The congressional intent on tax exemption on the insurance benefits of terminally ill individuals is to alleviate the financial burden for long-term expenses on healthcare. The inclusion of accelerated death benefits in life insurance allows terminally ill individuals to receive part or all of the death benefits presupposed by the insurance policy and use the money to support their health (Burke & Friel, 2008). Death benefits and other proceeds relating to the purchase of policies for individuals with terminal illness are non-taxable death earnings. A terminally ill person can obtain the cash suggested by a policy with the associated gains being separated from the gross income, which means that s/he does not have to pay tax on the gains. Gains due the cancellation or sale of a life insurance policy before the death of the insured are subject to taxation because the tax exemption on proceeds from life insurance applies upon the death of the policy owner. The taxpayer treats the proceeds from a canceled or sold life insurance as an investment taxable on the principle of gains over the premium (Miller & Maine, 2010).
Bob’s decision was inconsistent with the congressional intent to provide the tax exemption on his insurance because he exploited the policy to enjoy the benefits of tax-deferred growth on a pool of capital. Bob’s actions highlight a loophole in the federal laws on taxation, which individuals can exploit as a source of tax-free proceeds to offset the expenses incurred due to the taxation of other pools of capital such as fixed income, equities and mutual funds. He used tax exemptions to gain income, which he used for purposes unrelated to the expense on healthcare. The Income Tax Act allows the owner of a tax-exempted insurance policy to transfer and distribute the proceeds from the policy on a tax-free basis. The lack of specific policies in the use of proceeds from a tax-exempted policy has created a tax shelter under which individuals can accumulate money for use in diverse projects (Stephens, 2005). The insured has a chance to increase his wealth using the current federal taxation laws by investing in a tax-exempted policy before transferring the proceeds to mainstream investment, such as real estate. The exploitation of the policies on tax exemption for terminally ill individuals has minimal effects on tax collection because only individuals certified as terminally ill can exploit accelerated death benefits.
There is no need to close the loophole because people who purchase insurance policies from the terminally ill cannot inherit the benefits of tax-exemption. Although Bob used the benefits on his insurance for the unintended purpose, the impact of his actions on tax collection is insignificant. Considering that the criteria for certifying a terminally ill person entails the expectation of death of the insured within 24 months, the impacts of the tax-free gains on life insurance are mainly short-term (Tiller & Fagerberg, 2005). The transfer of property acquired from the proceeds of the cash surrendered on an insurance policy is subjected to federal laws on taxation of inheritance, which limits the scope of exploiting tax-exempted insurance as an investment vehicle or means of transferring wealth without paying taxes. The framework for the exploitation of tax exemption on accelerated death benefits and sale of an insurance policy for a terminally ill person cannot serve the long-term purpose of an asset class in an investment portfolio.
References
Burke, J. M., & Friel, M. K. (2008). Understanding federal income taxation (3rd ed.). Newark, NJ: LexisNexis.
Miller, J. A., & Maine, J. A. (2010). The fundamentals of federal taxation: problems and materials (2nd ed.). Durham, NC: Carolina Academic Press.
Stephens, G. R. (2005). Estate planning with life insurance (3rd ed.). Toronto: CCH Canadian.
Tiller, J., & Fagerberg, D. (2005). Life, Health & Annuity Reinsurance. Minnesota: ACTEX Publications.
Recently, American citizens have witnessed a tendency of rising taxes (Blodget 1). This issue of rising taxes seems to have gained momentum, especially after the financial recession of 2008. Today, many Americans are concerned about the increasing tax levels. The issue of huge taxes has led to declining disposable income, forcing many consumers to struggle in their daily lives.
If one was to interview many Americans on the issue of taxes, there are high chances that many of them will respond by highlighting their deteriorating living standards resulting from high taxes. This paper will discuss the issue of high taxes and its effect on American people.
The direct impact of high taxes on households would be low purchasing power, which leads to a reduction in consumption levels, as well as accumulation of debts as household seek alternative source of funds to support their livelihood. On the other hand, high taxes affect businesses, as they eat into the firms’ profits, significantly reducing net earnings that could be used in expansion of business or new investments. As a result, the whole economy tends to suffer, as demand decreases significantly.
Therefore, there is need for government agencies responsible for tax regulation to initiate tax reforms and policies that would be beneficial to all the stakeholders in the economy. Moreover, given that the taxpayers are directly affected by the tax system in place, it is important that the system should be equitable, accommodative, and fair to all stakeholders.
High taxes have a negative effect on the growth of the economy. For example, high taxes lead to low net incomes despite the efforts made by people to earn such income, thus eroding motivation from people who then become less productive (Cohn 1). In addition, high taxes tend to increase operating costs for businesses, and since the businesses have to make profit, they may decide to increase the price of finished products or lay off some employees in order to cut costs.
The effect of expensive finished products is felt by consumers. Indeed, the consumers are affected twice by increased taxes, first through reduced income and then through increased commodity prices. The general effect of this tax increment is reduction in purchases, which then leads to reduction in supply as firms reduce production to match demand. Finally, the overall economic activity in the country declines, thus affecting economic growth negatively.
Although the above points call for reduction of taxes for the benefit of consumers and investors, some scholars believe that low taxes are not beneficial to the economy. They state that, taxes are used by government to finance public goods, which are essential for the welfare of citizens (Cohn 1). Therefore, low taxes will make provision of welfare goods by the government difficult, thus deteriorating the general economic conditions.
