C H A P T E R

L E A R N I N G O B J E C T I V E S

Working with theTax Law

After completing Chapter 2, you should be able to:

L O . 1Distinguish between the statutory, administrative, and judicial sources of the tax lawand understand the purpose of each source.

L O . 2 Locate and work with the appropriate tax law sources.

L O . 3 Understand the tax research process.

L O . 4 Communicate the results of the tax research process in a client letter and a tax filememorandum.

L O . 5 Apply tax research techniques and planning procedures.

L O . 6 Have an awareness of electronic tax research.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–2 PART I Introduction and Basic Tax Model

Tax Sources

Understanding taxation requires a mastery of the sources of the rules of tax law.These sources include not only legislative provisions in the form of the InternalRevenue Code, but also congressional Committee Reports, Treasury DepartmentRegulations, other Treasury Department pronouncements, and court decisions.Thus, the primary sources of tax information include pronouncements from all threebranches of government: legislative, executive, and judicial.

In addition to being able to locate and interpret the sources of the tax law, atax professional must understand the relative weight of authority within thesesources. The tax law is of little significance, however, until it is applied to a set offacts and circumstances. This chapter, therefore, both introduces the statutory,administrative, and judicial sources of tax law and explains how the law is appliedto individual and business transactions. It also explains how to apply researchtechniques and use planning procedures effectively.

A large part of tax research focuses on determining the intent of Congress.Although Congress often claims simplicity as one of its goals, a cursory examinationof the tax law indicates that it has not been very successful in achieving thisobjective. Commenting on his 48-page tax return, James Michener, the author, said“it is unimaginable in that I graduated from one of America’s better colleges, yetI am totally incapable of understanding tax returns.” David Brinkley, the televisionnews commentator, observed that “settling a dispute is difficult when our taxregulations are all written in a foreign tongue whose language flows like dampsludge leaking from a sanitary landfill.”

Frequently, uncertainty in the tax law causes disputes between the InternalRevenue Service (IRS) and taxpayers. Due to these gray areas and the complexityof the tax law, a taxpayer may have more than one alternative for structuring abusiness transaction. In structuring business transactions and engaging in othertax planning activities, the tax adviser must be cognizant that the objective of taxplanning is not necessarily to minimize the tax liability. Instead a taxpayer shouldmaximize his or her after-tax return, which may include maximizing nontax aswell as noneconomic benefits.

Tax Sources, 2–2

Statutory Sources of the Tax Law, 2–3

Administrative Sources of the Tax Law, 2–8

Judicial Sources of the Tax Law, 2–13

Working with the Tax Law—Tax Research, 2–22

Identifying the Problem, 2–23

Refining the Problem, 2–24

Locating the Appropriate Tax Law Sources, 2–24

Assessing the Validity of the Tax Law Sources, 2–26

Arriving at the Solution or at Alternative Solutions,2–30

Communicating Tax Research, 2–30

Working with the Tax Law—Tax Planning, 2–31

Nontax Considerations, 2–31

Tax Avoidance and Tax Evasion, 2–33

Follow-up Procedures, 2–34

Tax Planning—A Practical Application, 2–35

Electronic Tax Research, 2–35

O U T L I N E

L O . 1 Distinguish between the

statutory, administrative, andjudicial sources of the tax law

and understand the purpose ofeach source.

CHAPTER 2 Working with the Tax Law 2–3

STATUTORY SOURCES OF THE TAX LAW

Origin of the Internal Revenue Code. Before 1939, the statutory provisionsrelating to Federal taxation were contained in the individual revenue acts enactedby Congress. Because dealing with many separate acts was inconvenient and confus-ing, in 1939 Congress codified all of the Federal tax laws. Known as the InternalRevenue Code of 1939, the codification arranged all Federal tax provisions in alogical sequence and placed them in a separate part of the Federal statutes. Afurther rearrangement took place in 1954 and resulted in the Internal RevenueCode of 1954, which continued in effect until 1986 when it was replaced by theInternal Revenue Code of 1986. Although Congress did not recodify the law in theTax Reform Act (TRA) of 1986, the magnitude of the changes made by TRA of1986 did provide some rationale for renaming the Federal tax law the InternalRevenue Code of 1986.

The following observations help clarify the codification procedure:

• Neither the 1939 nor the 1954 Code substantially changed the tax law existingon the date of its enactment. Much of the 1939 Code, for example, wasincorporated into the 1954 Code; the major change was the reorganizationand renumbering of the tax provisions.

• Although the 1986 Code resulted in substantial changes, only a minority ofthe statutory provisions were affected.1

• Statutory amendments to the tax law are integrated into the Code. Forexample, the Taxpayer Relief Act (TRA) of 1997, the Internal Revenue ServiceRestructuring and Reform Act of 1998, the Tax Relief Reconciliation Act of2001, the Job Creation and Worker Assistance Act of 2002, the Jobsand Growth Tax Relief Reconciliation Act (JGTRRA) of 2003, the Working

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

TAX INTHE

NEWS

TAX FREEDOM DAY

In income tax history, 1913 was an important year. In that year, the Sixteenth Amendmentto the Constitution was ratified:

The Congress shall have power to tax and collect taxes on incomes, from whateversource derived, without apportionment among the several States, and without regardto any census or enumeration.

The first income tax legislation that definitely was constitutional was passed that same year.According to the Tax Foundation, Tax Freedom Day fell on April 11, 2004, the earliest

in 37 years. Tax Freedom Day is the date on which a taxpayer through working has paidoff his or her taxes for the year. Of course, if you lived in Connecticut with the heaviesttotal tax burden, Tax Freedom Day fell on April 28, 2004. Alaskans paid the least andfinished paying off their tax burden on March 26, 2004.

SOURCE: Tax Foundation, “Tax Freedom Day Arrives on April 11th in 2004,” http://www.taxfoundation.org/taxfreedomday.html.

1This point is important in assessing judicial decisions interpretingprovisions of the Internal Revenue Code of 1939 and the InternalRevenue Code of 1954. If the same provision was included in the

Internal Revenue Code of 1986 and has not been subsequentlyamended, the decision has continuing validity.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–4 PART I Introduction and Basic Tax Model

Families Tax Relief Act of 2004, and the American Jobs Creation Act of 2004all became part of the Internal Revenue Code of 1986. In view of the fre-quency with which tax legislation has been enacted in recent years, it appearsthat the tax law will continue to be amended frequently.

The Legislative Process. Federal tax legislation generally originates in theHouse of Representatives, where it is first considered by the House Ways andMeans Committee. Tax bills originate in the Senate when they are attached asriders to other legislative proposals.2 If acceptable to the House Ways and MeansCommittee, the proposed bill is referred to the entire House of Representatives forapproval or disapproval. Approved bills are sent to the Senate, where they areconsidered by the Senate Finance Committee.

The next step is referral from the Senate Finance Committee to the entire Senate.Assuming no disagreement between the House and Senate, passage by the Senateresults in referral to the President for approval or veto. The passage of JGTRRA of2003 required the vote of Vice President Dick Cheney to break a 50–50 tie in theSenate. If the bill is approved or if the President’s veto is overridden, the billbecomes law and part of the Internal Revenue Code of 1986.

House and Senate versions of major tax bills frequently differ. One reason billsare often changed in the Senate is that each individual senator has considerablelatitude to make amendments when the Senate as a whole is voting on a billreferred to it by the Senate Finance Committee.3 In contrast, the entire House ofRepresentatives either accepts or rejects what is proposed by the House Ways andMeans Committee, and changes from the floor are rare. When the Senate versionof the bill differs from that passed by the House, the Joint Conference Committee,which includes members of both the House Ways and Means Committee and theSenate Finance Committee, is called upon to resolve the differences. The delibera-tions of the Joint Conference Committee usually produce a compromise betweenthe two versions, which is then voted on by both the House and the Senate. If bothbodies accept the bill, it is referred to the President for approval or veto. FormerSenator Daniel Patrick Moynihan observed that it is common in the last hours ofCongress for the White House and lawmakers to agree on a “1,200-page monster,we vote for it; nobody knows what is in it.” Figure 2–1 summarizes the typicallegislative process for tax bills.

The role of the Joint Conference Committee indicates the importance of compro-mise in the legislative process. As an example of the practical effect of the compro-mise process, consider Figure 2–2, which shows what happened to a limitation oncontributions by employees to their education Individual Retirement Accounts(now Coverdell Education Savings Accounts) in the Taxpayer Relief Act of 1997.

Referrals from the House Ways and Means Committee, the Senate FinanceCommittee, and the Joint Conference Committee are usually accompanied by Com-mittee Reports. These Committee Reports often explain the provisions of the pro-posed legislation and are therefore a valuable source for ascertaining the intent ofCongress. What Congress had in mind when it considered and enacted tax legislationis, of course, the key to interpreting such legislation by taxpayers, the IRS, and thecourts. Since Regulations normally are not issued immediately after a statute isenacted, taxpayers often look to Committee Reports to determine congressionalintent.

2The Tax Equity and Fiscal Responsibility Act of 1982 originated inthe Senate, and its constitutionality was unsuccessfully challengedin the courts. The Senate version of the Deficit Reduction Act of1984 was attached as an amendment to the Federal Boat Safety Act.

3During the passage of the Tax Reform Act of 1986, Senate leaderstried to make the bill amendment proof to avoid the normal amend-ment process.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6CHAPTER 2 Working with the Tax Law 2–5

Joint Conference Committee (if the House and Senate differ)

Consideration by theHouse and Senate

Consideration bythe House of

Representatives

Senate Finance Committee

Approval or Vetoby the President

Incorporation into the Code(if approved by the President or ifthe President’s veto is overridden)

Consideration bythe Senate

House Ways and Means

Committee

■ FIGURE 2–1Legislative Process for Tax Bills

For child under age 18, allowsannual $5,000 contribution.

For child under age 18, allows$500 annual contribution with phase-outs for higher-bracket taxpayers.*

Allows annual contribution of$500 child tax credit plus

$2,000 nondeductible contribution.

House Version

Joint Conference Committee Result

Senate Version

*Subsequent legislation increased the amount to $2,000.

■ FIGURE 2–2Example of Compromise in the Joint ConferenceCommittee

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–6 PART I Introduction and Basic Tax Model

Arrangement of the Code. The Internal Revenue Code of 1986 is found inTitle 26 of the U.S. Code. In working with the Code, it helps to understand theformat. Note, for example, the following partial table of contents:

Subtitle A. Income TaxesChapter 1. Normal Taxes and Surtaxes

Subchapter A. Determination of Tax LiabilityPart I. Tax on Individuals

Sections 1–5Part II. Tax on Corporations

Sections 11–12

In referring to a provision of the Code, the key is usually the Section number.In citing Section 2(a) (dealing with the status of a surviving spouse), for example,it is unnecessary to include Subtitle A, Chapter 1, Subchapter A, Part I. Merelymentioning Section 2(a) will suffice, since the Section numbers run consecutivelyand do not begin again with each new Subtitle, Chapter, Subchapter, or Part. Notall Code Section numbers are used, however. Notice that Part I ends with Section5 and Part II starts with Section 11 (at present there are no Sections 6, 7, 8, 9, and 10).4

Tax practitioners commonly refer to some specific areas of income tax law bytheir Subchapters. Some of the more common Subchapter designations includeSubchapter C (“Corporate Distributions and Adjustments”), Subchapter K (“Part-ners and Partnerships”), and Subchapter S (“Tax Treatment of S Corporations andTheir Shareholders”). In the last situation in particular, it is much more convenientto describe the subject of the applicable Code provisions (Sections 1361–1379) asS corporation status rather than as the “Tax Treatment of S Corporations andTheir Shareholders.”

4When the 1954 Code was drafted, some Section numbers wereintentionally omitted so that later changes could be incorporatedinto the Code without disrupting its organization. When Congress

does not leave enough space, subsequent Code Sections are givenA, B, C, etc., designations. A good example is the treatment of§§ 280A through 280H.

TAX INTHE

NEWS

THOSE DISAPPEARING DEPENDENTS

Tax law changes can have unforeseen or peculiar impacts. In 1986, 77 million depend-ents were claimed on U.S. individual income tax returns, but a year later, in 1987, morethan 7 million of those dependents had disappeared. More than 11,000 taxpayers whoclaimed seven or more dependents in 1986 claimed none in 1987. Had some disaster orplague occurred?

No, according to former IRS Commissioner Donald C. Alexander. A 1987 tax lawchange required taxpayers to provide a dependent’s Social Security number on their taxreturns. Apparently, those 7 million disappearing dependents were fakes who neverexisted.

Two years later 2.6 million babysitters disappeared. Kidnapped maybe? No, a changein the tax law required taxpayers to provide the babysitter’s name, address, and SocialSecurity number on the income tax return. Alexander says that tax laws must be enforcedto be effective.

SOURCE: Adapted from “An Open Letter to the New Commissioner of the IRS from Donald C.Alexander,” Tax Notes (May 17, 1993): 975.

Definitions and special rules (relating to the income tax imposed on individuals).

Definition of a surviving spouse.

For purposes of § 1 (the determination of the applicable rate schedule), a surviving spouse must meet certain conditions.

§ 2

(a)

(1)

(A) One of the conditions necessary to qualifyas a surviving spouse is that the tax-payer's spouse must have died duringeither of his or her two taxable yearsimmediately preceding the present tax-able year.

5Some Code Sections do not require subparts. See, for example,§§ 211 and 241.

6Some Code Sections omit the subsection designation and use theparagraph designation as the first subpart. See, for example,§§ 212(1) and 1222(1).

7§ 12(d) of the Internal Revenue Code of 1939 is the predecessor to§ 2 of the Internal Revenue Code of 1954 and the Internal Revenue

Code of 1986. Keep in mind that the 1954 Code superseded the 1939Code and the 1986 Code has superseded the 1954 Code. Footnote 1of this chapter explains why references to the 1939 or 1954 Codeare included.

Abbreviation for “Section”

Section number

Subsection number

Paragraph designation

Subparagraph designation

§ 2 (a) (1) (A)

6

Broken down by content, § 2(a)(1)(A) becomes:

Throughout the text, references to the Code Sections are in the form givenabove. The symbols “§” and “§§” are used in place of “Section” and “Sections.”Unless otherwise stated, all Code references are to the Internal Revenue Code of1986. The following table summarizes the format that will be used:

Complete Reference Text Reference

Section 2(a)(1)(A) of the Internal Revenue Code § 2(a)(1)(A)of 1986

Sections 1 and 2 of the Internal Revenue Code of §§ 1 and 21986

Section 2 of the Internal Revenue Code of 1954 § 2 of the Internal Revenue Codeof 1954

Section 12(d) of the Internal Revenue Code of § 12(d) of the Internal Revenue19397 Code of 1939

Effect of Treaties. The United States signs certain tax treaties (sometimes calledtax conventions) with foreign countries to render mutual assistance in tax enforce-ment and to avoid double taxation. The Technical and Miscellaneous Revenue Act

CHAPTER 2 Working with the Tax Law 2–7

Citing the Code. Code Sections often are broken down into subparts.5 Section2(a)(1)(A) serves as an example.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–8 PART I Introduction and Basic Tax Model

of 1988 provided that neither a tax law nor a tax treaty takes general precedence.Thus, when there is a direct conflict, the most recent item will take precedence. Ataxpayer must disclose on the tax return any position where a treaty overrides atax law.8 There is a $1,000 penalty per failure to disclose for individuals and a$10,000 per failure penalty for corporations.9

ADMINISTRATIVE SOURCES OF THE TAX LAW

The administrative sources of the Federal tax law can be grouped as follows:Treasury Department Regulations, Revenue Rulings and Revenue Procedures, andvarious other administrative pronouncements (see Exhibit 2–1). All are issued byeither the U.S. Treasury Department or the IRS.

