Writing Project

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CHAPTER

LEARNING O B 』 ECτIVES: A_fteγ completiηg Chapteγ 2, y ou should be able to:

L0.1

L0.2

L0.3

ι0.4

Distinguish between the statutory, administrative, and judicial sources of the tax law and understand the purpose 。f each s。urce.

Locate and w。rk with the appropriate tax law sources.

Develop an awareness of tax research t。。Is.

Describe the tax research process.

CHAPTER OUTLINE

2-1 Tax Sources, 2-2

2-1 a Statutory Sources of the Tax Law, 2-2

2-1 b Administrative Sources of the Tax Law, 2-6

2-1 c Judicial Sources of the Tax Law, 2-1 O

2-1 d Other Sources of the Tax Law, 2-17

2-2 Working with the Tax Law-Tax Research Tools, 2-18

2-2a Commercial Tax Services, 2-18

2-2b Using Electronic (Online) Tax Services, 2-19

2-2c Noncommercial Electronic (Online) Tax Services, 2-19

2-3 Working with the Tax Law-Tax Research, 2-20

2-3a Identifying the Problem, 2-22

2-3b Refin ing the Problem, 2-22

2-3c Locating the Appropriate Tax Law Sources, 2-23

L0.5

L0.6

L0.7

Communicate the results of the tax research process in a client letter and a tax file memorandum.

Apply tax research techniques and planning procedures.

Be aware of taxation on the CPA examination.

2-3d Assessing the Validity of Tax Law Sources, 2-23

2-3e Arriving at the Solution or at Alternative Solutions, 2-25

2-3f Communicating Tax Research, 2-26

2-4 Working with the Tax Law-Tax Planning, 2-28

2-4a Nontax Considerations, 2-29

2-4b Components of Tax Planning, 2-29

2-4c Tax Avoidance and Tax Evasion, 2-30

2-4d Follow-Up Procedures, 2-30

2-4e Tax Planning, 2-31

2-5 Taxation 。n the CPA 在xaminati。n, 2-31

2-Sa Preparation Blueprints, 2-31

2-Sb Regulation Section, 2-31

州总刷TIERSTOCK.COM

Early in November 2019, Fred and Megan Martel scheduled a meeting with you to discuss a potential

tax problem. Fred and Megan pt1rchased a 40-acre parcel of property in 2014 for $195,000. On it, they

built their “ dream home" in 2015. In March 2019, while walking on a remote part of their property, they

spotted something shiny on the ground. They started digging and eventually unearthed eight metal cans

containing more than 1,400 rare gold coins in $5, $10, and $20 denominations dated from 1846 to 1895.

The face value of the gold coins is about $28,000, and the coins are in mint condition. Their delay in

coming to you for tax advice was dt1e to a state law that required their discovery to be tl1rned over to the

state for disposition. The state, for a period of six months, was required to publicize the find and ask if

anyone could prove ownership. When no one came forward , the coins were returned to the Martels in

October 2019. As they are now the rightful owners of the coins, they want to know the tax implications (if any) of their discovery.

Read the chapteγ and formulate your γ·esponses.

2-2 PART 1 Introductio n and Basic Tax Mode l

L0.1

Distinguish between the statutory, adm inistrative, and judicial sources of the tax law and understand the purpose of each s。urce.

ederal tax law reflects the three branches of our Federal government. It is a mixture of laws passed by Congress, explanations prov ided by the Treasury Department and the Internal Revent1e Service ( IRS), and court decis ions. Anyone

w ho has attempted to work w ith this vast amount of information is familiar w ith its complexity. Th e tax research process allows u s to understand, evaluate, and apply the tax law to questions that are raised b y taxpayers and tax practitioners.

In addition to being able to locate and interpret tax law, a tax professional also must unders tand the relative we您ht of authori沙 that each source carries. The tax law is of little significance, however, t1ntil it is applied to a set of facts and circumstances. This c hapter introdt1ces the statutory, administrative, and judicial sources of tax law and explains how the law is applied to indiv idt1al and bt1siness transactions . It also explains how to apply research techniqt1es and u se planning procedt1res effectively. A large part of tax research focu ses on determining the intent of Congress.

Frequently, uncertainty in the tax law causes dispt1tes between the Internal Revent1e Service (IRS) and taxpayers. Due to these gray areas and the complexity of the tax law, a taxpayer may have more than one alternative for structuring a financial transaction. In structuring financial transactions and engaging in other tax planning activ ities, the tax adviser mt1st be cognizant that the objective of tax planning is not necessarily to mini- H咀ze the tax liability. Instead, a taxpayer should max imize his or her after-tax wealth , w hich may include max imizing nontax as well as noneconomic benefits.

2-1 TAX SOURCES

Understanding tax ation requires a mastery of the sources of tax law. These sources include laws passed by Congress, w hich are contained in the Internal Revenue Code and congressional Committee Reports, Treasury Department Regulations, other Treasury Department and IRS pronouncements, and court decisions. Thus, the primary sources of tax law inclt1de information from all three branches of government: legislative (or statutory), executive, and judicial.1

2- 1 a Statutory Sources of the Tax Law Statutory sources of law include the Constitution (Article I, Sections 7, 8, and 10), the Internal Revenue Code, and tax treaties (agreements between countries to mitigate the double taxation of taxpayers subject to the tax laws of those countries). The Constitt1tion grants Congress the power to impose and collect taxes and authorizes the creation of treaties w ith other cot1ntries. The power of Congress to implement and collect taxes is reflected in the Internal Revent1e Code, the official title of U.S. tax law, and the Code is the basis for arriv ing at solutions to all tax questions.

Origin of the Internal Revenue Code

Before 1939, the statutory prov is ions relating to Federal taxation were contained in the indiv idual revenue acts enacted by Congress. Because dealing w ith many separate acts w a s inconvenient and confusing, Congress codified all of the Federal tax laws in 1939. Know n a s the Internal Revent1e Code of 1939, the codification arranged all Federal tax provisions in a logical sequence and placed them in a separate part of the Federal stat- utes. A further rearrangement took place in 1954 and resulted in the Internal Revenue Code of 1954, w hich continued in effect until 1986, w hen it was replaced by the Internal Revenue Code of 1986. Although Congress did not recodify the law in the Tax Reform Act (TRA) of 1986, the magnitude of the changes made by TRA of 1986 did provide some rationale for renaming the Federal tax law the Internal Revenue Code of 1986.2

1Secondary sources also are used by tax practitioners. Tl1ese sot1rces are not part of the tax law and inclt1de items like tax articles from profes- sional tax jot1rnals, newsletters, and textbooks. Commentary contained in variot1s tax research services (such as Tl1omson Reuters Checkpo仰，t) also are secondary sot1rces.

21'11is point is important in assessing jt1dicial decisions interpreting provisions of the Internal Revent1e Code of 1939 and the Internal Revenue Code of 1954. If a provision from the 1939 or 1954 Code was included in tl1e Internal Revenue Code of 1986 and has not been st1bseqt1ently amended, the provi- sion and the related jt1dicial decisions have contint1ing validity.

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CHAPTER 2 Working w ith the Ta× Law

The Legislative Process

Exhib it 2.1 illustrates the legislative process for enacting changes to the Internal Revenue Code of 1986. Federal tax legislation generally originates in the House of Representatives, where it is first considered by the Hot1se Ways and Means Committee.3 Once approved by the House Ways and Means Committee, the proposed bill is referred to the entire House of Representatives for approval or d isapproval. Approved bills are sent to the Senate, where they are considered by the Senate Finance Committee. 4

After approval by the Senate Finance Committee, the bill is sent to the entire Senate. Assuming no disagreement between the House and Senate, passage by the Senate results in referral to the President for approval or veto. If the bill is approved or if the

House Ways and Means

ζommittee

Consideration by the House of

Representatives

Senate Finance Com m ittee

Consideration by the Senate

Approval or Veto

by the President

Incorporation into the Internal Revenue Code

(if approved by the President o r if the President’s veto is overridden)

」

Joint Conference Committee (if the House and Senate di忏er)

ζonsideration by the House and Senate

2-3

3Congress enacts tax legislation virtually every year, and each piece of legis- lation contains changes to the Internal Revenue Code of 1986.

Responsibility Act of 1982 originated in the Senate, and its constitutionality was upheld by tl1e courts.

4Although rare, a tax bill can originate in the Senate when it is attached as a rider to a different legislative proposal. The Tax Equity and Fiscal

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2-4 PART 1 Introduction and Basic Tax Mode l

President's veto is overridden, the b ill becomes law and part of the Internal Revent1e Code of 1986.

House and Senate versions of major tax bills frequently differ. One reason bills are often changed in the Senate is that each senator has considerable latitt1de to make amendments w hen the Senate as a w hole is voting on a b ill referred to it by the Senate Finance Committee. 5 In contrast, the entire House of Representatives either accepts or rejects w hat is proposed by the House Ways and Means Committee, and changes from the floor are rare. When the Senate version of the bill differs fro1n that passed by the House, the Joint Conference Committee, w hich includes members of both the House Ways and Means Committee and the Senate Finance Committee, resolve s the differences. The deliberations of the Joint Conference Committee u sually produce a compromise between the two versions, w hich then is voted on by both the Hot1se and the Senate. If both bodies accept the bill, it is referred to the President for approval or veto.

The role of the Joint Conference Committee indicates the importance of compromise in the legislative process. Exhibit 2.2 illustrates w hat happened w ith amendments to the child tax credit in the Tax Cuts and Jobs Act (TCJA) of 2017.

The House Ways and Means Committee, the Senate Finance Committee, and the Joint Conference Committee each produce a Committee Report. These Committee Reports explain the provisions of the proposed legislation and are a valuable source for ascer- taining the intent of Coηgress. What Congress had in mind w hen it considered and enacted tax legislation is, of course, the key to interpreting the legislation by taxpayers, the IRS, and the courts. Because it takes time to develop other primary authority (e.g. , from the Treasury Department, the IRS, and the courts), tax researchers rely heavily on Committee Repo rts to interpret and apply new tax laws.

H。use Versi。n Senate Version Replaces the child ta× credit with an expanded fam ily tax credit, allowing a tax credit of $1,600

per child and $300 for the taxpayer, spouse, and other dependents. Credit is partial ly

refundable ($1,000 per child).

Increases the child ta× cred it to $2,000 per child and allows a $500 tax cred it for other dependents. Increases the age limit of a

qualified chi ld by one year.ζredit is partia 川y refundable ($1,000 per child).

)During the passage of tl1e Tax Reforn1 Act of 1986, Senate leaders tried to make the bill ameηdment proof to avoid the norn1al amendment process.

J。int c。nference Committee Result Increases the child tax credit to

$2,000 per chi ld and allows a $500 ta× cred it for other dependents. No change in the age limit

of a qua I i白ed child. Credit is partia lly refundable ($1,400 per child).

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Editorial review has deemed that any suppressed content does not materially affec t the overall learning experience. Cengage Leami ng reserves !he right to remove additional co ntent at any time if subs叫uent rig hts restrictions require it.

CHAPTER 2 Workin g with the Ta× Law 2-5

Arrangement of the Internal Revenue Code

The Internal Revenue Code of 1986 is found in Title 26 of the U.S. Code. In working with the Internal Revenue Code, it helps to understand the format. Here is a partial table of contents :

SL1btitle A. Income Taxes Chapter 11. Normal Taxes and Surtaxes

Subchapter A. Determination of Tax Liability Part I. Tax on Indiv iduals

Sections 1-5 Part II. Tax on Corporations

Sections 11-12

In referring to a provision of the Code, the 均y is u sually the Section number. In citing a Section number, identi乌ring the related SL1btitle, Chapter, SL1bchapter, and Part is not necessary. Merely mentioning the Section is sufficient because the Section numbers run con secutively and do not begin again w ith each new Subtitle, Chapter, Subchapter, or Part. 6

Tax researchers often refer to speci白c areas of income tax law by their Subchapters. Some of the more common Subchapter designations include Subchapter C （℃orporate Distributions and Adjustments’立 Subchapter K (“Partners and Partnerships ”), and Sub- chapter S (“Tax Treatment of S Corporations and Their Shareholders").

Citing the Code

Code Sections often are broken dow n into subparts.7 Section 2(a)(l )(A) s erves as an example.

§ 2 (a) (1) (A)

一一一一一一一一一一一一一一一一一一一－ ..,.. Abbreviation for ”Section”

－－－一一－一一－－一－－－一－－一－ - ..,.. Section number

一一一一一一一一一一一一一一一一一一一－ ..,.. Subsection designation8

- - - - - - - - - - - - - - - - - - _..,.. Paragraph designation

一一一一一一一一一一一一一一一一一一一－ ..,.. Subparagraph designation

Broken down by content, § 2(a)(l)(A) becomes:

§2

(A)

De自nitions and special rules （「el ating to the income ta× imposed on individua ls). Definition of a surviving spouse. For purposes of§ 1 (the determination of the app licab le rate schedule), a surviving spouse must meet certa in condit ions.

One of the conditions necessary to qualify as a surviving spouse is that the ta×- pay凹’ s spouse must have died during either of his or her two ta × able years immediately preceding the present tax- able year.

(a) 、、 ‘ ， J

1 (

Throughout the text, references to the Code Sections are in the form given above. The symbols "§'’ and “祭” are L1sed in place of “Section” a nd “Sections,” respectively. The follow ing table summarizes the format that we L1se:

6\Vhen the 1954 Code was d.rafted, some Section nt1mbers were intentionally omitted so that later changes could be incorporated into the Code withot1t disrupting its organization. When Congress does not leave enough space, st1bsequent Code Sections are given A, B, C, etc., designations. A good example is the treatment of§§ 280A tl1rot1gh 280H.

7Son1e Code Sections do not require st1bparts. See, for example, §§ 211 and 241.

8Some Code Sections omit the subsection designation and t1se the paragraph designation as the first st1bpart. See, for exan1ple, §§ 212(1) and 1222(1).

2-6 PART 1 Introduction and Basic Tax Model

Source

Regulations

Temporary Regulations

Proposed Regulations

Revenue Rulings Revenue Procedures Treasury Decisions Actions on Decisions

General Counsel Memoranda Technical Advice Memoranda

Letter Rulings

Complete Reference

Section 2(a)(1 )(A) of the Internal Revenue Code of 1986 Sections 1 and 2 of the Internal Revenue Code of 1986 Section 2 of the Internal Revenue Code of 1954

Section 12(d) of the Interna l Revenue Code of 19399

Text Reference

§ 2(a)(1 )(A) §§ 1 and 2 § 2 of the Internal Revenue

Code of 1954 § 12(d) of the Internal

Revenue Code of 1939

2-1 b Administrative Sources of the Tax Law The administrative sources of the Feder a l tax law include Treasury Department Regula-

tions, Rev enue Ruling s and Rev ent1e Procedures, and v arious other adminis trativ e pro- nouncements (see Exhibit 2.3). All are issued b y either the U.S. Treasury Department or the IRS.

