establishing that there is no factual dispute.

 

      Discovery is the process of finding facts relevant to the subject matter of the cause of action, which is not privileged.  Any material admissible at trial is discoverable.  Evidence that would be inadmissible is still discoverable as long as it is reasonably calculated to lead to the discovery of admissible evidence.  A party may discover the identity of any expert that the opposition expects to call at the trial and the substance of the facts and the opinions to which the expert is expected to testify.  There are limitations on privileged issues.  There is absolute privilege on attorney-client privilege.  Irrelevant matters and confidential matters are protected. Protective orders must be sought in confidential matters.

 

      There can be a request for a directed verdict, which is a motion for a judgment as a matter of law stating that there "is no legally sufficient evidentiary basis for a reasonable jury to have found for that party with respect to that issue.

 

      Appeals can be made from a final adverse judgment. 

 

The Rules of Evidence

 

      A court can take judicial notice of a fact as true without the necessity of formal proof.  Legislative facts are those facts that are relevant to "legal reasoning" and the "lawmaking process." The adjudicative facts are the rules which relate to the parties.  Who did what, where, when, how, with whom and with what motive.  Facts that normally would go to the jury may be given judicial notice because no reasonable person could dispute them, such as the reliability of radar speed tests and the boiling point of water.  The effect of judicial notice is that it is binding on the jury to accept as conclusive any fact that is judicially noticed.  

 

      The burden of proof is on the party who asserts a fact.  Without evidence, the fact does not go to the jury.  The burden in on the plaintiff to prove the allegations in the complaint.  In a civil case the standard of proof is a preponderance of the evidence but in a criminal case, the defendant must be convicted beyond a reasonable doubt. Direct evidence proves a proposition directly. Circumstantial evidence tends to prove the issue indirectly through inference. 

 

      Evidence must be relevant.  If the evidence tends to prove or disprove a fact of consequence, is related to an issue in the case, or logically tends to prove a proposition, it is irrelevant. All relevant evidence is admissible unless it is excluded by a specific rule.  Evidence may be excluded by judicial discretion. Most relevancy problems involve circumstantial evidence.  Character evidence is admissible when it is directly on issue.  Opinion testimony of lay witnesses is generally inadmissible.  Expert witness testimony is generally admissible. The client holds the privilege to refuse to disclose and to prevent anyone else (including lawyer) from disclosing a confidential communication between attorney and client during legal services.

 

      A statement made out of court is hearsay.  Leading questions are allowed on cross-examination and the witness cannot refuse to answer.  Leading questions are improper on direct examination except to establish preliminary facts; to aid the witness with memory loss; when questioning a hostile witness, child witness, timid witness, etc.

      A business record that is made in the regular course of business is admissible.

 

Some Aspects of Criminal Procedure

 

      Several Constitutional Amendments apply in criminal situations.  The Fourth Amendment gives protection from unreasonable searches and seizures.  The Fifth Amendment gives freedom from self-incrimination.  The Sixth Amendment gives a right to assistance of counsel and a speedy trial.  The Fourteenth Amendment puts due process of law limitations on the states. 

 

      A law enforcement officer may arrest only where there is probable cause to believe that one has committed a crime.  The arrests can be made with or without a warrant.  Suspects are booked at the police office and a file is opened with pertinent information.  The prosecutor files a charge if there is enough evidence.   When the defendant is in custody after an arrest, a magistrate or judge informs him of the charges against him, the right to counsel, the bail amount.  The prosecutor prepares the charging document or information with the allegations of the crime.  The Grand Jury then decides whether an Indictment shall issue after hearing the prosecutor's evidence.  Then the defendant is arraigned and he pleads either guilty, no contest or not guilty to the Grand Jury Indictment.

 

      Pretrial motions may be filed.  A Motion to Suppress is a pretrial motion that can be filed to suppress what was obtained by the prosecution that the defense believes was illegally obtained by an illegal search or seizure.  It is the prosecutor's duty to disclose documents, tangible objects, lists of witnesses that are to be called at trial.  The Constitution's Due Process Clause requires the prosecution to disclose to the defense any exculpatory evidence within the prosecution's possession.  The defendant has a right to a trial by jury if he is charged with a felony or a misdemeanor punishable by more than six months in jail. The defendant has a right to cross-examine witnesses and to remain silent. 

      The government violates the 4th Amendment if the search warrant is overbroad.  Evidence obtained by violating the defendant's constitutional rights may not be introduced at trial to prove the defendant's guilt.

