Tax R Ch. 9 + FASB
Describe the different constitutional challenges with regard to federal and state taxes.
-The constitutional validity of *state tax laws is still challenged in the courts today*, whereas the constitutionality of *federal taxes is rarely questioned anymore* -State and local *challenges* are (1) is the tax *consistent with the constitution* and (2) whether *laws are federally constitutional*. -The *constitution requires* that *tax laws (1) are uniform (2) provide equal protection & (3) Tax law has a public purpose.*
Explain what "due process" means with respect to taxing out-of-state businesses.
-a *requirement that legal matters be resolved according to established rules and principles*, and that individuals be treated fairly.----------------------Essentially a fairness standard for governmental activities. The *"fairness test" is satisfied when an out-of-state-entity "purposefully avails itself of the benefits of an economic market in the foreign state."* - *To be successful in applying a tax, states must prove that the business has a minimum connection to the state* and that the taxing base for the interstate enterprise *includes only amounts fairly apportioned* to its activities within the state.
Where is the guidance for financial accounting now located?
Accounting Standards Codification (ASC).
What is included in the FASB Accounting Standards Codification Research system?
All accounting standards issued by a standard-setter within level A-D of the current GAAP hierarchy
State Legislature's responsibilities
S-tate legislatures are responsible for *enacting laws regarding state revenue sources and consequently pass bills amending and augmenting their state's tax code.* -While federal revenue bills constitutionally must *start in the House of Representatives*, this is *not a requirement in all state legislatures.*
What is the Securities and Exchange Commission's role in establishing financial accounting standards?
The SEC is responsible for *interpreting federal securities laws, issuing new rules and amending existing rules, overseeing the inspection of securities firms, brokers, investment advisers, and ratings agencies, overseeing private regulatory organizations in the securities, accounting, and auditing fields, and coordinating U.S. securities regulation with federal, state, and foreign authorities.* For public companies, the SEC retains standard-setting authority.
Commerce Clause
The clause in the Constitution (Article I, Section 8, Clause 1) that *gives Congress the power to regulate all business activities that cross state lines or affect more than one state or other nations.* -Taxpayer needs physical presence in state to be legally responsible to collect the state's use tax
Public Law 86-272
*Prevents assessment* of income taxes on a company whose *only business in the state is to solicit sales orders.*
What is the starting point in determining state taxable income?
*federal taxable income* as reflected on the corporate income tax return (Form 1120) or taxable income before the dividends-received deduction
List some of the more common modifications to federal income to arrive at state income.
-*Adding back interest on state and municipal obligations* if not exempt for state purposes (net of expenses). -*Subtracting interest on U.S. obligations*, which is taxable for federal purposes but not state purposes (net of expenses). -*Adding back state income taxes* deducted in computing federal taxable income. -*Subtracting refunds* of state income taxes. -*Subtracting federal income tax paid.* (A limited deduction is allowed in a few states.) -*Adding back federal depreciation, amortization, and depletion* in excess of that allowed by the state or subtracting state depreciation, amortization, and depletion in excess of the federal amount. -*Adjustments of gain or loss on asset dispositions* because of depreciation differences. -*Adjustments for differences between federal and state net operating losses.*
Explain how the passage of a state tax bill is similar to the passage of a federal law
-*State legislatures are responsible for enacting laws* regarding the revenue sources, the *same as Federal *legislatures. -*The state legislatures pass bills amending their state's taxing code*. Once the tax bills are *passed and signed by the Governor*, they are incorporated into the state's statutory structure.
State judicial systems are, for the most part, patterned on the federal system. Most states use three levels of courts: *supreme courts, appeals (appellate) courts, and trial courts*.: (explain how they operate)
-*The trial courts establish the facts and apply the law* to these facts. -*The appeals courts review the trial courts' application* of the law to the set of facts. They generally rely on the trial courts' finding of the facts. -*The state's supreme court usually holds powers corresponding to the U.S. Supreme Court; it is the final interpretation* of an extant law of the state, but its *precedents apply only* to the state in which it is *located.*
How is the codification numbered?
-*Topics* are given a *three-digit number* between *105 and 999.* -*Intersection topics* have a *three number* index as well. -*Subtopics* are given a *two-digit number.* -*Section numbers vary* from topic to topic but are consistent throughout the whole codification. -*Subsections* are denoted by *paragraph number.* (Ex: ASC 740-270-25-1)
"Solicitation of orders"
-Goes beyond merely making requests for sales—it includes the entire process associated with requesting orders by out-of-state businesses. -Activities that are ancillary to obtaining orders are considered part of the solicitation. -*Further, activities that are beyond solicitation of orders, but are trivial, are considered de minimis and do not violate the solicitation of orders protection.* -*Having an office located in a state, even if solely for the solicitation of orders, is not de minimis and can subject a business to state taxation.*
Nexus
-Needed in Due process -the *requisite contract between a taxpayer and a state before the state has jurisdiction to tax the taxpayer.*
Enacting Tax Statutes
-Once tax statutes are enacted, they *must be interpreted and enforced*. -These *duties fall to administrative agencies* created by either statutory or constitutional provisions. -In most states, the *Department of Revenue (Department of Taxation, State Tax Commission, etc.) is the main administrative agency for this purpose*
Why is state and local tax planning becoming more important?