Moreover, the government will be forced to cut budget for public goods such as healthcare, education, transport, security among others, which are essential for all citizens, the result of which will be a decrease in social welfare of the society (Cohn 1). Therefore, the issue of enacting reforms to reduce taxes to manageable levels for majority of Americans is considered not to be the best option by this school of thought.
There are numerous avenues through which this issue of high taxes can be tackled and bring relief to majority of Americans. As the situation stands now, many businesses are either closing down due to high taxes or moving to other countries where taxes are affordable. The result is the increasing unemployment as job opportunities decline. Moreover, as businesses relocate, government financing declines, leading to collapse of various programs and reduction of wealth creation in the country.
The government should therefore initiate a policy that encourages investment and wealth creation. Such a policy would ensure that the taxes applicable to various business classes are equitable and fair so that the businesses are able to operate profitable. When this happens, numerous companies willing to leave will be enticed to stay and participate in wealth creation. The establishment of more indigenous industries will provide employment for many Americans, enabling the many consumers to possess more income after paying taxes.
What the government will do is that, instead of concentrating high taxes on a particular segment of population, it should spread the tax bracket across a wide group, making it possible to reduce taxes as more people become eligible to pay taxes. The government should also reform its spending pattern for effective implementation of tax system by prioritizing the most important programs. Indeed, this will largely reduce the deficit and enable the economy to recover.
Another area that the government needs to address is the American property industry. According to Tuttle (1), property taxes have skyrocketed recently, forcing investors to shy away from the property industry, or even relocating to other industries or countries.
Moreover, as property taxes increase, property prices including rent increase, thus affecting consumers and small businesses. Indeed, small businesses are the main drivers of the economy, therefore, when they are faced with expensive properties, they tend to relocate, leading to unemployment and reduced trading activities.
When this happens, the impact is huge and evident in key aspects such as reduction of employment opportunities, increase in number of unemployment benefits, and little contribution to national tax kitty. Therefore, it is prudent for effective and efficient property tax reforms to be enacted.
The issue of raising tax for the rich and middle class population is very sensitive to the economy. Generally, a rise in taxes creates an immense burden to larger American society. The society cannot progress at an accelerated speed if high taxes persist, as this tends to push investors and rich people to other regions.
As investors move away from the economy, employment opportunities reduce, while at same time, taxes reduce leading to low production of social welfare programs that cannot adequately cater for the whole population. Therefore, given the immense negative effects that high tax are imposing on the nation, there is need for establishment and implementation of a comprehensive tax reform framework that is more business friendly.
Increased business activity contributes to growth of the economy, as more people are able to earn incomes, thus entering into tax bracket. In this case, distribution of tax pay will be more even and widespread, thus allowing government to reduce tax rates while at the same time collecting enough to finance social programs.
Therefore, instead of just fixing eyes on the tax movement, it would be advisable if necessary steps were undertaken to stimulate economic growth, reduce government spending, and exploit more energy resources available in the country, which will subsequently contribute to economic growth, hence pushing taxes down.
This paper seeks to define the objectives of modern income tax statutes, compare and contrast Generally Accepted Accounting Principles (GAAP) and tax accounting. The paper also explains the reasons for the difference between the two. In addition, the paper will differentiate between tax avoidance and tax evasion. The last part makes a conclusion from the discussions made.
Analysis and Discussion
The objectives of modern income tax statutes
The objectives of modern income tax statutes primarily include raising tax revenues to defray expenses of government (Crane, 2006). There is no government in this world that would survive without taxes. Hence taxes are considered as the lifeblood of the government (Dimaampao, 2002).
To attain its objectives, the government must be able to have a framework or standard to measure revenues and expenses as done in financial accounting. However the standards as far as taxation is concerned, are not exactly the same as those accomplished under financial accounting. The next section will speak more about the distinctions of the two terms.
Another purpose of modern income tax statutes is for regulation. Income taxation applies the principle of progressive taxation which means that those who have more income will have to share more by paying higher taxes. Thus, it is not surprising to see that the higher the income of the individual the higher would be share in taxes. The income tax therefore would promote in the distribution of wealth to society since than those who have less would benefit as a result from the higher taxes paid by those who earn more income.
Since income could explain the growth of wealth among all kinds of entities, it could be deduced that those who have increased wealth must have paid more taxes. Since wealth could also be measured my monetary currency, it is indispensable that there could be tax accounting for purposes of computing the tax liabilities of individuals and business entities. Moreover, since income taxation is made to distribute wealth, it essentially promotes equality of opportunities for all which is in consonance with the objectives of the US Constitution.
As a regulatory measure, income taxes could be used by the government to influence consumer spending, depending on how the government evaluates what is happening on the economy. To illustrate, because of the present downturn in the economy, the Obama government may include in its plan the use tax cuts as a way of motivating people to spend because of higher disposal income caused by reduced tax rates. The reduction in tax rates could therefore help in restoring the economic activities that are badly needed not only by the US economy but the whole world as many are depending from it.
As regulatory measure, the income tax is also use to balance a sense of inequality or injustice that is created by state property taxes and federal tariffs and excises (Crane, 2006).
