Chapter Chapter 77

Tax Research Tax Research for for

Compliance Compliance and Tax and Tax

PlanningPlanning

Tax research goalsTax research goals Tax research challengesTax research challenges Tax research databasesTax research databases Primary tax authoritiesPrimary tax authorities

Code, Treasury Regs, and casesCode, Treasury Regs, and cases Tax research processTax research process Professional standardsProfessional standards

Learning ObjectivesLearning Objectives

Not always to get the lowest tax liabilityNot always to get the lowest tax liability Maximize after-tax return or benefitsMaximize after-tax return or benefits

Some desire to minimize disputesSome desire to minimize disputes DistinguishDistinguish

Tax Evasion Tax Evasion – illegal acts – illegal acts Tax Avoidance Tax Avoidance –minimize taxes legally–minimize taxes legally Abusive Tax Avoidance Abusive Tax Avoidance – –

misapplying tax laws, some tax shelters misapplying tax laws, some tax shelters

Tax Research GoalsTax Research Goals

Two different types of tax research exist:Two different types of tax research exist: Applied tax researchApplied tax research

Checks existing law, examines the impact Checks existing law, examines the impact on a given situation.on a given situation.

This textbook uses applied tax research.This textbook uses applied tax research. Academic tax research Academic tax research

Often empirical, behavioral tax researchOften empirical, behavioral tax research Some policy oriented for society at largeSome policy oriented for society at large Occasionally theoreticalOccasionally theoretical

Tax Research - DefinedTax Research - Defined

Determine the relevant factsDetermine the relevant facts.. Facts include events and Facts include events and

both the taxpayer’s and IRS’s positions. both the taxpayer’s and IRS’s positions. Many disputes have questions of fact. Many disputes have questions of fact. Relevancy decided by applicable law.Relevancy decided by applicable law. ““Relevant facts” are those that make a Relevant facts” are those that make a

difference in how the law is applied.difference in how the law is applied. ““Colorable facts” are those that Colorable facts” are those that

only some people consider relevant.only some people consider relevant.

Tax Research ChallengesTax Research Challenges

Find and examine relevant tax laws. Find and examine relevant tax laws. Apply the law to the facts Apply the law to the facts

to determine the tax consequences. to determine the tax consequences. Alternative correct paths may exist.Alternative correct paths may exist.

Inform the client of differing options.Inform the client of differing options.

Tax Research Challenges Tax Research Challenges (contd.)(contd.)

Three types of tax practice for research: Three types of tax practice for research: Tax ComplianceTax Compliance

Completes tax returns Completes tax returns (facts have already occurred)(facts have already occurred)

Tax PlanningTax PlanningOpen fact engagementsOpen fact engagementsCarefully executed tax avoidance.Carefully executed tax avoidance.Planning requires knowledge and Planning requires knowledge and skills.skills.

Tax Litigation Tax Litigation Lawyers handle tax litigation.Lawyers handle tax litigation.

Tax PracticeTax Practice

Many alternative sources of tax law existMany alternative sources of tax law exist Legal databases - LexisNexis and Westlaw.Legal databases - LexisNexis and Westlaw. Specialized tax databases -RIA and CCH.Specialized tax databases -RIA and CCH. Research Institute of America – RIA CheckpointResearch Institute of America – RIA Checkpoint Commerce Clearing House - CCH IntelliConnectCommerce Clearing House - CCH IntelliConnect

previously CCH had Tax Research Network previously CCH had Tax Research Network Databases include bothDatabases include both

Primary tax authorities: Primary tax authorities: Code, Regs, & casesCode, Regs, & cases Secondary authorities: Secondary authorities: tax services, treatisestax services, treatises

IRS publications, private letter rulings, … IRS publications, private letter rulings, …

Tax Research DatabasesTax Research Databases

Created by the 3 areas of Created by the 3 areas of government:government: Congress, the executive branch, & the courtsCongress, the executive branch, & the courts

Hierarchy of tax law exists:Hierarchy of tax law exists: Statutory lawStatutory law

Law passed by Congress, signed by PresidentLaw passed by Congress, signed by President US Constitution, tax treaties also part of top US Constitution, tax treaties also part of top

levellevel

Primary Tax AuthoritiesPrimary Tax Authorities

Primary Tax AuthoritiesPrimary Tax Authorities

Administrative regulationsAdministrative regulations Treasury Department releases Treasury Department releases

treasury regulationstreasury regulations Internal Revenue Service creates Internal Revenue Service creates

