Federal tax law is comprised of many different provisions and pronouncements.
In this lesson, you will review the fundamentals of federal tax law,
specifically in the next six parts you will
refresh your memory on the origins of taxation,
the three sources of tax law,
the hierarchical ranking of tax law sources,
and influential judicial doctrines.
You have likely learned about some of this material in an introductory tax course.
However, review is necessary as these topics and concepts
form the legal foundation of business entity taxation.
Let's begin by reviewing the origins of federal taxation.
Tax law is constantly evolving, thus,
understanding the past is essential for
appreciating the present and predicting the future.
Along these lines, Michael Crichton,
author of Drastic Park and many other famous works stated,
"If you don't know history,
then you don't know anything.
You're a leaf that doesn't know it is part of a tree."
So let's start from the beginning and move forward.
The first income tax in the US was enacted in 1634 by the Massachusetts Bay Colony.
This faculty tax as it was known provided for the assessment of
every individual's assets and the product of their abilities.
The federal government however did not initially adopt this form of taxation;
in part because it did not have the authority to do so.
It was not until 1787 that Article 1 Section 8 Clause one of
the US Constitution known as the 'spending
clause' granted the federal government its power to tax.
Specifically, the clause states that,
"The Congress shall have the power to lay and collect Taxes, Duties, Imposts,
and Excises to pay the debt and provide for
the common Defense and general Welfare of the United States,
but all Duties, Imposts and Excises shall be uniform throughout the United States."
Know that Excises generally refer to transaction level taxes.
Also notice that Taxes were required to be uniform throughout the United States.
You will return to these points in just a moment.
With the start of the American Civil War,
the federal government increased its spending on defense.
To fund such expenditures,
the government enacted an individual income tax in 1861,
that was similar to the one employed by the English colonists in 1634.
After the Civil War ended and major defense expenditures were no longer necessary,
the income tax was repealed in 1872.
It returned in 1894.
However, this time its enactment was met with resistance.
In a landmark case,
Pollock v. Farmers' Loan and Trust Company,
the US Supreme Court held that the unapportioned income taxes on interest,
dividends and rents imposed by the Income Tax Act of 1894,
were equivalent to direct taxes on the property involved.
As such the taxes were ruled unlawful
because they violated the provision in the Constitution,
requiring that direct taxes be uniform throughout the United States.
In response, the federal government enacted
a new corporate income tax a few years later in 1909.
This tax was held to be constitutional because it was designed as an excise tax;
a tax on the right to do business and
the corporate form which was explicitly permitted by the Constitution, cleaver.
Then, to nullify the Pollock decision,
the 16th Amendment of the US Constitution was ratified in 1913.
Specifically, it reads, "The Congress shall have
the power to lay and collect taxes on incomes from whatever source
derived without apportionment among
the several States and without regard to any census or enumeration."
In other words, apportionment and uniformity were no longer requirements.
Because the 16th Amendment officially sanctioned
federal individual and corporate income taxes,
it is routinely cited as the genesis of the income tax,
but as you have seen in the last few minutes the story
actually began about 280 years earlier.
It seems that the opening quote by Michael Crichton is rather spot on.
Michael P Donohoe, PhD, CPAAssociate Professor of Accountancy and PwC Faculty Fellow