Compare and contrast Generally Accepted Accounting Principles (GAAP) and tax accounting. Explain why they are different
The GAAP encompasses the standards used in the preparation of financial statements under financial accounting under the standards (Meigs and Meigs, 1995). On other hand, under tax accounting standards include the taxation laws passed by the US legislative bodies particularly the US Congress and those laws and regulations as implemented by the Internal Revenue Service (IRS). There is similarity under financial accounting which uses GAAP and tax accounting which uses tax laws, rules and regulations. Both would cause the production of the income statement and balance sheet. The income statements measures the revenues and expenses while the balance sheet measures the financial position of an individual or a business entity in terms of assets, liabilities and owner’s equity.
But since the bases or standards from which the two financial statements are prepared, the results would be different to a great extent. Revenues reported under financial accounting would be different under tax accounting in many cases. This could be caused by the fact that under financial accounting, the usual accounting method is accrual accounting while under tax accounting there are cases where the cash accounting method is used.
Similarly, difference in net income between financial accounting and tax accounting could be caused by the treatment of expenses. Some expenses which are deduction to revenues may be part of the financial accounting like the doubtful accounts expense (Meigs and Meigs, 1995) but the same may not be allowed by the tax rules unless the accounts could no longer be collected by the taxpayer by stronger kind of evidence than mere estimate.
The difference is essentially caused by the distinct purpose of each. While financial accounting aims to provide information for various users of financial statements, tax accounting basically serves government users such the Internal Revenue Service (IRS), the US Congress and others for purposes as described earlier.
Differentiate between tax avoidance and tax evasion
Tax avoidance is legal and is allowed by law by the application of knowledge of the different options as allowed by the tax laws and regulations to minimize the payment of taxes. Tax evasion on the other hand is illegal since it is a deliberate non-payment of correct taxes which may be caused by deliberately by not filing of the required income tax returns or deliberately misstating the correct amount of revenues or expenses to compute income as required by law. The tendency therefore if there is attempt to commit tax evasion is by misstatement in terms of understating the reported revenues and overstating of reported expenses. To practice tax avoidance, one must be familiar with tax laws and different valid options that would be availed legally. Tax avoidance may not need familiarity of tax laws as it is enough that there is deliberate intention not to pay taxes or to commit fraud in meeting tax obligations to the government.
Conclusion
This paper has defined the objectives of modern income tax statutes which laid the ground in comparing and contrasting GAAP and tax accounting. The objectives of tax accounting is essentially different from financial accounting that uses GAAP but understanding financial accounting appears to provide a good foundation in understanding tax accounting. It is not big surprise to see that those who are practicing tax accounting are necessarily accountants who have backgrounds in accounting. The reasons for the difference between the two concepts therefore emanated from the difference of their objectives or purposes. The similarities and distinctions of the two could not be further detached from the discussion of the difference between tax avoidance and tax evasion.
Since the accountants practicing tax accounting are expected to know other areas of accounting including its intricacies and complexities, it is not also surprising that the accountants are best people to understand the effective implementation of taxations laws. On the other hand, thus if accountants are true to their profession they could really help prevent evasion and help their clients to resort to tax avoidance. In certain cases however, some of those who may commit or help commit tax evasion may include the accountants who happen to know more about accounting.
References
Crane, Charlotte (2006) The Income Tax and The Burden of Perfection, Northwestern University Law Review, Vol. 100, No. 1
Meigs and Meigs (1995) Financial Accounting, McGraw-Hill, New York, USA.
Dimaampao, Japar (2002) Tax Principles and Remedies, Rex Bookstore, Inc.
This paper critically examines the efficacy of the Taxes Act 2003, passed by former President Bush by cutting personal taxes and depreciation rates, in order to create more incomes and thus increase consumer spending, leading to higher GDP and lower unemployment after its passing.
By using economic models, it is sought to show that marginal propensity for increased income would be more than marginal imports, thus creating surplus funds for social good. However, the assumption that consumption and imports bear a nexus to disposable income may not be applicable in all cases.
While this article has been partly successful in its approach and argument, it has failed to provide robust recommendations on how to address this dilemma.
Introduction
Did she/he set forth a clear purpose of analysis and the question at issue (that is the problem or dilemma) very clearly? Explain fully why or why not.
Yes, to a certain extent, there was a clear purpose of analysis, and this was in terms of critically examining the Taxes Act 2003. The dilemma was in terms of whether after the passing of the Act, the aims and objectives of this Bill had been achieved, especially in areas of higher GDP, lowered unemployment brought about by reduced tax rates, which normally should increase spending and make the economy flush with funds for investments and higher employment rates. It is believed that “savings from the capital gains tax cut would be concentrated among higher-income individuals, and as a result the savings were less likely to be spent and would produce only a small economic stimulus.” (Krawczyk and Wright, 2009, Para 2).
The clear purpose however could not be fully determined since the graphs were not consistent and matching with the commentary. Moreover, there are also unexplained definitions and key terms with regard to financial terminologies used.
The Concepts: Did she/he give a concise description and definition of the concepts? Explain fully (Please identify the concepts)
The main concepts have been the economic concepts which state that
Total income = Consumption (as a function of disposable income) + investments (function of Interest r) + exogenous government exports + exogenous imports – Imports (as a function of disposable income). (The 2003 Tax Cuts and the Economy: The underlying Concepts). It is believed that when income increases, consumption also increases, since this report assumes that income is linked with consumption and imports, but the additional inclination to consume is higher than additional inclination to import.