GLOBALTAX

ISSUES

TAX TREATIES

The United States has entered into treaties with most of the major countries of the worldin order to eliminate possible double taxation. For example, nonresident alien studentswishing to claim exemption from taxation are required to provide an information statementas set forth in several Revenue Procedures. The withholding agent must also certifythe form.

Chinese students are required to prepare a four-part statement. Part 3 of the student’sstatement is as follows:

I will receive compensation for personal services performed in the United States. Thiscompensation qualifies for exemption from withholding of Federal income tax underthe tax treaty between the United States and the People’s Republic of China in anamount not in excess of $5,000 for any taxable year.

ETHICALCONSIDERATIONS The President and the IRS

President Franklin Delano Roosevelt once said, “I amwholly unable to figure out the amount of tax.” In a letterto the then Commissioner of the IRS, Roosevelt said, “asthis is a problem in higher mathematics, may I ask theBureau [IRS] to let me know the amount of the balancedue.”

When a friend of FDR was ordered to pay $420,000 intax penalties, the President called the Commissioner withinearshot of reporters and told him to cut the penalties to$3,000. One listener, David Brinkley, recalled years later:“Nobody seemed to think it was news or very interesting.”Evaluate the President’s actions.

8§ 7852(d).9Reg. §§ 301.6114–1, 301.6712–1, and 301.7701(b)(7).

10§ 7805.

Treasury Department Regulations. Regulations are issued by the U.S. Trea-sury Department under authority granted by Congress.10 Interpretive by nature,they provide taxpayers with considerable guidance on the meaning and applicationof the Code. Regulations may be issued in proposed, temporary, or final form. Regula-tions carry considerable authority as the official interpretation of tax statutes. Theyare an important factor to consider in complying with the tax law.

CHAPTER 2 Working with the Tax Law 2–9H

offm

an, e

t al.,

Wes

t Fed

eral

Tax

atio

n: In

div

idu

al In

com

e Ta

xes,

Cin

cinn

ati,

OH

, Tho

mso

n B

usi

ness

and

Eco

nom

ics,

© 2

006

Since Regulations interpret the Code, they are arranged in the same sequenceas the Code. A number is added at the beginning, however, to indicate the typeof tax or administrative, procedural, or definitional matter to which they relate.For example, the prefix 1 designates the Regulations under the income tax law.Thus, the Regulations under Code § 2 are cited as Reg. § 1.2 with subparts addedfor further identification. The numbering patterns of these subparts often have nocorrelation with the Code subsections. The prefix 20 designates estate tax Regula-tions; 25 covers gift tax Regulations; 31 relates to employment taxes; and 301 refersto procedure and administration. This list is not all-inclusive.

New Regulations and changes to existing Regulations are usually issued inproposed form before they are finalized. The interval between the proposal of aRegulation and its finalization permits taxpayers and other interested parties tocomment on the propriety of the proposal. Proposed Regulations under Code § 2,for example, are cited as Prop.Reg. § 1.2. The Tax Court indicates that ProposedRegulations carry little weight—no more than a position advanced in a writtenbrief prepared by a litigating party before the Tax Court. Finalized Regulationshave the force and effect of law.11

Sometimes the Treasury Department issues Temporary Regulations relatingto matters where immediate guidance is important. These Regulations are issuedwithout the comment period required for Proposed Regulations. Temporary Regu-lations have the same authoritative value as final Regulations and may be cited asprecedents. Temporary Regulations must also be issued as Proposed Regulationsand automatically expire within three years after the date of issuance.12 Temporary

Source Location Authority**

Regulations Federal Register* Force and effect of law.

Temporary Regulations Federal Register* May be cited as a precedent.Internal Revenue Bulletin Cumulative Bulletin

Proposed Regulations Federal Register* Preview of final Regulations.Internal Revenue BulletinCumulative Bulletin

Revenue Rulings Internal Revenue Bulletin Do not have the force and effect ofRevenue Procedures Cumulative Bulletin law.Treasury DecisionsActions on Decisions

General Counsel Memoranda Tax Analysts’ Tax Notes; RIA’s May not be cited as a precedent.Technical Advice Memoranda Internal Memoranda of the IRS;

CCH's IRS Position Reporter

Letter Rulings Research Institute of America and Applicable only to taxpayerCommerce Clearing House addressed. No precedential loose-leaf services force.

*Finalized, Temporary, and Proposed Regulations are published in soft-cover form by several publishers.**Each of these sources may be substantial authority for purposes of the accuracy-related penalty in § 6662.

Notice 90–20, 1990–1 C.B. 328.

■ EXHIBIT 2–1Administrative Sources

11F. W. Woolworth Co., 54 T.C. 1233 (1970); Harris M. Miller, 70 T.C.448 (1978); and James O. Tomerlin Trust, 87 T.C. 876 (1986).

12§ 7805(e).

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–10 PART I Introduction and Basic Tax Model

Regulations and the simultaneously issued Proposed Regulations carry moreweight than traditional Proposed Regulations. An example of a Temporary Regula-tion is Temp.Reg. § 1.274–5T(k), which excludes cars, trucks, and vans that arequalified nonpersonal use vehicles from the substantiation requirements for excep-tion treatment to the depreciation limits on luxury passenger automobiles.

Proposed, Temporary, and final Regulations are published in the Federal Regis-ter, in the Internal Revenue Bulletin (I.R.B.), and by major tax services. Final Regula-tions are issued as Treasury Decisions (TDs).

Regulations may also be classified as legislative, interpretive, or procedural. Thisclassification scheme is discussed under Assessing the Validity of a Treasury Regu-lation later in the chapter.

Revenue Rulings and Revenue Procedures. Revenue Rulings are officialpronouncements of the National Office of the IRS.13 They typically provide one ormore examples of how the IRS would apply a law to specific fact situations. LikeRegulations, Revenue Rulings are designed to provide interpretation of the taxlaw. However, they do not carry the same legal force and effect as Regulationsand usually deal with more restricted problems. Regulations are approved by theSecretary of the Treasury, whereas Revenue Rulings generally are not.

Although letter rulings (discussed below) are not the same as Revenue Rulings,a Revenue Ruling often results from a specific taxpayer’s request for a letter ruling.If the IRS believes that a taxpayer’s request for a letter ruling deserves officialpublication because of its widespread impact, the letter ruling will be convertedinto a Revenue Ruling and issued for the information and guidance of taxpayers,tax practitioners, and IRS personnel. Names, identifying descriptions, and moneyamounts are changed to conceal the identity of the requesting taxpayer. RevenueRulings also arise from technical advice to District Offices of the IRS, court decisions,suggestions from tax practitioner groups, and various tax publications.

Revenue Procedures are issued in the same manner as Revenue Rulings, butdeal with the internal management practices and procedures of the IRS. Familiaritywith these procedures can increase taxpayer compliance and help the IRS administerthe tax laws more efficiently. A taxpayer’s failure to follow a Revenue Procedurecan result in unnecessary delay or, in a discretionary situation, can cause the IRSto decline to act on behalf of the taxpayer.

Both Revenue Rulings and Revenue Procedures serve an important functionby providing guidance to IRS personnel and taxpayers in handling routine taxmatters. Revenue Rulings and Revenue Procedures generally apply retroactivelyand may be revoked or modified by subsequent rulings or procedures, Regulations,legislation, or court decisions.

Revenue Rulings and Revenue Procedures are published weekly by the U.S.Government in the Internal Revenue Bulletin (I.R.B.). Semiannually, the bulletins fora six-month period are gathered together and published in a bound volume calledthe Cumulative Bulletin (C.B.).14 The proper form for citing Revenue Rulings andRevenue Procedures depends on whether the item has been published in the Cumu-

13§ 7805(a).14Usually, only two volumes of the Cumulative Bulletin are publishedeach year. However, when Congress has enacted major tax legisla-tion, other volumes may be published containing the congressionalCommittee Reports supporting the Revenue Act. See, for example,the two extra volumes for 1984 dealing with the Deficit Reduction

Act of 1984. The 1984–3 Cumulative Bulletin, Volume 1, contains thetext of the law itself; 1984–3, Volume 2, contains the CommitteeReports. There are a total of four volumes of the Cumulative Bulletinfor 1984: 1984–1; 1984–2; 1984–3, Volume 1; 1984–3, Volume 2.

CHAPTER 2 Working with the Tax Law 2–11

lative Bulletin or is only available in I.R.B. form. Consider, for example, the follow-ing transition:

Temporary Rev.Rul. 2004–18, I.R.B. No. 8, 509.

Citation Explanation: Revenue Ruling Number 18, appearing on page 509 ofthe 8th weekly issue of the Internal Revenue Bulletin for 2004.

Permanent Rev.Rul. 2004–18, 2004–1 C.B. 509.

Citation Explanation: Revenue Ruling Number 18, appearing on page 509 ofVolume 1 of the Cumulative Bulletin for 2004.

Note that the page reference of 509 is the same for both the I.R.B. (temporary) andC.B. (permanent) versions of the ruling. The IRS numbers the pages of the I.R.B.sconsecutively for each six-month period so as to facilitate their conversion toC.B. form.

Revenue Procedures are cited in the same manner, except that “Rev.Proc.” issubstituted for “Rev.Rul.” Some recent Revenue Procedures dealt with the follow-ing matters:

• Deduction limits on luxury automobile depreciation.• Revised procedures for the issuance of letter rulings.• Automatic consent procedure for a change in accounting method.

Letter Rulings. Letter rulings are issued for a fee upon a taxpayer’s requestand describe how the IRS will treat a proposed transaction for tax purposes. Theyapply only to the taxpayer who asks for and obtains the ruling, but post-1984 letterrulings may be substantial authority for purposes of the accuracy-related penalty.15

Letter rulings can be useful to taxpayers who wish to be certain of how a transactionwill be taxed before proceeding with it. Letter rulings also allow taxpayers to avoidunexpected tax costs. Although the procedure for requesting a ruling can be quitecumbersome, sometimes requesting a ruling is the most effective way to carry outtax planning. Nevertheless, the IRS limits the issuance of individual rulings torestricted, preannounced areas of taxation. The main reason the IRS will not rulein certain areas is that they involve fact-oriented situations. Thus, a ruling maynot be obtained on many of the problems that are particularly troublesome fortaxpayers.16 The IRS issues over 2,000 letter rulings each year.

The law now requires the IRS to make individual rulings available for publicinspection after identifying details are deleted.17 Published digests of private letterrulings can be found in Private Letter Rulings (published by RIA), BNA Daily TaxReports, and Tax Analysts & Advocates Tax Notes. IRS Letter Rulings Reports (pub-lished by Commerce Clearing House) contains both digests and full texts of allletter rulings. Letter Ruling Review (published by Tax Analysts) is a monthly publica-tion that selects and discusses the more important letter rulings issued each month.In addition, computerized databases of letter rulings are available through severalprivate publishers.

Letter rulings are issued multidigit file numbers, which indicate the year andweek of issuance as well as the number of the ruling during that week. Consider,

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

15Notice 90–20, 1990–1 C.B. 328. In this regard, letter rulings differfrom Revenue Rulings, which are applicable to all taxpayers. Aletter ruling may later lead to the issuance of a Revenue Ruling ifthe holding affects many taxpayers. In its Agents’ Manual, the IRSindicates that letter rulings may be used as a guide with otherresearch materials in formulating a District Office position on anissue. The IRS is required to charge a taxpayer a fee for letterrulings, determination letters, etc.

16Rev.Proc. 2005–3, I.R.B. No. 1, 118 contains a list of areas in whichthe IRS will not issue advance rulings. From time to time, subse-quent Revenue Procedures are issued that modify or amplifyRev.Proc. 2005–3.

17§ 6110.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–12 PART I Introduction and Basic Tax Model

for example, Ltr.Rul. 200414039, which ruled that grants awarded under a tax-exempt theology school’s scholarship program do not represent compensation forservices.

2004 14 039

Year 2004 14th week of 39th ruling issued during the 14thissuance week

Other Administrative Pronouncements. Treasury Decisions (TDs) are issuedby the Treasury Department to promulgate new Regulations, amend or otherwisechange existing Regulations, or announce the position of the Government on se-lected court decisions. Like Revenue Rulings and Revenue Procedures, TDs arepublished in the Internal Revenue Bulletin and subsequently transferred to the Cumu-lative Bulletin.

The IRS publishes other administrative communications in the Internal RevenueBulletin such as Announcements, Notices, LRs (Proposed Regulations), and Prohib-ited Transaction Exemptions.

Like letter rulings, determination letters are issued at the request of taxpayersand provide guidance on the application of the tax law. They differ from letterrulings in that the issuing source is the Area Director rather than the NationalOffice of the IRS. Also, determination letters usually involve completed (as opposedto proposed) transactions. Determination letters are not published and are madeknown only to the party making the request.

The following examples illustrate the distinction between letter rulings anddetermination letters:

The shareholders of Red Corporation and Green Corporation want assurance that the consoli-dation of the corporations into Blue Corporation will be a nontaxable reorganization. Theproper approach is to request the National Office of the IRS to issue a letter ruling concerningthe income tax effect of the proposed transaction. ■

Chris operates a barber shop in which he employs eight barbers. To comply with the rulesgoverning income tax and payroll tax withholdings, Chris wants to know whether thebarbers working for him are employees or independent contractors. The proper procedureis to request a determination letter on their status from the appropriate Area Director. ■

Several internal memoranda that constitute the working law of the IRS nowmust be released. These General Counsel Memoranda (GCMs), Technical AdviceMemoranda (TAMs), and Field Service Advice (FSAs) are not officially published,and the IRS indicates that they may not be cited as precedents by taxpayers.18

However, these working documents do explain the IRS’s position on various issues.The National Office of the IRS releases Technical Advice Memoranda (TAMs)

weekly. TAMs resemble letter rulings in that they give the IRS’s determination ofan issue. However, they differ in several respects. Letter rulings deal with proposedtransactions and are issued to taxpayers at their request. In contrast, TAMs dealwith completed transactions. Furthermore, TAMs arise from questions raised byIRS personnel during audits and are issued by the National Office of the IRS toits field personnel. TAMs are often requested for questions relating to exempt

E X A M P L E 1

E X A M P L E 2

18These are unofficially published by the publishers listed in Exhibit2–1. Such internal memoranda for post-1984 may be substantialauthority for purposes of the accuracy-related penalty. Notice 90–20, 1990–1 C.B. 328.

CHAPTER 2 Working with the Tax Law 2–13

organizations and employee plans. TAMs are not officially published and may notbe cited or used as precedent.19 They are assigned file numbers according to thesame procedure used for letter rulings. For example, TAM 200417004 refers to the4th TAM issued during the 17th week of 2004.

The Office of Chief Counsel prepares Field Service Advice (FSAs) to help IRSemployees. They are issued in response to requests for advice, guidance, andanalysis on difficult or significant tax issues. FSAs are not binding on either thetaxpayer to whom they pertain or on the IRS. For example, FSA 200233016 statesthat § 269 may be used to disallow foreign tax credits and deductions that arisefrom a series of reorganizations if the underlying transaction’s principal purposeis to secure tax benefits.

Field Service Advices are being replaced by a new form of field guidance calledTechnical Expedited Advice Memoranda (TEAMs). The purpose of TEAMs is toexpedite legal guidance to field agents as disputes are developing. FSAs are revert-ing to their original purpose of case-specific development of facts.

A TEAM guidance differs from a TAM in several ways, including a mandatorypresubmission conference involving the taxpayer. In the event of a tentativelyadverse conclusion for the taxpayer or the field, a conference of right is offered tothe taxpayer and to the field; once the conference of right is held, no furtherconferences are offered.

JUDICIAL SOURCES OF THE TAX LAW

The Judicial Process in General. After a taxpayer has exhausted some or allof the remedies available within the IRS (i.e., no satisfactory settlement has beenreached at the agent or at the Appeals Division level), the dispute can be takento the Federal courts. The dispute is first considered by a court of original jurisdic-tion (known as a trial court) with any appeal (either by the taxpayer or the IRS)taken to the appropriate appellate court. In most situations, the taxpayer has achoice of any of four trial courts: a Federal District Court, the U.S. Court of FederalClaims, the U.S. Tax Court, or the Small Cases Division of the U.S. Tax Court.The trial and appellate court system for Federal tax litigation is illustrated inFigure 2–3.