Revenue RulingsRevenue Rulings Court casesCourt cases

Judicial case decisions are law in Judicial case decisions are law in common law countries, such as the common law countries, such as the United StatesUnited States

Hierarchy existsHierarchy exists

Statutory law for federal taxation Statutory law for federal taxation commonly referred to as commonly referred to as the Code or the Code or IRCIRC Internal Revenue Code of 1986, as Amended Internal Revenue Code of 1986, as Amended Found in Title 26 of the U.S. CodeFound in Title 26 of the U.S. Code

Within the Code, refer to sections (§).Within the Code, refer to sections (§). Sections are uniquely numbered Sections are uniquely numbered

The Code - IntroductionThe Code - Introduction

The Code - IntroductionThe Code - Introduction(contd.)(contd.)

To find a code section, search by To find a code section, search by keywords, drill down in table of keywords, drill down in table of contents, or use the index contents, or use the index in the Code or a Tax Service. in the Code or a Tax Service. If the code section number is known, If the code section number is known,

the citation approach can access it the citation approach can access it quickly.quickly.

A section is divided into subsections, A section is divided into subsections, paragraphs, subparagraphs, clauses.paragraphs, subparagraphs, clauses. Cite as specific as possible within the Cite as specific as possible within the

section, such as subsection, paragraph, or section, such as subsection, paragraph, or subparagraph. subparagraph.

Always read subsection (a) carefully. Always read subsection (a) carefully. Scan other subsections for relevancy.Scan other subsections for relevancy. If another code section is referenced in a If another code section is referenced in a

relevant part, examine that other section.relevant part, examine that other section.

The Code - SectionsThe Code - Sections

Citation to a regulation references Citation to a regulation references the Code provision explained.the Code provision explained.

The Executive branch issues admin. The Executive branch issues admin. auth.auth. The Treasury Department creates The Treasury Department creates

Treasury regulations – interpret and Treasury regulations – interpret and clarify statutory lawclarify statutory law

Internal Revenue Service is part of Treas. Internal Revenue Service is part of Treas. Dep’t creates lesser authorities and Dep’t creates lesser authorities and enforces the law.enforces the law.

Administrative Administrative AuthoritiesAuthorities

Administrative Administrative AuthoritiesAuthorities

(contd.)(contd.) Three types of Treasury RegulationsThree types of Treasury Regulations

Proposed Regs Proposed Regs – trial balloons – not – trial balloons – not authorityauthority

Temporary Regs Temporary Regs - no public hearings, - no public hearings,

legally binding, but expire in 3 years legally binding, but expire in 3 years Final Regulations Final Regulations – go through – go through

public hearing process, follow the public hearing process, follow the regulations or penalties exist regulations or penalties exist

Two types of final regulationsTwo types of final regulations Legislative RegulationsLegislative Regulations

Arise when Congress has delegated specific Arise when Congress has delegated specific law-making authority to the Treasury Dep’t law-making authority to the Treasury Dep’t

Interpretive RegulationsInterpretive Regulations Arise under the authority of Section Arise under the authority of Section

7805(a) which expressly provides that the 7805(a) which expressly provides that the Treasury Department Secretary ”shall Treasury Department Secretary ”shall prescribe all needful rules and regulations prescribe all needful rules and regulations for the enforcement of this title.”for the enforcement of this title.”

Most consider both types equal in Most consider both types equal in weight of authority, some favor weight of authority, some favor legislative regulationslegislative regulations

Treasury Regulations - Treasury Regulations - FinalFinal

Revenue Rulings and Revenue Revenue Rulings and Revenue ProceduresProcedures Both issued by the IRS.Both issued by the IRS.

Revenue RulingsRevenue Rulings Apply the law to a specific set of facts. Apply the law to a specific set of facts. Weaker than Treasury Regulations.Weaker than Treasury Regulations. Citation to a rev. rul. does not reference the Citation to a rev. rul. does not reference the

Code sec., but some publishers add that info. Code sec., but some publishers add that info.

Revenue Ruling & Revenue Ruling & Revenue ProceduresRevenue Procedures

Revenue Ruling & Revenue Ruling & Revenue Procedures Revenue Procedures

(contd.)(contd.)