 

Some Bankruptcy Issues

 

      Some individuals may find themselves in a situation in which they have to declare bankruptcy against the IRS.  This is possible in most cases if you prepare in advance.  Returns must be filed for two years and the taxes must be three years old.  There must also be 240 days since the date of assessment.  You can file either a Chapter 7 which is a complete bankruptcy or a Chapter 13 which is a  payment plan bankruptcy.  Claims of the government and other creditors may be secured to the value of property.  Once a bankruptcy is filed there is an automatic stay of collection activities.  Any IRS levies must immediately be removed. 

Trusts

      There are many individuals that are selling common law and other sorts of trusts to protect assets from the IRS.  These individuals also claim that business trusts are exempt from income tax.  These trust schemes do not work.  The IRS can challenge them at various levels.  Even if the trust is set up properly and operated properly, the IRS can attack the trust on theories of transfer liability and fraudulent transfer.  It is possible to set up a trust for purposes of passing assets between generations but this will not necessarily protect assets against the IRS. 

      Remember that you are dealing with the most powerful agency in the most powerful country in the world and act accordingly.

 

 

 

 

 

 

STATUE OF LIMITATIONS ISSUES

 

            Generally, the statute of limitations period for all income taxes is three years from the date the return was filed.  However there are some exceptions.  If an individual does not file a return, the statute of limitations on assessment or collections without assessment is never set in operation and the IRS may begin a proceeding for collection whenever they want to (IRC Section 6501(c)(3).  One problem with the Quiet Title approach is that if no return has been filed, the statute doesn't end, so the IRS might be able to correct the problem and start over again.

 

            A tax return is deemed filed on the day it was due for the purposes of the statute of limitations even if it was filed early.  If an individual does not file a return and the IRS files one for him pursuant to 6020(b), the statute of limitations period does not begin.

 

            There is a six-year limitations period on assessment in cases where the taxpayer has omitted from gross income more than 25% of the gross income stated in the return.

 

            Section 6501(a) provides that taxes can be assessed within three years after a return is filed and Section 6502 provides for a ten-year period of limitation for collection after the date of assessment.

 

            The statute of limitations issue as a defense for the individual must be pleaded and proved.  The government must prove an exception to the running of a statute.

 

            If a return is delinquent, the period of limitation runs from the time of filing (J.P. Bell Co., Inc v. Comm., 3 BTA 254; Paul Haberland v. Comm., 25 BTA, 1370.  When delinquent returns are filed, if they are not false or fraudulent, the running of the period of limitations begins.

 

            The date of mailing is the date of filing.  The date of the United States postmark stamped on the cover in which the document was mailed is the date of delivery.  (IRC 7502).

 

            For a return to comply with the law and start the statute of limitations it must do the following:

 

             1.  is made in good faith

             2.  cover the entire period    

              3.  contains information as to the various items of income, deductions and credit.

 

            The failure to use the exact form will not prevent the running of the statue of limitations if the return was filed in good faith.

 

            The lack of a signature has been held to be a defect which deprives an individual of the statue of limitations. (Lucas v. Pilliod Lumber Co., 281 US 245, 74 L.Ed 829, 50 SCt 297 (1930); Comm. v. Krug, 78n F2d 57; Fourth and Railroad Realty Co. v. Comm., 25 TC 458.

 

            The commissioner is prohibited from making an assessment during the 90 days after a Statutory Notice of Deficiency is issued and during the time in which the case has been docketed in the Tax Court.  The period of limitations on the making of assessments or the collection by levy is suspended during the time a case is in the Tax Court and for 60 days thereafter.

 

            The mailing of the notice of deficiency does not suspend the running period of the statute of limitations with respect to any additional deficiency that may be alleged in a subsequent deficiency notice. (Reg. Section 301.6503(a)-1(a).

 

            If there is a dispute over Third Party Records, the statue of limitations is suspended.  That means that if you file a Motion of Quash a Summons, the statue of limitations will be suspended during the period of the litigation.

 

            Tax refund claims must be filed within three years from the time the return was filed or within two years from the time the tax was paid.

 

            The filing of a tax return does not start the assessment period. (Davidovitz v. U.S., 58 F2d 1063.  See also Heffernan v. Alexander 48 F2d 855). The assessment is that made by the Secretary (U.S. v. Amori, 136 F Supp 601).  It is made by "recording the liability of the taxpayer in the office of the Secretary." (IRC Section 6203).  The six-year period of limitations begins to run when the Secretary signs the assessment, not the date the list is made.  As you can see there is a lot to learn, but hang in there, you can learn it.