Treasury Department Regulations

Regulations are issued b y the U.S. Treasury Department under at1thority granted b y Congress.10 Interpretiv e b y nature , they prov ide taxpay ers w ith considerable guidance

o n the meaning and application of the Code. Regt1lations , w hich carry cons iderable at1thority a s the official interpretation of tax law, may be issued in proposed, temporary, or final form.

Because Regulations interpret the Code, they are a rranged in the same sequence a s the Code. A number is a dded at the beginning , how ever, to indicate the type o f tax or administrativ e , procedural, or definitional matter to w hich they relate. 11 For e x ample ,

Location

Federal Register

Federal Register Internσl Revenue Bulletin Cumulative Bulletin必

Federal Register Internal Revenue Bulletin Cumulative Bulletin必

Internal Revenue Bulletin Cumulative Bulletin必

Tax Analysts' Tax Notes; Thomson Reuters Checkpoint**; Commerce Clearing House lntelliConnect

Thomson Reuters and Commerce Clearing House tax services

Authority

Force and e忏ect of law.

May be cited as a precedent.

Preview of final Regulations.

Do not have the force and e忏ect of law.

May not be cited as a precedent.

Applicable only to taxpayer addressed. No precedential force.

势Through 2008, the contents of Internal Revenue Bulletins were consolidated semiannually into a Cumulative Bulletin. Beginning in 2009, the IRS decided to stop producing a Cumulative Bulletin because all Internal Revenue Bulletins are available electronically on the IRS website.

**Thomson Reuters Checkpoint includes a wide variety of tax resources. The most significant are materials produced by the Research Institute of America (RIA), including the Federal Tax Coordinator 2d.

9Section 12(d) of tl1e Internal Revent1e Code of 1939 is the predecessor to § 2 of the Internal Revent1e Code of 1954 and the Internal Revent1e Code of 1986. Keep in mind tl1at the 1954 Code superseded tl1e 1939 Code and the 1986 Code st1perseded the 1954 Cod.e. Footnote 2 explains why references to the 1939 or 1954 Code are inclt1ded.

10§ 7805 . 11The prefix 20 d.esignates estate tax Regt1lations, 25 covers gift tax Regula-

tions, 31 relates to employment taxes, and 301 refers to procedt1re and. administration.

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Edito rial review has deemed that any suppressed content does no t materially affec t the overall learning experience. Cengage Leaming reserves !he rig ht to remove additio nal co ntent at any time if subs叫uent rig hts restrictions req uire it.

CHAPTER 2 Workin g with the Ta× Law 2-7

the prefix 1 des ignates the Regulations under the income tax law . Tht1s, the Regulations under Code § 2 are cited as Reg. § 1. 2, w ith subparts added for further identificatio n. The numbering patterns of these subparts often have no correlation w ith the Code subsectio n s.

Maybe someone in your extended family is driving a luxury car and comments that only fools pay all of their taxes. Or maybe a contractor demands payment in cash. Or perhaps someone at work is not reporting all of his or her income. If cheating on taxes bothers you, the IRS wants to hear from you (and may make it worthwhile). The IRS has two whistleblower programs. The small-awards program is

for situations involving less than $2 million of tax, and the award can be as high as 15°/o of collections, although it often is less. The large-awards program covers situations involving $2 million or more of tax. Here, the reward can go as high as 30%. The IRS’s tip line is 1-800-829-0433, and the appropriate form to report tax fraud is Form 3949-A (Information Referral). Would you turn in someone?

New Regulatio n s and changes to existing Regulations are usually issued in proposed form before they are finalized. The interval between the proposal of a Regulation and i臼 finalization permits tax p ayers and other interested parties to comr丑ent on the pro- priety of the proposal. [f旦P。sed Regulati。ns under Code § 2, for example , are cited as Prop.Reg. § 1.2. The Tax Court indicates that Proposed Regulations carry little weight.12 ·Final Regulations ! have the force and effect of law.

Sometimes the Treasury Department issues tTemp。rary Regulati。ns l w here immediate gt1idance is impo rtant . These Regulations are issued w ithout the comment period required for Pro posed Regulatio n s. Temporary Regulations, cited as Temp.Reg. §, h ave the same authoritative value as final Regt1latio n s and may be cited as precedents. How - ever, Temporary Regulations also must be issued as Proposed Regulations and automati- cally expire w ithin three years after the date of isst1ance.13

Proposed , Temporary, and fina l Regulations are pt1blished in the Federal Regist以 in the Internal Revenue Bulletin (I.R.B.), and by major tax services . Final Regt1lations are isst1ed as Treasury Decis ions (TDs) .

Regulations also may be classified a s legislative, inteψretive, or procedural. These classificatio n s are discussed in text Section 2-3d (Assessing the Validity of Tax Law Sources) later in the chapter.

Revenue Rulings and Revenue Procedures

Revenue Ruling主 are official pronouncemen臼 of the National Office of the IRS .14 They typically provide o ne or more examples of h ow the IRS would apply a law toψ，ec扩icfact situations. Like Regulations, Revenue Rulings are designed to provide interpretation of the tax law. Although they do n o t carry the same legal force and effect as Regt1lations, becat1se 出ey are focu sed o n a spec的c fact pattern, they provide a more detailed analysis of the law.

Although letter rulings (discussed in the nex t section) are n o t the same as Revent1e Rulings, a Revenue Ruling often results from a specific taxpayer’s request for a letter ruling. If the IRS believes that a letter ruling request has w idespread impact, the letter ruling w ill be converted into a Revent1e Ruling a nd isst1ed. Revenue Rt1lings also can be issued in respon se to technical advice to Distric t Offices of the IRS , cot1rt decisions, and st1ggestions from tax practitioner groups.

Revenue Pr。cedures . deal w ith the inte rnal management practices and procedures of the IRS. For example, Rev.Proc. 2019-1 (2019-1 I.R.B. 1) provides general instructions

12F W Woolworth Co. , 54 T.C. 1233 (1970); Ha1γis M. Miller, 70 T.C. 448 (1978); andjames 0. Tomerlin 7子ust, 87 T.C. 876 (1986) . 、 7805(e).

14§ 7805(a).

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2-8 PART 1 Introduction and Basic Tax Model

for taxpayers requesting letter rulings or determination letters from the IRS. A taxpayer's failure to follow a Revenue Procedure can result in unnecessary delay or, in a discretion- ary situation, can cause the IRS to decline to act.

Both Revent1e Rulings and Revenue Procedures serve an important function by providing guidance to IRS personnel and taxpayers in handling routine tax matters. Revenue Rulings and Revent1e Procedures generally apply retroactively and are binding on the IRS until revoked or modified by subsequent rulings or procedt1res, Regulations, legislation, or court decisions.

Revenue Rulings and Revenue Procedt1res are published weekly by the U.S. Govern- ment in the Iηternal Revenue Bulletin (I.R.B.).

The proper form for citing Revenue Rt1lings is as fol lows. Revent1e Procedures are cited in the same manner, except that “ Rev.Proc.” is substitt1ted for “ Rev.Rul. ”

Rev.Rul. 2018- 22, 2018-34 I.R.B. 308.

E写plaηatioηJ Revenue Rt1ling Number 22, appearing on page 308 of the 34th weekly issue of the Internal Revenue Bulletin for 2018.

Revenue Rul ings and other tax resources may be found at the IRS website: irs.gov.1)

Letter Rulings

Letter rulinas are isst1ed for a fee upon a taxpayer’s request and describe how the IRS will treat a proposed transaction for tax purposes. Issued by the National Office of the IRS , they apply only to the taxpayer who asks for and obtains the ruling.16 Letter rulings can be useful to taxpayers who want to be certain of how a transaction will be taxed before proceeding with it. Letter rulings also allow taxpayers to avoid unexpected tax costs and may be the most effective way to carry out tax planning. However, the IRS limits the issuance of individual rt1lings to restricted, preannounced areas of taxation.17 The IRS issues more than 2,500 letter rulings each year.

The IRS must make individual rulings available for public inspection after identifying details are deleted.18 Published digests of private letter rt1lings can be found in a variety of sources, including IRS Letter Rul的gs Rψorts (published by CCH), Bloomberg BNA’S Daily TaxR，ψorts, Tax Analysts ' Tax Notes, and electronic (online) tax research services (such as Thomson Ret1ters Checkpoint).

Letter rulings are issued multi-digit file numbers that indicate the year and week of issuance as well as the number of the ruling during that week. For example, Ltr.Rul. 201822015 provides 2018 interest rates to compt1te the special use value of farm real estate.

2018 22 015

Year20 18 22nd week o f 2018 15th ru ling issu ed du ring the 22nd week

Other Administrative Pronouncements

Treasuη Decisions (TDs) are issued by the Treasury Department to announce new Regulations, amend or change existing Regulations, or announce the position of the

I王Comn1ercial sources for Revent1e Rulings and Revent1e Procedt1res are available, usually reqt1iring a st1bscription fee. Older Revenue Rulings and Revent1e Procedt1res are often cited as being published in tl1e Cumulative Bulletin (C.B .) rather tl1an in 由e Internal Revenue Bitlletin (I .R.B.).

otl1er research materials in forn1ulating a District Office position on an isst1e. Tl1e IRS is required to cl1arge a taxpayer a fee for letter rt1lings, detern'lination letters, etc.

17Rev.Proc. 2019-3, 2019-1 I.R.B. 130 contains a list of areas in which the IRS will not isst1e advance n1lings. According to 由e IRS, the main reason they will not rule in certain areas is that speci白c fact-oriented situations are involved. Tht1s, a ruling n1ay not be obtained on many of tl1e problen1s that are partict1larly trot1blesome for taxpayers.

16Post-1984 letter n1lings may be substantial at1thority for purposes of the acct1racy-related penalty; see pp. 2-24 and 2-25; Notice 90- 20, 1990-1 C.B. 328. In tl'lis regard, letter rulings differ from Revenue Rulings, whicl1 are applicable to all taxpayers. A le忧er ruling may later lead to the isst1ance of a Revent1e Ruling if the holding affects many taxpayers. In its Agents’ Manual, the IRS indicates that letter rt11ings may be used as a gt1ide with

18§ 6110.

Copyright 2020 Cengage Leaming. All Rights Reserved. May not be copied, scanned，。r dupl icated, in whole or in part. Due to elec1ronic rights, some lhird party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Leami ng reserves !he right to remove additional content at any time if subs叫uent rights restrictions require it.

CHAPTER 2 Working with th e Ta× Law 2-9

Government on selected court decisions. Like Revenue Rulings and Revent1e Proce- dures, TDs are pt1blished in the Internal Revenue Bulletin.

The IRS also publishes other administrative communications in the Internal Revenue Bulletin , such as Announcements, Notices, IRs (News Releases), Internal Legal Memo- randa (ILMs), Chief Counsel Notices (CC), and Prohibited Transaction Exemptions.

Like letter rulings , [determination letters I are issued at the reqt1est of taxpayers and provide guidance on the application of the tax law. They differ from letter rulings in that the isst1ing source is an IRS Area Director (rather than the National Office of the IRS). Also, determination letters usually involve completed (as opposed to proposed) transactions. Determination letters are not published and are made known only to the party making the request.

The following examples illt1strate the distinction between letter rulings and deter- mination letters.

The shareholders of Red Corporation and Green Corporation want assurance that the consolida- tion of the corporations into Blue Corporation will be a nontaxab le reorganization . The proper approach is to request that the National Office of the IRS issue a letter ruling concerning the income tax effect of the proposed transaction.

Chris operates a barbershop in which he employs eight barbers. 丁O comply with the rules governing income tax and payroll tax withholdings, Chris wants to know whether the barbers working for him are employees or independent contractors. The proper procedure is to request a determination letter on their status from the appropriate Area Director.

A variety of internal memoranda that constitute the working law of the IRS also are released. These General Counsel Memoranda ( GCMs), Technical Advice Memoranda (TAMs), Internal Legal Memoranda (ILM纱， and Field Service Advice Memoranda (FSAs) are not officially published, and the IRS indicates that they may not be cited as prece- dents by taxpayers.19 However, these working documents do explain the IRS's position on various isst1es.

The National Office of the IRS releases 「丽丽丽丽l Advi豆eMem。ra画画a(TAMs) 1 weekly. TAMs resemble letter rulings in that they give the IRS’s determination of an issue. How- e ver, they differ in several respects. Letter rulings deal with proposed transactions and are issued to taxpayers at their request. In contrast, TAMs deal with completed (rather than proposed) transactions. TAMs are issued by the National Office of the IRS in response to questions raised by taxpayers or IRS field personnel dt1ring audits. TAMs are n ot officially pt1blished and may not be cited or used as precedent. 20 They are assigned file numbers according to the same procedt1re t1sed for letter rulings. For example, TAM 201808024 refers to the 24th TAM issued during the 8th week of 2018.

The Office of Chief Counsel prepares Field Service Advice Memoranda (FSAs) to help IRS employees. These are issued in response to requests for advice, guidance, and analysis on difficult or significant tax issues and are not binding on either the taxpayer to whom they pertain or the IRS. Some FSAs are being replaced by another form of field guidance called Technical Expedited Advice Memoranda (TEAMs). The purpose of TEAMs is to expedite legal gt1idance to field agents as disputes are developing. FSAs are reverting to their original purpose of case-speci自c development of facts. 21

19Tl1ese are made available by the publishers listed in Exhibit 2.3. These internal memoranda n1ay be st1bstantial at1thority for purposes of the acct1racy-related penalty for post-1984 transactions (see pp. 2-24 and 2-25; Notice 90- 20, 1990- 1 C.B. 328).

2飞 6110(k)(3) . Post-1984 TAMs may be st1bstantial at1阳仰 for pt1rposes of avoiding the acct1racy-related penalty. Notice 90- 20, 1990-1 C.B . 328.

21A TE灿tI guid.ance differs from a T灿tI in several ways, including a mand.a- to叩 prest1bmission conference involving 由e taxpaye r. In the event of a tentatively adverse conclt1sion for the taxpayer or the field agent, a confer- ence of right is offered to 由e taxpayer and to the field agent; once the conference of right is held, no further conferences are offered.

Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202 Copyright 2020 Ce ngage Leaming. All Rights Reserved. May not be copied, scanned，。r duplicated, in whole or in part. Due to electronic rights, some lhird party content may be suppressed from the eBook and/or eChapter(s).

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2-10 PART 1 Introduction and Basic Tax Mode l

2-1 c Judicial Sources of the Tax Law Five Federal courts have jurisdiction over tax dispt1tes between the IRS and taxpay ers : the U.S. Tax Court, the U .S. District Court, the U.S. Court of Federal Claims, the U.S. Court of Appeals, and the U.S. Supreme Court.