The broken line between the U.S. Tax Court and the Small Cases Divisionindicates that there is no appeal from the Small Cases Division. The jurisdictionof the Small Cases Division is limited to cases involving amounts of $50,000 orless. The proceedings of the Small Cases Division are informal (e.g., no necessityfor the taxpayer to be represented by a lawyer or other tax adviser). Special trialjudges rather than Tax Court judges preside over these proceedings. The decisionsof the Small Cases Division are not precedents for any other court decision andare not reviewable by any higher court. Proceedings can be more timely and lessexpensive in the Small Cases Division. Some of these cases can now be found onthe U.S. Tax Court Internet Web site.

American law, following English law, is frequently made by judicial decisions.Under the doctrine of stare decisis, each case (except in the Small Cases Division)has precedential value for future cases with the same controlling set of facts. MostFederal and state appellate court decisions and some decisions of trial courts arepublished. More than 4 million judicial opinions have been published in the UnitedStates; over 130,000 cases are published each year.20 Published court decisions areorganized by jurisdiction (Federal or state) and level of court (trial or appellate).

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

19§ 6110(j)(3). Post-1984 TAMs may be substantial authority for pur-poses of avoiding the accuracy-related penalty. Notice 90–20,1990–1 C.B. 328.

20Jacobstein, Mersky, and Dunn, Fundamentals of Legal Research, 6thed. (Westbury, N.Y.: The Foundation Press, 1994), p. 11.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–14 PART I Introduction and Basic Tax Model

A decision of a particular court is called its holding. Sometimes a decisionincludes dicta or incidental opinions beyond the current facts. Such passing remarks,illustrations, or analogies are not essential to the current holding. Although theholding has precedential value under stare decisis, dicta are not binding on a fu-ture court.

Trial Courts. The differences among the various trial courts (courts of originaljurisdiction) can be summarized as follows:

• Number of courts. There is only one Court of Federal Claims and only oneTax Court, but there are many Federal District Courts. The taxpayer doesnot select the District Court that will hear the dispute but must sue in theone that has jurisdiction where the taxpayer resides.

• Number of judges. District Courts have various numbers of judges, but onlyone judge hears a case. The Court of Federal Claims has 16 judges, and theTax Court has 19 regular judges. The entire Tax Court, however, reviews acase (the case is sent to court conference) only when more important ornovel tax issues are involved. Most cases are heard and decided by one ofthe 19 judges.

• Location. The Court of Federal Claims meets most often in Washington, D.C.,whereas a District Court meets at a prescribed seat for the particular district.Each state has at least one District Court, and many of the more populousstates have more than one. Choosing the District Court usually minimizesthe inconvenience and expense of traveling for the taxpayer and his or hercounsel. Although the Tax Court is officially based in Washington, D.C., thevarious judges travel to different parts of the country and hear cases atpredetermined locations and dates. This procedure eases the distance prob-lem for the taxpayer, but it can mean a delay before the case comes to trialand is decided.

• Jurisdiction of the Court of Federal Claims. The Court of Federal Claims hasjurisdiction over any claim against the United States that is based uponthe Constitution, any Act of Congress, or any regulation of an executivedepartment. Thus, the Court of Federal Claims hears nontax litigation as

U.S. Court of Appeals

(Regional Circuit)

U.S. Supreme Court

Small CasesDivision

Appellate Courts

Trial Courts(Courts of Original

Jurisdiction)

U.S. Tax Court

U.S. District Court

U.S. Courtof Federal

Claims

U.S. Court of Appeals

(Federal Circuit)

■ FIGURE 2–3Federal Judicial System

CHAPTER 2 Working with the Tax Law 2–15

well as tax cases. This forum appears to be more favorable for issues havingan equitable or pro-business orientation (as opposed to purely technicalissues) and for those requiring extensive discovery.21

• Jurisdiction of the Tax Court and District Courts. The Tax Court hears only taxcases and is the most popular forum. The District Courts hear a wide varietyof nontax cases, including drug crimes and other Federal violations, as wellas tax cases. Some Tax Court justices have been appointed from IRS orTreasury Department positions. For these reasons, some people suggest thatthe Tax Court has more expertise in tax matters.

• Jury trial. The only court in which a taxpayer can obtain a jury trial is aDistrict Court. But since juries can only decide questions of fact and notquestions of law, even taxpayers who choose the District Court route oftendo not request a jury trial. In that event, the judge will decide all issues.Note that a District Court decision is controlling only in the district in whichthe court has jurisdiction.

• Payment of deficiency. For the Court of Federal Claims or a District Court tohave jurisdiction, the taxpayer must pay the tax deficiency assessed by theIRS and sue for a refund. A taxpayer who wins (assuming no successfulappeal by the Government) recovers the tax paid plus appropriate interest.For the Tax Court, however, jurisdiction is usually obtained without firstpaying the assessed tax deficiency. In the event the taxpayer loses in the TaxCourt (and does not appeal or an appeal is unsuccessful), the deficiencymust be paid with appropriate interest. With the elimination of the deductionfor personal (consumer) interest, the Tax Court route of delaying paymentof the deficiency can become expensive. For example, to earn 7 percentafter tax in 2005, a taxpayer with a 35 percent marginal tax rate wouldhave to earn 10.77 percent. By paying the tax, a taxpayer limits underpay-ment interest and penalties on the underpayment.

• Termination of running of interest. A taxpayer who selects the Tax Court maydeposit a cash bond to stop the running of interest. The taxpayer mustdeposit both the amount of the tax and any accrued interest. If the taxpayerwins and the deposited amount is returned, the Government does not payinterest on the deposit.

• Appeals. Appeals from a District Court or a Tax Court decision are to theU.S. Court of Appeals for the circuit in which the taxpayer resides. Appeals

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

TAX INTHE

NEWS

CHANGING THE FACE OF RUSSIA

Peter the Great, the ruler of Russia from 1682 to 1725, imposed a tax on beards (exceptfor clergy) because he felt that beards were “unnecessary, uncivilized, and ridiculous.”If an individual did not pay the tax, a tax official would scrape off the beard. Without warn-ing Peter himself would take a straight razor to the faces of bearded men appearingbefore him. When Peter attended a ceremony or banquet, anyone arriving with a beardwould depart without it.

SOURCE: Adapted from Erik Jensen, “Taxation of Beards,” Tax Notes (January 5, 2004): 153–157.

21T. D. Peyser, “The Case for Selecting the Claims Court to Litigatea Federal Tax Liability,” The Tax Executive (Winter 1988): 149.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–16 PART I Introduction and Basic Tax Model

from the Court of Federal Claims go to the Court of Appeals for the Fed-eral Circuit. Few Tax Court cases are appealed, and when appeals are made,most are filed by the taxpayer rather than the IRS.

• Bankruptcy. When a taxpayer files a bankruptcy petition, the IRS, like othercreditors, is prevented from taking action against the taxpayer. Sometimesa bankruptcy court may settle a tax claim.

For a summary of the Federal trial courts, see Concept Summary 2–1.

Appellate Courts. The losing party can appeal a trial court decision to a CircuitCourt of Appeals. The 11 geographic circuits, the circuit for the District of Columbia,and the Federal Circuit22 appear in Figure 2–4. The appropriate circuit for an appealdepends on where the litigation originated. For example, an appeal from NewYork goes to the Second Circuit.

If the Government loses at the trial court level (District Court, Tax Court, orCourt of Federal Claims), it need not (frequently does not) appeal. The fact thatan appeal is not made, however, does not indicate that the IRS agrees with theresult and will not litigate similar issues in the future. The IRS may decide not toappeal for a number of reasons. First, if the current litigation load is heavy, theIRS may decide that available personnel should be assigned to other, more im-portant cases. Second, the IRS may determine that this case is not a good one toappeal. Perhaps the taxpayer is in a sympathetic position or the facts are particularlystrong in his or her favor. In that event, the IRS may wait to test the legal issuesinvolved with a taxpayer who has a much weaker case. Third, if the appeal is froma District Court or the Tax Court, the Court of Appeals of jurisdiction could havesome bearing on whether the IRS chooses to go forward with an appeal. Based onpast experience and precedent, the IRS may conclude that the chance for success

Federal Judicial System: Trial Courts

U.S. Court of FederalIssue U.S. Tax Court U.S. District Court Claims

Number of judges per 19* Varies 16court

Payment of deficiency No Yes Yesbefore trial

Jury trial available No Yes No

Types of disputes Tax cases only Most criminal and civil Claims against the Unitedissues States

Jurisdiction Nationwide Location of taxpayer Nationwide

IRS acquiescence policy Yes Yes Yes

Appeal route U.S. Court of Appeals U.S. Court of Appeals U.S. Court of Appeals forthe Federal Circuit

*There are also 14 special trial judges and 9 senior judges.

CONCEPT SUMMARY 2–1

22The Court of Appeals for the Federal Circuit was created, effectiveOctober 1, 1982, by P.L. 97–164 (4/2/82) to hear decisions appealedfrom the Claims Court (now the Court of Federal Claims).

CHAPTER 2 Working with the Tax Law 2–17

on a particular issue might be more promising in another Court of Appeals. If so,the IRS will wait for a similar case to arise in a different jurisdiction.

The Federal Circuit at the appellate level provides the taxpayer with an alterna-tive forum to the Court of Appeals for his or her home circuit. Appeals from boththe Tax Court and the District Court go to a taxpayer’s home circuit. When aparticular circuit has issued an adverse decision, the taxpayer may prefer the Courtof Federal Claims route, since any appeal will be to the Federal Circuit.

District Courts, the Tax Court, and the Court of Federal Claims must abide bythe precedents set by the Court of Appeals of jurisdiction. A particular Court ofAppeals need not follow the decisions of another Court of Appeals. All courts,however, must follow the decisions of the U.S. Supreme Court.

This pattern of appellate precedents raises an issue for the Tax Court. Becausethe Tax Court is a national court, it decides cases from all parts of the country. Formany years, the Tax Court followed a policy of deciding cases based on what itthought the result should be, even though its decision might be appealed to aCourt of Appeals that had previously decided a similar case differently. A numberof years ago this policy was changed in the Golsen23 decision. Now the Tax Courtwill decide a case as it feels the law should be applied only if the Court of Appealsof appropriate jurisdiction has not yet passed on the issue or has previously decideda similar case in accord with the Tax Court’s decision. If the Court of Appeals ofappropriate jurisdiction has previously held otherwise, the Tax Court will conformunder the Golsen rule even though it disagrees with the holding.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

FLORIDAMIDDLE

NEW MEXICO

DELAWARE

MARYLAND

TEXAS WESTERN

OKLAHOMAWESTERN

KANSAS

NEBRASKA

SOUTH DAKOTA

NORTH DAKOTAMONTANA

WYOMING

COLORADO

UTAH

IDAHO

ARIZONA

NEVADA

WASHINGTONEASTERN

OREGON

KENTUCKYWESTERN

MAINE

PENNSYLVANIAMIDDLE

MICHIGANWESTERN

MASSACHUSETTS

RHODEISLAND

CONN

VIRGINIAWESTERN

W. VIRGINIASOUTHERN

OHIONORTHERNINDIANA

NORTHERN

NORTHCAROLINAEASTERN

TENNESSEEMIDDLE

SOUTHCAROLINA

ALABAMANORTHERNMISSISSIPPI

NORTHERN

ARKANSASEASTERN

LOUISIANAWESTERN

MISSOURIWESTERN

IOWANORTHERN

MINNESOTA

WISCONSINWESTERN

DISTRICT OF COLUMBIA

NEW JERSEY

GEORGIASOUTHERN

7

1

11

2

3

FEDERALCIRCUIT

8

D.C.CIRCUIT

610

NEW YORK EASTERN

CALIFORNIAEASTERN

ILLINOISCENTRAL

4

9HAWAII

NORTHERNMARIANAISLANDS

GUAM

9

ALASKA9

Washington, D.C.

Washington, D.C.

1PUERTO RICO

VIRGIN ISLANDS

3

CALIFORNIA CENTRAL

CALIFORNIASOUTHERN

CA

LIFOR

NIA

NO

RTH

ER

N

WASHINGTONWESTERN

TEXASNORTHERN

TEXASSOUTHERN

TEXASEASTERN

LOUISIANAEASTERN

LOUISIANAMIDDLE

OKLAHOMAEASTERN

OKLAHOMANORTHERN

MISSISSIPPISOUTHERN

ALABAMASOUTHERN

ALABAMAMIDDLE

GEORGIANORTHERN

GEORGIAMIDDLE

FLORIDASOUTHERN

FLORIDA NORTHERN

NORTHCAROLINA

MIDDLE

NORTHCAROLINAEASTERN

TENNESSEEEASTERN

TENNESSEEWESTERN

KENTUCKYEASTERN

W. VIRGINIANORTHERN

VIRGINIAEASTERN

OHIOSOUTHERN

INDIANASOUTHERN

MICHIGANEASTERN

WISCONSINEASTERN

IOWASOUTHERN

MISSOURIEASTERN

ILLINOISSOUTHERN

ILLINOISNORTHERN

ARKANSASWESTERN

PENNSYLVANIAWESTERN PENN

EASTERN

NEW YORKNORTHERN

NEW YORK SOUTH

5

NEW YORKWESTERN

LEGENDCircuit BoundariesState BoundariesDistrict Boundaries

ADMINISTRATIVE OFFICE OF THE UNITED STATES SUPREME COURT

APRIL 1988

MICHIGAN WESTERN

NEW HAMPSHIRE

VERMONT

■ FIGURE 2–4The Federal Courts of Appeals

23Jack E. Golsen, 54 T.C. 742 (1970).

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–18 PART I Introduction and Basic Tax Model

Emily lives in Texas and sues in the Tax Court on Issue A. The Fifth Circuit Court of Appealsis the appellate court of appropriate jurisdiction. It has already decided, in a case involvingsimilar facts but a different taxpayer, that Issue A should be resolved against the Government.Although the Tax Court feels that the Fifth Circuit Court of Appeals is wrong, under itsGolsen policy it will render judgment for Emily. Shortly thereafter, Rashad, a resident ofNew York, in a comparable case, sues in the Tax Court on Issue A. Assume that the SecondCircuit Court of Appeals, the appellate court of appropriate jurisdiction, has never expresseditself on Issue A. Presuming the Tax Court has not reconsidered its position on Issue A, itwill decide against Rashad. Thus, it is entirely possible for two taxpayers suing in thesame court to end up with opposite results merely because they live in different parts ofthe country. ■

Appeal to the U.S. Supreme Court is by Writ of Certiorari. If the Court agreesto hear the case, it will grant the Writ (Cert. granted). Most often, it will denyjurisdiction (Cert. denied). For whatever reason or reasons, the Supreme Court rarelyhears tax cases. The Court usually grants certiorari to resolve a conflict among theCourts of Appeals (e.g., two or more appellate courts have assumed opposingpositions on a particular issue) or where the tax issue is extremely important. Thegranting of a Writ of Certiorari indicates that at least four members of the SupremeCourt believe that the issue is of sufficient importance to be heard by the full Court.

The role of appellate courts is limited to a review of the record of trial compiledby the trial courts. Thus, the appellate process usually involves a determination ofwhether the trial court applied the proper law in arriving at its decision. Rarelywill an appellate court disturb a lower court’s fact-finding determination.