-State and local tax planning is becoming more important because it's become a *large part of client satisfaction* to minimize state and local tax burdens, especially as costs are increasing. -There is *a lot of opportunity in tax planning to save businesses/people money* and help them get closer to their overall financial goals.
Why are taxpayers emphasizing multijurisdictional tax planning?
-The *scope of tax professional services* has gotten *increasingly larger* and more complex due to the state's *expansion of their taxing systems and collection efforts*. -It is important to understand the jurisdictions of different clients, how to deal with transactions across state borders, as well as how the U.S. deals with taxing foreign transactions and how foreign countries will tax the U.S. companies. -*Multijurisdictional tax planning can help relieve some of the potential issues* with the points listed above.
What are examples of authorities included in the Accounting Standards Codification?
-The Codification organizes thousands of U.S. GAAP pronouncements into accounting topics. -The ACS has authority over 5 main areas such as *General principles, presentation, financial statement accounts, broad transactions, and industry. * -*Authorities included in the ASC include portions of the SEC issued forms of guidance,* Regulation S-X, staff accounting bulletins and others that have been codified by the SEC.
Discuss the supremacy provision in the U.S. Constitution.
-The Supremacy Clause was created to *help with potential conflicts between the state and federal law.* -It dictates when conflicts must be resolved in the federal government's favor. -*The federal laws are referred to as the "supreme law of the land" and trump all state laws.*
How is the codification organized?
-The codification is organized by *topical areas.* -Each area is broken down into topics, and each topic is further expanded by subtopic, then into sections, and finally into subsections
Transfer price: "Arm's-length"
Principal requires that *prices for services rendered should be set as if parties are not related*
Due Process Clause
The Due Process Clause *does not require a physical presence by the out-of-state entity* for a state to have taxing jurisdiction. Thus, *an economic presence rising above a de minimis level is sufficient* to tax under the Due Process Clause.
What is the FASB Accounting Standards Codification Research system?
The FASB Accounting Standards Codification is the *source of authoritative generally accepted accounting principles (GAAP)* recognized by the FASB to be applied to nongovernmental entities.
How should researchers search the Codification?
The FASB suggests two steps when conducting research: 1.) *Browse the topical structure and related tables of contents.* Because all related content is organized topically, users should be able to identify most content by topical browsing. 2.) *Use the text-search feature only for very specific items.* Text search is based on specific language. Deviations from a selected search expression will lead to certain relevant content being excluded from search results. The CRS incorporates certain tools to help overcome the issue but searching will always be constrained.
What organization has the primary responsibility for establishing standards of financial accounting?
The Financial Accounting Standards Board (FASB).
Who issues International Accounting Standards? Where are they available?
The International Accounting Standards Board (IASB) issues the Internal accounting standards, and they are available in the international financial reporting standards (IFRS).
State Judicial Continued
Whereas the federal judicial system includes a court specifically for tax cases, the Tax Court, most states do not have an equivalent.
Sources of Income and Dividends Continued: Deductions and losses apportioned between domestic and foreign-source gross income-
−*Deductions to be allocated where clearly related to income* −*Deductions apportioned where no direct relationship exists to income* −*Special apportionment rules for interest expense, research and experimentation costs, and losses on sales of real property*
Equal Protection Clause of 14th Amendment
−Based on Article 14, *no state shall "deny to any person within its jurisdiction the equal protection of the laws."*
Tax Treaties
−Intended to mitigate double taxation −*Treasury Department negotiates U.S. treaties* -Both IRC and tax treaties may provide conflicting treatment of some types of foreign-sourced income
State constitutions:
−Limit rates and types of taxes and requires tax laws to: ---> *Show uniformity* ---> *Show equal protection* ---> *Have a public purpose*
Sources of Income and Dividends
−Per tax law, type of income can also dictate source ---> *Interest and dividends generally sourced to payer's residence*; however, exemptions allowed to nonresidents for interest paid by U.S. bank ---> *Rents, royalties, or gains from property sales* sourced to *property's location* ---> *Sales of inventory sourced* to *transaction's location* ---> *Compensation income usually sourced to where services performed*
Administrative
−State administrative agencies taxed with interpreting and enforcing tax laws