Analysis: Did she/he employ comprehensive thinking to analyze, synthesize, and evaluate the facts, concepts, and values that together form the case with a view to testing somebody or bodies of principles, proposals, or procedures…? Explain fully
The author has taken recourse to diagrammatical representation to analyze, synthesize and evaluate the topic. The aspect tested is whether legislation has impacted upon growth and reduced economic uncertainties, like unemployment. While this study has believed that the bill may have been partly successful in increasing growth rates (GDP), it is seen that it has not been able to consider whether unemployment has been addressed. Further, it is also seen that the reasons for the bottom dip and later increase in lending rates and fiscal position have not been addressed. It could be apparent and best surmised that the upward curve to the left in lending rates and fiscal position and would have been due to other factors and not due to the direct impact of Bill 2003.
Conclusions/recommendations: Did she/he summarize the findings and conclusions and include specific recommendations for action. Explain fully.
To a certain extent, the summarization of the findings and conclusions has been made, but these could have been better structured and presented. For one thing, the nexus between the economic concepts used and their implications on unemployment rates have not been delineated; for another, the diagrammatical representations have not been lucidly explained. The recommendations have been scantly stressing only upon the fact that direct methods rather than indirect methods to reduce unemployment rates may be used. What these direct methods are have not been mentioned or discussed.
Style: Did she/he use quotations, paraphrases, and summaries appropriately?
Yes, largely, the quotations, paraphrases and summaries have been reasonably appropriate. The correct APA citation has also been, by and large following.
Reference List
Krawczyk, K and Wright, L. (2009). Dividends and capital gains planning after the 2003 Tax act: Economic effects. The CPA journal. A Publication of the New York State Society of CPAs. Web.
The 2003 Tax Cuts and the Economy: The underlying Concepts. (Provided by the customer).
A tax lien is a law that is imposed by the federal government of the Unites states of America when one owesur unpaid taxes to the Internal Revenue Service (IRS). The government and the treasury hold one liable for a tax lien when one has delayed to make tax payments on time.
Federal tax liens show the entire world that one owes the IRS money via unpaid taxes and any individual who pulls out one’s report on credits or whoever tries to access information on public records will clearly know of the Lien. Tax liens always have a negative effect on one’s credit score since they show up on public records. A tax lien has the potential of putting off potential lenders and creditors and it damages one’s ability to be lent or credited money and more so it makes it more difficult for one to purchase a car or a home.
A public record on a tax lien becomes part of credit reports and it remains so for up to seven years even if full payments have been made. In order to remove the tax lien in the public record, one can file a dispute with the aid of the credit bureaus. The way one can file a dispute for other errors that have been incurred by other credit reports is the same way one can file a complaint. Another way of getting a tax lien released from one’s credit report is by requesting the Credit Bureau to remove it if the IRS has withdrawn it from its records.
When the statute of limitation expires, this becomes is a clear indication that the tax lien should not be imposed, and if the lien is not removed on the credit report one should make a call to the Internal Revenue Service. The call is to inform the bureau of the reason as to why one needs the lien dispatched as soon as possible (Loftis 48). In case one is buying a house or a car and the tax lien is a hindrance to the purchasing process the Taxpayer Advocate service should be contacted for immediate action to be taken towards the removal of the lien.
Buying a car and a house simultaneously is a little bit complicated. Alternatively, it is recommendable to have both the car and the house if there is adequate liquid capital to purchase them. However, since one wants both the vehicle and the home it is much more advisable to acquire the home first because its cost and other commitments are much lower. Qualifying for a car loan is also very easy unlike qualifying for a house loan. For instance, the analysis of a customer’s credit report is less when he/she is acquiring a vehicle and it is sensible for one to pursue the house purchase first and then follow up with the car.
In case the purchase of the car cannot be postponed, one should first analyze and see whether a lender can qualify him/her for a loan then determine whether personally he/she can gather the collateral to cover the purchase price of the desired car. Some lenders require one to pay off some or all the debts they have in order for them to qualify for a home loan therefore lending both for the car and the house will be difficult.
Works Cited
Loftis, Larry. Profit by Investing in Real Estate Tax Liens: Earn Safe, Secured, and Fixed Returns Every Time, New York, NY: Kaplan Pub, 2007. Print.
It is worth recalling that expressed powers refer to those powers of the U.S. Congress, which are defined in Article I Section 8 of the U.S. Constitution. These are specific, delegated actions to this governmental body, which are explicitly stated in the Constitution, unlike implied powers. Such powers give Congress the power to make critical national decisions on national policy, including questions of peace and war. Among all the expressed powers, some of the most significant to Congress are taxation and import relations. More specifically, the following two expressed powers are considered in this paper, “To lay and collect… Excises…” and “To regulate Commerce with foreign Nations…” as being of crucial importance to the United States Congress (NCC, n.d., p. 3). The purpose of this mini-essay is to discuss this thesis and make a compelling argument for it.
Taxation
It is a fact that, without taxes, no state structure can sustainably exist over time. There is always a connection between any interacting parties: in the case of the relationship between the state and citizens, taxes are a form of that cooperation. People actively enjoy the benefits created and feel within national security because they pay their taxes faithfully. On the contrary, states collect taxes from the population but ensure the sustainable functioning of national systems. However, among the many tax obligations that have been actively developing late, special attention should be paid to excise taxes. Generally speaking, excise taxes are indirect taxes imposed domestically on consumer goods, whether cigarettes or alcohol. Excise is one of the most important sources of money for the state budget for two reasons at once. First, people are unlikely to give up consuming tobacco or alcohol due to their heavy dependence. Secondly, the excise stamp can often reach half or even more of the price, which means that the revenues to the state treasury are substantial.