Both the Code and the Supreme Court indicate that Federal appellate courtsare bound by findings of facts unless they are clearly erroneous.24 This aspect ofthe appellate process is illustrated by a decision of the Court of Appeals for theDistrict of Columbia involving whether a taxpayer was engaged in an activity forprofit under § 183.25 This appeals court specifically held that the “Tax Court’sfindings of facts are binding on Federal courts of appeals unless clearly erroneous.”The court applauded the Tax Court for the thoroughness of its factual inquiry butcould “not place the stamp of approval upon its eventual legal outcome.” In re-versing and remanding the decision to the Tax Court, the appellate court said that“the language of § 183, its legislative history and the applicable Treasury regulationcombine to demonstrate that the court’s [Tax Court’s] standard is erroneous as amatter of law.” The appeals court held that this taxpayer’s claims of deductibilitywere to be evaluated by proper legal standards.

An appeal can have any of a number of possible outcomes. The appellate courtmay approve (affirm) or disapprove (reverse) the lower court’s finding, or it maysend the case back for further consideration (remand). When many issues areinvolved, a mixed result is not unusual. Thus, the lower court may be affirmed(aff’d) on Issue A and reversed (rev’d) on Issue B, while Issue C is remanded (rem’d)for additional fact finding.

When more than one judge is involved in the decision-making process, disagree-ments are not uncommon. In addition to the majority view, one or more judgesmay concur (agree with the result reached but not with some or all of the reasoning)or dissent (disagree with the result). In any one case, of course, the majority viewcontrols. But concurring and dissenting views can have an influence on other courtsor, at some subsequent date when the composition of the court has changed, evenon the same court.

E X A M P L E 3

24§§ 7482(a) and (c). Comm. v. Duberstein, 60–2 USTC ¶9515, 5 AFTR2d1626, 80 S.Ct. 1190 (USSC, 1960). See Rule 52(a) of the Federal Rulesof Civil Procedure.

25Dreicer v. Comm., 81–2 USTC ¶9683, 48 AFTR2d 5884, 665 F.2d 1292(CA–DC, 1981).

CHAPTER 2 Working with the Tax Law 2–19

Knowledge of several terms is important in understanding court decisions.The term plaintiff refers to the party requesting action in a court, and the defendantis the party against whom the suit is brought. Sometimes a court uses the termspetitioner and respondent. In general, “petitioner” is a synonym for “plaintiff,” and“respondent” is a synonym for “defendant.” At the trial court level, a taxpayer isnormally the plaintiff (or petitioner), and the Government is the defendant (orrespondent). If the taxpayer wins and the Government appeals as the new petitioner(or appellant), the taxpayer becomes the new respondent.

Judicial Citations—General. Having briefly described the judicial process, itis appropriate to consider the more practical problem of the relationship of caselaw to tax research. As previously noted, court decisions are an important sourceof tax law. The ability to cite and locate a case is, therefore, a must in workingwith the tax law. Judicial citations usually follow a standard pattern: case name,volume number, reporter series, page or paragraph number, court (wherenecessary), and the year of the decision.

Judicial Citations—The U.S. Tax Court. A good starting point is with theTax Court. The Tax Court issues two types of decisions: Regular and Memorandum.The Chief Judge decides whether the opinion is issued as a Regular or Memorandumdecision. The distinction between the two involves both substance and form. Interms of substance, Memorandum decisions deal with situations necessitating onlythe application of already established principles of law. Regular decisions involvenovel issues not previously resolved by the court. In actual practice, however, thisdistinction is not always preserved. Not infrequently, Memorandum decisions willbe encountered that appear to warrant Regular status and vice versa. At any rate,do not conclude that Memorandum decisions possess no value as precedents. Bothrepresent the position of the Tax Court and, as such, can be relied on.

The Regular and Memorandum decisions issued by the Tax Court also differin form. Memorandum decisions are officially published in mimeograph form only.Regular decisions are published by the U.S. Government in a series entitled TaxCourt of the United States Reports (T.C.). Each volume of these Reports covers asix-month period (January 1 through June 30 and July 1 through December 31)and is given a succeeding volume number. But, as is true of the Cumulative Bulletin,there is usually a time lag between the date a decision is rendered and the date itappears in bound form. A temporary citation may be necessary to help the re-searcher locate a recent Regular decision. Consider, for example, the temporary andpermanent citations for Estate of Leona Engelman, a decision filed on July 24, 2003:

Temporary Estate of Leona Engelman, 121 T.C. _____, No. 4 (2003).Citation Explanation: Page number left blank because not yet known.

Permanent Estate of Leona Engelman, 121 T.C. 54 (2003).Citation Explanation: Page number now available.

Both citations tell us that the case will ultimately appear in Volume 121 of theTax Court of the United States Reports. But until this volume is bound and madeavailable to the general public, the page number must be left blank. Instead, thetemporary citation identifies the case as being the 4th Regular decision issued bythe Tax Court since Volume 120 ended. With this information, the decision caneasily be located in either of the special Tax Court services published by CommerceClearing House (now owned by the Dutch company Wolters Kluwer) or ResearchInstitute of America (formerly by Prentice-Hall). Once Volume 121 is released, thepermanent citation can be substituted and the number of the case dropped. Startingin 1999, both Regular decisions and Memorandum decisions are published on theU.S. Tax Court Web site (http://www.ustaxcourt.gov).

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

L O . 2Locate and work with the

appropriate tax law sources.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–20 PART I Introduction and Basic Tax Model

Before 1943, the Tax Court was called the Board of Tax Appeals, and its decisionswere published as the United States Board of Tax Appeals Reports (B.T.A.). These 47volumes 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 Reports,page 784, issued in 1928.

If the IRS loses in a decision, it may indicate whether it agrees or disagreeswith the results reached by the court by publishing an acquiescence (“A” or “Acq.”)or nonacquiescence (“NA” or “Nonacq.”), respectively. Until 1991, acquiescencesand nonacquiescences were published only for certain Regular decisions of the TaxCourt, but the IRS has expanded its acquiescence program to include other civiltax cases where guidance is helpful. The acquiescence or nonacquiescence is pub-lished in the Internal Revenue Bulletin and the Cumulative Bulletin as an Action onDecision. The IRS can retroactively revoke an acquiescence.

Most often the IRS issues nonacquiescences to adverse decisions that are notappealed. In this manner, the Government indicates that it disagrees with the resultreached, despite its decision not to seek review of the matter in an appellate court.A nonacquiescence provides a warning to taxpayers that a similar case cannot besettled administratively. A taxpayer will incur fees and expenses appealing withinthe IRS even though the IRS may be unwilling to litigate a fact pattern similar toa nonacquiescence decision.26

Although Memorandum decisions were not published by the U.S. Governmentuntil recently (they are now published on the U.S. Tax Court Web site), theywere—and continue to be—published by Commerce Clearing House (CCH) andResearch Institute of America (RIA [formerly by Prentice-Hall]). Consider, for exam-ple, the three different ways that Jack D. Carr can be cited:

Jack D. Carr, T.C.Memo. 1985–19The 19th Memorandum decision issued by the Tax Court in 1985.

Jack D. Carr, 49 TCM 507Page 507 of Vol. 49 of the CCH Tax Court Memorandum Decisions.

Jack D. Carr, RIA T.C.Mem.Dec. ¶85,019Paragraph 85,019 of the RIA T.C. Memorandum Decisions.

Note that the third citation contains the same information as the first. Thus,¶85,019 indicates the following information about the case: year 1985, 19th T.C.Memo. decision.27 Although the RIA citation does not specifically include a volumenumber, the paragraph citation indicates that the decision can be found in the 1985volume of the RIA Memorandum decision service.

Starting in 2001, U.S. Tax Court Summary Opinions are published on the U.S.Tax Court Web site, with the warning that they may not be treated as precedentfor any other case. For example, Edward Charles Jones, filed on May 27, 2003, iscited as follows:

Edward Charles Jones, T.C. Summary Opinion, 2003–61.

Judicial Citations—The U.S. District Court, Court of Federal Claims, andCourts of Appeals. District Court, Court of Federal Claims, Court of Appeals,and Supreme Court decisions dealing with Federal tax matters are reported in boththe CCH U.S. Tax Cases (USTC) and the RIA American Federal Tax Reports (AFTR)series. Federal District Court decisions, dealing with both tax and nontax issues,also are published by West Publishing Company in its Federal Supplement Series

26G. W. Carter, “Nonacquiescence: Winning by Losing,” Tax Notes(September 19, 1988): 1301–1307.

27In this text, the RIA citation for Memorandum decisions of the U.S.Tax Court is omitted. Thus, Jack D. Carr would be cited as 49 TCM507, T.C.Memo. 1985–19.

28In this text, the case would be cited in the following form: Simons-Eastern Co. v. U.S., 73–1 USTC ¶9279, 31 AFTR2d 73–640, 354F.Supp. 1003 (D.Ct. Ga., 1972). Prentice-Hall Information Servicesis now owned by Research Institute of America. Although recentvolumes contain the RIA imprint, many of the older volumes con-tinue to have the P-H imprint.

29Before October 29, 1992, the Court of Federal Claims was calledthe Claims Court. Before October 1, 1982, the Court of FederalClaims was called the Court of Claims.

Finkbohner, Jr. v. U.S., (CA–11, 1986)

(Fed.Cl., 1994)

86–1 USTC 9393 (CCH citation)57 AFTR2d 86–1400 (RIA citation)788 F.2d 723 (West citation)

Apollo Computer, Inc. v. U.S.,

95–1 USTC 50,015 (CCH citation)74 AFTR2d 94–7172 (RIA citation)32 Fed.Cl. 334 (West citation)

Note that Finkbohner, Jr. is a decision rendered by the Eleventh Circuit Courtof Appeals in 1986 (CA–11, 1986), while Apollo Computer, Inc. was issued by theCourt of Federal Claims in 1994 (Fed.Cl., 1994).

Judicial Citations—The U.S. Supreme Court. Like all other Federal tax deci-sions (except those rendered by the Tax Court), Supreme Court decisions arepublished by Commerce Clearing House in the USTCs and by RIA (formerly byPrentice-Hall) in the AFTRs. The U.S. Government Printing Office also publishesthese decisions in the United States Supreme Court Reports (U.S.) as does West

CHAPTER 2 Working with the Tax Law 2–21

(F.Supp.). Volume 999, published in 1998, is the last volume of the Federal SupplementSeries. It is followed by the Federal Supplement Second Series (F.Supp.2d). The follow-ing examples illustrate three different ways of citing a District Court case:

Simons-Eastern Co. v. U.S., 73–1 USTC ¶9279 (D.Ct. Ga., 1972).Explanation: Reported in the first volume of the U.S. Tax Cases (USTC) published byCommerce Clearing House for calendar year 1973 (73–1) and located at paragraph 9279(¶9279).Simons-Eastern Co. v. U.S., 31 AFTR2d 73–640 (D.Ct. Ga., 1972).Explanation: Reported in the 31st volume of the second series of the American Federal TaxReports (AFTR2d) published by RIA and beginning on page 640. The “73” preceding thepage number indicates the year the case was published but is a designation used only inrecent decisions.Simons-Eastern Co. v. U.S., 354 F.Supp. 1003 (D.Ct. Ga., 1972).Explanation: Reported in the 354th volume of the Federal Supplement Series (F.Supp.)published by West Publishing Company and beginning on page 1003.

In all of the preceding citations, note that the name of the case is the same (Simons-Eastern Co. being the taxpayer), as is the reference to the Federal District Court ofGeorgia (D.Ct. Ga.) and the year the decision was rendered (1972).28

Decisions of the Court of Federal Claims29 and the Courts of Appeals arepublished in the USTCs, AFTRs, and a West Publishing Company reporter calledthe Federal Second Series (F.2d). Volume 999, published in 1993, is the last volumeof the Federal Second Series. It is followed by the Federal Third Series (F.3d). Beginningwith October 1982, the Court of Federal Claims decisions are published in anotherWest Publishing Company reporter entitled the Claims Court Reporter (abbreviatedCl.Ct.). Beginning with Volume 27 on October 30, 1992, the name of the reporterchanged to the Federal Claims Reporter (abbreviated as Fed.Cl.). The following exam-ples illustrate the different forms:

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–22 PART I Introduction and Basic Tax Model

Publishing Company in its Supreme Court Reporter (S.Ct.) and the Lawyer’s Co-operative Publishing Company in its United States Reports, Lawyer’s Edition (L.Ed.).The following illustrates the different ways the same decision can be cited:

L O . 3 Understand the tax research

process.

U.S. v. The Donruss Co.,

69–1 USTC ¶9167 (CCH citation) 23 AFTR2d 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-operative Publishing Co. citation)

(USSC, 1969)

The parenthetical reference (USSC, 1969) identifies the decision as having beenrendered by the U.S. Supreme Court in 1969. In this text, the citations of SupremeCourt decisions will be limited to the CCH (USTC), RIA (AFTR), and West (S.Ct.)versions. For a summary, see Concept Summary 2–2.

Working with the Tax Law—Tax ResearchTax research is the method by which a tax practitioner, student, or professordetermines the best available solution to a situation that possesses tax consequences.In other words, it is the process of finding a competent and professional conclusionto a tax problem. The problem may originate from completed or proposed transac-tions. In the case of a completed transaction, the objective of the research is to

Judicial Sources

Court Location Authority

U.S. Supreme Court S.Ct. Series (West) Highest authorityU.S. Series (U.S. Gov’t.)L.Ed. (Lawyer’s Co-op.)AFTR (RIA)USTC (CCH)

U.S. Courts of Appeal Federal 3d (West) Next highest appellate courtAFTR (RIA)USTC (CCH)

Tax Court (Regular decisions) U.S. Govt. Printing Office Highest trial court*RIA/CCH separate services

Tax Court (Memorandum decisions) RIA T.C.Memo. (RIA) Less authority than Regular T.C.TCM (CCH) decision

U.S. Court of Federal Claims** Federal Claims Reporter (West) Similar authority as Tax CourtAFTR (RIA)USTC (CCH)

U.S. District Courts F.Supp.2d Series (West) Lowest trial courtAFTR (RIA)USTC (CCH)

Small Cases Division of Tax Court U.S. Tax Court Web site*** No precedent value

*Theoretically, the Tax Court, Court of Federal Claims, and District Courts are on the same level of authority. But some peoplebelieve that since the Tax Court hears and decides tax cases from all parts of the country (i.e., it is a national court), itsdecisions may be more authoritative than a Court of Federal Claims or District Court decision.

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

CONCEPT SUMMARY 2–2

CHAPTER 2 Working with the Tax Law 2–23

determine the tax result of what has already taken place. For example, was theexpenditure incurred by the taxpayer deductible or not deductible for tax purposes?When dealing with proposed transactions, the tax research process is directedtoward the determination of possible alternative tax consequences. To the extentthat tax research leads to a choice of alternatives or otherwise influences the futureactions of the taxpayer, it becomes the key to effective tax planning.

Tax research involves the following procedures:

• Identifying and refining the problem.• Locating the appropriate tax law sources.• Assessing the validity of the tax law sources.• Arriving at the solution or at alternative solutions with due consideration

given to nontax factors.• Effectively communicating the solution to the taxpayer or the taxpayer’s

representative.• Following up on the solution (where appropriate) in light of new

developments.

This process is depicted schematically in Figure 2–5. The broken lines reflectthe steps of particular interest when tax research is directed toward proposed,rather than completed, transactions.

IDENTIFYING THE PROBLEM

Problem identification must start with a compilation of the relevant facts involved.30

In this regard, all of the facts that may have a bearing on the problem must be

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

CommunicationNew

Developments

ProblemRefinement and

Discovery ofNew Problem

Areas

LegislativeSources

AdministrativeSources

JudicialSources

UnofficialSources

NontaxConsiderations

PreliminaryProblem

Identification

TaxResearch

Solution

■ FIGURE 2–5Tax Research Process

30For an excellent discussion of the critical role of facts in carryingout tax research, see R. L. Gardner, D. N. Stewart, and R. G. Wors-

ham, Tax Research Techniques (New York: The American Instituteof Certified Public Accountants, 2000), Chapter 2.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–24 PART I Introduction and Basic Tax Model

gathered because any omission could modify the solution reached. To illustrate,consider what appears to be a very simple problem.