The Judicial Process in General Once a taxpayer has e xhausted the remedies available w ithin the IRS (i.e., no satisfac- tory settlement has been reached at the agent or at the Appeals Div ision level), the d is pute can be taken to the Federal courts. The trial and appellate court system for Federal tax litigation is illustrated in Exhibit 2. 4.

A trial court, also know n as a I c。urt of ori也到urisdictioril, initially hears the case. Appeals (either b y the tax payer or the IRS) are heard b y the appropriate appellate court. A taxpayer has a choice of three trial courts: a 皂生District Cou百l 由e U.S. Court . of Federal Claims I, or the [U.S. Tax c。urt1 .

The U .S. Tax Court contains a f Small Cases Division ! that only hears ca ses involving amounts of $50,000 or less. The ruling of the judge is final (no appeal is available), and these rulings are not precedent for any other cases (i.e., they are not primary authority and are not citable a s substantial authority). Proceedings of the Small Cases Div ision are informal, and because there is no requirement that a taxpayer be represented by an atto rney, they can be less costly for a tax payer. The typical small case lasts one to two hours, and the taxpayer only needs to tell the judge his or her stoηr and present any supporting evidence. Special trial judges, rather than Tax Court judges, often preside over these hearings. Some of these cases can be found on the U.S. Tax Court w ebsite.

American law, follow ing English law, is frequently created by judicial decisions . Under the doctrine of sta仰 dee必is ("let the decision stand"), each case has precedential value for futt1re cases w ith the same set of facts. Judges are not required to follow judicial precedent beyond their own jurisd iction. For example, the decisions of an appellate court are binding only on the trial cot1rts w ithin i岱 jurisdiction and not on other trial courts. Different appel- late cour臼 may reach different opinions about the same issue. Further, the doctrine of prec- edential authority requ让es a court to fo llow prior cases only w hen the issues and material facts of the cu盯ent case are essentially the same as those involved in the prior decisions.

U.S. Ta× Court

U.S. Court of Appea ls

(Regiona l Circuit)

Sma ll Cases Div i s ion祷

U.S. Supreme Court

U.S. District Cou rt

祷No appeal from this division of the U.S. Tax Court.

U.S. Court of Appeals

(Federa l Circu it)

U二 Court

of Federal Cla ims

Appellate Courts

Trial Courts (Courts of Origina l

Jurisd iction)

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CHAPTER 2 Working with the Ta× Law 2-11

Most Fed.eral and state appellate court decisions and some decisions of trial courts are published. Pt1blished court decisions are organized by jurisdiction (Federal or state) and level of court (trial or appellate). 22

Several other terms are important to understand. The plaintiff is the party reqt1esting a hearing, and the d吃fendant is the party being challenged. Sometimes a court uses the terms petitioner and re句pondent (rather than plaintiff and d与fendant). At the trial cot1rt level, a taxpayer is normally the plaintiff ( or petitioner), and the Government is the def en- dant (or respondent). If the taxpayer wins and the Government appeals, the Government becomes the petition er (or appellant), and the taxpayer becomes the respondent.

Trial Courts

Here are some differences between the various trial courts (courts of original jt1risdiction):

• Number of courts. There is only one Court of Federal Claims and only one Tax Court, bt1t there are many U.S. District Courts. District Courts hear cases based on where the taxpayer lives (so a taxpayer in Atlanta would have her case heard by the Atlanta U.S. District Cour川

• Number of judges. District Courts have a number of judges, but only one judge hears a case. The Cot1rt of Federal Claims has 16 judges, and the Tax Cot1rt has 19 regt1lar judges. Typically, Tax Court cases are heard and decided by only one of the 19 regular judges. However, if the case is viewed as impo rtant or novel tax issues are raised the entire Tax Court mioht hear the case. If a case is reviewed

。

by the full Tax Court, such an en bane decision has compelling authority.

• Location. The Cot1rt of Federal Claims meets most often in Washington, D.C. Each state has at least one District Court, and many of the more populous states have more than one. Although the Tax Court is officially based in Washington, D.C., the variot1s judges travel to d ifferent parts of the country and hear cases at prede- termined locations and dates.

• jurisdiction of the Tax Court and District Gou仰 The Tax Court hears only tax cases and is the most popular forum for tax cases since its judges have more tax expertise; many had careers in the IRS or Treasury Department before being appointed to the Tax Court. The District Courts hear a wide variety of nontax cases as well as tax cases. As a result, District Court judges are viewed as generalists (rather than specialists) in tax law.

• Jurisdictioη of the Court of Federal Claims. The Court of Federal Claims has jt1ris- diction over any claim against the United States. As a rest1lt, the Cot1rt of Federal Claims hears nontax litigation as well as tax cases. Court of Federal Claims judges are tax law generalists. This court is viewed as a stronger option when equity is an isst1e (as opposed to purely technical issues) or when the case requires exten- sive discovery of evidence. In addition, it has a pro-business orientation. 23

• juη； trial. A jury trial is only available in a District Cot1rt. However, becat1se juries can decide only qt1estions of fact (and not questions of law), taxpayers who choose a District Court often do not request a jury trial. In that event, the judge decides all issues in a bench trial. A District Court decision carries precedential value o nly in its district.

• Payment of d，可βciency. Before the Court of Federal Claims or a District Cot1rt will hear a case, the taxpayer must pay any taxes assessed by the IRS and sue for a refund. This is not the case with the Tax Court. Her飞 a taxpayer may request a hearing withot1t making any payments to the IRS. As a result, whether to pay the

22 A d ecisio n o f a particular court is calle d its holding . Son1e times a de ci-

sio n inc lt1des dicta, o r inc ide nta l o pinions b eyond tl1e ct1rre nt fa cts . St1ch passing re n1arks , illt1strations , o r analogies are not essentia l to tl1e ct1rre nt l1o lding . Although the holding has preced e ntial valt1 e unde r sta1它 deci.'.;;is, dicta are no t binding o n a fl.1tt1re cot1rt.

23T. D. Pe yser, “The Case fo r Selecting the Cla ims Co t1rt to Litiga te a Fe de ra l

Tax Liabili吼” Tax 丘x:ecutive (Winte r 1988): 149.

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2-12 PART 1 Introduction and Basic Tax Mode l

tax in advance (and limit further interest and penalties) or wait to pay the tax (and risk additional interest and penalties) becomes part of the decision-making process of selecting a venue.

• Appeals. Appeals from a District Cot1rt or a Tax Cot1rt decision are to the U.S. Court of Appeals for the circuit w here the taxpayer lives. Appeals from the Court of Federal Claims go to the Court of Appeals for the Federal Circuit.

• Bankriψtcy. When a taxpayer files a bankruptcy petitio n , the IRS, like o ther credi- tors, is prevented from taking action against the taxpayer. Sometimes a bankruptcy court may settle a tax claim.

• Gn句； areas. Because there are “ gray areas” in the tax laws, courts may disagree as to the proper tax treatment of an item. With these differences in judicial authority, a tax- p ayer may have some flexibility to choose the most favorable fon1m to hear the case.

See Concept Summary 2.1 fo r a summary of various attribt1tes of the Federal trial courts.

L ‘ k '. .. i,;;{I,) Concept Summary 2.1 Federal Judicial System: Trial Courts

Issue

Number of judges per court

Payment of deficiency before trial

Jury trial ava ilable

Types of disputes

Jurisdiction

IRS acquiescence policy

Appeal route

U.S. Tax c。urt

19铃

Tax cases only

Nationwide

Yes

U.S. Court of Appeals

U.S. District c。urt

Varies

Yes

Most criminal and civil issues

Location of taxpayer

Yes

U.S. Court of Appeals

U.S. Court of Federal Claims

Yes

Claims against the United States

Nationwide

Yes

U.S. Court of Appea ls for the Federal Circuit

祷Currently, there are only 15 regular judges. They are assisted by 10 senior judges (whose terms have ended but return to hear cases as needed) and 5 special trial judges (who are appointed by the Senior Judge of the U.S. Tax Court rather than by the President) (November 2018).

Appellate Courts A trial court decision can be appealed to the appropriate [ Circuit c。urt of Apl?eals !. The 11 geographic circuits, the circuit for the District of Co lumbia, and the Federal Circuit24 appear in Exhibit 2.5. Generally, a three-judge panel hears a Court of Appeals case, but occasionally 由e卢II court decides more controversial cases.

If the Government loses at the trial cot1rt level (District Cot1rt, Tax Court, or Court of Federal Claims), it may decide not to appeal. However, the fact that the IRS does not appeal does not mean that the IRS agrees w ith the result (and it may litigate similar issues in the future).

η1e IRS may decide not to appeal for a number of reasons. First, the IRS may decide that available personnel should be assigned to other more important cases. Second，由e IRS may decide that the taxpayer has a sympathetic position or the facts are particula rly strong in his or her favor. In that event, the IRS may wait to test the legal issues w ith a different taxpayer (who might have a weaker case). Third, the Court of Appeals jurisdiction might matter. Based on past ex perience and precedent, the IRS may decide that the chance fo r success on a partict1lar issue might be more promising in a different Cot1rt of Appeals.

The Federal Circuit provides 由e taxpayer w ith a n alternative forum. When a particular Circuit Cot1rt of Appeals has isst1ed an adverse decision in a similar case，出e taxpayer may prefer the Court of Federal Claims route because any appeal is to 出e Federal Circuit.

24Tl1e Cot1rt of Appeals for the Fed.era! Circuit was created, effective October 1, 1982, by P.L. 97-64 (4/2/82) to hear decisions appealed from the Claims Cot1rt (now the Court of Federal Claims).

Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202 Copyright 2020 Cengage Leaming. All Rights Reserved. May no t be copied, scanned，。r dupl icated, in whole or in part. Due to electronic rights, some lhird party content may be suppressed from the eBook and/or eChapter(s).

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CH A P TER 2 Working with the Ta× Law 2-13

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ADMINISTRATIVE OFFICE OF THE UNITED STATES SUPREME COURT

APRIL 1988

The Appellate Process

The role of the appellate court is u sually limited to a review of w hether the trial court applied the proper law in arriving at its decision. Rarely does an appellate court ques- tion a lower cot1rt’s fact-finding determination. Both the Code and the St1preme Court indicate that Federal appellate cot1rts are bound by findings of facts t1nless they are clearly erroneous.25

An appeal can have a number o f possible outcomes. The appellate court may approve (affirm) or disapprove ( reverse) the lower cot1rt’s finding , or it may send the case back to the tria l court for further consideration (remand). When many issues are involved, a mixed rest1lt is n o t unusual. Thus, the lower court may be affirmed (aff协 on Issue A and reversed (rev份 on Issue B and Issue C is remanded (rem份 for additional fact finding.

When more than one jt1dge is involved in the decision-making process, disagree- men臼 are common. In addition to the majority view, one or more judges m ay conct1r (agree w ith the result reached but n o t w ith some or a ll of the reasoning) o r dissent (disagree w ith the rest1lt). In any decision, of cot1rse, the majority contro ls. But conct1r- ring and dissenting v iews can have an influence on future cases or other courts.

Appellate Precedents and the Tax Court District Courts, the Tax Court, and the Court of Federal Claim s must abide by the 匾！！C司画可 set by a Cot1rt of Appeals jurisdiction. A particular Court of Appeals need not fo llow the decisions of another Cot1rt o f Appeals. All courts, however, mt1st follow the decisions of the ［~旦J!reme c。urt ..

This pattern of appellate precedents raises an issue for the Tax Court. Because the Tax Court is a national cot1rt, it decides cases from all parts of the cot1ntry. Under a

25§§ 7482(a) and (c). Conim. v. Duberstein, 60- 2 USTC 咱9515, 5 AFTR 2d 1626, 80 S.Ct. 1190 (USSC, 1960). See Rl1le 52(a) of the Federal Rules of Civil Procedl1re.

2-14 PART 1 Introduction and Basic Tax Mode l

L0.2

ι。cateand w。rkwith the appropriate tax law s。urces.

26 Jack E. Go/sen, 54 T.C. 742 (1970).

policy k n own as the Golsen rule, the Tax Cour t d ecides a case as it believes the law should be applied only if the Court of Appeals of appropriate ju risdiction h as n ot yet ru le d o n the issue o r has p reviously affirmed the Tax Court’s rationale. If the Cour t of Appeals h as rule d on a case s im ila r to the o n e bein g h eard by the Tax Court, th e Tax Court w ill confo rm to th e Appeals Cour t decisio n u n der the Golsen rule even th ough it d isagrees w ith the decis io n . 26

Emily lives in Texas and sues in the Tax ζourt on Issue A. The Fi仕h Circuit Court of Appeal s is the appropriate appellate court. The Fifth Circu it has already decided, in a case involving si milar facts but a different taxpayer, that Issue A should be resolved in favor of the taxpayer. Although the Tax Court believes that the Fifth Circuit Court of Appeal s is wrong, under its Go/sen policy, the trial court will rule in favor of Emily.

Shortly thereafter, Rashad, a resident of New York, in a comparable case, sues in the Tax Court on Issue A. Assume that the Second Circuit ζourt of Appeals, the appellate court that would hear a Tax Court appeal, has never expre ssed itself on Issue A. As a result, the Ta x Court will decide again st Ra shad .

Thus, it is possible for two taxpayers, both having their cases heard by the Tax Court, to end up with opposite results merely because they live in diffe rent parts of the country.

Appeal to the U.S. Supreme Court Appeal to the U.S. Supreme Court is by !Writ of "Certioraril . If th e Cot1rt agrees to hear the case, it w ill g rant the Writ ( Cert. grante动． Sin ce the Supreme Court rarely hears tax cases, m ost often, it denies jurisdiction ( Cert. denie均. The Court usually gran臼 certiorari to resolve a conflict among the Cou rts of Appeals (e.g., two o r more appella te cou rts have asst1med opposin g positio n s o n a particular issue) o r where the tax issue is extremely impor tan t. The g ra n ting of a Writ of Certio ra ri ind icates that at least four o f th e n ine members of the Supreme Cour t believe th a t the isst1e is of s11fficient importance to be heard by the fu ll Court.

Judicial Citations

Court d ecis io n s a re an important source of tax law, and the ability to cite and locate a case is a critical sk过l when work ing w ith the tax law. J udicial citatio n s usually fo llow a stan dard pattern: case n ame, volt1me n u m ber, repor ter series, page o r paragraph num ber, cour t ( w h ere n ecessary), a n d year of the decisio n (see Con cept Su mmary 2. 2).

