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ACCT324InstructorsManualCh1[1] - CHAPTER 1 AN INTRODUCTION...

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CHAPTER 1 AN INTRODUCTION TO TAXATION AND UNDERSTANDING THE FEDERAL TAX LAW LECTURE NOTES HISTORY OF U.S. TAXATION EARLY PERIODS 1. Constitutionality and Type of Taxpayer . Emphasize the difference between the income tax on individuals and that imposed on corporations in terms of whether such taxes were allowed under the U.S. Constitution prior to the passage of the Sixteenth Amendment . a. The tax imposed on individuals was broad enough to tax income from real and personal property. As such, it was a direct tax and required apportionment under the constitution. (1) In Pollock v. Farmers’ Loan and Trust Co. , the Supreme Court found the income tax applicable to individuals unconstitutional. (2) The Court did not hold however, that a tax on income from personal services was unconstitutional. b. The corporate income tax , enacted in 1909, was held to be constitutional , because it was deemed to be an excise tax. In essence, it was considered to be a tax on the right to do business in the corporate form. It was likened to a form of franchise tax . Because a corporation is an entity created under state law, jurisdictions possess the right to tax its creation and operation. Note that many states still impose franchise taxes on corporations under this rationale. 2. Tests of Constitutionality . The income tax imposed during the Civil War period came and went without ever being successfully challenged under the U.S. Constitution. Only when the income tax was reenacted in 1894 was the issue of constitutionality raised again and pursued in the courts. 1-1
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1-2 2008 Individual Edition/Instructor’s Guide with Lecture Notes 3. Criticism of Income Tax . One of the reasons the income tax evoked such criticism was that many regarded it as an invasion of privacy . At the turn of the century, financial affairs were regarded as highly personal and only concerned the party involved, not the business of the U.S. government. 4. Ratification of Sixteenth Amendment . The timing of the ratification of the Sixteenth Amendment to the U.S. Constitution (1913 ) was instrumental in the financing of U.S. participation in World War I. REVENUE ACTS 5. Tax Law Prior to IRC of 1939 . The tax practitioner or the tax professor of past years must have encountered difficulty prior to the enactment of the Internal Revenue Code of 1939. a. For example, the resolution of a particular problem might have required reference to dozens of different statutes. b. Also, what was established as the law in one particular statute could have been rescinded or modified by a later statute. c. The code approach solved such problems by bringing all of these statutory materials together in one place and provided the practitioner with the latest word on any one issue (since changes are incorporated into a code).
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