Early in December, Fred and Megan review their financial and tax situation with their son,Sam, and daughter-in-law, Dana, who live with them. Fred and Megan are in the 28% taxbracket in 2005. Both Sam and Dana are age 21. Sam, a student at a nearby university, ownssome publicly traded stock that he inherited from his grandmother. A current sale wouldresult in approximately $8,000 of gross income. At this point, Fred and Megan provide about55% of Sam and Dana’s support. Although neither is now employed, Sam has earned $960and Dana has earned $900. The problem: Should the stock be sold, and would the sale pro-hibit Fred and Megan from claiming Sam and Dana as dependents? ■

REFINING THE PROBLEM

Initial reaction is that Fred and Megan in Example 4 could not claim Sam and Danaas dependents if the stock is sold, since Sam would then have gross income ofmore than the exemption amount under § 151(d).31 However, Sam is a full-timestudent, and § 152(c)(3)(A)(ii) allows a son or daughter who is a full-time studentand is under age 24 (a qualifying child) to have gross income that is greater than theexemption amount without penalizing the parents with the loss of the dependencyexemption. Thus, Sam could sell the stock without penalizing the parents withrespect to the gross income test. However, the $8,000 income from the sale of thestock might lead to the failure of the greater-than-50 percent support test, depend-ing on how much Sam spends for his (or Dana’s) support.

Assume, however, that further fact gathering reveals the following addi-tional information:

• Sam does not really need to spend the proceeds from the sale of the stock.• Sam receives a sizable portion of his own support from a scholarship.

With these new facts, additional research leads to § 152(f)(5) and Regulation§ 1.152–1(c), which indicate that a scholarship received by a student is not includedfor purposes of computing whether the parents furnished more than one-half ofthe child’s support (the child is not self-supporting). Further, if Sam does not spendthe proceeds from the sale of stock, the unexpended amount is not counted for pur-poses of the support test. Thus, it appears that the parents would not be denied thedependency exemptions for Sam and Dana.

LOCATING THE APPROPRIATE TAX LAW SOURCES

Once the problem is clearly defined, what is the next step? Although the next stepis a matter of individual judgment, most tax research begins with the index volumeof the tax service, a keyword search on an online tax service, or a CD-ROM search(see the subsequent discussion of Electronic Tax Research). If the problem is notcomplex, the researcher may bypass the tax service or online service and turndirectly to the Internal Revenue Code and Treasury Regulations. For the beginner,the latter procedure saves time and will solve many of the more basic problems.If the researcher does not have a personal copy of the Code or Regulations, resortingto the appropriate volume(s) of a tax service or a CD-ROM will be necessary.32 Themajor tax services available are as follows:

31See the related discussion in Chapter 3.32Several of the major tax services publish paperback editions of theCode and Treasury Regulations that can be purchased at modestprices. These editions are usually revised twice each year. For an

annotated and abridged version of the Code and Regulations thatis published annually, see James E. Smith, West's Internal RevenueCode of 1986 and Treasury Regulations: Annotated and Selected(Thomson/South-Western, 2006).

E X A M P L E 4

CHAPTER 2 Working with the Tax Law 2–25

Standard Federal Tax Reporter, Commerce Clearing House.

United States Tax Reporter, Research Institute of America (entitled Federal Taxes prior toJuly 1992).

Federal Tax Coordinator 2d, Research Institute of America.

Tax Management Portfolios, Bureau of National Affairs.

Federal Income, Gift and Estate Taxation, Warren, Gorham and Lamont.

CCH’s Federal Tax Service, Commerce Clearing House.

Mertens Law of Federal Income Taxation, Callaghan and Co.

Working with the Tax Services. In this text, it is not feasible to teach the useof any particular tax service; this ability can be obtained only by practice.33 However,several important observations about the use of tax services cannot be overempha-sized. First, always check for current developments. The main text of any paper-based service is not revised frequently enough to permit reliance on that portionas the latest word on any subject. Where current developments can be founddepends, of course, on which service is being used. Commerce Clearing House’sStandard Federal Tax Reporter service contains a special volume devoted to currentmatters. Both RIA’s U.S. Tax Reporter and Federal Tax Coordinator 2d integrate thenew developments into the body of the service throughout the year. Second, whendealing with a tax service synopsis of a Treasury Department pronouncement ora judicial decision, remember there is no substitute for the original source.

To illustrate, do not base a conclusion solely on a tax service’s commentary ona potentially relevant court case such as Simons-Eastern Co. v. U.S.34 If the case is vitalto the research, look it up. The facts of the case may be distinguishable from thoseinvolved in the problem being researched. This is not to say that the case synopsiscontained in the tax service is wrong; it might just be misleading or incomplete.

Tax Periodicals. The various tax periodicals are another source of tax informa-tion. The easiest way to locate a journal article pertinent to a tax problem is throughCommerce Clearing House’s Federal Tax Articles. This multivolume service includesa subject index, a Code Section number index, and an author’s index. The RIA(formerly P-H) tax service also has a topical “Index to Tax Articles” section that isorganized using the RIA paragraph index system. Also, beginning in 1992, TheAccounting & Tax Index is available in three quarterly issues plus a cumulativeyear-end volume covering all four quarters. The original Accountant’s Index startedin 1921 and ended in 1991.

The following are some of the more useful tax periodicals:

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

33The representatives of the various tax services are prepared toprovide the users of their services with printed booklets and indi-vidual instruction on the use of the materials.

34Refer to Footnote 28.

The Journal of TaxationWarren, Gorham and Lamont395 Hudson Street4th FloorNew York, NY 10014

Tax Law ReviewWarren, Gorham and Lamont395 Hudson Street4th FloorNew York, NY 10014

Estate PlanningWarren, Gorham and Lamont395 Hudson Street4th FloorNew York, NY 10014

Taxation for AccountantsWarren, Gorham and Lamont395 Hudson Street4th FloorNew York, NY 10014

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–26 PART I Introduction and Basic Tax Model

ASSESSING THE VALIDITY OF THE TAX LAW SOURCES

Once a source has been located, the next step is to assess it in light of the problemat hand. Proper assessment involves careful interpretation of the tax law withconsideration given to its relevance and validity. In connection with validity, animportant step is to check for recent changes in the tax law.

Interpreting the Internal Revenue Code. The language of the Code often isdifficult to comprehend fully. Contrary to many people’s suspicions, the Code isnot written deliberately to confuse. Unfortunately, though, it often has that effect.The Code is intended to apply to more than 200 million taxpayers, many of whomare willing to exploit any linguistic imprecision to their benefit—to find a “loophole”in popular parlance. Many of the Code’s provisions are limitations or restrictionsinvolving two or more variables. Expressing such concepts algebraically would bemore direct; using words to accomplish this task instead is often quite cumbersome.Among the worst such attempts was former § 341(e) relating to so-called collapsi-ble corporations. One sentence had more than 450 words (twice as many as in theGettysburg Address). Within this same subsection was another sentence of 300words. Research has shown that in one-third of the conflicts reaching the Tax Court,the court could not discern the intent of Congress by simply reading the statute. Yet

Trusts and Estates249 W. 17th StreetNew York, NY 10011

Oil, Gas, and Energy QuarterlyMatthew Bender & Co.1275 BroadwayAlbany, NY 12204

The International Tax JournalAspen Publishing, Inc.1185 Avenue of the AmericasNew York, NY 10036

TAXES—The Tax MagazineCommerce Clearing House, Inc.2700 Lake Cook RoadRiverwood, IL 60015

National Tax Journal725 15th Street NWSuite 600Washington, D.C. 20005

The Tax AdviserHarborside Financial Center201 Plaza IIIJersey City, NJ 07311-3881

The Practical AccountantOne State Street PlazaNew York, NY 10004

The Tax Executive1200 G Street NWSuite 300Washington, D.C. 20005

Journal of Corporate TaxationWarren, Gorham and Lamont395 Hudson Street4th FloorNew York, NY 10014

Journal of Taxation for IndividualsWarren, Gorham and Lamont395 Hudson Street4th FloorNew York, NY 10014

The Tax LawyerAmerican Bar Association750 N. Lake Shore DriveChicago, IL 60611

Journal of the American TaxationAssociationAmerican Accounting Association5717 Bessie DriveSarasota, FL 34233

Tax Notes6830 Fairfax DriveArlington, VA 22213

35T. L. Kirkpatrick and W. B. Pollard, “Reliance by the Tax Court onthe Legislative Intent of Congress,” The Tax Executive (Summer1986): 358–359.

36Augustus v. Comm., 41–1 USTC ¶9255, 26 AFTR 612, 118 F.2d 38(CA–6, 1941).

CHAPTER 2 Working with the Tax Law 2–27

the overriding attitude of the Tax Court judges is that the statute comes first. Evenwhen the statute is unworkable, the court will not rewrite the law.35

Assessing the Validity of a Treasury Regulation. Treasury Regulations arethe official interpretation of the Code and are entitled to great deference. Occasion-ally, however, a court will invalidate a Regulation or a portion thereof on thegrounds that the Regulation is contrary to the intent of Congress. Usually, thecourts do not question the validity of Regulations because of the belief that “thefirst administrative interpretation of a provision as it appears in a new act oftenexpresses the general understanding of the times or the actual understanding ofthose who played an important part when the statute was drafted.”36

Keep the following observations in mind when assessing the validity of aRegulation:

• IRS agents must give the Code and the Regulations issued thereunder equalweight when dealing with taxpayers and their representatives.

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

• In a challenge, the burden of proof is on the taxpayer to show that theRegulation varies from the language of the statute and has no support inthe Committee Reports.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

TAX INTHE

NEWS

INTERNAL REVENUE CODE: INTERPRETATION PITFALLS

One author has noted 10 common pitfalls in interpreting the Code:

1. Determine the limitations and exceptions to a provision. Do not permit the languageof the Code Section to carry greater or lesser weight than was intended.

2. Just because a Section fails to mention an item does not necessarily mean thatthe item is excluded.

3. Read definitional clauses carefully.4. Do not overlook small words such as and and or. There is a world of difference

between these two words.5. Read the Code Section completely; do not jump to conclusions.6. Watch out for cross-referenced and related provisions, since many Sections of the

Code are interrelated.7. At times Congress is not careful when reconciling new Code provisions with existing

Sections. Conflicts among Sections, therefore, do arise.8. Be alert for hidden definitions; terms in a particular Code Section may be defined

in the same Section or in a separate Section.9. Some answers may not be found in the Code; therefore, a researcher may have

to consult the Regulations and/or judicial decisions.10. Take careful note of measuring words such as less than 50 percent, more than 50

percent, and at least 80 percent.

SOURCE: Adapted by permission from Henry G. Wong, “Ten Common Pitfalls in Reading theInternal Revenue Code,” Journal of Business Strategy (July–August 1972): 30–33. Reprinted withpermission by Faulkner & Gray, Inc., 11 Penn Plaza, New York, NY 10001.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–28 PART I Introduction and Basic Tax Model

• If the taxpayer loses the challenge, a 20 percent negligence penalty may beimposed.37 This accuracy-related penalty applies to any failure to make areasonable attempt to comply with the tax law and any disregard of rules andRegulations.38

• Final Regulations can be classified as procedural, interpretive, or legislative.Procedural Regulations neither establish tax laws nor attempt to explaintax laws. Procedural Regulations are housekeeping-type instructions indicatinginformation that taxpayers should provide the IRS as well as informationabout the internal management and conduct of the IRS itself.

• Some interpretive Regulations rephrase and elaborate what Congress statedin the Committee Reports that were issued when the tax legislation wasenacted. Such Regulations are hard and solid and almost impossible to over-turn because they clearly reflect the intent of Congress. An interpretiveRegulation is given less deference than a legislative Regulation, however.The Supreme Court has told lower courts to analyze Treasury Regulationscarefully before accepting the Treasury’s interpretation.39

• In some Code Sections, Congress has given the Secretary or his delegate theauthority to prescribe Regulations to carry out the details of administrationor to otherwise complete the operating rules. Under such circumstances,Congress effectively is delegating its legislative powers to the Treasury De-partment. Regulations issued pursuant to this type of authority possess theforce and effect of law and are often called legislative Regulations (e.g.,consolidated return Regulations).

• Courts tend to apply a legislative reenactment doctrine. A particular Regula-tion is assumed to have received congressional approval if the Regulationwas finalized many years earlier and Congress has not amended the CodeSection pertaining to that Regulation.

Assessing the Validity of Other Administrative Sources of the Tax Law.Revenue Rulings issued by the IRS carry less weight than Treasury DepartmentRegulations. Revenue Rulings are important, however, in that they reflect theposition of the IRS on tax matters. In any dispute with the IRS on the interpretationof tax law, therefore, taxpayers should expect agents to follow the results reachedin any applicable Revenue Rulings. A 1986 Tax Court decision, however, indicatedthat Revenue Rulings “typically do not constitute substantive authority for a posi-tion.”40 Most Revenue Rulings apply retroactively unless a specific statement indi-cates the extent to which a ruling is to be applied without retroactive effect.41

Actions on Decisions further tell the taxpayer the IRS’s reaction to certain courtdecisions. Recall that the IRS follows a practice of either acquiescing (agreeing) ornonacquiescing (not agreeing) with selected judicial decisions. A nonacquiescencedoes not mean that a particular court decision is of no value, but it does indicatethat the IRS may continue to litigate the issue involved.

Assessing the Validity of Judicial Sources of the Tax Law. The judicialprocess as it relates to the formulation of tax law has already been described.How much reliance can be placed on a particular decision depends upon thefollowing variables:

• The higher the level of the court that issued a decision, the greater the weightaccorded to that decision. A decision rendered by a trial court (e.g., a Federal

37§§ 6662(a) and (b)(1).38§ 6662(c).39U.S. v. Vogel Fertilizer Co., 82–1 USTC ¶9134, 49 AFTR2d 82–491,102 S.Ct. 821 (USSC, 1982); National Muffler Dealers Assn., Inc., 79–1USTC ¶9264, 43 AFTR2d 79–828, 99 S.Ct. 1304 (USSC, 1979).

40Nelda C. Stark, 86 T.C. 243 (1986). See also Ann R. Neuhoff, 75 T.C.36 (1980). For a different opinion, however, see Industrial ValleyBank & Trust Co., 66 T.C. 272 (1976).

41Rev.Proc. 87–1, 1987–1 C.B. 503.

CHAPTER 2 Working with the Tax Law 2–29

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 on any tax issue.

• More reliance is placed on decisions of courts that have jurisdiction in thearea where the taxpayer’s legal residence is located. If, for example, a taxpayerlives in Texas, a decision of the Fifth Circuit Court of Appeals means morethan one rendered by the Second Circuit Court of Appeals. This result occursbecause any appeal from a U.S. District Court or the Tax Court would beto the Fifth Circuit Court of Appeals and not to the Second Circuit Courtof Appeals.42

• A Tax Court Regular decision carries more weight than a Memorandumdecision since the Tax Court does not consider Memorandum decisions tobe binding precedents.43 Furthermore, a Tax Court reviewed decision carrieseven more weight. All of the Tax Court judges participate in a revieweddecision.

• A Circuit Court decision where certiorari has been requested and denied bythe U.S. Supreme Court carries more weight than a Circuit Court decisionthat was not appealed. A Circuit Court decision heard en banc (all the judgesparticipate) carries more weight than a normal Circuit Court case.

• A decision that is supported by cases from other courts carries more weightthan a decision that is not supported by other cases.

• The weight of a decision also can be affected by its status on appeal. Forexample, was the decision affirmed or overruled?

In connection with the last two variables, the use of a citator is invaluable to taxresearch.44 A citator provides the history of a case and lists subsequently publishedopinions that refer to the case being assessed. Reviewing these references enablesthe tax researcher to determine whether the decision in question has been reversed,affirmed, followed by other courts, or distinguished in some way. If one intendsto rely on a judicial decision to any significant degree, “running” the case througha citator is imperative. Citators and their use are discussed in Appendix E.