Judicial Citations-The U.S. Tax Court T he U.S. Tax Court issues two types of decis io n s: Regula r a nd Memoran dum, based o n the Chief J udge’s determination . They d iffe r in both st1bsta n ce and form. In terms o f substa n ce, Memorandum decisions d eal with cases that involve only th e application of establish e d p rinciples of law. Regular decisions involve n ovel issues n ot previot1sly resolved by the Tax Court. In actual p rac- tice, h owever, both Regular and Memorandum represent the position of the Tax Court and, as such , can be re lie d o n . 27

The Regula r and Memora n dum decis io n s issued by the Tax Col1rt also d iffe r in form. Regula r d ecisions a re p u blished by th e U.S. Governme n t in a series entitled 阳Court of the United States R，ψorts (T.C.). Each volt1me of these Rψorts covers a six-mon th period (J a n t1a ry 1 through J u n e 30 and J u ly 1 through D ecember 31) and is g iven a succeed ing volu m e number. Usually there is a time lag between th e date a decision is ren dered and the date it is publish e d . A tem porary citation may be necessary to help the research er locate a recent Regl1lar d ecisio n . Con sid e r, fo r exam ple, the temporary and perm anen t citation s for Mehrdad R，ψzadeh, a decisio n filed on J a n uary 2, 2018.

27U.S. Tax Court Small Cases Division Sl1mmary Opinions car叩 no preceden- tial vall1e. Sl1mmary Opinions issl1ed after January 9, 2001, are available on the U.S. Tax Col1rt website.

Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202 Copyright 2020 Cengage Leaming. All Rights Reserved. May no t be copied, scanned，。r dupl icated, in whole or in part. D ue to elec1ronic rights, some lhird party content may be suppressed from the eBook and/or eChapter(s).

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[ t . ,u：；二｜ Concept Summary 2.2 Judicial Sources Court

U.S. Supreme Court

U.S. Courts of Appeal

Tax Court (Regular decisions)

Tax Court (Memorandum decisions)

U.S. Court of Federal Claims州

U.S. District Courts

Small Cases Division of Ta× Court

Location

S.Ct. Series (West)

U.S. Series (U.S. Gov’t.)

L.Ed.2d (Lawyer’s Co-op.)

AFTR (RIA)

USTC (CCH)

Federal 3d (West)

AFTR (RIA)

USTC (CCH)

U.S. Gov’t. Printing Office

RIA/CCH separate services

RIA T.C.Memo. (RIA)

TCM （ζζH)

Federal Claims Reporter (West)

AFTR (RIA)

USTC (CCH)

F.Supp.2d Series (West)

AFTR (RIA)

USTC (CCH)

U.S. Tax ζourt website州骨

CHAPTER 2 Working with the Ta× Law 2-15

Authority

Highest authority

Next highest appellate court

Highest trial court铃

Less authority than Regular T.C . decision

Similar authority as Tax Court

Lowest trial court

No precedent value

祷Theoretically, the Tax Court, Court of Federal Claims, and District Courts are on the same level of authority. But some people believe that because the Tax Court

hears and decides tax cases from all parts of the country (i.e., a national court), its decisions may be more authoritative than a Court of Federal Claims or District

Court decision.

**Before October 29, 1992, the U.S. Claims Court. 祷铃婪Starting in 2001.

Temporary Citation

Permanent Citation

Mehrdad Rψzadeh, 150 T. C 一－， No. 1 (2018). Explanation: Page number left blank because not yet known.

MehrdadRq卢zadeh, 150 T.C. 1 (2018). Explanation: Page number now available.

Both citations tell us that the case w ill ultimately appear in Volume 150 of the Tax Court qf the United States Rψarts. But until this volume is made available, the page nt1mber must be left blank. Instead, the temporary citation identifies the decision as being the 1st Regt1lar decision issued by the Tax Court since Volume 149 ended. With this information, the decision can easily be located in the special Tax Court services published by Commerce Clearing House (CCH) an d Research Institute of America (RIA). Once Volume 150 is released, the permanen t citation can be st1bstituted and the number of the case dropped. Starting in 1995, both Regular decisions and Memorandum deci- sio n s a re published on the U.S. Tax Court website (ustaxcourt.gov). Memorandum decisio n s, although available on the U.S. Tax Court website, are not published by the U.S. Government.

Before 1943, the Tax Court was called the Board of Tax Appeals, and its decisions were published as the United States Board of Tax Appeals Rψorts (B.T.A.). These 47 volumes cover the period from 1924 to 1942. For example, the citation Karl Pauli, 11 B.T.A. 784 (1928), refers to the 11th volume of the Board of Tax Appeals Rφorts, page 784, isst1ed in 1928.

Copyright 2020 Cengage Leaming. All Rights Reserved. May no t be copied, scanned，。r duplicated, in whole or in part. D ue to electronic rights, some lhird party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Leami ng reserves !he right to remove additional co ntent at any time if subs叫uent rig hts restrictions require it.

2-16 PART 1 Introduction and Basic Tax Model

Memorandum decisions are published by both CCH and RIA. Consider, for example, the three different ways the Nick R. Hughes case can be cited:

Nick R. Hughes, T.C.Memo. 2009-94 丘ψlaηation: The 94th Memorandum decision issued by the Tax Court in 2009.

Nick R. Hughes, 97 TCM 1488 E写planatio饲： Page 1488 of Vol. 97 of the CCH Tax Court Memorandum Decisions.

Nick R. Hughes, 2009 RIA T.C.Memo. 常2009,094 Explanation: Paragraph 2009,094 of the RIA TC. Memorandum Decisions.

Note that the third citation contains the same information as the 白rst. Tht1s，节2009,094 indicates both the year and decision nt1mber of the case. 28

U.S. Tax Court Summary Opinions relate to decisions of the Tax Court’s Small Cases Division. 29 These opinions may not be treated as precedent for any other case. For example, John A. Garcia, filed on August 7, 2018, is cited as follows:

John A. Garcia, T.C. St1mmary Opinion 2018-38.

If the IRS loses a decision, it may indicate whether it agrees or disagrees with the results reached by the court by pt1blishing an 匾g币市n再） ("A" or “ Acq.") or n。nacguiescence l (“NA" or “Nonacq.＇立 respectively. Until 1991 , acquiescences and non- acquiescences were published only for certain Regular decisions of the Tax Court, but the IRS expanded its acquiescence program to include other tax cases. The acquies- cence or nonacquiescence is published in the Internal Revenue Bulletin as an Action on Decision. The IRS can retroactively revoke an acqt1iescence.

Most o丘en, the IRS issues nonacquiescences to adverse decisions that are not appealed. In this manner, the Government indicates 由at it disagrees with the result reached, despite i岱 decision not to seek review of the matter in an appellate cou口. A nonacquiescence provides a warning to taxpayers that a similar case cannot be settled administratively. A taxpayer will inct1r fees and expenses while the case moves throt1gh the IRS even thot1gh the IRS may be t1nw山ing to litigate a fact pattern sin世ar to a nonacqt1iescence decision.到

Judicial Cita胁’“－The U.S. District Court, Court of Federal Claims, and Courts of Appeals District Cot1rt, Court of Federal Claims, Cot1rt of Appeals, and St1preme Court decisions dealing with Federal tax matters are reported in both the CCH US. Tax Cases (USTC) and the RIA American Federal Tax Rψorts (AFTR) series. U.S. District Court decisions, dealing with both tax and nontax isst1es, also are published by West in its Federal Suppl，θmeηt Second Sθrie」） (F.Supp.2d).31 The following exar丑ples illustrate three different ways of citing a Distr t Court case:

Turnerv. U丘， 2004-1 USTC 节60,478 (D.Ct. Tex., 2004). Explanation: Reported in the 自rst volume of the US. Tax Cases, pt1blished by

Commerce Clearing House, for calendar year 2004 (2004-1) and located at paragraph 60,478 （节60,478) .

Turner v. US., 93 AFTR 2d 2004-686 (D.Ct. Tex., 2004). Eψlanation: Reported in the 93rd volume of the second series of the American

Federal Tax Rψorts (AFTR 2d), published by RIA, and beginning on page 686.

Turner v. US., 306 F.St1pp.2d 668 (D.Ct. Tex., 2004) . Explanation: Reported in the 306th volume of the Federal Supplement Secoηd

Series (F.Supp.2d), published by West, and beginning on page 668.

28In tl1is text, the RIA citation for Memorandt1m decisions of ilie U.S. Tax Court is omitted. Tht1s , Nick R. Hitghes is cited as 97 TCM 1488, T.C. Memo. 2009-94.

29In 2005 , the U.S. St1preme Cot1rt held that decisions of the Small Cases Division must be made pt1blic.

30G. W. Carter, "Nonacquiescence: Winning by Losing,” Tax Notes (September

19, 1988): 1301-1307. 31Cases prior to 1999 are fot1nd in West’S Federal Szψple1ηent Series CF.Stipp.).

Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202 Copyright 2020 Cengage Leaming. All Rights Reserved. May not be copied, scanned，。r duplicated, in whole or in part. Due to electronic rights, some lhird party content may be suppressed from the eBook and/or eChapter(s).

CHAPTER 2 Working with the Ta× Law 2-17

The case name , the reference to the U.S. District Court of Texas CD.Ct. Tex扎 and the year the decision was rendered ( 2004) appear in each of the citations.32

Decisio ns of the Court of Federal Claims33 and the Courts of Appeals are published in the USTCs, the AFTRs, and two West reporters. The Federal Tbird Series (F.3d) reports Courts of Appeals decisions, w hereas the Federal Claims Rψorter (abbreviated as Fed.Cl.) reports Court of Federal Claims decisions.34 The following examples illustrate the different forms:

Estate of Gribauskas 以 Comm.

2003-2 USTC 啊60,466 (CCH citation) 92 AFTR 2d 2003-5914 (RIA citation) 342 F.3d 85 (West citation)

Apollo Computer, Inc. v. U.S.

95-1 USTC 响 50,015 （ζCH citation) 74 AFTR 2d 94-7172 (RIA citation) 32 Fed.Cl. 334 (West citation)

(CA-2, 2003)

(Fed.Cl., 1994)

Estate qf Gribauskas v. Comm . is a decision rendered by the Second Circuit Court of Appeals in 2003 (CA-2 , 2003), and Apollo Computer, Inc., was issued by the Cot1rt of Federal Claims in 1994 (Fed.Cl. , 1994).

Judicial Citations-The U.S. Supreme Court Supreme Court decisions are published by CCH in the USTCs and by RIA in the AFTRs. The U.S. Government Printing Office also pt1blishes these decision s in the United States Supreme Court Rψorts (U.S.), as does West in its Supreme Court Rφorter CS.Ct.), and the Lawyer’s Co-operative Publishing Company in its United States Rψor，民 Lawyer云 Edition CL.Ed.). The following illustrates the different ways the same decision can be cited:

U.S. 以 The Donruss Co.

69-1 USTC 咱9167 （ζCH citation) • 23 AFTR 2d 69-418 (RIA citation) 89 S.Ct. 501 (West citation) 393 U.S. 297 (U.S. Government Printing Office citation) • 21 L. Ed.2d 495 (Lawyer’s Co叩erative Publishing Co. citation) •

(USSC, 1969)

’

The parenthetical reference (USSC, 1969) identifies the decision as having been ren- dered b y the U.S. St1preme Court in 1969. In this text, St1preme Court decision citations are limited to the CCH (USTC), RIA (AFTR), a nd West CS.Ct.) versio n s.

2-1 d Other Sources of the Tax Law Other sources of tax information that a tax professional may need to consult include tax treaties and tax periodicals.

Tax Treaties

The United States signs certain tax treaties (sometimes called tax conventions) w ith foreign countries to assist in tax enforcement and to avoid double taxation. Since 1988, w hen there is a direct conflict between the Code and a treat民 the most recent item takes precedence. A taxpayer mt1st disclose on the tax return any position w here a treaty overrides a tax law. 35

32In this text, tl1e case is cited. in the fo llowing form: Tuγner v. U.S., 2004- 1 USTC 咱60,478, 93 AFTR 2d 2004- 686, 306 F.Supp.2d 668 (D.Ct. Tex. , 2004).

33Before October 29, 1992, the Cot1rt of Federal Clain1s was called. tl1e Claims Court. Before October 1, 1982, tl1e Cot1rt of Federal Claims was called the Cot1rt of Claims.

34west’S Federal Second Series (F.2d) contains cases prior to 1994. Beginning in October 1982, the Court of Federal Claims decisions were pt1blished in a different West reporter called the Claims Court R，写porter (abbreviated Cl.Ct.).

3王§ 7852(d); there is a $1,000 penalty per failt1re to disclose for individuals and a $10,000 per failure penalty for co甲orations. See Reg.§§ 301.6114-1, 301.6712- 1, and 301.7701(b)(7).

2-18 PART 1 Introduction and Basic Tax Mode l

L0.3

Tax Periodicals The u se of tax perio dicals can often shorten the research time needed to resolve a tax isst1e. An article relevant to the issue at hand may provide the references needed to locate the primary sources of the tax law that apply (e.g., citations to jt1dicial decisions, Regulatio n s, and o ther IRS pronoun cements).

Several indexes are available for locating tax a rticles, inclt1ding CCH's Federal Tax Articles (which includes a su bject index, a Co de Sectio n number index, and an autho r's index) and the Index to Federal Tax Articles (pu b lished by Thomson Ret1ters). Both of these indexes are available by subscription.

Here are some of the more u seful tax periodica ls:

Jou：γ叽al of Taχatio叽 Journal of International Taxation pγαctical Tax Stγ-ategies Estate Planning Corporate Taxation Busi：γie,'is Eγztities

Taxa tion of Exempts Real Estate Taxation ria. thomsonreuters.com/ journals

The Tax Execut::ve tei.org

The Tax Adviseγ thetaxadviser.com

Tax La：组'J Revi臼'1) law.nyu.edu/tax/taxlawreview I

Journal of the Ameγicaη Taxatioη Associatioη

aa材ournals.org/loi/a tax

古fJe ATA]oi儿rnal of Legal Tax Research a叫ournals.org/loi/jltr

Oil, Gas & EηeγgyQuaγteγly bus.lsu.edu/ accounting/facul句／ lcrumbley I oilgas.html

Triιsts and Estates wealthmanagement.com/te-home

Jou：γ忧al of Passthγough Entities TAXES一－The Tax Magaziγze tax.cchgroup.com/books

Tax Notes taxnotes.com

Develop an awareness of tax research t。。Is.

2-2 WORKING WITH THE TAX LAW- TAX RESEARCH TOOLS

Tax law consists of a body of legislative (e.g. , Code Sections and tax treaties), ad1ninistrative (e.g., Regulations and Rulings), and judicial (e.g., court cases) pronouncemen臼. Working with the tax law reqt1ires being able to locate and u se these sources e旺ectively. A major consideration is the tir丑e required to find relevant informatio n related to the issues identified.

Unless the problem is simple (e.g., the Code Section is known and there is a Regula- tion on point), the research process begins w ith a tax service.

2-2a Commercial Tax Services In the past, commercial tax services could be classified as annotated (i.e., o rganized by Internal Revenue Code) or topical (i.e., o rganized b y major topics). However, as tax research has become electronic, this classificatio n system is no longer appropriate. For example, Thomson Reuters Chee局point includes both the Federal Tax Coord的ator 2d (topical) and the United States Tax Rψorter (annotated) .