In terms of significance, the excise tax as a type of tax allows for establishing a stable and understandable relationship between Congress and the population. In addition to the already mentioned effect of increasing the state’s tax base, the excise tax instrument allows Congress to manage the nation’s health indirectly. Since such stamps are imposed on harmful products, the state regulates their price: consequently, the higher the cost of tobacco and alcohol, the fewer people are expected to consume them. Consequently, excise taxes for Congress have a double effect and are the instrument that provides a firm connection with the masses of people.
Imports
Congress has the power not only in the state’s domestic policy but also in the foreign policy. The use of import policy, for example, enables it to control the products imported into the state. These can be any object of the food industry, items, or even the results of intellectual activity. Ignoring the management of foreign products is a strategic mistake of the state. Therefore, the U.S. Congress has the constitutional authority to be in charge of import policy to bring scarce or locally unproduced goods into the country. At the same time, managing imports allows Congress to create a necessary and sufficient facility of specific products in the country to control consumer demand and not create a deficit economy. The more imports a country is characteristic of, the more sustainable its economy is expected.
Conclusion
To summarize, it should be recalled that the powers of the U.S. Congress include a list of constitutionally mandated powers. Among these powers, one of the most important is the administration of excise taxes and the country’s import policy. Both of these powers have a similar effect. Excise taxes allow us to manage the system of indirect taxation, while import policy helps us manage products coming in from outside the country. Both powers directly impact the national economy and allow us to strengthen the link between the state and the population.
The tax of the $11,000 fees paid to the attorney by Sarah is a fixed amount hence no deductions will be made on the value.
This memo identifies the judgmental considerations and relevant section of the law that explains how the decision was made.
Relevant facts
In this case Sarah, the petitioner, clearly understands the market value of the property she acquired. The property, a parcel of land, is the property inherited from her mother meaning that the acquisition and ownership of the property are not meant for the sole purpose of sale. Receiving the parcel in 2009 and inquiring about the market value of the property does not rule out the prospects of a future sale.
The intentions of increasing the number of residences per acre after defining the reason as to why the price low indicated “future sale”. Consequently, after the Texas County Board of Supervisors began deliberating on the enactment of the zoning law, she suspended the case appeal and after the ruling, the new value of the property was raised at $25,000 from $15,750. She incurred attorney fees of $11,000. The paradox involves the determination of the status of these charges as either deductible or not.
Issues identified
The cost incurred in this case charges for the services offered by the attorney. She did not incur them in “reproducing” the property. In addition, she is an economist meaning she is aware of the market-value price of land, hence she will do everything possible to get the best value of the property. Should the cost incurred by Sarah as attorney’s fees are deducted?
Conclusion
The amount of $11,000 is not deductible and is capitalized. This is according to IRS 263A-1T which states that in case there are costs incurred in a new building or for activities aimed at improving the quality or increasing the value of a building, there will be no deduction allowed. The amount is the attorney’s fee and is not for tangible improvements to the land according to IRS 263A (g) 1 which includes the actions of building, constructing, installing, manufacturing, developing, or improving as the only means by which the amount can be deducted. It is therefore concluded that the amount should not be taxed.
An example of the regulation governing capital expenditure provided by the department of the treasury is IRS 1.263A-2T. Capital expenditure under this section has been defined as the cost incurred when acquiring or creating interest in land which includes minerals and timber rights among others. This supports that the fee paid by Sarah to the attorney should be capitalized.
Authorities and reasoning
This case is supported by the ruling of Lee D. and Marjorie L. Hustead v. Commissioner, U.S. Tax Court, CCH. 50,022(M), T.C. Memo. 50,022(M), 68 T.C.M. 342, T.C. Memo, 1994-374, (1994) case. This case was decided on the following section 263A on the general rule. Also, “It is of course well established that rezoning expenses are not deductible when made, since they represent a capital outlay”, as ruled by Chevy Chase Land Co. v. Commissioner, 72 T.C. 481, 487 (1979); see also Galt v. Commissioner, 19 T.C. 892, 910 (1953).
In the recent past, high profile cases due to fraudulent accounting and tax evasion have led to substantial changes in the regulations of corporate governance and accounting (Crocker & Slemrod, 2005). Fraudulent accounting and tax evasion has been established as an avenue through which corporations can increase their profits and as such requires increased regulation (Crocker & Slemrod, 2005).
In this regard the Sarbanes Oxley bill passed in 2002 set up a regulatory board charged with oversight of the accounting industry. Based on new regulations there are harsher penalties for corporations or officers found to have colluded in the evasion of taxes (Crocker & Slemrod, 2005).
The evasion of taxes is a more serious issue in some economies than in others. It is reported that with moderate government regulation the rate of tax evasion is reduced and an increased compliance is observed coupled with greater economic growth (Chen, 2003). However, the enforcement of law in international corporations is difficult given varying legal requirements.
This problem could be overcome through listing of foreign companies in the U.S. stock trading market with a view to deterring officials from engaging in embezzlement and tax evasion (Siegel, 2005). This can be performed through an American Depository Receipt or direct listing on a major American stock exchange. This procedure has been found effective by international companies seeking to force compliance and deter corrupt officials (Siegel, 2005).