Assessing the Validity of Other Sources. Primary sources of tax law includethe Constitution, legislative history materials, statutes, treaties, Treasury Regula-tions, IRS pronouncements, and judicial decisions. In general, the IRS considersonly primary sources to constitute substantial authority. However, a researchermight wish to refer to secondary materials such as legal periodicals, treatises, legalopinions, General Counsel Memoranda, and written determinations. In general,secondary sources are not authority.

Although the statement that the IRS regards only primary sources as substantialauthority generally is true, there is one exception. In Notice 90–20,45 the IRS ex-panded the list of substantial authority for purposes of the accuracy-related penaltyin § 6662 to include a number of secondary materials (e.g., letter rulings, GeneralCounsel Memoranda, the Bluebook). “Authority” does not include conclusionsreached in treatises, legal periodicals, and opinions rendered by tax professionals.

A letter ruling or determination letter is substantial authority only for thetaxpayer to whom it is issued, except as noted above with respect to the accuracy-related penalty.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

42Before October 1, 1982, an appeal from the then-named U.S. Court ofClaims (the other trial court) was directly to the U.S. Supreme Court.

43Severino R. Nico, Jr., 67 T.C. 647 (1977).44The major citators are published by Commerce Clearing House,RIA, and Shepard’s Citations, Inc. These citators are available in

published and electronic formats. WESTLAW has a citator that isavailable only in electronic format.

451990–1 C.B. 328; see also Reg. § 1.6661–3(b)(2).

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–30 PART I Introduction and Basic Tax Model

Upon the completion of major tax legislation, the staff of the Joint Committeeon Taxation (in consultation with the staffs of the House Ways and Means andSenate Finance Committees) often will prepare a General Explanation of the Act,commonly known as the Bluebook because of the color of its cover. The IRS willnot accept this detailed explanation as having legal effect, except as noted abovewith respect to the accuracy-related penalty. The Bluebook does, however, providevaluable guidance to tax advisers and taxpayers until Regulations are issued. Someletter rulings and General Counsel Memoranda of the IRS cite Bluebookexplanations.

ARRIVING AT THE SOLUTION OR AT ALTERNATIVESOLUTIONS

Example 4 raised the question of whether a taxpayer would be denied dependencyexemptions for a son and a daughter-in-law if the son sold some stock near theend of the year. A refinement of the problem supplies additional information:

• Sam was a full-time student during four calendar months of the year.• Sam and Dana anticipate filing a joint return.

Additional research leads to § 152(f)(2) and Regulation § 1.151–3(b), which indi-cate that to qualify as a student, Sam must be a full-time student during each of fivecalendar months of the year at an educational institution. Thus, proceeds fromSam’s sale of the stock would cause his parents to lose at least one dependencyexemption because Sam’s gross income would exceed the exemption amount. Theparents still might be able to claim Dana as an exemption if the support test is met.

Section 152(b)(2) indicates that a supporting taxpayer is not permitted a depen-dency exemption for a married dependent if the married individual files a jointreturn. Initial reaction is that a joint return by Sam and Dana would be disastrousto the parents. However, more research uncovers two Revenue Rulings that providean exception if neither the dependent nor the dependent’s spouse is required tofile a return but does so solely to claim a refund of tax withheld. The IRS assertsthat each spouse must have gross income of less than the exemption amount.46

Therefore, if Sam sells the stock and he and Dana file a joint return, the parentswould lose the dependency exemption for both Sam and Dana.

If the stock is not sold until January, both exemptions may still be available tothe parents. However, under § 151(d)(2) a personal exemption is not available toa taxpayer who can be claimed as a dependent by another taxpayer (whetheractually claimed or not). Thus, if the parents can claim Sam and Dana as dependents,Sam and Dana would lose their personal exemptions on their tax return.

COMMUNICATING TAX RESEARCH

Once the problem has been researched adequately, the researcher may need toprepare a memo, letter, or oral presentation setting forth the result. The form sucha communication takes could depend on a number of considerations. For example,does the employer or professor recommend a particular procedure or format fortax research memos? Is the memo to be given directly to the client, or will it firstgo to the researcher’s employer? Who is the audience for the oral presentation?How long should you talk? Whatever form it takes, a good tax research communica-tion should contain the following elements:

L O . 4 Communicate the results of the

tax research process in aclient letter and a tax file

memorandum.

46Rev.Rul. 54–567, 1954–2 C.B. 108; Rev.Rul. 65–34, 1965–1 C.B. 86.

CHAPTER 2 Working with the Tax Law 2–31

• A clear statement of the issue.• In more complex situations, a short review of the fact pattern that raises

the issue.• A review of the pertinent tax law sources (e.g., Code, Regulations, Revenue

Rulings, judicial authority).• Any assumptions made in arriving at the solution.• The solution recommended and the logic or reasoning supporting it.• The references consulted in the research process.

In short, a good tax research communication should tell the audience whatwas researched, the results of that research, and the justification for the recommen-dation made.47

Illustrations of the memos for the tax file and the client letter associated withExample 4 appear in Figures 2–6, 2–7, and 2–8.

Working with the Tax Law—Tax PlanningTax research and tax planning are inseparable. The primary purpose of effectivetax planning is to reduce the taxpayer’s total tax bill. This statement does not meanthat the course of action selected must produce the lowest possible tax under thecircumstances. The minimization of tax liability must be considered in context withthe legitimate business goals of the taxpayer.

A secondary objective of effective tax planning is to reduce or defer the tax inthe current tax year. Specifically, this objective aims to accomplish one or more ofthe following: eradicating the tax entirely; eliminating the tax in the current year;deferring the receipt of income; converting ordinary income into capital gains;converting active to passive income; converting passive to active expense; proliferat-ing taxpayers (i.e., forming partnerships and corporations or making lifetime giftsto family members); eluding double taxation; avoiding ordinary income; or creating,increasing, or accelerating deductions. However, this second objective should beapproached with considerable reservation and moderation. For example, a taxelection in one year may reduce taxes currently, but saddle future years with adisadvantageous tax position.

NONTAX CONSIDERATIONS

There is an honest danger that tax motivations may take on a significance that doesnot correspond to the true values involved. In other words, tax considerations mayimpair the exercise of sound business judgment by the taxpayer. Thus, the tax planningprocess can become a medium through which to accomplish ends that are sociallyand economically objectionable. All too often, planning seems to lean toward theopposing extremes of placing either too little or too much emphasis on tax considera-tions. The happy medium—a balance that recognizes the significance of taxes, butnot beyond the point where planning detracts from the exercise of good businessjudgment—turns out to be the promised land that is too infrequently reached.

The remark is often made that a good rule is to refrain from pursuing anycourse of action that would not be followed were it not for certain tax considerations.This statement is not entirely correct, but it does illustrate the desirability of pre-venting business logic from being sacrificed at the altar of tax planning.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

L O . 5 Apply tax research techniques

and planning procedures.

47See Chapter 6 of the publication cited in Footnote 30. For oralpresentations, see W. A. Raabe and G. E. Whittenburg, “Talking

Tax: How to Make a Tax Presentation,” The Tax Adviser (March1997): 179–182.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–32 PART I Introduction and Basic Tax Model

August 16, 2005

TAX FILE MEMORANDUM

FROM: John J. Jones

SUBJECT: Fred and Megan TaxpayerEngagement: Issues

Today I talked to Fred Taxpayer with respect to his August 12, 2005 letter requesting taxassistance. He wishes to know if his son, Sam, can sell stock worth $19,000 (basis = $11,000)without the parents losing the dependency exemptions for Sam and Sam’s wife, Dana.

Fred Taxpayer is married to Megan, and Sam is a full-time student at a local university. Saminherited the stock from his grandmother about five years ago. If he sells the stock, he willsave the proceeds from the sale. Sam does not need to spend the proceeds if he sells thestock because he receives a $5,500 scholarship that he uses for his own support (i.e., to payfor tuition, books, and fees). Fred and Megan are in the 28% tax bracket and furnish approxi-mately 55% of Sam and Dana’s support.

ISSUE: If the stock is sold, would the sale prohibit Fred and Megan from claiming Sam andDana as dependents? I told Fred that we would have an answer for him within two weeks.

■ FIGURE 2–6Tax File Memorandum

August 26, 2005

TAX FILE MEMORANDUM

FROM: John J. Jones

SUBJECT: Fred and Megan TaxpayerEngagement: Conclusions

See the Tax File Memorandum dated August 16, 2005, which contains the facts and identifiesthe tax issues.

Section 152(a) provides that in order for a taxpayer to take a dependency exemption, thepotential dependent must satisfy either the qualifying child requirements or the qualifying rel-ative requirements (see Chapter 3). Fred and Megan provide about 55% of the support oftheir son, Sam, and their daughter-in-law, Dana. If Sam should sell the stock in 2005, he wouldnot need to spend the proceeds for support purposes (i.e., would save the proceeds). Thus,the stock sale would not affect his qualifying as self-supporting under § 152(c)(1)(D). In cal-culating the percentage of support provided by Fred and Megan, a $5,500 scholarshipreceived by Sam is not counted in determining the amount of support Sam provides for himself[see § 152(f)(5) and Reg. § 1.152–1(c)].

Section 152(d)(1)(B) provides that in order to qualify for a dependency exemption as a qual-ifying relative, the potential dependent’s gross income must be less than the exemptionamount (i.e., $3,200 in 2005). Without the stock sale, the gross income of both Sam ($960)and Dana ($900) will be below the exemption amount in 2005. The $5,500 Sam receives as ascholarship is excluded from his gross income under § 117(a) because he uses the entireamount to pay for his tuition, books, and fees at a local university.

The key issue then is whether the stock, which will generate $8,000 of gain for Sam, will causethe gross income test to be violated. The gain will increase Sam’s gross income to $8,960($8,000 + $960). However, § 152(c)(3)(A)(ii) permits a child’s gross income to exceed theexemption amount if the child is a student under the age of 24 (satisfies the qualifying childtest). Under § 152(f)(5) and Reg. § 1.151–3(b), to qualify as a student, the person must be afull-time student during each of five calendar months. A telephone call to Megan providedthe information that Sam was a student for only four months in 2005. Thus, since Sam is noteligible for the student exception, the sale of the stock by Sam in 2005 would result in Fredand Megan losing the dependency exemption for Sam.

The stock sale would also result in the loss of the dependency exemption for Dana if Samand Dana file a joint return for 2005 [see § 152(b)(2)].

From a tax planning perspective, Sam should not sell the stock until 2006. This delay will enableFred and Megan to claim dependency exemptions on their 2005 return for Sam and Dana. Note,however, that neither Sam nor Dana will be permitted to take a personal exemption deductionon their 2005 tax return since they are claimed as dependents on someone else’s return [see§ 151(d)(2)]. However, this disallowance of the personal exemption deduction will not produceany negative tax consequences since their tax liability will be zero if the stock is not sold in 2005.

■ FIGURE 2–7Tax File Memorandum

CHAPTER 2 Working with the Tax Law 2–33H

offm

an, e

t al.,

Wes

t Fed

eral

Tax

atio

n: In

div

idu

al In

com

e Ta

xes,

Cin

cinn

ati,

OH

, Tho

mso

n B

usi

ness

and

Eco

nom

ics,

© 2

006

Hoffman, Smith, and Willis, CPAs5191 Natorp Boulevard

Mason, Ohio 45040

August 30, 2005

Mr. and Ms. Fred Taxpayer111 BoulevardWilliamsburg, Virginia 23185

Dear Mr. and Ms. Taxpayer:

This letter is in response to your request for us to review your family’s financial and tax situation.Our conclusions are based upon the facts as outlined in your August 12th letter. Any changein the facts may affect our conclusions.

You provide over 50% of the support for your son, Sam, and his wife, Dana. The scholarshipSam receives is not included in determining support. If the stock is not sold, you will qualifyfor a dependency exemption for both Sam and Dana.

However, if the stock is sold, a gain of approximately $8,000 will result. This amount will resultin the gross income requirement being violated (i.e., potential dependent’s gross incomemust not equal or exceed $3,200) for Sam. Therefore, you will not qualify to receive a depend-ency exemption for Sam. In addition, if Sam sells the stock and he and Dana file a joint return,you also will not qualify for a dependency exemption for Dana.

From a tax planning perspective, Sam should not sell the stock in 2005. Delaying the stocksale will enable you to claim dependency exemptions for both Sam and Dana. If the stock issold, Sam and Dana should not file a joint return. If they file separate returns, you will still beable to qualify for a dependency exemption for Dana.

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

Sincerely yours,

John J. Jones, CPAPartner

■ FIGURE 2–8Client Letter

TAX AVOIDANCE AND TAX EVASION

A fine line exists between legal tax planning and illegal tax planning—tax avoidanceversus tax evasion. Tax avoidance is merely tax minimization through legaltechniques. In this sense, tax avoidance is the proper objective of all tax planning.Tax evasion, while also aimed at the elimination or reduction of taxes, connotesthe use of subterfuge and fraud as a means to an end. Popular usage—probablybecause of the common goals involved—has so linked these two concepts thatmany individuals are no longer aware of the true distinctions between them.Consequently, some taxpayers have been deterred from properly taking advantageof planning possibilities. The now classic words of Judge Learned Hand in Commis-sioner v. Newman reflect the true values the taxpayer should have:

Over and over again courts have said that there is nothing sinister in so arranging one’saffairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all doright, for nobody owes any public duty to pay more than the law demands: taxes areenforced extractions, not voluntary contributions. To demand more in the name ofmorals is mere cant.48

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

48Comm. v. Newman, 47–1 USTC ¶9175, 35 AFTR 857, 159 F.2d 848(CA–2, 1947).

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–34 PART I Introduction and Basic Tax Model

FOLLOW-UP PROCEDURES

Because tax planning usually involves a proposed (as opposed to a completed)transaction, it is predicated upon the continuing validity of the advice based uponthe tax research. A change in the tax law (either legislative, administrative, orjudicial) could alter the original conclusion. Additional research may be necessaryto test the solution in light of current developments (refer to the broken lines atthe right in Figure 2–5).

TAX INTHE

NEWS

THE DISAPPEARING TAXPAYERS

Should income taxes be increased, not decreased, especially on the bottom 50 percentof taxpayers? Should the tax base be expanded? Recent tax data lend credence to suchunpopular opinions.

For 2001, the top 50 percent of all taxpayers paid about 96 percent of all personalincome taxes, leaving the bottom half to pay the remaining 4 percent. A large group ofnontaxpayers paid nothing. The top 1 percent of taxpayers paid 33 percent of totalindividual income taxes, down from 37 percent in the prior year. The top 25 percent oftaxpayers (making $55,000 or more) paid 83 percent of the total tax burden. A substantialmajority of households with less than $50,000 of adjusted gross income paid an averagetax rate of less than 10 percent.

The Internet is also helping taxpayers to disappear. In a recent New Yorker magazinecartoon, two dogs are sitting in front of a computer screen; one tells the other, “on theInternet, nobody knows that you are a dog.” Similarly, in order to collect a tax, the govern-ment must know who is liable to pay the tax. Taxpayers are becoming increasingly moredifficult to identify as anonymous electronic money and uncrackable encryption techniquesare developed.

If too many taxpayers disappear via the Internet, will the government’s deficit growlarger?

ETHICALCONSIDERATIONS Tax Avoidance: Good or Bad?

In a speech class, a student who is a government majorargues that tax advisers are immoral because they helppeople cheat the government. Each time a tax advisershows a taxpayer a tax planning idea that reduces theclient’s tax liability, all other taxpayers have to pay moretaxes. Therefore, society would be better off if all tax advis-ers would work at protecting our environment or improvingliving conditions in the inner cities.