Here is a partia l list of the available commercial tax services:

• Standard Federal Tax Rφorter, Commerce Clearing House.

• CCR IntelliConnect, Commerce Clearing House-the online version of the Stan- dard Federal Tax Rψorter (along w ith o ther CCH materials).

• United States Tax R句porter, Research Ins titute of America, Thomson Reuters .

• Thomson Ret1ters Checkpoint, Research Institute of America-the online versions of RIA's Federal Tax Coordinator 2d and United States Tax Rψort，以

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CHAPTER 2 Working with the Ta× Law 2-19

• Practical Tax Expert, CCH/Wolters Kluwer.

• Tax Management Portfolios, Bloomberg BNA.

• Mertens Law qf Federal Income Taxation, Thomson Reuters.

• Thomson Reuters W色列law and Westlau抽xt-compilations include access to Tax Management Por扩olios, Federal Tax Coordinator 2d, and Mer.加ηs

• LexisN exis TaxCenter-一－a compilation of primary sources and various materials taken from CCH, Matthew Bender, Kleinrock, and Bloomberg BNA.

2-2b Using Electronic (Online) Tax Services A competent tax professional must become familiar and proficient with electronic research services and be able to t1se them to complete research projects efficiently. Following certain general procedt1res can simplify the research process. The follow ing suggestions may be helpful:36

• Carefully choose keywords for the search. Words w ith a broad usage, st1ch as income, are of limited value. If the researcher is interested in a specific type of dividend income, the search phrase dividend income is too broad because it finds a variety of topics including stock dividends, constructive dividends, and liquidating dividends (drawing about 2,000 hits in Thomson Reuters Chec岭oint). Searching for qualtβed dividend income obtains 793 items, whereas stock divi- dend income obtains 59 items, cash dividend income finds 44 items, and proper，吵 dividend income finds 20 items.

• Take advantage of coηηectors such as “+” and quotation marks to p lace param- eters on the search and further restrict the output. Although each tax service has its own set of connectors, many are similar. Thus, quotation marks around a phrase mean “ exact phrase” in both Thomson Reuters Checkpoint and CCH IntelliConnect (e.g.,“personal service corporation”).

• Be selective in choosing the data to search. For example, if the research project does not involve case law, do not include judicial decisions in the search.

• Use a table of contents, an index, or a citation when appropriate. Althot1gh the keyword approach is most frequently used, electronic databases can be searched in other ways. Using the table of contents or index may narrow the information that needs to be examined. Tax law (including annotations) also can be accessed by a citation: statutory (e.g., Code Section), administrative (e.g., Rev.Rul.), or jt1dicial (e.g., Tax Court).

2-2c Noncommercial Electronic (Online) Tax Services The internet provides a wealth of tax information in several popt1lar forms, sometimes at no cost to the researcher. A tax professional can access a sign的cant amount of infor- mation that can assist in the research process.

• w告bsites are provided by accounting and consulting firms, publishers, tax aca- demics, libraries, and governmental bodies as a means of making inforr w idely available. One of the best sites available to the tax professional is the Internal Revenue Service’s home page, illustrated in Exhibit 2.6. This site offers downloadable forms and instructions, interpretations of Regulations, and news update items. Exhibit 2. 7 lists some of the websites that may be most useft1l to tax researchers. Particularly t1seful is the directory at taxsites.com, which provides links to accounting and tax sources (including international, state , and payroll tax sources).

36For a n10陀 complete discussion of the use of Thon1son Ret1ters Checkpoint and CCH IηtelliConnect and. internet research in taxation, see Sawyer and

Gill, Federal Tax Research, 11由 ed. (Cengage Learning, 2018), Chapters 6 and 7.

Copyright 2020 Cengage Leaming. All Rights Reserved. May no t be copied, scanned，。r duplicated, in whole or in part. Due to electronic rights, some lhird party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Leaming reserves the right to remove additional content at any time if subs叫uent rights restrictions require it.

2-20 PART 1 Introductio n and Basic Tax Mode l

File Pay Re-funds Credits ac Oeduc创ons Forms le Ins衍vctlons

0: Refund Stah』S 自 Get Your Tax RKo叫

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• Biogs and RSS sites provide a means by w hich information related to the tax law can be exchanged among taxpayers, tax professionals, and others w ho subscribe to the group’s services. Individuals can read the exchanges and offer replies and st1ggestions to inquiries. Discussions address the interpretation and application of existing law, analysis of proposals and new pronot1ncements, and reviews of tax software.

Although tax information on the internet is plentift1l, information in the public domain should not be relied upon w ithout referring to other sources. Anyone can set up a w ebsite, and the quality of the information can be difficult for a tax professional to ascertain.

2-3 WORKING WITH THE TAX LAW- TAX RESEARCH

L0.4

Describe the tax research process.

豆豆旦S旦旦剧 is the process of finding a competent and p rofessional conclt1sion to a tax problem. The problem may originate from completed or proposed transactions. In the case of a completed transaction, the objective of the research is to determine the tax result of w hat has already taken p lace. For example, is a taxpayer expense deduct- ible? When dealing w ith proposed transactions, tax research has a different objective: effective tax planning by determining the tax conseqt1ences of various alternatives. A large part of a tax professional’s career is spent on this type of tax research.

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CHAPTER 2 Workin g wit h the Ta× Law 2-21

Website

Accounting firms and professional organizations

ζengage Learning

Commercial tax publishers

Court opinions

Internal Revenue Service

Tax Almanac

Tax Analysts

Tax Foundation

Tax laws online

Tax Sites Directory

U.S. Tax Court decisions

Caut ion: Web addresses change frequent ly.

Web Address

For instance, the AICPA’s page is at aicpa.。rg, Ernst & Young is at ey.com, and KPMG is at kpmg.com

cengage.com

For instance, taxn。tes.com， αhgroup.c。m, tax.th。msonreuters.c。m,and

bna.com

The site at law.justia.com covers state, Federal, and Supreme Court decisions (but not Tax Court)

1rs.g。v

taxalmanac.org

taxanalysts.。rg

taxf，。undation.。rg

Regulations are at law.cornell.edu/cfr, and the Code is at uscode.house.gov and law.cornell.edu/uscode

taxsites.com

ustaxcou rt.gov

Tax research involves the following s teps :

• Identifying and refining the problem.

• Locating the appropriate tax law sources.

• A ssessing the v alidity of the tax law sot1rces.

Descripti。n

Tax planning newsletters, descriptions of services o仔ered and career opportunities, and exchange of data with clients and subscribers

Informational updates, newsletters, support materials for students and adopters, and continuing education

Information about products and services available for subscription and newsletter excerpts

A synopsis of results reached by the court

News releases, downloadable forms and instructions, tables, Circular 230, and e-mail

Smorgasbord of tax research resources

Policy-oriented readings on the tax law and proposals to change it, moderated bulletins on various tax subjects

Nonprofit educational organization that promotes sound tax policy and measures tax burdens

References and links to tax sites on the internet, including state and Federal tax sites, academic and professional pages, tax forms, and software

Recent U.S. Tax Court decisions

• Arriv ing at the solution or at alternative solutions ( including consider ation of

nontax factors) .

• Effectively communicating the solution to the taxpayer.

• Updating the solution (where appropriate) in light of new developments.

The tax researc h process is illus trated in Exhibit 2.8. The broken lines reflect the

s teps of particular interes t w hen tax res earch is d irected toward proposed, rather than

completed, transactions .

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2-22 PART 1 Introd uction and Basic Tax Model

白」

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Prel im inary Problem

ldenti币cation ：‘－－－－－－－－－－－－－－－－『

Administrative Sou 「ces

Tax Research “ ”

Problem Re白nement and

Discovery of New Problem

Areas Judicia l Sou rces

Unofficial Sou rces

Non tax Considerations 一一－－”’

Solution

Communication ___ ,.... New Developments --

2-3a Identi马ring the Problem Problem identification starts by documenting the relevant facts involved with the issue.37 All of the facts that may have a bearing on the problem must be gathered; if any facts are omitted, the solution provided will likely change. To illustrate, return to the facts of Tbe Big Picture on p. 2-1 and consider the tax implications of the gold coins discovered by Fred and Megan Martel.

2-3b Refining the Problem In the facts of Tbe Big Picture on p. 2-1, the question of the tax implications of the Martels' d iscovery can be determined with some basic research. Internal Revenue Code § 61 defines gross income as “ all income from whatever so11rce derived."38 Further, Treasury Regulation§ 1.61- 14(a) states that “ a treasure trove, to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is redt1ced to undispt1ted possession.”

Given that the Martels discovered the coins on their property in March 2019 and the state returned the coins to them in October 2019 (“t1ndisputed possession’'), their gross income in 2019 will include the “ value in United States ct1rrency” of the coins. The question of “ valt1e” is key to the Martels’ situation.

37For an excellent discl1ssion of tl1e critical role of facts in carrying Ollt tax research, see Gardner, Stewart, and Worsham, Tax Research Techniqites, 10th ed. (New York: The American Institute of Certified Pl1blic Accountants, 2015), Chapter 2.

38See the related discussion in Chapter 3.

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CHAPTER 2 Working with the Ta× Law 2-23

2-3c Locating the Appropriate Tax Law Sources Once a problem is clearly defined , what is the next step? Althol1gh the next step is a matter of individual judgment, most tax research begins with a keyword search using an electronic tax service. If the problem is not complex, the researcher may turn directly to the Internal Revenue Code and Treasury Regulations. The Code and Regulations are accessible electronically (and also available in print from a nl1mber of publishers). 39

2-3d Assessing the Validi句r of Tax Law Sources Once a sol1rce has been located, the next step is to assess it in light of the problem at hand. Proper assessment involves careful interpretation of the tax law with consideration given to its relevance and validity. In connection with validity, an important step is to check for recent changes in the tax law.

Interpreting the Internal Revenue Code

The langt1age of the Code can be extremely difficl1lt to comprehend. Some of this dif- 白culty is dl1e to its structure (the Code follows the structure of all U.S. law), so getting used to reading (and interpreting) the Cod.e can take time.

The Code mt1st be read carefully for restrictive language st1ch as "at least 80 percent” and “ more than 80 percent” o r “ less than 50 percent” and “ exceeds 50 percent.” Whether two o r more clauses a re connected by or or b y and makes a great deal of difference.

Sometimes the Code directs the researcher elsewhere for the answer. For example, § 162(c) refers to the Foreign Corrupt Practices Act for purposes of determining when payments to foreign officials are dedt1ctible.

Definitions vary from one Code Section to another. For example, § 267 disallows losses between related parties. Brothers and sisters are included in this definition of related parties. This is not the case w ith § 318, which deals with the definition of related parties for certain stock redemptions. Research has shown that in one-third of the conflicts reach- ing the Tax Court, the court could not discern the intent of Congress by simply reading the statute (the Court had to look to Committee Reports to t1nderstand intent).40

If an answer is not in the Code, it may be necessary to look to other tax law, includ- ing Regulations and judicial decisions.

Assessing the Validity of a Treasury Regulation

TreasurγRegulations are the official interpretation of the Code and are entitled to great deference. Occasionally, however, a court invalidates a Regulation (or a portion of it) because the Regulation is contrary to the intent of Congress. Usually, cot1rts do not question the validity of Regulations. Courts believe that “ the first administrative inter- pretation of a prov ision as it appears in a new act often expresses the general under- standing of the times or the actual t1nderstanding of those who played an important part when the statute was drafted."41

Keep the following things in mind when you assess the validity of a Regt1lation:

• IRS agents must give the Code and any related Regulations equal weight when dealing w ith taxpayers and their representatives.

• Proposed Regulations provide a preview of future final Regulations , but they are not binding on the IRS or taxpayers.

• Taxpayers have the bt1rden of proof to show that a Regulation varies from the language of the statute and is not supported by the related Committee Reports.

39Tl1e Internal Revent1e Service provides a gateway to the Internal Rev- ent1e Code, Treast1ry Department Regt1lations, and other items at irs.gov/ tax-professionals/tax-code-regulations-and-official-guidance.

40,丁. L. Kirkpatrick and W. B. Pollard, "Reliance by the Tax Cot1rt on the Legislative Intent of Congress，＇’ 刀7e Tax Executive (St1nm1er 1986): 358-359.

41Aitgustus v. Comm. , 41- 1 USTC 咱9255 , 26 AFTR 612, 118 F.2d 38 (CA- 6, 1941).

Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202 Copyright 2020 Ce ngage Leaming. All Rights Reserved. May not be copied, scanned，。r duplicated, in whole or in part. Due to electronic rights, some lhird party content may be suppressed from the eBook and/or eChapter(s).

Editorial review has deemed that any suppressed content does not materially affec t the overall learning experience. Cengage Leami ng reserves !he right to remove additional co ntent at any time if subs叫uent rights restrictions require it.

2-24 PART 1 Introduction and Basic Tax Mode l

• If the taxpayer challenges a Regulation and loses, a 20 percent negligence penalty may appl予42

• Final Regulations can be classified as procedt1ral, interpretive, or legislative. ~edural 坠gulati。nsJ are housekeψing-type instructions indicating information that taxpayers should provide the IRS, as well as information about the internal management and conduct of the IRS itself.

• Some I interpretive Re9.ulat坠吃毛 rephrase or elaborate w hat Congress stated in the Committee Reports that were issued when the tax legislation was enacted. These Regu lations are almost impossible to overtt1rn because they clearly reflect the intent of Congress. Historically, an interpretive Regulation has been given less deference than a legislative Regulation.43 The Supreme Court has told lower courts to analyze Treasury Regulations carefully before accepting the Treasury's

. 44 interoretat1on.

• In some Code Sections, Congress has given 出e 升-easurySec何tary or his delegate the authority to prescribe Regt1latio ns to carry ot1t the details of administration or to other- w ise complete 出e opera山g n 1les. In these cases, Congress is delegating i臼 legislative powers to the Treasury Department. Regulations issued under this type of authority possess the force and e旺ect of law and are often called U到islative Regulati。ns

• Courts tend to apply a legislative reenactment doctrine. A particular Regt1lation is assumed to have received congressional approval if the Regulation was finalized many years earlier and Congress has not amended the related Code Section.

Assessing the Validity of 。ther Administrative Sources of the Tax Law

Revenue Rulings issued by the IRS carry less weight than Treasury Department Regula- tions. Revenue Rulings are important, however, in that they reflect the position of the IRS o n tax matters. IRS agents w ill follow the rest1lts reached in a Revenue Rt1ling that relates to the research question (or the tax return). A 1986 Tax Court decision, however, indicated that Revenue Rulings “ typically do not constitute st1bstantive authority for a position."45 Most Revenue Rulings apply retroactively unless the ruling indicates otherwise.46

A ctions on Decisions document the IRS’s reaction to certain court decisions. The IRS foll ows a practice of either acquiescing (agreeing) or n onacquiescin g (not agreeing) w ith selected judicial decisions.