In addition to the above practices insider trading is a practice that has drawn concern among regulators and participants in the financial industry. It is not permitted for banks to use private knowledge based on information such as credit default swaps (CDS) to trade. However, reports suggest that many institutions have been doing this to reduce risks to their own balance sheets (Acharya & Johnson, 2007).
Studies have indicated that there is a flow of information from CDS markets to equity markets most often emanating from sources within the financial organizations (Randazzo et al., 2005).Following such actions the committee that developed the Sarbanes Oxley bill made provisions to allow for prosecution of individuals within the organization as well as provisions that could protect whistle blowers (Wallison, 2005).
Brief Historical Context of Sarbanes Oxley Act
The bill passed in 2002 and implemented by the Securities and Exchange Commission (SEC) came into being following the financial scandals that led to the collapse of Enron, WorldCom and several other major companies (Wallison, 2005).
The main component of the act is that it places responsibility on the shoulders individuals and systems to prevent fraud before it happens. The directors, auditors and accountants must comply with more stringent internal controls in an attempt to end unfair trading practices within organizations thus reducing risks to shareholders investment (Wallison, 2005).
The implementation of the act has been useful in addressing some ethical issues that before were not appropriately catered for thus creating loopholes. Following the huge losses that were made in the scandals involving Enron, WorldCom and the like it became apparent that the CEO’s should be held directly accountable for their decisions with regards to the organizations finances (Wallison, 2005).
In addition to this the act through such measures also provided an avenue to curb the actions of insiders who perform illegal trade activities without authorization. The improved requirements for information security thus make it much harder for such actions to be undertaken (Pinder, 2006).
The act has also improved the rate of compliance with regard to taxation by the increased requirement on regular audits. This coupled by the fact that the auditors are also expected to satisfy strict requirements ensures that tax compliance and economic growth can be improved (Kirchler & Wahl, 2010).
It has already been established that moderate degree of government involvement is a key ingredient for improved compliance (Crocker & Slemrod, 2005). In addition to this the requirement for organizational ethics programs are a suitable method of ensuring the selection of the right leaders by shareholders as opposed to the most profitable leaders (Wallison, 2005).
Despite the increased monitoring that has been introduced through the bill it is possible to assume that there has been an improvement in auditing standards within the industry.
Unfortunately the implementation of the act has caused auditing costs to increase significantly. As a result it is still difficult to observe whether the act has made trade in the securities markets more profitable (Vakkur, McAfee & Kipperman, 2010). This has led some practitioners to suggest that the stricter rules based regime may not necessarily produce greater results than a principle based regime.
References
Acharya, V. V., & Johnson, T. C. (2007). Insider Trading in Credit Derivatives. Journal of Financial Economics, 84, 110-141.
Chen, B. L (2003). Tax Evasion in a model of Endogenous Growth. Review of Economic Dynamics, 6, 381-403.
Crocker, K. J., & Slemrod, J. (2005). Corporate Tax Evasion with Agency Costs. Journal of Public Economics, 1-29.
Kirchler, E., Wahl, I. (2010). Tax Compliance Inventory TAX-I. Designing an Inventory for Surveys on Tax Compliance. Journal of Economic Psychology, 31, 331-346.
Pinder, P. (2006). Preparing Information Security for Legal and Regulatory Compliance (Sarbanes-Oxley and Basel II). Information Security Technical Report II, 32-38.
Randazzo, M. R., Keeney, M., Kowalski, E., Cappeli, D., & Moore, A. (2005). Insider Threat Study: Illicit Cyber Activity in the Banking and Finance Sector. Technical Report, CMU/SEI-2004-TR-021, 1-37.
Siegel, J. (2005). Can Foreign Firms Bond themselves effectively by Renting U.S. Securities Laws? Journal of Financial Economics, 1-96.
Vakkur, N. V., McAfee, R. P., & Kipperman, F. (2010). The Unintended Effects of the Sarbanes Oxley Act of 2002. Research in Accounting Regulation, 22, 18-28.
Wallison, P. J. (2005). Sarbanes-Oxley and the Ebbers Conviction. American Enterprise Institute for Public Policy Research, 1-8.
The council of the City of Prince George is charged with the mandate of providing a variety of services to residents and inhabitants of the area. Some of these services include solid waste, transportation, finance, billing and taxation, water and real estate management within the city. The council can carry out this mandate since it conducts meetings where policies are debated and decided. I got the opportunity to watch how the Council of the City of Prince George conducts its meetings during the creation of ByLaw number 8370 2011. This ByLaw applied to Parcels that are situated within the Revitalization Area where a project is proposed by an owner. The council defined the Revitalization Area as a specific area that was mapped in the downtown part of the City of Prince George.
The ByLaw No. 8370 2011 was created to create a contractual agreement between the City of Prince George and the owners of properties that lie within the Revitalization Area. The ByLaw also provided tax exemption to owners of these properties, which is a fraction of the municipal property taxes that are payable according to the evaluated value of the property or improvements made on it. The ByLaw was passed after a unanimous decision by all the council members who were present in the meeting and were eligible to vote. This occurred on July 25th, 2011 after three readings were done (City of Prince George 2011). The ByLaw was then left for signing by the mayor and corporate officer thereafter.
Several laws and statutes were mentioned or discussed during the Council meeting. It was mentioned that the ByLaw agreement does not interfere with a common law or the powers of the city which are stated in the Interpretation Act, R.S.B.C. 1979, c. 206. The Strata Property Act was also mentioned to explain the procedures to be followed in case an owner stratifies his property but is entitled to tax exemption.
