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Chapter 1 1

Fundamentals of Tax Research



REVIEW QUESTIONS

1. The four steps in the tax research process are as follows: 1) determine the relevant facts, 2)
identify the tax issues, 3) find, analyze, and update applicable sources of tax law, and 4)
document and communicate tax research results.
2. Primary sources of tax law include the following: (students to name 5)
The Constitution
The Internal Revenue Code (IRC or Code)
Treasury Regulations
IRS Revenue Rulings
IRS Revenue Procedures
Private Letter Rulings
Technical Advice Memoranda
Court Decisions
Tax Treaties
The differences between primary sources and secondary sources of tax law include the
following:
Primary sources are issued by the government (Congress, Treasury Department, IRS,
or the courts) and secondary sources are not.
Primary sources have precedential value and secondary sources do not.
Some primary sources are considered substantial authority, reliance on which can
prevent the taxpayer from incurring certain tax penalties. Secondary sources are not
considered substantial authority.
3. Internal Revenue Code and Treasury Regulations.
(a) The IRC is amended by federal statutes that are adopted through the legislative
process. Amendments to the IRC must be passed by majority votes of both the U.S.
House of Representatives and the Senate, and are signed into law by the President. If
the President vetoes a bill, Congress can override the veto by a two-thirds vote of
both houses of Congress. The legislative process also involves the House Ways and
Means Committee and the Senate Finance Committee (which write and review draft
tax legislation for their respective houses of Congress) and the Joint Conference
Committee (to work out a compromise if there is a difference between the House and
Senate versions of proposed tax legislation). Treasury Regulations are adopted by the
U.S. Treasury Department, with much IRS involvement. Treasury Regulations are
usually first published in proposed form with a public comment period (of at least 30
days). A public hearing may also be scheduled. Following this public outreach, the
Treasury Department may finalize the proposed regulation, revise and re-propose it,
or withdraw it for further study.
(b) The Internal Revenue Code has greater precedential value than Treasury Regulations.
This means that if there is a conflict between a provision in the IRC and a Treasury
Regulation, the IRC provision controls.
4. Revenue Rulings and Revenue Procedures are both primary sources of tax law that are issued
by the IRS and are published in the Internal Revenue Bulletin (and the Cumulative Bulletin).
Revenue Rulings are the IRS official interpretation of tax law and can involve the
application of the Code and Treasury Regulations to a particular set of facts or may contain
informational updates, such as inflation-related adjustments to certain Code provisions or
changes in the applicable federal rates of interest applicable to certain tax calculations.
Revenue Procedures involve guidance in the nature of how to do something, such as how
to request a private letter ruling from the IRS or how to make certain elections under the
Code.
5. Private Letter Rulings (PLRs) and Technical Advice Memoranda (TAMs) are both
primary sources of tax law that are issued by the IRS National Office. PLRs may be
requested by taxpayers seeking guidance regarding, or to confirm the tax consequences of,
proposed or not-yet-reported transactions. A TAM may be requested by an IRS agent during
a federal tax audit, for which the agent seeks National Office input. The TAM describes the
IRS tax analysis and conclusion regarding the tax audit issue.
6. The federal trial courts that can hear and decide federal tax cases are:
U.S. Tax Court:
(a) jurisdiction is limited to federal tax cases; and
(b) the taxpayer does not have to pay the tax alleged to be due before initiating
litigation in this court.
U.S. District Court:
(a) jurisdiction includes federal tax cases as well as cases involving any federal
statute or the U.S. Constitution, cases in which the U.S. Government is a
party, and cases in which the parties are of diverse citizenship (e.g., citizens of
different states) and more than $75,000 is at issue; and
(b) the taxpayer has to pay the tax alleged to be due before initiating tax refund
litigation in this court.
U.S. Court of Federal Claims:
(a) jurisdiction is limited to cases involving monetary claims against the U.S.
federal government (including claims for tax refunds); and
(b) the taxpayer has to pay the tax alleged to be due before initiating tax refund
litigation in this court.
7. An appellate court decides appeals of other court decisions in cases. Appellate courts do not
hold trials of cases. Instead, an appellate court has to decide whether any errors of law (which
can include an error in interpreting tax law) were made at the trial court or a lower appellate
court. The appellate courts that may issue decisions in federal tax cases are the U.S. Court of
Appeals and the U.S. Supreme Court. The U.S. Supreme Court is the highest judicial
authority on issues of U.S. federal tax law.