Assessing the Validity of Judicial Sources of the Tax Law

How much reliance can be placed on a particular decision depends on the follow ing variables:

• The level of court. A decision rendered by a trial court (e.g., a U.S. District Court) carries less weight than one issued by an appellate court (e.g. , the Fifth Circuit Court of Appeals). Unless Congress changes the Code, decisions by the U.S. Supreme Court represent the last word o n any tax issue.

• Residence of the taxpayer. A decision of the appellate court in the taxpayer’s circuit carries more weight than one rendered by an appellate cot1rt in a different circt1it. If, for example, a taxpayer lives in Texas, a decisio n of the Fi丘h Circuit Court of Appeals ( which would hear an appeal from a Texas trial court) means more than one rendered by the Second Circuit Court of Appeals.47

42§§ 6662(a) and (b)(l). This accuracy-related penalty applies to any failt1re to make a reasonable attempt to comply with tl1e tax law and any disregard. of rules and Regt1lations [§ 6662(c)]. The term reasonable is not defined in the Code; the IRS looks at all of the facts and circt1mstances surrounding the effort of the taxpayer to report the coηect tax liability. 竹However, see Mayo Foundation卢r Medical Education and Research ,

2011-1 USTC 咱50, 143, 107 AFTR 2d 2011- 341, 103 S.Ct. 704 (USSC, 2011), wl1ere the Supreme Cot1rt provided greater deference to interpretive Regt1lations (and appeared to blur the line between legislative and inter- pretive Regt1lations).

44U S. v. Vogel Fertilizer Co. , 82- 1 USTC 节9134, 49 AFTR 2d 82-491 , 102 S.Ct. 821 (USSC, 1982); National Muffler Dealers Assn., lrzc., 79-1 USTC 节9264, 43 AFTR 2d 79-828, 99 S.Ct. 1304 (USSC, 1979).

4王1Velda C. Star,舟， 86 T.C. 243 (1986). See alsoAnnR. Neuhoj汇 75 T.C. 36 (1980). For a different opinion, however, see Industrial l位ll，ηBank&1子ust Co., 66 T.C. 272 (1976).

46Rev.Proc. 87- 1, 1987- 1 C.B. 503. 47Before October 1, 1982, an appeal from the then-named U.S. Court of

Claims (the other trial court) was directly to the U.S. St1preme Court.

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CHAPTER 2 Working with the Ta× Law 2-25

• Regular or Memorandum decision. A Tax Court Regt1lar decision carries more weight than a Memorandum decision because the Tax Court does not consider Memorandum decisions to be binding precedents.48 A Tax Court reviewed decision ( where all of the Tax Court judges participate) carries even more weight.

• Supreme Court certiorari. A Circuit Cot1rt decision where certiorari has been requested and denied by the U.S. Supreme Court carries more weight than a Cir- ct1it Court decision that was not appealed. A Circuit Court decision heard en banc (all of the jt1dges participate) carries more weight than a normal Circuit Court case.

• Other courts' support. A decision that is supported by cases from other courts car- ries more weight than a decision that is not st1pported by other cases.

• Status on appeal. The weight of a decision also can be affected by i臼 status on appeal. For example, was the decision affirmed or overruled?

In connection with the last three variables, the use of a citator is invaluable to tax research. 49 A [Q亟画 provides the h istory of a case, including the autho仰 relied on (e.g., other judicial decis ions) in reaching the result. Reviewing the references listed in the citator discloses w hether the decision was appealed and, if so, with w hat result (e.g., affirmed, reversed, or remanded). It also shows other cases w ith the same o r s imilar issues and how they were decided. As a rest1lt, a citator reflects on the validity of a case and may lead to other relevant judicial material.50 If one intends to rely on a judicial decis ion, ((citating" the case is imperative.

Assessing the Validity of Other Sources Primary sources of tax law include the Constitution, legislative history materials, stat- utes, treaties, Treasury Regulations, IRS pronouncements, and judicial decisions. The IRS con siders only primary sot1rces to constitute st1bstantial authority. However, reference to secondary sources such as legal periodicals, treatises, legal opinions, IRS publications, and other materials can be t1seful. In general, secondary sources are not authority.

Although the statement that the IRS regards only primary sources as substantial author- ity generally is trt1e, there is one exception. For purposes of the accuracy-related penalty in § 6662, the IRS expands the list of substantial authority to include a number of second- ary sources (e.g., letter rulings , General Counsel Memoranda, and the Bluebook) .51 “Authority" does not include conclusions reached in treatises, legal periodicals, and opinions rendered by tax professionals.

A letter ruling or determination letter is substantial authority only for the taxpayer to w hom it is issued, except for the accuracy-related penalty.

Once major tax legislation is completed, the staff of the Joint Committee on Taxation (in consultation w ith the staffs of the Hot1se Ways and Means and Senate Finance Commit- tees) often prepares a General Explanation of the Act, commonly know n as the Bluebook (because of the color of its cover). The IRS does not accept this detailed explanation as having legal effect, except for the accuracy-related penalty. The Blueboo k does, however, provide valuable guidance to tax advisers and taxpayers until Regt1lations are issued.

2-3e Arriving at the Solution or at Alternative Solutions The Big Picture on p. 2-1 raises the question of how a “ treasure trove” should be taxed. Based on Reg.§ 1.61-14(a), the Martels must include in their gross income the “ valt1e in United States currency ” o f the coins once they have “ u ndispt1ted possession” of the coins.

Does it make any difference that the cot1ple paid $195,000 for the land w here the coins were bt1ried? Since the taxpayers fot1nd the gold coins on their own property，由ey could argue that they purchased the coins when they purchased the land. This argument is similar to an individual discovering oil or natt1ral gas on her property. And with

48Severino R. JVico, Jr. , 67 T.C. 647 (1977). 49The major citators are pt1blished by CCH, RIA, Westlaw, and Shepard’s.

5吁he CCH citator is available online througl1 由e CCH fntelliConnect service; 阳的 citator can be found in Thomson Ret1ters Checkpoint. Westlaw’s citator (KeyCite) is part of its online service. Shepard’s citator is part of LexisNexis.

王1Notice 90- 20, 1990- 1 C.B. 328; see also Reg.§ 1.6661- 3(b)(2).

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2-26 PART 1 Introductio n and Basic Tax Mode l

Tax law is developed by many entities, including Congress, and the legislators of other countries,

the courts, and the IRS. Accounting principles also have many sources.ζonsequently, in reconciling the tax and financial accounting reporting of a transaction, the tax professional needs to know the hierarchy of authority of accounting principles-in particular, the level of importance to assign to a specific GAAP document. The diagram below presents the sources of GAAP arranged in a general order of authority from highest to lowest.

Professional research is conducted to find and analyze the sources of accounting reporting standards in much the same way a tax professional conducts research on an open tax ques- tion. In fact, many of the publishers that provide tax research materials also can be used to find GAAP and International Financial Reporting Standards (IFRS) documents. The Financial Accounting Standards Board (FASB) also makes its standards and interpretations available by subscription.

L0.5

Financial Accounting Standards and Interpretations of the FASB. Pronouncements of bodies that preceded the FASB, such as the Accounting Principles Board (APB).

FASB Technica l Bul letins. · Audit and Accounting Gu ides, prepared by the American Institute of CPAs (AICPA) and cleared by the FASB.

Practice Bu lletins, prepared by the American Institute of CPAs (AlζPA) and cleared by the FASB.

Interpretation Gu ides of the FASB Staff. · Accounting Interpretations of the AICPA.

IASB Accounting Standa 「ds. FASBζoncepts Standards.

· Widely accepted accounting practices, professional journals, accounting textbooks, and treatises.

natural resot1rces, there must be a realization event (e.g. , a sale or exchange) before there is income. Would this notion work for this couple? Unfortunately, no. A decision affirmed by the Sixth Circt1it Court of Appeals indicates that the entire value of the couple’s discovery wot1ld be included in their income in the year of discovery. 52 In Cesarini, the taxpayer purchased a piano that happened to conceal cash. The court s allocated the entire purchase price to the piano, so the tax able in the year of discov ery. Although the Martels might want to argue that there is no “ income ” until the coins are sold (i.e. , the coins have a zero basis on dis covery), Reg.§ 1.61-14(a) and Cesarini indicate that the treasure trove’s valt1e shot1ld be included in gross income a s soon as the couple has “ undisputed possession.”

Finally, the “ value” is not the $28,000 face value of the coins. Rather, it is the fair market value of the coins . But how does one value the coins? It w ill likely depend on the appraisal of the coins (and, as you might suspect, there could be di旺erences in apprais- als) . If the Martels sell any of the coins, they could argue that the best 飞ralue” would be the sales price of the coins. But an appraisal w ill be required to determine the fair market value of the coins, and this amount must be included in the Martels’ 2019 gross income. 53

2-3f Communicating Tax Research c。mmunicate the results of the tax research process in a client letter and a tax file memorandum.

Once the research process has been completed, the researcher w ill need to prepare a memo, a letter, or an oral presentation. The form of communication depends on a nt1mber of factors. For example, most firms document the results of a tax research project in a memorandum. Although the format of this memorandum can vary, certain

)2Cesarini v. US., 69- 1 USTC 节9270, 23 AFTR 2d 69- 997, 296 F.Supp. 3 CD.Ct. N.Oh. , 1969), aff'd 70-2 USTC 咱9509 , 26 AFTR 2d 70- 5107, 428 F.2d 812 (CA- 6, 1970).

53This Big Picture example is based on a 2013 discovery made in Cal证。rnia; see en.wikipedia.org/wiki/Saddle_Ridge_Hoard. For more detail on the tax implications of this discovery, see M. Morris, C. Cl1eng, and

D. L. Crt1n1bley,“Tl1e Saddle Ridge Gold Coin Discovery: How the U.S. Shot1ld Tax U.S. Cl1rrency Under the Treast1re Trove Regt1lations,'’ 1-Ioitston Business and Tax Law Jοurnal, Vol. 17, Issue 2 (2017), pp. 120-145.

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CHAPTER 2 Working with the Ta× Law 2-27

e lemen ts app ear in all m e m os. In a dditio n , v irtually all m emos are reviewed b y senio r tax professio nals to e n sure a ccuracy.

H ow a r e resu lts co mmunica ted to the c lie nt ( d o e s the c lie nt receive the tax rese a rc h memo, a le tte r, o r som e oth e r fo rm o f commt1nicatio n )? If an o r a l p resentatio n is req uired, w h o w ill be the at1die nce? W h a tever fo rm it ta k es, the fo llowing e le m e nts w ill be p a rt of the communic a tio n:

A c le ar s ta tement o f the issue .

• In m o re com p lex s ituatio n s, a s h o r t review o f the facts tha t ra ised the issu e .

• A review o f th e re levant tax law sot1rces (e.g., Co d e, Regt1la tio n s, Revenue Rulings, a nd judic ia l autho rity).

• Any asst1mptio n s m a de in a rriv ing a t th e solutio n .

• Th e solutio n recomme nde d and the logic o r reasoning suppo rting it.

• T h e refe re n ces con sulted in th e resear c h process.

A good tax researc h communic a tio n s h o uld te ll th e audie n ce w h a t was rese a rched, th e results o f tha t rese a rc h , and the justi自cation fo r a n y recomme nda tio n s.54

Ex hib its 2.9 a nd 2.10 present the tax file m e m o r a ndum ( interna l to the firm) a n d the c lient le tte r associa te d w ith the facts o f The Big Picture.

November 14, 2019

TAX FILE MEMORANDUM

FROM: John J. Jones SUBJECT: Fred and Megan Martel

Income from Coin Discovery

Today I met with Fred and Megan Martel related to a request for tax assistance. In 2014, the Martels purchased 40 acres of land for $195,000; they built their current residence on the property in 2015. In March 2019, while walking on a remote part of their property, they spotted something shiny on the ground. They started digging and eventually unearthed eight metal cans containing more than 1,400 rare gold coins in $5, $10, and $20 denominations dated from 1846 to 1895. The face value of the gold coins is about $28,000, and the coins are in mint condition. As required by state law, the Martels turned over the coins to the state for disposition. For a period of six months, the state was required to publicize the find and ask if anyone could prove ownership. When no one came forward , the coins were returned to the Martels in October 2019.

ISSUE: What are the tax implications of the Martels’ coin discovery?

FINDINGS: Internal Revenue Code§ 61 defines gross income as 飞II income from whatever source derived:’ Further, Treasury Regulation § 1.61 - 14(a) states that飞 treasure trove, to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession:’ The fact that the state returned the coins to the Martels in October 2019 appears to indicate "undisputed possession" as required by Reg. § 1.61 - 14(a). As a result, their gross income will include ”value in United States currency” of the coins. The question of”value” is key to the Martels’ situation.

Since the Martels found the gold coins on their own property, the taxpayers could argue that they purchased the coins when they purchased the land. This argument is similar to an individual discovering oil or natural gas on her property. With natural resources, there must be a realization event (e.g., a sale or exchange) before there is income.

Given the findings in Cesarini [70- 2 USTC 咱9509, 26 AFTR 2d 70- 5107, 428 F.2d 812 (CA- 6, 1970日， this notion would not appear to work for the Martels. In Cesarini, the taxpayer purchased a piano that happened to conceal cash. The court allocated the entire purchase price to the piano, so the ”windfall气urrency was wholly taxable in the year of discovery. As a result, this decision by the Sixth Circuit Court of Appeals would indicate that the entire value of the couple’s discovery is to be included in their income in the year of discovery.

Although the Martels might want to argue that there is no ” income” until the coins are sold (i.e., the coins have a zero basis on discovery), Reg. § 1.61 - 14(a) and Cesarini indicate that the treasure trove’s value should be included in gross income as soon as the couple has "undisputed possession:'

Finally, the ” value” is not the $28,000 face value of the coins. Rather, it is the fair market value of the coins. The Martels should engage a qualified appraiser (or appraisers) to value the coins appropriately. Then the appraised value of the coins will be included in their 2019 gross income.

54See Chapter 7 of tl1e AICPA pt1blication cited in Footnote 37. For oral pre- sentations, see W. A. Raabe and G. E. Whittenburg, "Talking Tax: How to Make a Tax Presentation,” Tax Adviseγ （March 1997): 179- 182.

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2-28 PART 1 Introduction and Basic Tax Model

November 18, 2019

M仁 and Mrs. Fred Martel 111 Saddle Ridge Road Williamsburg, VA 23185

Dear Mr. and Mrs. Martel:

Maloney, Raabe, Young, Nellen, & Hoffman, CPAs 5191 Natorp Boulevard

Mason, OH 45040

This letter is in response to your request for advice related to your discovery of gold coins on your property in March 2019. Our conclu- sions are based on the facts discussed during our meeting with you on November 14, 2019. Any change in the facts may affect our conclusions.