An accounting student argues that the primary purposeof tax planning is to reduce a taxpayer’s overall liability. This

advisory process can result in avoiding, reducing, or post-poning the tax burden until the future. There is nothing ille-gal or immoral about tax avoidance. Taxpayers have everylegal right to be concerned about tax avoidance and toarrange their affairs so as to pay no more taxes than the lawdemands. There is no difference between reducing taxexpense through the help of a tax adviser and reducing thecost of operating a business with the advice of a costaccountant.

Comment on each student’s position.

CHAPTER 2 Working with the Tax Law 2–35

TAX PLANNING—A PRACTICAL APPLICATION

Returning to the facts of Example 4, what could be done to protect the dependencyexemptions for the parents? If Sam and Dana refrain from filing a joint return,both could be claimed by the parents. This result assumes that the stock is not sold.

An obvious tax planning tool is the installment method. Could the securitiesbe sold using the installment method under § 453 so that most of the gain is deferredinto the next year? Under the installment method, certain gains may be postponedand recognized as the cash proceeds are received. The problem is that the install-ment method is not available for stock traded on an established securities market.49

A little more research, however, indicates that Sam might be able to sell thestock and postpone the recognition of gain until the following year by selling shortan equal number of substantially identical shares and covering the short sale in thesubsequent year with the shares originally held. Selling short means that Sam sellsborrowed stock (substantially identical) and repays the lender with the stock heldon the date of the short sale. This short against the box technique would allow Samto protect his $8,000 profit and defer the closing of the sale until the following year.50

However, additional research indicates that 1997 tax legislation provides that theshort against the box technique will no longer produce the desired postponementof recognized gain. That is, at the time of the short sale, Sam will have a recognizedgain of $8,000 from a constructive sale. Note the critical role of obtaining the correctfacts in attempting to resolve the proper strategy for the taxpayers.

Throughout this text, most chapters include observations on Tax PlanningConsiderations. Such observations are not all-inclusive but are intended to illustratesome of the ways in which the material covered can be effectively utilized tominimize taxes.

ELECTRONIC TAX RESEARCH

Computer-based tax research tools hold a prominent position in tax practice. Elec-tronic tax resources allow the tax library to reflect the tax law itself, including itsdynamic and daily changes. Nevertheless, using electronic means to locate tax lawsources cannot substitute for developing and maintaining a thorough knowledgeof the tax law or for logical and analytical review in addressing open tax re-search issues.

Accessing tax documents through electronic means offers several importantadvantages over a strictly paper-based approach.

• Materials generally are available to the practitioner faster through an elec-tronic system, as delays related to typesetting, proofreading, production,and distribution of the new materials are streamlined.

• Some tax documents, such as so-called slip opinions of trial-level court casesand interviews with policymakers, are available only through electronic means.

• Commercial subscriptions to electronic tax services are likely to provide, atlittle or no cost, additional tax law sources to which the researcher wouldnot have access through stand-alone purchases of traditional material. Forexample, the full texts of letter rulings are quite costly to acquire in a paper-based format, but electronic publishers may bundle the rulings with othermaterials for a reasonable cost.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

L O . 6 Have an awareness of

electronic tax research.

49See Chapter 18 for a discussion of installment sales.50§§ 1233(a) and 1233(b)(2). See Chapter 16 for a discussion ofshort sales.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–36 PART I Introduction and Basic Tax Model

Strict cost comparisons of paper and electronic tax research materials are difficultto construct, especially when the practitioner uses hardware, including work-stations and communications equipment, that is already in place and employedelsewhere in the practice. Over time, though, the convenience, cost, and reliabilityof electronic research tools clearly make them the dominant means of finding andanalyzing the law in tax practice.

Using Electronic Services. Tax researchers often use electronic means to findsources of the tax law. Usually, the law is found using one of the following strategies:

• Search various databases using keywords that are likely to be found in theunderlying documents, as written by Congress, the judiciary, or administra-tive sources.

• Link to tax documents for which all or part of the proper citation is known.• Browse the tax databases, examining various tables of contents and indexes in

a traditional manner or using cross-references in the documents to jump fromone tax law source to another.

Virtually all of the major commercial tax publishers and most of the primarysources of the law itself, such as the Supreme Court and some of the Courts ofAppeals, provide tax materials in electronic formats. Competitive pressures haverewarded tax practitioners who have developed computer literacy skills, and theuser-friendliness of the best of the tax search software is of great benefit to boththe daily and the occasional user. Exhibit 2–2 summarizes the most popular of theelectronic tax services on the market today.

CD-ROM Services. The CD has been a major source of electronic tax data forabout a decade. Data compression techniques continue to allow more tax materialsto fit on a single disc every year. CCH, RIA, WESTLAW, and others offer vast taxlibraries to the practitioner, often in conjunction with a subscription to traditionalpaper-based resources or accompanied by newsletters, training seminars, and ongo-ing technical support.

At its best, a CD-based tax library provides the archival data that make up apermanent, core library of tax documents. For about $300 a year, the tax CD isupdated quarterly, providing more comprehensive tax resources than the researcheris ever likely to need. The CD is comparable in scope to a paper-based library ofa decade ago costing perhaps $20,000 to establish and $5,000 per year in perpetuityto maintain. If the library is contained on a small number of discs, it also can offerportability through use on notebook computers.

Online Systems. An online research system allows a practitioner to obtainvirtually instantaneous use of tax law sources by accessing the computer of theservice provider. Online services generally employ price-per-search cost structures,which can be as much as $200 per hour, significantly higher than the cost of CDmaterials. Thus, unless a practitioner can pass along related costs to clients orothers, online searching generally is limited to the most important issues and tothe researchers with the most experience and training in search techniques.

Perhaps the best combination of electronic tax resources is to conduct day-to-day work on a CD system, so that the budget for the related work is known inadvance, and augment the CD search with online access where it is judged to becritical. Exhibit 2–3 provides details on the contents of the most commonly usedcommercial online tax services.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6CHAPTER 2 Working with the Tax Law 2–37

The Internet. The Internet provides a wealth of tax information in several popu-lar forms, sometimes at no direct cost to the researcher. Using so-called browsersoftware that often is distributed with new computer systems and their communica-tion devices, the tax professional can access information provided around the worldthat can aid the research process.

• Home pages (sites) on the World Wide Web (WWW) are provided by accountingand consulting firms, publishers, tax academics and libraries, and govern-mental bodies as a means of making information widely available or of

Electronic TaxService Description

CCH Includes the CCH tax service, primary sources includingtreatises, and other subscription materials. Ten to 20discs and online.

RIA Includes the RIA topical Coordinator and the annotatedtax service formerly provided by Prentice-Hall. Thecitator has elaborate document-linking features, andmajor tax treatises are provided. One to 10 discs andonline.

WESTLAW Code, Regulations, Cumulative Bulletins, cases, citator,and editorial material. About a dozen discs andonline.

Kleinrock’s A single disc with tax statutory, administrative, andjudicial law. Another single disc provides tax forms and instructions for Federal and statejurisdictions.

■ EXHIBIT 2–2Electronic Tax Services

Online Service Description

LEXIS/NEXIS Federal and state statutory, administrative, and judicialmaterial. Extensive libraries of newspapers,magazines, patent records, and medical andeconomic databases, both U.S. and foreign-based.

RIA Includes the RIA tax services, major tax treatises, Federaland state statutes, administrative documents, andcourt opinions. Extensive citator access, editorialmaterial, and practitioner aids.

CCH Includes the CCH tax service, primary sources includingtreatises, and other subscription materials. Tax andeconomic news sources, extensive editorial material,and practitioner support tools.

WESTLAW Federal and state statutes, administrative documents,and court opinions. Extensive citator access, editorialmaterial, and gateways to third-party publications.Extensive government document databases.

■ EXHIBIT 2–3Online Tax Services

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–38 PART I Introduction and Basic Tax Model

soliciting subscriptions or consulting engagements. The best sites offer linksto other sites and direct contact to the site providers. One of the best sitesavailable to the tax practitioner is the Internal Revenue Service’s Digital Daily,illustrated in Exhibit 2–4. This site offers downloadable forms and instruc-tions, “plain English” versions of Regulations, and news update items. Exhibit2–5 lists some of the Web sites that may be most useful to tax researchers andtheir Internet addresses as of press date.

• Newsgroups provide a means by which information related to the tax lawcan be exchanged among taxpayers, tax professionals, and others who sub-scribe to the group’s services. Newsgroup members can read the exchangesamong other members and offer replies and suggestions to inquiries asdesired. Discussions address the interpretation and application of existinglaw, analysis of proposals and new pronouncements, and reviews of taxsoftware.

• E-mail capabilities are available to most tax professionals through an employ-er’s equipment or by a subscription providing Internet access at a low andusually fixed cost for the period. E-mail allows for virtually instantaneoussending and receiving of messages, letters, tax returns and supporting data,spreadsheets, and other documents necessary to solve tax problems.

In many situations, solutions to research problems benefit from, or require, theuse of various electronic tax research tools. A competent tax professional mustbecome familiar and proficient with these tools and be able to use them to meetthe expectations of clients and the necessities of work in the modern world.51

51For a more detailed discussion of the use of electronic tax researchin the modern tax practice, see Raabe, Whittenburg, Sanders, and

Bost, West's Federal Tax Research, 7th ed. (Thomson/South-Western,2006).

GLOBALTAX

ISSUES

DATA WAREHOUSING REDUCES GLOBAL TAXES

Many global companies are using data warehouses to collect data, which can be analyzedand used to minimize their global tax liabilities. “You take all of your tax data and dumpit into a data warehouse,” says Michael S. Burke of KPMG’s e-tax solutions. “Next, it’sapplying a tool to define user requirements—compliance, real time analysis, etc.” Thecompany can then manipulate all of this information to reduce compliance costs, facilitateplanning for value added taxes, and minimize time spent dealing with international taxproblems.

For example, a company wishes to implement an e-procurement technique that wouldsave it $100 million in expenses and increase taxable income. That could mean that about$40 million in additional taxes would go to the U.S. Treasury and state treasuries. Bylooking at the tax laws worldwide, the company may decide to base the operation inBermuda, Ireland, or the Philippines where the tax will be only $20 million. That’s a savingsof $20 million, which is not taxable.

SOURCE: Adapted from Jay Weinstein, “Internet Tax Solutions Proliferate,” Global Finance, January2001, pp. 74–75.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6CHAPTER 2 Working with the Tax Law 2–39

■ EXHIBIT 2–4The IRS’s Digital Daily

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–40 PART I Introduction and Basic Tax Model

WWW Address at Press Date(Usually preceded by http://

Web Site www.) Description

Internal Revenue Service irs.gov/ News releases, downloadable formsand instructions, tables, and e-mail

Court opinions The site at law.emory.edu/caselawallows the researcher to link to the siteof the jurisdiction (other than the TaxCourt) that is the subject of the query.

Tax Analysts taxanalysts.com Policy-oriented readings on the taxlaw and proposals to change it,moderated bulletins on various tax subjects

Tax Sites Directory taxsites.com References and links to tax sites onthe Internet, including state andFederal tax sites, academic andprofessional pages, tax forms,and software

Tax laws online Regulations are atcfr.law.cornell.edu/cfr/and the Code is atuscode.house.gov/search/criteria.phpand www4.law.cornell.edu/uscode/

Commercial tax publishers For instance, tax.com and cch.com Information about products and services available for subscriptionand newsletter excerpts

Large accounting firms and For instance, the AICPA’s page is at Tax planning newsletters, descriptionsprofessional organizations aicpa.org, Ernst and Young is at of services offered and career

ey.com/home.asp, and KPMG opportunities, and exchange ofis at kpmg.com data with clients and subscribers

Thomson South-Western wft.swlearning.com Informational updates, newsletters,support materials for students andadopters, and continuing education

U.S. Tax Court decisions ustaxcourt.gov Recent U.S. Tax Court decisions

NOTE: Caution: addresses change frequently.

■ EXHIBIT 2–5Tax-Related Web Sites

Acquiescence, 2–20

Circuit Court of Appeals, 2–16

Citator, 2–29

Court of original jurisdiction, 2–13

Determination letters, 2–12

Federal District Court, 2–13

Finalized Regulations, 2–9

Interpretive Regulations, 2–28

Legislative Regulations, 2–28

Letter rulings, 2–11

Nonacquiescence, 2–20

Precedents, 2–17

Procedural Regulations, 2–28

Proposed Regulations, 2–9

Revenue Procedures, 2–10

Revenue Rulings, 2–10

Small Cases Division, 2–13

Tax avoidance, 2–33

Tax research, 2–22

Technical Advice Memoranda(TAMs), 2–12

Temporary Regulations, 2–9

U.S. Court of Federal Claims, 2–13

U.S. Supreme Court, 2–17

U.S. Tax Court, 2–13

Writ of Certiorari, 2–18

KEY TERMS

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6CHAPTER 2 Working with the Tax Law 2–41

Discussion Questions

1. What is a primary source of tax information?

2. With proper research methods and tools, a researcher generally will arrive at one alter-native for structuring a business transaction. Assess the validity of this statement.

3. Tax legislation normally originates in the Senate Finance Committee. Assess the validityof this statement.

4. What is the function of the Joint Conference Committee of the House Ways and MeansCommittee and the Senate Finance Committee?

5. In which title and subtitle of the U.S. Code is the income tax portion of the InternalRevenue Code of 1986 found?

6. Paul Bishop operates a small international firm named Teal, Inc. A new treaty betweenthe United States and France conflicts with a Section of the Internal Revenue Code.Paul asks you for advice. If he follows the treaty position, does he need to disclose thison his tax return? If he is required to disclose, are there any penalties for failure todisclose? Prepare a letter in which you respond to Paul. Teal’s address is 100 InternationalDrive, Tampa, FL 33620.

7. Interpret this Regulation citation: Reg. § 301.7701–2(c)(2).

8. Explain how Regulations are arranged. How would the following Regulations be cited?a. Finalized Regulations under § 442.b. Proposed Regulations under § 318.c. Temporary Regulations under § 446.d. Legislative Regulations under § 1501.

9. Distinguish between legislative, interpretive, and procedural Regulations.

10. In the citation Rev.Rul. 99–5, 1999–1 C.B. 434, to what do the 5 and the 434 refer?

11. Rank the following items from the highest authority to the lowest in the Federal taxlaw system:a. Interpretive Regulation.b. Legislative Regulation.c. Letter ruling.d. Revenue Ruling.e. Internal Revenue Code.f. Proposed Regulation.

12. Interpret each of the following citations:a. Prop.Reg. § 1.280A–3(c)(4).b. Rev.Rul. 67–74, 1967–1 C.B. 194.c. Ltr.Rul. 200409001.

13. Barbara Brown calls you on the phone. She says that she has found a 1991 letter rulingthat agrees with a position she wishes to take on her tax return. She asks you aboutthe precedential value of a letter ruling. Draft a memo for the tax files outlining whatyou told Barbara.

14. Sammie is considering writing the IRS to determine whether a retirement plan main-tained by an association of churches qualifies as a church plan under § 414(e). Outlinesome relevant tax issues Sammie faces in making this decision.

15. What are the major differences between letter rulings and determination letters?

16. What are the differences between Technical Advice Memoranda (TAMs) and TechnicalExpedited Advice Memoranda (TEAMs)?

PROBLEM MATERIALS

Communications

Communications

Issue ID

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–42 PART I Introduction and Basic Tax Model

17. Caleb receives a 90-day letter after his discussion with an appeals officer. He is notsatisfied with the $92,000 settlement offer. Identify the relevant tax research issuesfacing Caleb.

18. Which of the following would be considered advantages of the Small Cases Divisionof the Tax Court?a. Appeal to the U.S. Tax Court is possible.b. A hearing of a deficiency of $65,000 is considered on a timely basis.c. Taxpayer can handle the litigation without using a lawyer or certified public

accountant.d. Taxpayer can use other Small Cases Division decisions for precedential value.e. The actual hearing is conducted informally.f. Travel time will probably be reduced.