During the council meeting, several visual aids were used to illustrate certain details of the ByLaw. Some of these tools that were used include a detailed map of the downtown area where the Revitalization Area is marked. A copy of the contract that is used to bind the owner and the City of Prince George was also available during the meeting. This contact was the focal point for ByLaw No. 8370 since it spelled out all the required details about the obligations of the two parties involved in the tax exemption program. The contract captured qualifications for property owners who could be granted tax exemption.
The contract explained the factors under which the City Council of Prince George can revoke the agreement and the penalties involved thereafter for the parties that breach the contract. For instance, it was stated that if the owner sells a portion of the property without transferring the tax benefits to the buyer, then this would be a breach liable for termination of the agreement and a fine payable within 30 days.
The possible outcomes of the ByLaw No. 8370 are that property owners in the Revitalization Area will breathe a sigh of relief thanks to the adoption of the tax exemption program that kicked off on 08/08/2011 when the ByLaw was adopted. There will also be better handling of properties within the Revitalization Area so that owners can qualify and maintain their tax exemption status.
Works Cited
City of Prince George. Downtown Revitalization Tax Exemption Bylaw No. 8370. 2011. Web.
This is a detailed report on superannuation and tax implications on SMSF (self managed super fund).Superannuation is a project or rather a system that is used in Australia with the aim of securing the old people and their plans in terms of investments. This is where a regular or a repetitive payment is made by somebody towards their retirement.
This happens through periodic reductions of somebody’s income made towards the superannuation. In this research, we will look at the certain implications of superannuation and tax on certain actions. The main aim or advantage of superannuation is that when contributions are made from ones income, tax is lower.
This is according to Dale and Ralph (1993) However; there are rules that govern superannuation. Loopholes or disadvantages that will make this program fail might appear or take shape if regulations are not put into place. According to Myra this are the regulations she hopes will be effective so that her husband does not lose her money.
Methods of research
Through a vigorous investigative exercise, enough information was gathered on the various rules that govern superannuation. The sources for this information included library materials and a small use of questionnaires. The questionnaires were used on tax professionals and financial writers who have been in this field over the years. It took a week to conclusively come up with the relevant information.
An in-depth look at superannuation and tax
Preservation age: This is the first basic rule about superannuation fund. It means that one cannot access the fund until they reach a certain age limit. Here, the age limit is 55 years of age. According to research made by CCH Australia (1994), Contributions made towards the superannuation fund are made by people below the age of 55.
According to the Australian rules also, any person born before the first day of July, 1960 has the preservation age set at 55. Those born later have varying preservation ages which depend on other months of birth. We must remember that the main aim of coming up with this program was to secure the future or the retirement life of the contributors. One cannot withdraw unless they have not reached the specified age.
Lump sum withdrawal: Lump sum here means that of a large quantity. If a lump sum withdrawal is made, tax has to be deducted. Again we must remember that the aim of the superannuation program is to secure the entire retirement life, but not one moment. There is also the medical levy issue.
It is enforced on any lump sum withdrawal. A point to note here is that lump sum withdrawals are highly discouraged. Many people will avoid this withdrawal as they will be taxed. An example here is when one has a collective amount of 100000 dollars and decides to withdraw 90000 of that during retirement: it must be subjected to tax again altogether. (Chris 2007)
Employee contributions: An employee is anybody under the financial rules somebody else. An employee is subjected to rules and regulations of his boss. Also to note here is that, for an employee, his or her salary is fixed. According to Charles (1990), an employee may decide to issue an order towards his monthly or annual salary.
The order here is to direct a certain amount of this salary towards superannuation. Usually a contribution of 9% of income is made towards this program. Of course, one may decide to contribute more depending on wishes and current financial obligations. A key, important factor to note concerning this is that these are
Self employed contributions: Stuart can contribute 25000, somebody who is self employed is that who has had varying income amounts. They are their own bosses and control the financial activity of the business. Examples of these people are entrepreneurs and moguls. The rules on superannuation differ because contributions towards the retirement fund differ according to the performance of the business and the different occurring needs.
The deduction is made before the income is taxed. Here, tax is deducted on any contribution of up to 5000 dollars. Three quarters of Any amount above that are taxed, a closer look into this regulation imply that the more the amount contributed above the 5000 mark, would simply mean the less the tax in terms of percentage to the original amount.(Grant 2008)
Any person willing to make a contribution towards the superannuation program after his or her income is taxed is free to do so. In this case, the contributions will be tax free (Anon 1984).
However, Current changes on laws regarding superannuation. As discussed earlier, one who is employed can sacrifice about 9 % of his salary. This is set to be raised to 12 %. It will have a greater pinch to the employee’s salary. But on the brighter side after many years of cumulative withdrawal, this will be a larger amount.
Those who contribute around 50000 dollars will not have this cut down to 25000 dollars as expected. This figure is set to be retained. This also like the first rule will mean larger amounts will be saved.
Here are some of the recommendations Myra should consider
Benefits of SMSF
After finding the rules and regulations of superannuation, the relevance of the above actions on self managed super fund could be easily traced and be used. This means that superannuation can be used to hatch a good investment during retirement.
Self managed super funds (SMSF); this is a financial term or activity which means that the contributions made towards a superfund are used to come up with a business scheme. According to the latest research (James, et al, 2009) the contributors themselves manage the money.