In general, the fair market value of the coins you discovered must be included in your 2019 gross income. This conclusion is based on your "undisputed possession" of the coins (as of October 2019) and opinions expressed in U.S. Treasury Department Regulations and court cases (including one from the Sixth Circuit Court of Appeals).

Given the potential value of your discovery, I would encourage you to seek a competent appraiser (or appraisers) to assess the value of the coins. Once a determination of value is made, we can work on a plan to pay the related Federal and state income taxes.

Should you need more information or want to clarify our conclusions, do not hesitate to contact me.

Sincerely yours,

John J. Jones， ζPA Partner

L0.6

Apply tax research techniques and planning procedures.

2-4 WORKING WITH THE TAX LAW- TAX PLANNING

Tax research and tax p lanning are inseparable. The primaη； purpose of effective tax plann的g is to m .aximize the taxpayer’s after-tax wealth. The course of action selected

might not prodt1ce the lowest possible tax under the circumstances. The minimization

of tax liability must be considered in context w ith the nontax goals of the taxpayer.

A secoηdary objective of effective tax planning is to reduce or defer the tax

in the ct1rrent tax year. Specifically, this objective aims to accomplish one or more

of the following:

• Eliminating the tax entirely.

• Eliminating the tax in the ct1rrent year.

• Deferring the receipt of income.

• Converting ordinary income into capital gains.

• Converting active income to passive activity income.

• Converting passive activity expense to active expense.

• Increasing the number of taxpayers (i.e., forming partners hips and corporations

or making lifetime gifts to family members).

• Eluding dot1ble taxation.

• Avoiding ordinary income.

• Creating, increas ing, or accelerating dedt1ctions.

How e ver, this objective should be approached w ith caution. For example, a tax e lec-

tion in one year may reduce taxes currently but cause future y ears to have disad v anta-

geot1s tax positions.

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CHAPTER 2 Working with the Ta× Law 2-29

2-4a Nontax Considerations There is a danger that tax considerations may impair the exercise of sound financial planning or business judgment by the taxpayer. Thl1s, the tax planning process can lead to ends that are economically (or socially) incorrect. Unfortunately, a tendency exists for planning to move toward the opposing extremes of placing either too little or too much emphasis on tax considerations. The goal should be a balance that recognizes the sign的cance of taxes, but not beyond the point where planning detracts from the exer- cise of good business judgment. In general, if the only reason for pursuing a spec的c course of action is because of the tax benefits, then one should rethink that decision.

2-4b Components ofTax Planning The popular perception of tax planning often is restricted to the adage “ defer income and accelerate dedl1ctions. ” Althol1gh this timing approach does hold true and is impor- tant, meaningful tax planning involves considerably more.

Preferable to deferring taxable income is complete avoidance of taxation. Consider, for example, the employee who chooses nontaxable fringe benefits （巳g., group term life insurance and health insurance coverage) over a fu lly taxable fl1ture pay increase. 55 Complete avoidance of gain recognition a lso occurs when the owner of appreciated property transfers it by death. Here, the “ step-up”(appreciation) in basis to fair market value completely escapes the income tax. 56

If 由e recognition of income cannot be avoided, its deferral will postpone income tax conseql1ences. A tax paid in the future cos臼 less than a tax paid today because of the time value of money. D电ferral of income can take many forms. Besides like-kind exchanges and involuntary conversions, most retirement plans postpone income tax consequences until the benefits are paid. Deferral of gain recognition also can occllr when appreciated property is transferred to a newly formed corporation or partnership. 57

A corollary to the deferral of income is the acceleration of dedl1ctions. For example, if an accrual basis, calendar year corporation al1thorizes a charitable contribution in 2019 and pays it on or before April 15, 2020, the deduction can be claimed for 2019. 58 Taxes also can be saved by sh沪的g income to lower-bracket taxpayers. Gifts of appreci- ated property to lower-bracket family members can reduce the related capital gain tax rate on a later sale by 15 percentage points (from 15 percent to O percent). 59 For certain h igh-income taxpayers, the reduction is 20 percentage points.

If income cannot be avoided, deferred, or shifted, the nature of the gain can be converted. By changing the classification of property, income taxes can be reduced. Thus, a taxpayer who transfers appreciated inventoηr to a controlled corporation has converted ordinary income property (the inventory) to a capital asset (stock in the cor- poration). When the taxpayer’s stock is later sold, preferential capital gain rates apply.

The conversion approach also can work in tax planning for losses. Properly struc- tured, a loan to a corporation that becomes worthless can be an ordinary loss rather than a capital loss. Likewise, via § 1244, an investor in quali白ed small bl1siness stock can convert what would be a capital loss into an ordinary loss. 60

Effective tax planning requires that careful consideration be given to the choice of entity used for conducting a bl1siness. The corporate form resl1lts in dot1ble taxation bt1t permits shareholder-employees to be covered by fringe benefit programs. Partnerships and S corporations a llow a pass-through of losses and other tax attributes, but transfer- ring ownership interests as gifts to family members may be difficult. 61

Although the st1bstance of a transaction rather than i臼 form generally controls, this rule is not always the case with tax planning. Preserving formalities , with particularly

记See text Sections 5-6 and 5-8 and Examples 19 and 38 in Chapter 5. 56See Example 24 in Chapter 13. 57See Chapters 18 and 21. 58See Chapter 17.

59See text Section 13-2b in Chapter 13. 60See Exan1ple 9 in Chapter 7. 61See Chapters 21 and 22.

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2-30 PART 1 Introduction and Basic Tax Model

clear documentation, often is crt1cial to the result. Is an advance to a corporation a loan or a contribution to capital? The answer may depend on the existence of a note.

Along w ith preserving formalities, the taxpayer shot1ld keep records that support how a transaction is treated. Returning to the issue of loan verst1s contribution to capital, how is the advance listed on the books of the borrower? What do the corporate minutes say about the advance?

Finally, effective tax planning requires consisteηcy on the part of taxpayers. A share- holder w ho treats a corporate distribution as a return of capital cannot later avoid a stock basis adjustment b y contending that the dis tribt1tion was really a div idend.

In summary, the key components of tax planning include the follow ing:

• Avoid the recognition of income (t1sually by resorting to a nontaxable sot1rce or nontaxable event).

• D写fer the recognition of income (or accelerate deductions) .

• Convert the classification of income (or deductions) to a more advantageous form (e.g., ordinary income into capital gain).

• Choose the business entity w ith the desired tax attributes.

• Preserve formalities by generating and maintaining Sll pporting documentation.

• Act in a manner consistent w ith the intended objective.

2-4c Tax Avoidance and Tax Evasion A fine line exists between legal tax planning and illegal tax planning-tax avoidance versu s tax evasion. Tax avoidance is merely tax minimization through legal techniqt1es, w hich is the proper objective of all tax planning. Tax evasion, althot1gh also aimed at the elimination or redt1ction of taxes, connotes the u se of subterfuge and fraud as a means to an end. Popt1lar usage-probably because of the common goals involved- has so linked these two concepts that many individt1als are no longer aware of the true distinctions between them. Consequently, some taxpayers may not take advantage of planning possibilities. The now classic words of Judge Learned Hand in Commissioner v. Newman reflect the true values the taxpayer should have:

O ver and over again cot1rts have said that there is nothing sinister in so a町anging one’s affairs as to keep taxes as low as possible. Everybod y does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced ex tractions, not voluntary contributions. To demand more in the name of morals is mere cant.62

As Denis Healy, a former British Chancellor, once said,“The difference between tax avoidance and tax evasion is the thickness of a prison wall.”

U.S. taxpayers spent over 8.9 billion hours (or more than 1 million years) preparing and filing tax returns in 2016. Considering indiv idual, business, and employment taxes, this time amounts to about $409 billion annually in compliance costs. For example, the Treasury Department's Proposed Regulations related to the qt1ali白ed bL1siness income deduction are almost 200 pages long, and the IRS estimates that they could increase compliance costs b y $1.3 billion over the next 10 years . Of course, additional time is spent filing state tax returns each year. 63

2-4d Follow-Up Procedures Because tax planning u sually involve s a proposed (rather than a completed) transac- tion, being aware of if or w hen the law changes is critical to the tax planning process. A change in the tax law (legislative, administrative, or judicial) could alter the original conclusion. Additional research may be necessary to test the solt1tion in light of ct1rrent develo pments (refer to the broken lines at the right in Exhibit 2.8).

62Comm. v. Newman, 47-1 USTC 咱9175 , 35 AFTR 857, 159 F.2d 848 (CA- 2, 1947).

63Scott A. Hodge,“Tl1e Compliance Costs of IRS Regt1lations,” Tax Founda- tion, June 15, 2016.

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CHAPTER 2 Workin g with the Ta× Law 2-31

2-4e Tax Planning Throughout this text, each chapter concludes w ith observations on Tax Planning. These observations are not all-inclusive, but they are intended to illt1strate some of the ways in w hich the material covered in the chapter can be effectively utilized to minimize taxes .

2-5 TAXATION ON THE CPA EXAMINATION

The revised CPA exam continues to test in the familiar four sections-Aud iting and Attestation (AUD), Business Environment and Concepts (BEC), Financial Accounting and Reporting (FAR), and Regulation (REG) . However, the exam places less emphasis o n remembering-and-understanding skills, enabling higher-level analysis and evaluation skills to be tested:

• The number of task-based simulations, a highly effective w ay to assess higher- order skills, increased. Task-based simulations are part of the BEC section for the first time, and the AUD , FAR, and REG sections each have eight o r nine task-based simulations .

• Total testing time is now 16 hours (up from 14 hours) . Both the BEC and REG sections increased by one hour, partly becat1se of the increase in task-based simu- lations . Testing time remains the same for the AUD and FAR sections.

• Multiple-choice questions and task-based simulatio n s each contribt1te about 50 percent toward the candidate's score in the AUD, FAR, and REG sections. In the BEC sectio n , multiple-choice questions contribute about 50 percent of the scoring, w ith 35 percent coming from task-based simulations and 15 percent from 轧rritten com口1unication.

• The revised CPA exam places less emphasis o n multiple-choice questions, w ith about 50 percent of the total points (dow n fro m 60 percent).

• The revised CPA exam tests remembering and t1nderstanding, application, analysis, and evaluation. The previous CPA exam only tested for the first two of these items.

2-Sa Preparation Blueprints To prepare for the revised CPA exam, candidates are able to u se AICPA-developed blueprints that replaced the Content Speci白cation Outline (CSO) and Skill Specification Ot1tline (SS0 ).64

The blueprints provide candidates w ith more detail about w hat to expect on the exam. They contain about 600 representative tasks, w hich are aligned w ith the skills required of new ly licensed CPAs, across the four exam sections . The blt1eprints are designed to provide candidates w ith clearer information on the material the exam tests and show educators w h at knowledge a nd skills candidates need as new ly licen sed CPAs. In addition, the blueprints provide candidates w ith sample tasks that align w ith b o th the content and skill level at w hich the content w ill be tested.

2-S b Regulation Section Taxation continues to be tested w ithin the REG sec tion of the CPA exam. Testing w ithin REG is administered in five b locks called testlets, w hich featl1re multiple-choice questions (MCQs) and task-based simulations (TBSs). Candidates receive at least one research question (research-oriented TBS) that requires the candidate to search the applicable at1thoritative literature and find an appropriate reference.

L0.7

Be aware of taxation 。n the CPA examination.

64The bll1eprints can be accessed at aicpa.org/becomeacpa/cpaexam/ examinationcontent/downloadabledocuments/cpa-exam- blueprints-effective-20180101. pdf; a Sl1mn1a叩 of changes made to the

previollS b lueprints can be accessed at aicpa.org/becomeacpa/cpaexam/ examinationcontent/downloadabledocuments/cpa-exam-blueprints- 20180101-summaη，－changes. pdf.

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2-32 PART 1 Introduction and Basic Tax Model

Each of the five topics in REG inclt1des one or more representative tasks that are not necessarily questions on the exam. For example, the exam does not specifically ask a candidate to “ Calculate taxpayer penalties relating to Federal tax returns." However, identifying situations where a taxpayer penalty might apply would be appropriate. In addition, tasks are to be inclusive, not exclusive, of exam content. For example, the task “ Calculate tax depreciation for a tangible business property ... " could include the calcula- tion of additional first-year (bonus) depreciation.

Task-based simulations are case stt1dies that allow candidates to demonstrate their knowledge and skills by generating responses to questions rather than simply selecting an answer. They typically require candidates to use spreadsheets and/ or to research at1thoritative literature provided in the CPA exam (e.g., Internal Revenue Code, Regula- tions, IRS publications, and tax forms).

There are five content areas in the REG section of the CPA exam:

• Area 1: Ethics, professional responsibilities, and Federal tax procedures ( weight: 10 to 20 percent).

• Area 2: Business law (weight: 10 to 20 percent).

• Area 3: Federal taxation of property transactions (weight: 12 to 22 percent).

• Area 4: Federal taxation of individuals (weight: 15 to 25 percent).

• Area 5: Federal taxation of entities (weight: 28 to 38 percent).

Area 1 covers ethics and responsibilities in tax practice, licensing and disciplinary systems, Federal tax procedures, and legal duties and responsibilities of a CPA.

Area 3 covers Federal taxation of property transactions and Federal estate and gift taxation.

Area 4 covers the Federal income taxation of individuals from both a tax preparation and tax planning perspective (e.g., income, exclusions, deductions , and retirement plans).

Area 5 covers the Federal income taxation of entities, including sole proprietorships, partnerships, limited liability companies, C corporations, S corporations, joint ventures, trusts, estates, and tax-exempt organizations from both a tax preparation and tax plan- ning perspective.

Accounting methods and periods and tax elections are inclt1ded in Areas 3, 4, and 5. Only Area 2 does not involve taxation.

Remembering-and-understanding skills are tested mainly in Areas 1 and 2. Applica- tion and analysis skills are tested p rimarily in Areas 3, 4, and 5. These three areas contain more of the day-to-day tasks that new ly licensed CPAs are expected to perform. As a rest1lt, they are tested at the higher end of the skill level contint1um. O verall , the REG section tests skills in the following way: remembering and learning (25 to 35 percent), application (35 to 45 percent), and analysis (25 to 35 percent). The REG section does not test any content at the evaluation skill level since newly licensed CPAs are not expected to demonstrate that level of skill in regard to the REG content. 吐1e REG section has 76 multiple-choice questions and 8 or 9 task-based simulations

(TBSs); the key increase is in TBSs (up from 6 in the previous CPA exam). This change allows the AICPA to assess the candidate’s higher-order skills. In addition, TBSs on the CPA exam provide increased background material and data that requ让e candidates to determine what information is or is not relevant to the question. The scoring weight of multiple-choice questions and TBSs is about 50 percent each on the REG section of the CPA exam.

Depending on the skill level being asse ssed, well-prepared candidates likely will spend 15 to 20 minutes for each TBS. Certain analysis and/or evaluation-level TBSs could take a well-prepared candidate up to 30 minutes to complete. Several illustrations of task-based simulations are shown in the examples that fol low.