Revenue ProceduresRevenue Procedures Provides procedural requirements Provides procedural requirements

that taxpayers must follow, such as that taxpayers must follow, such as documents to include when filing a documents to include when filing a tax return involving tax return involving a Sec. 351 tax-free incorporation.a Sec. 351 tax-free incorporation.

Court decisions interpret the Court decisions interpret the Code and the RegulationsCode and the Regulations Courts have the final say regarding Courts have the final say regarding

what the Code words really mean.what the Code words really mean. Judicial PrecedentJudicial Precedent

– Courts will follow prior case holdings– Courts will follow prior case holdings

Judicial SourcesJudicial Sources

Judicial Sources Judicial Sources (contd.)(contd.)

Federal court hierarchy existsFederal court hierarchy exists Supreme Court is the highest courtSupreme Court is the highest court Courts of Appeals is the second Courts of Appeals is the second

highesthighest Three alternative trial courts:Three alternative trial courts: Tax Court, District Court, & Court of Tax Court, District Court, & Court of

Federal ClaimsFederal Claims

Advantage to the taxpayer: Advantage to the taxpayer: No prepayment needed for No prepayment needed for the amount in dispute.the amount in dispute.

Other trial courts consider only Other trial courts consider only refunds.refunds.

AcquiescenceAcquiescence (acq.) – IRS will follow (acq.) – IRS will follow the court’s decision in similar cases.the court’s decision in similar cases.

U.S. Tax CourtU.S. Tax Court

U.S. Tax Court (contd.)U.S. Tax Court (contd.)

Tax Court has two types of decisionsTax Court has two types of decisions““Regular decision” Regular decision” - Chief judge - Chief judge decides decides if new legal principle announced if new legal principle announced

““Memorandum decision” Memorandum decision” applies applies prior principle to new facts prior principle to new facts

U.S. Court of AppealsU.S. Court of Appeals Court of Appeals considers only the Court of Appeals considers only the

application of the law, not application of the law, not redetermination of facts.redetermination of facts.

Both taxpayers and IRS can appeal Tax Both taxpayers and IRS can appeal Tax Court and District Court decisions to the Court and District Court decisions to the relevant regional Court of Appealsrelevant regional Court of Appeals

13 court of appeals, 11 regional, DC and 13 court of appeals, 11 regional, DC and Federal –citation must be specificFederal –citation must be specific

District courts must follow precedent set District courts must follow precedent set by the relevant circuit court.by the relevant circuit court.

U.S. Court of AppealsU.S. Court of Appeals

Considers few cases involving tax Considers few cases involving tax issues.issues.

All courts must follow the precedent All courts must follow the precedent from the Supreme Court.from the Supreme Court.

U.S. Congress can overturn a decision U.S. Congress can overturn a decision by passing new statutory law.by passing new statutory law.

The citator The citator enables the researcher to enables the researcher to check the subsequent decisions check the subsequent decisions referencing a case, and the case referencing a case, and the case historyhistory

U.S. Supreme CourtU.S. Supreme Court

The Code is the strongest authorityThe Code is the strongest authority Treasury Regulations are the Treasury Regulations are the

next strongest authoritynext strongest authority Supreme Court decision applies to all Supreme Court decision applies to all

courts and taxpayers.courts and taxpayers. Circuit court decisions are either Circuit court decisions are either

precedent or influential on other courts.precedent or influential on other courts. Published IRS Revenue Rulings and Published IRS Revenue Rulings and

Revenue Procedures are binding on IRS Revenue Procedures are binding on IRS revenue agents, but not the courtsrevenue agents, but not the courts

Evaluating Tax Evaluating Tax AuthoritiesAuthorities

1. Investigate the facts and identify issues1. Investigate the facts and identify issues 2. Collect the appropriate authorities2. Collect the appropriate authorities 3. Analyze the research3. Analyze the research 4. Develop the reasoning and conclusions4. Develop the reasoning and conclusions 5. Communicate the results5. Communicate the results

Steps in Conducting Tax Steps in Conducting Tax ResearchResearch

IRS Circular 230IRS Circular 230 Governs practice before the IRS and Governs practice before the IRS and

provides enforceable standards of provides enforceable standards of conductconduct

Impacted tax practice in various waysImpacted tax practice in various ways AICPA’s Statements on Standards for AICPA’s Statements on Standards for

Tax ServicesTax Services Supplements the AICPA Code of Supplements the AICPA Code of

Professional ConductProfessional Conduct CPA tests students on tax researchCPA tests students on tax research

Standards for TaxStandards for Tax