All of them are above the age limit of 65, and nobody is above the other. The members must not be more than five. All activities of the business are carried by the members. Also, important here, is that all the members take part in the management of the business. Authoritatively, all are equal. Stuart will be in charge of his money. The main benefit of the self managed super fund is that there is a merger of contributions to come up with a bigger capital base for a business opportunity.
Tax free fund is used to run the scheme: this will be cheaper for Stuart to invest. Unlike a normal retail enterprise that uses taxed money to operate the self managed super fund is different meaning that a considerable large amount of money will put up a business. Also, here there is no tax issued on any capital gained when a self managed super fund starts making profits.
We have to remember that the self managed super fund run on money invested by the contributors with the aim of securing their retirement. Stuart can claim 25000 as tax deduction. A maximum of 15 % tax is deducted on the earnings. Tax cannot exceed the given percentage but can in some cases fall to 0%. Myra should not be worried as Stuart’s money will not be taxed.
What happens when one transfers shares to a super fund?
One can transfer his or her shares to a superfund to an SMSF to reduce or offset tax. This can be offset by the use of imputations credits. (Taylor, et al 2010) Imputation credits are in a system whereby one buys shares from the company in case he or she has tax to buy. This system reduces the amount of tax to be paid and at the same time increases the business share volume.
Pension: This being the monthly “salary” for the contributors is tax free. Lisa (2010) clearly explains that, unlike the income from the business which is minimally taxed, the pension is not. Here, we must note that the pension is like a form of monthly withdrawal system of the money that was saved during early years. It is zero taxed.
In some cases, death of a member of a self managed super fund organization may occur. Here, a system to ensure that the benefits passed on to the inheritors are not taxed is put in place
Other benefits of self managed super funds fee over other funds are:
We have to remember that superannuation is managed by the members who are the contributors.
A study by the national library of Australia (1984) showed that, there are no extra or added fees on the SMSF. Other funds have to consider management fee, termination fee, audit fee, account balance fee, administration fee, contribution fee and even withdrawal fee. This entire fee is not included in SMSF.
Also member can have his or her value on the sums passed down to their generations. Just like the essence of a will is to hand down your wealth to the future generation, ones share can also be handed down.
There are also freedoms that are enjoyed by the self managed super fund groups according to Jimmy (2011) these are:
A super managed super fund can be allowed to deposit its funds with any bank. It cannot be limited to any banking institution. Members can choose their banker depending on the most suitable policies towards them or their businesses.
It can also insure its property against unforeseen circumstances with the insurance company of its choice. Again here it cannot be limited to any or special firm due to its nature. The fact that dealing with people of the old age may tend to put the members at a larger risk. This may in turn make one think that this needs a special insurance. The truth is that it does not. (Kumar, 1995)
A self managed super fund is not also limited to a selected service provider, engineer or a planner. According to a report by CCH Australia Limited (1994), it is free to select or appoint its services from whom it requires. The government or any other institution is not allowed to intervene with the activities of the self managed super fund by dictating from whom it may acquire its services.
Members look for their services from the best provider or who they deem fit for operating or carrying out a task. A team of highly experienced tax and finance professionals (1999) found out that, for this to happen, it has to take place via the consent of all the members of the self managed super fund.
Conclusion
A super managed super fund uses the money from superannuation to run its activities. All members are the contributors and are involved in running of the business. Due to the nature of the fund any money allocated to the members as pension is not taxed. The main aim of the super managed super fund is to pull funds together to realize a larger business capital source.
This source is greater in volume than a normal retail as it is untaxed fund or superannuation. Supperannuation rules change only to benefit those involved; Stuart should not be scared of these rules. This means it will put up a larger business. Mendel (2011)
References
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Charles A S, (1990), Staples’ Guide to New Zealand Income Tax Practice, Taylor & Francis CCH Australia Limited, Australia.
Chris A, (2007), Howard’s fourth government: Australian commonwealth administration, UNSW Press.
Dale W. J, Ralph L, (1993), Tax reform and the cost of capital: an international comparison, Brookings Institution Press.
Editor-in-Chief Mendel, CCH Australia Limited, (2011), Australian master financial planning guide, CCH Australia Limited, Australia.
Gerald. E, Whittenberg, Martha Atulus-Buller (2010), Income Tax Fundamentals: Cengage Learning, 2009 Stamford USA.
Grant A, (2008), Self Managed Superannuation Funds Strategy Guide, CCH Australia Limited, Australia.
Iris C, (2010), Tax reform in open economies: international and country perspectives, Edward Elgar Publishing.
James L, Shirley M, Giles H, (2009), Australian master superannuation guide, CCH Australia Limited, Australia.
Jimmy B. FCPA, (2011), Superannuation and Taxation: A Practical Guide to Saving Money on Your Super or SMSF, John Wiley and Sons Press.
Kumar D, (1995), Title Managerial finance in the corporate economy, Routledge, London.
Lisa M, (2010), the Politics of Retirement Savings Taxation: A Trans-Tasman Comparison, CCH Australia, Limited.
National Library of Australia, (1984), APAIS, Australian public affairs information service: a subject index to current literature, National Library Australia.
Salvador V. (1999), the Economics of Pensions: Principles, Policies, and International Experience, Cambridge University Press.
Taylor S, et al, (2010), Financial Planning in Australia 4th edition, LexisNexis Butterworths, Sydney.