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CHAPTER 2 Working with the Ta× Law 2-33

The tax citation type simulation requires the candidate to research the Internal Revenue Code and enter a Code Section and subsection.

For example, Amber ζompany is considering using the simplified dollar-value method of pric- ing its inventory for purposes of the LIFO method that is available to certain small businesses. What Code Section is the re levant authority in the Internal Revenue Code you should use to determine whether the taxpayer is eligible to use this method? To be successful, the candidate must find § 474.

A tax form completion simulation requires the candidate to fill out a portion of a tax form. For example, Red Company is a limited liability company (LLC) for tax purposes. Complete the income section of Form 1065 for Red Company using the values found and calculated on previous tabs along with the following data:

Ordinary income from other partnerships Net gain (loss) from Form 4797 Management fee income

$ 5,200 2,400

12,000

The candidate is provided with page 1 of Form 1065 on which to record the appropriate amounts. Any field that requires an entry is a shaded rectangular cell. Some white rectangular cells will

automatically calculate based on the entries in the shaded cells.

Candidates ca n learn m o re about the CPA examina tio n at aicpa.org/becomeacpa/ cpaexam.html. In additio n to acc essing th e Unifo rm CPA Examinatio n Bluep rints, candidates w ill find tuto rials re lated to th e exam , h ave the ability to ta ke sample exams, learn h ow the exam is g ra d e d , and discover the re quire m e nts needed to sit fo r th e CPA exam in e a ch licensing jurisdictio n.

Co ntent re lated to the TCJA o f 2017 is eligible for testing o n the CPA exam starting J a nuary 1, 2019. Beg inning th e n , the re w ill be a s imultan eou s intro ductio n o f conte nt re la te d to th e TCJA of 201 7 and re m oval o f co ntent re lated to the previo t1s tax law.

[ Key Terms

Acquiescence, 2-16

Circuit Court of Appeals, 2” 12

Citator, 2-25

Court of original jurisdiction, 2-10

Determination letters, 2-9

Final Regulations, 2-7

Interpretive Regulations, 2-24

Legislative Regulations, 2-24

Letter rulings, 2-8

Nonacquiescence, 2-16

Precedents, 2-13

Procedural Regulations, 2-24

Proposed Regulations, 2-7

Revenue Procedures, 2-7

Revenue Rulings, 2-7

Small Cases Division, 2-10

Tax avoidance, 2-30

Tax research, 2-20

Technical Advice Memoranda (TAMs), 2-9

Temporary Regulations, 2-7

U.S. Court of Federal Claims, 2-10

U.S. District Court, 2-10

U.S. Supreme ζourt, 2-13

U.S. Tax Court, 2-10

Writ of Certiorari, 2-14

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2-34 PART 1 Introduction and Basic Tax Mode l

Discussion Questions ]

1. lL0.1 A large part of tax research consists of determining w hat?

2. lL0.1 )Why do taxpayers often have more than one alternative for structuring a busi- ness transaction?

3. l巴：！） Where does Federal 阳 legislation generally originate?

Communications 4. 岳E Sonja Bishop 0阳ates a small internat叫 firm named Tile, Inc. A new treaty between the United States and Spain conflicts w ith a Section of the

Internal Revenue Code. Sonja asks you for advice. If she fo llows the treaty position, does she need to disclose this on her tax return? If she is reqt1ired to disclose, are there any penalties for failu re to disclose? Prepare a letter in w hich yot1 respond to Sonja. Tile's address is 100 International Drive, Tampa, FL 33620.

5. LL~亟Inte 6. (io:i) In川the citation Notice 90一20, 1990一1 C.B. 328, to what do优 20and 由e 328 陀仨d 7. lL0.1, 4 Rank the follow ing items from the lowest to highest authority in the Federal

tax law system:

a. Interpretive Regulation.

b. Legislative Regulation.

c. Letter ruling.

d. Revenue Rt1ling.

e. Internal Revenue Code.

f. Proposed Regulation.

8. lL0.1 ]Interpret each of the follow ing citations:

a. Temp.Reg. § 1.956-2T.

b. Rev.Rul. 2012-15, 2012-23 I.R.B. 975.

c. Ltr.Rul. 200204051.

Communications 9. l巴生_5) Sally Andrews calls you on the phone. She says 出at she has fot1nd a 2009 letter ruling that agrees w ith a position she wants to take on her tax return.

She asks you about the precedential value of a letter ruling. Draft a memo for the tax files, outlining what you told Sally.

10.画Where may川e letter rul川川。itical Thinking 11. （巴； s叫ay receives a 90也y le阳加his discussion w ith an appeals officer. He

is not satisfied with the $101, 000 settlement offer. Identify the relevant tax research issues facing Sanjay.

12. I L空：！） List an advantage and a disadvantage of using 优 U.S. Cot1rt of Federal Claims as the trial court for Federal tax litigation.

Communications 13. l巴丰~Eddy Falls is considering litigating a 阳 deficiency of approximately $229,030 in the cot1rt system. He asks yot1 to provide him w ith a short

description of his alternatives, indicating the advantages and disadvantages of each. Prepare your response to Eddy in the form of a letter. His address is 200 Mesa Drive, Tucson, AZ 85714.

14. (L0.1 }List an advantage and a d isadvantage of using the U.S. Tax Court as the trial court for Federal tax litigation.

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CHAPTER 2 Working with the Ta× Law 2-35

15. l巴：！）A taxpayer lives in Michigan. In a controversy with the IRS, the 阳payer loses at the trial col1rt level. Describe the appeal procedure under the fol lowing

different assumptions:

a. The trial court was the Small Cases Division of the U.S. Tax Court.

b. The trial court was the U.S. Tax Court.

c. The trial court was a U.S. District Court.

d. The trial court was the U.S. Court of Federal Claims.

16. 岳阳…叫川丑petitioner? 17. l巴.YA 阳payer living in the following states would appeal a decision of the U.S.

District Court to which Court of Appeals?

a. Wyoming.

b. Nebraska.

c. Idaho.

d. Lol1isiana.

e. Illinois .

18. lL0.1 J 飞What precedents must each of these courts follow?

a. U.S. Tax Court.

b. U.S. Court of Federal Claims.

c. U.S. District Court.

19. l巴:J) What determines the appropriate Circuit Court of Appeals for a particular taxpayer?

20. i坦生.1J In assessing the validity of a prior cot1rt decision, discuss 优鸣nificance of the following on the taxpayer’s issue:

a. The decision was rendered by the U.S. District Court of Wyoming. Taxpayer lives in Wyoming.

b. The decision was rendered by the U.S. Court of Federal Claims. Taxpayer lives in Wyoming.

c. The decision was rendered by the Second Circuit Col1rt of Appeals. Taxpayer lives in California.

d. The decision was rendered by the U.S. Supreme Court.

e. The decision was rendered by the U.S . Tax Court. The IRS has acquiesced in the result.

f. Same as part (e) except that the IRS has issued a nonacquiescence as to the result.

21. (L0.2 1In the citation Schuster's Express, Inc., 66 T.C. 588 (1976), aff'd 562 F.2d 39 (CA- 2, 1977), nonacq., to w hat do the 66, 39, and nonacq. refer?

22. JL0.2 Is there an automatic right to appeal to the U.S. Supreme Court? If so, w hat 』－ is the process?

23. lL0.2 ) Referring to the citation only, determine w hich court issued these decisions.

a. 716 F.2d 693 (CA-9, 1983).

b. 92 T.C. 400 (1998).

c. 70 U.S. 224 (1935).

d. 3 B.T.A. 1042 (1926).

e. T.C.Memo. 1957-169.

f. 50 AFTR2d 92-6000 (Ct. Cl., 1992).

g. Ltr.Rul. 9046036.

h. 111 F.Supp.2d 1294 (S.D.N.Y., 2000).

i. 98- 50, 1998-1 C.B. 10.

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2-36 PART 1 Introduction and Basic Tax Model

24. lL0.2 ) Interpret each of the following citations:

a. 14 T.C. 74 (1950).

b. 592 F.2d 1251 (CA-5, 1979).

c. 95-1 USTC 节50,104 (CA- 6, 1995).

d. 75 AFTR2d 95-110 (CA- 6, 1995).

e. 223 F.St1pp. 663 (W.D. Tex., 1963).

25. lL0.2J Give the Commerce Clearing House citation for the following courts:

a. Small Cases Division of the Tax Court.

b. U.S. District Court.

c. U.S. Supreme Court.

d. U.S. Court of Federal Claims.

e. Tax Court Memorandum decision.

26. l巴：3) Where can you locate a pt1blished decision of the U.S. Court of Feder

ζ叫itiα｜丁hi 『， king 27. 面；3习~ For her tax class, Yvonne must p即are a research paper disct1ssing the tax

Decision Making

Critical Thinking

aspects of qualified stock options. Explain to Yvonne how she can research this topic using variot1s tax research resources. r一一『

28. l巴：生Where can a researcher find the current Internal Revenue Code of 1986?

29. lL0.2，主＿4)Yot1 inherit a 阳 problem that was researched five months ago. You believe the answer is correct, but you are unfamiliar with the general

area. How would you find recent articles dealing with the subject area? How do you evaluate the reliability of the authority cited in the research report? How do you determine the latest developments pertaining to the research problem?

30. l巴：~ What is the primary purpose of effective tax planning? Explain.

31. 面写） Describe simulation questions on the CPA exam.

Problems ]

32. l巴夕 In which St1bchap阳 of 优 Inte tion about corporate distribt1tions?

a. Subchapter S.

b. Subchapter C.

c. Subchapter P.

d. St1bchapter K.

e. St1bchapter M.

Decisi

a. Letter R·uling.

b. Legislative Regulation.

c. Code Section.

d. Revent1e Ruling.

e. Proposed Regulation.

f. Interpretive Regulation.

g. Recent Temporary Regulation.

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CHAPTER 2 Working with the Ta× Law 2-37

34. (L0.4 ] Using the legend provided, classify each of the following tax sources:

ιegend

P = Primary tax source S = Secondary tax source B = Both N = Neither

a. Sixteenth Amendment to the U.S. Constitution.

b. Tax treaty between the United States and India.

c. Reven ·ue Procedure.

d. An IRS publication.

e. U.S. District Cot1rt decision.

f. Yale Lα：wjouγηαl 也·ticli巳

g. Temporary Regulations (issued 2018).

h. U.S. Tax Court Memorandum decision.

i. Small Cases Division of the U.S. Tax Court decision.

j. House Ways and Means Committee report.

35. 面~1 ，马Using the legend provided, clas呻 each of the following citations as to L一一－ publisher:

Legend

RIA= Research Institute of America CCH = Commerce Clearing House

W = West U.S. = U.S. Government

0 = Others

a. 83-2 USTC 咱9600.

b. 52 AFTR 2d 83-5954.

c. 67 T.C. 293 (1976).

d. 39 TCM 32 (1979).

e. 416 U .S. 938.

f. RIA T.C. Memo. 节80,582.

g. 89 S.Ct. 501.

h. 40 Fed.Cl. 172.

i. 415 F.2d 488.

j. 592 F.Supp. 18.

k. 77-37, 1977-2 C.B. 568.

1. S. Rep. No. 1622, 83rd Cong., 2d Sess. 42 (1954).

36. ι。牛Jsing the legend provided, classify each of the following statements:

Legend

A= Tax avoidance E =Ta× evasion N = Neither

a. Sue w rites a $707 check for a charitable contribution on December 26, 2019, but does not mail the check to the charitable organization t1ntil January 10, 2020. She takes a deduction in 2019.

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2-38 PART 1 Introductio n and Basic Tax Model

b. Sam decides not to report interest income from a bank because the amount is only $19.75.

c. Harry pays property taxes on his home in December 2019 rather than w aiting until February 2020.

d. Variet switches her inve stments from taxable corporate bonds to tax-exempt municipal bonds.

e. Mel encourages his mother to save most of her Social Security benefits so that he w ill be able to claim her as a dependent.

Research Problems ]

Y”。MSON REUTERS

CHECKPOINT~ Note: Solutions to the Research Problems can be prepared by using the Thomson Reuters Checkpoint™ online tax research database, which accompanies this textbook. Solutions can also be prepared by using research materials found in a typical tax library.

Research Problem 1. Determine the missing data in these court decisions and rt1lings .

a. Higgens v. Comm., 312 U.S. 一一一一（1941).

b. Talen v. US., 355 F.Supp.2d 22 (D.Ct. D.C.，一一一＿）.

c. Rev. Rul. 2008-18, 2008-13 I.R.B.

d. Pahl v. Comm., 150 F.3d 1124 (CA-9，一一＿）.

e. v号？terinaη； Surgical Consultants PC, 117 T.C. f. ｝它＇agle Dη；wall Co., T.C.Memo. 2001

(2001).

Decision Making Research Problem 2. When Oprah gave away Pontiac G6 sedans to her TV audience, was the value of the cars taxable? On Labor Day weekend in 2006, World Furniture Mall in Plano, Illinois, gave away $275,000 of furniture because the Chicago Bears shut out the Green Bay Packers in the team's football season opener at Lambeau Field in Green Bay (26-0). Was the free furniture in the form of a discount or rebate tax- able, or should the furniture company have handed the customers a Form 1099-MISC?

Decision Making Research Problem 3. You are interview ing a client before preparing his tax return. He ind icates that he did not list as income $96,000 received as a recovery for false imprisonment. What should you do w ith respect to this significant recovery?

Pa：γtial i也t ofγeseaγch aids: CCA 200809001 . Dαniel α忧dBγeηdaSt，αdn弛， T.C.M巳：mo. 2008- 289. Rev.Ru!. 2007-14, 2007-1 C.B. 747. § 104.

Use internet tax resources to address the following questions. Look for reliable web- sites and biogs of the IRS and other government agencies, media outlets, businesses, tax professionals, academics, think tanks, and political outlets.

Research Problem 4. (1) Go to taxalmanac.org, and t1se the website to find§ 61(a). What is defined in this Code Section? Is the definition broad or narrow? (2) Go to legalbitstream.com, and find the case in w hich Mark Spitz, the former Olympic gold medalist, is the petitioner. Answer the following questions about the case:

a. What tax years are at issue in the case?

b. In w hat year was the case decided?

c. Did the court decide in favor of Mr. Spitz or the IRS?

d. Were any penalties imposed on Mr. Spitz? Why or w hy not?

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CHAPTER 2 Working with the Ta× Law 2-39

Research Problem 5. Go to the U.S. Tax Court website (ustaxcourt.gov). Communications a. What different types of cases can be found on the site?

b. What is a Summary Opinion? Find o n e.

c. What is a Memorandum Opinion? Find o ne.

d. Find the “ Rt1les of Practice and Procedure."

e. Summarize your responses in a brief e-mail to your instructor.

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