19. List an advantage and a disadvantage of using the U.S. District Court as the trial court forFederal tax litigation.

20. Dwain Toombs is considering litigating a tax deficiency of approximately $311,000 inthe court system. He asks you to provide him with a short description of his alternativesindicating the advantages and disadvantages of each. Prepare your response to Dwainin the form of a letter. His address is 200 Mesa Drive, Tucson, AZ 85714.

21. List an advantage and a disadvantage of using the U.S. Court of Federal Claims as thetrial court for Federal tax litigation.

22. A taxpayer lives in Michigan. In a controversy with the IRS, the taxpayer loses at the trialcourt level. Describe the appeal procedure under the following 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.

23. Suppose the U.S. Government loses a tax case in the U.S. District Court but does notappeal the result. What does the failure to appeal signify?

24. Because the U.S. Tax Court is a national court, it always decides the same issue in aconsistent manner. Assess the validity of this statement.

25. For the U.S. Tax Court, U.S. District Court, and U.S. Court of Federal Claims, indicatethe following:a. Number of regular judges per court.b. Availability of a jury trial.c. Whether the deficiency must be paid before the trial.

26. In which of the following states could a taxpayer appeal the decision of a U.S. DistrictCourt to the Fifth Circuit Court of Appeals?a. Alaska.b. Arkansas.c. Florida.d. New York.e. Texas.

27. 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.

28. What is the Supreme Court’s policy on hearing tax cases?

29. In assessing the validity of a prior court decision, discuss the significance of the followingon 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.

Issue ID

Communications

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6CHAPTER 2 Working with the Tax Law 2–43

c. The decision was rendered by the Second Circuit Court of Appeals. Taxpayer livesin 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 (e) except that the IRS has issued a nonacquiescence as to the result.

30. In the citation Estate of Charles E. Reichardt, 114 T.C. 144 (2000), what do the 114 and the144 refer to?

31. What is the difference between a Regular decision, a Memorandum decision, and aSummary Opinion of the U.S. Tax Court?

32. Referring to the citation only, determine which court issued these decisions:a. Estate of Albert Strangi, 115 T.C. 478 (2000).b. Moline Properties, 319 U.S. 436 (1943).c. Estate of Morton B. Harper, T.C.Memo. 2002–121.d. Azar Nut Co., 931 F.2d 314 (CA–5, 1991).

33. Interpret each of the following citations:a. 54 T.C. 1514 (1970).b. 408 F.2d 1117 (CA–2, 1969).c. 69–1 USTC ¶9319 (CA–2, 1969).d. 23 AFTR2d 69–1090 (CA–2, 1969).e. 293 F.Supp. 1129 (D.Ct. Miss., 1967).f. 67–1 USTC ¶9253 (D.Ct. Miss., 1967).g. 19 AFTR2d 647 (D.Ct. Miss., 1967).h. 56 S.Ct. 289 (USSC, 1935).i. 36–1 USTC ¶9020 (USSC, 1935).j. 16 AFTR 1274 (USSC, 1935).

k. 422 F.2d 1336 (Ct.Cls., 1970).

34. Explain the following abbreviations:a. CA–2. f. Cert. denied. k. F.3d.b. Fed.Cl. g. acq. l. F.Supp.c. aff’d. h. B.T.A. m. USSC.d. rev’d. i. USTC. n. S.Ct.e. rem’d. j. AFTR. o. D.Ct.

35. Give the Commerce Clearing House citation for the following courts:a. Small Cases Division of the Tax Court.b. Federal District Court.c. U.S. Supreme Court.d. U.S. Court of Federal Claims.e. Tax Court Memorandum decision.

36. Where can you locate a published decision of the U.S. Court of Federal Claims?

37. Which of the following items can probably be found in the Cumulative Bulletin?a. Action on Decision.b. Small Cases Division of the U.S. Tax Court decision.c. Letter ruling.d. Revenue Procedure.e. Finalized Regulation.f. U.S. Court of Federal Claims decision.g. Senate Finance Committee Report.h. Acquiescences to Tax Court decisions.i. U.S. Circuit Court of Appeals decision.

38. Ashley has to prepare a research paper discussing the differences between alimonyand child care support for her tax class. Explain to Ashley how she can research thesedifferences.

39. Where can a researcher find the current Internal Revenue Code of 1986?

Issue ID

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–44 PART I Introduction and Basic Tax Model

40. Which of the following would be considered differences between the Research Instituteof America and Commerce Clearing House citators?a. Distinguishes between the various issues in a particular court decision.b. Lists all court decisions that cite the court decision being researched.c. Allows a researcher to determine the validity of a Revenue Ruling.d. Indicates whether a court decision is explained, criticized, followed, or overruled

by a subsequent decision.e. Pinpoints the exact page on which a decision is cited by another case.

41. You inherit a tax problem that was researched five months ago. You believe the answeris correct, but you are unfamiliar with the general area. How would you find somerecent articles dealing with the subject area? How do you evaluate the reliability of theauthority cited in the research report? How do you determine the latest developmentspertaining to the research problem?

42. Define the following terms:a. Golsen rule.b. Small Cases Division of the U.S. Tax Court.c. Writ of Certiorari.d. Tax evasion.

43. Discuss some research strategies that a tax researcher may use with electronic services.

Problems

44. Tom, an individual taxpayer, has just been audited by the IRS and, as a result, has beenassessed a substantial deficiency (which has not yet been paid) in additional incometaxes. In preparing his defense, Tom advances the following possibilities:a. Although a resident of Kentucky, Tom plans to sue in a U.S. District Court in Oregon

that appears to be more favorably inclined toward taxpayers.b. If (a) is not possible, Tom plans to take his case to a Kentucky state court where an

uncle is the presiding judge.c. Since Tom has found a B.T.A. decision that seems to help his case, he plans to rely

on it under alternative (a) or (b).d. If he loses at the trial court level, Tom plans to appeal either to the U.S. Court of

Federal Claims or to the U.S. Second Circuit Court of Appeals because he hasrelatives in both Washington, D.C., and New York. Staying with these relativescould save Tom lodging expense while his appeal is being heard by the court selected.

e. Whether or not Tom wins at the trial court or appeals court level, he feels certainof success on an appeal to the U.S. Supreme Court.

Evaluate Tom’s notions concerning the judicial process as it applies to Federal incometax controversies.

45. Using the legend provided, identify the governmental unit that produces the followingtax sources:

Legend

T = U.S. Treasury DepartmentNO = National Office of the IRSAD = Area Director of the IRSNA = Not applicable

a. Proposed Regulations.b. Revenue Procedures.c. Letter rulings.d. Determination letters.e. Technical Advice Memoranda.f. Treasury Decisions.g. Revenue Rulings.h. Small Cases Division decisions.

Decision Making

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6CHAPTER 2 Working with the Tax Law 2–45

46. Using the legend provided, classify each of the following statements (more than oneanswer per statement may be appropriate):

Legend

D = Applies to the U.S. District CourtT = Applies to the U.S. Tax CourtC = Applies to the U.S. Court of Federal ClaimsA = Applies to the U.S. Circuit Court of AppealsU = Applies to the U.S. Supreme CourtN = Applies to none of the above

a. Decides only Federal tax matters.b. Decisions are reported in the F.3d Series.c. Decisions are reported in the USTCs.d. Decisions are reported in the AFTRs.e. Appeal is by Writ of Certiorari.f. Court meets most often in Washington, D.C.g. A jury trial is available.h. Trial court.i. Appellate court.j. Appeal is to the Federal Circuit and bypasses the taxpayer’s particular circuit court.

k. Has a Small Cases Division.l. The only trial court where the taxpayer does not have to pay the tax assessed by

the IRS first.

47. Using the legend provided, classify each of the following citations as to the type of court:

Legend

T = Applies to the U.S. Tax CourtD = Applies to the U.S. District CourtC = Applies to the U.S. Court of Federal ClaimsA = Applies to the U.S. Circuit Court of AppealsU = Applies to the U.S. Supreme CourtN = Applies to none of the above

a. Peter M. Schaeffer, T.C.Memo. 1997–263.b. Rev.Rul. 83–78, 1983–1 C.B. 245.c. Tufts v. Comm., 52 AFTR2d 83–5759 (CA–5, 1983).d. Farm Service Cooperative, 70 T.C. 145 (1978).e. Korn Industries v. U.S., 532 F.2d 1352 (Ct.Cl., 1976).f. Zeeman v. Comm., 275 F.Supp. 235 ( D.Ct. N.Y., 1967).g. Clark v. Comm., 489 U.S. 726 (1989).h. Rev.Proc. 2001–43, 2001–2 C.B. 191.i. 3 B.T.A. 1042 (1926).

48. Using the legend provided, classify each of the following tax sources:

Legend

P = Primary tax sourceS = Secondary tax sourceB = BothN = Neither

a. Sixteenth Amendment to the Constitution.b. Tax treaty between the United States and France.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–46 PART I Introduction and Basic Tax Model

c. Revenue Ruling.d. General Counsel Memoranda (1989).e. U.S. District Court decision.f. Tax Notes article.g. Temporary Regulations (issued 2004).h. U.S. Tax Court Memorandum decision.i. Small Cases Division of the U.S. Tax Court decision.j. Senate Finance Committee report.

49. Using the legend provided, classify each of the following citations as to publisher:

Legend

RIA = Research Institute of AmericaCCH = Commerce Clearing House

W = West Publishing CompanyU.S. = U.S. Government

O = Others

a. 103 T.C. 80.b. 69 TCM 3042.c. 839 F.Supp. 933.d. 56 AFTR2d 85–5926.e. 92–1 USTC ¶50,186.f. RIA T.C.Mem.Dec. ¶80,582.g. Rev.Proc. 92–16, 1992–1 C.B. 673.h. Rev.Proc. 77–37, 1977–2 C.B. 568.i. 110 S.Ct. 589.j. 493 U.S. 203.

50. Using the legend provided, classify each of the following statements:

Legend

A = Tax avoidanceE = Tax evasionN = Neither

a. Terry writes a $250 check for a charitable contribution on December 28, 2005, butdoes not mail the check to the charitable organization until January 10, 2006. Shetakes a deduction in 2005.

b. Robert decides not to report interest income from a bank because the amount isonly $11.75.

c. Jim pays property taxes on his home in December 2005 rather than waiting untilFebruary 2006.

d. Jane switches her investments from taxable corporate bonds to tax-exempt munici-pal bonds.

e. Ted encourages his mother to save most of her Social Security benefits so that hewill be able to claim her as a dependent.

Research Problems

Note: Solutions to Research Problems can be prepared by using the RIA Checkpoint® StudentEdition online research product, which is available to accompany this text. It is also possible toprepare solutions to the Research Problems by using tax research materials found in a standardtax library.

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6CHAPTER 2 Working with the Tax Law 2–47

Research Problem 1. In Bank One Corp., 120 T.C. 174 (2003), what was the position of thecourt with respect to the mark-to-market rule?

Research Problem 2. Determine what is covered in the following subchapters in Chapter1, Subtitle A of the Internal Revenue Code of 1986:a. B.b. D.c. F.d. K.e. P.

Research Problem 3. Locate the following items and give a brief summary of the results.a. Charles Y. Choi, T.C.Memo. 2002–183.b. Ltr.Rul. 200231003.c. Action on Decision 2000–004, May 10, 2000.

Research Problem 4. Determine how the term person is defined in the Internal RevenueCode of 1986. Specify the Code Section in which the term is defined.

Research Problem 5. Locate the June 2004 issue of the Journal of Taxation and find the articleby Steven G. Frost and Sheldon I. Banoff. What are the title and page numbers of thearticle they wrote? Define “LLE.”

Research Problem 6. Determine the reliability of the following items:a. FRGC Investment, LLC, T.C.Memo. 2002–276.b. Donald L. Evans, 54 T.C. 40 (1970).c. Rev.Rul. 77–137, 1977–1 C.B. 178.

Research Problem 7. Locate the following tax services in your library and indicate thename of the publisher and whether the service is organized by topic or Code Section:a. United States Tax Reporter.b. Standard Federal Tax Reporter.c. Federal Tax Coordinator 2d.d. Mertens Law of Federal Income Taxation.e. Tax Management Portfolios.f. Federal Income, Gift and Estate Taxation.g. Federal Tax Service.

Research Problem 8. In the tax publications matrix below, place an X if a court decision canbe found in the publication. There may be more than one X in a row for a particular court.

U.S.Govt. FederalPrinting Federal Federal Claims BTA T.C.

Court Office Supp.2d 3d Reporter S.Ct. Memo. T.C.Memo. AFTR Memo. USTC

U.S. Supreme Court

Circuit Court of Appeals

Court of Federal Claims

District Court

Tax Court (Regulardecisions)

Tax Court (Memo decisions)

Board of Tax Appeals

BTA Memo

West Publishing CompanyResearch Institute

of America

CommerceClearingHouse

Hof

fman

, et a

l., W

est F

eder

al T

axat

ion:

Ind

ivid

ual

Inco

me

Taxe

s, C

inci

nnat

i, O

H, T

hom

son

Bu

sine

ss a

nd E

cono

mic

s, ©

200

6

2–48 PART I Introduction and Basic Tax Model

Research Problem 9. Complete the following citations:a. Figgie International, Inc., T.C.Memo. 1985– .b. S. Morton, 38 BTA (1938).c. Northern Coal & Dock Co., 12 T.C. (1949).d. Winn-Dixie Stores, Inc., 254 F.3d (CA–11, 2001).e. Rev.Rul. 59– , 1959–2 C.B. 87.f. Upjohn Co. v. U.S., 449 U.S. (1981).g. In re Sealed Case, 737 F.2d 94 ( , 1984).

Research Problem 10. Find Kathryn Bernal, 120 T.C. 102 (2003) and answer the followingquestions:a. What was the docket number?b. When was the dispute filed?c. Who is the respondent?d. Who was the attorney for the taxpayers?e. Who was the judge who wrote the opinion?f. What was the disposition of the dispute?

Research Problem 11. Determine the disposition of the following decisions:a. Estate of Albert Strangi, 115 T.C. 478 (2000). b. Acro Manufacturing Co., 39 T.C. 377 (1962).c. Fetzer Refrigerator Co., 26 AFTR2d 70–5440 (D. Ky., 1969).

Research Problem 12. Determine the reliability of the following items:a. Fior D’Italia, Inc., 242 F.3d 844 (CA–9, 2001).b. Rev.Proc. 70–21, 1970–2 C.B. 501.c. Miller v. U.S., 38 F.3d 473 (CA–9, 1994).

Research Problem 13. During 2005, Frank lived with and supported a 20-year-old womanwho was not his wife. He resides in a state that has a statute that makes it a misdemeanorfor a man and woman who are not married to each other to live together. May Frank claimhis friend as a dependent assuming he satisfies the normal tax rules for the deduction?Should Frank consider moving to another state?

Partial list of research aids:§ 152(f)(3).John T. Untermann, 38 T.C. 93 (1962).S.Rept. 1983, 85th Cong., 2d Sess., reprinted in the 1958 Code Cong. & Adm. News 4791, 4804.

Use the tax resources of the Internet to address the following questions. Do not restrict your searchto the World Wide Web, but include a review of newsgroups and general reference materials,practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups,and other opportunities.

Research Problem 14. Go to each of the following Internet locations:a. Several primary sources of the tax law, including the U.S. Supreme Court, a Circuit

Court of Appeals, the Internal Revenue Service, and final Regulations.b. Sources of proposed Federal tax legislation.c. A collection of tax rules for your state.

Research Problem 15. Go to the U.S. Tax Court Internet site:a. What different types of cases can be found on the site?b. What is a Summary Opinion? Find one.c. What is a Memorandum Opinion? Find one.d. Find the “Rules and Practices and Procedures.”e. Is the site user-friendly? E-mail suggested improvements to the webmaster.

Decision Making

Internet Activity