8. The three methods for searching using an online tax research service are:
Table of Contents and Index searching Table of contents searching involves
clicking down from less specific to more specific content headings to access relevant
material. Index searching involves searching for all the entries in the service (or a
particular database) from an alphabetical listing.
Keyword searching involves selecting databases to be searched and entering words
(which can be entered using either natural language or Boolean terms and connectors)
that one would expect to find in the expected search result documents. The search
results will include all documents within the selected database(s) in which the
searched words appear and should then be reviewed for relevance and analyzed.
Citation searching involves finding a source of tax law by entering its citation
(which the researcher already has) at the appropriate place to retrieve the case, ruling,
or other source of tax law.
9. A citator is used to update certain sources of tax law, particularly court decisions and
Revenue Rulings and Revenue Procedures. It is important to use a citator to make sure that
the source of law the researcher is relying on is still good law. For court decisions, a tax
researcher can use a citator to learn whether the decision has been affirmed, reversed,
modified, or remanded (sent back to the trial court or a lower appellate court) by an appellate
court, whether the U.S. Supreme Court has granted or denied certiorari in the case, and
whether the IRS has issued an AOD acquiescing or nonacquiescing in the courts decision.
For Revenue Rulings and Revenue Procedures, a tax researcher can use a citator to find out
whether the ruling or procedure has been cited in a court decision, and whether the IRS has
clarified, modified, superseded, revoked, or declared the ruling or procedure obsolete.
10. The professional standards that apply to CPAs representing taxpayers in preparing federal
tax returns and providing tax advice to clients are:
Circular 230 which is set by the Treasury Department and the IRS
Statements on Standards for Tax Services which is set by the American Institute of
Certified Public Accountants (AICPA)


EXERCISES

1. IRC Section 162 has the following 16 subsections (Note (i) was repealed):
(a) In general.
(b) Charitable contributions and gifts excepted.
(c) Illegal bribes, kickbacks, and other payments.
(d) Capital contributions to Federal National Mortgage Association.
(e) Denial of deduction for certain lobbying and political expenditures.
(f) Fines and penalties.
(g) Treble damage payments under the antitrust laws.
(h) State legislators travel expenses away from home.
(i) Repealed.
(j) Certain foreign advertising expenses.
(k) Stock reacquisition expenses.
(l) Special rules for health insurance costs of self-employed individuals.
(m) Certain excessive employee remuneration.
(n) Special rule for certain group health plans.
(o) Treatment of certain expenses of rural mail carriers.
(p) Treatment of expenses of members of reserve component of Armed Forces of the
United States.
(q) Cross reference.
2. There are 19 regulations listed for IRC Section 132. (a) 10 are final regulations, (b) 1 is a
proposed regulation, and (c) 8 are temporary regulations. Sample citations for each type are
as follows:
Final regulation: Treas. Reg. 1.132-1
Proposed regulation: Prop. Treas. Reg. 1.132-5
Temporary regulation: Treas. Reg. 1.132-1T
3. Searches for citrus groves:
(a) 6 items are listed for citrus groves.
(b) The title of M-1828 is Casualty loss to citrus groves.
(c) Internal Revenue Code Section 165 is discussed in M-1828. (Note Section 2054 is
also briefly mentioned).
(d) The 4 other primary sources of tax law discussed in M-1828 and that can be accessed
from it are 1) Treasury Regulations (Reg. 1.165-7(b)(2)), 2) a U.S. Tax Court decision
(Knapp, 23 T.C. 716 (1955) acq.), 3) a Revenue Ruling (Rev. Rul. 71-254, 1971-1 C.B. 78),
and 4) a U.S. Court of Federal Claims decision (Rinaldi, 38 Fed. Cl. 341 (1997), affd on
other issue, 82 AFTR2d 98-7127 (Ct. Fed. Cl.).
4. Keyword Searches:
(a) The Natural Language search for can an employee deduct the cost of work clothes
found 100 cases, of which 5 are in American Federal Tax Reports (Prior Years), 5 are
in Tax Court & Board of Tax Appeals Reported Decisions (Prior Years), 74 are in
Tax Court & Board of Tax Appeals Memorandum Decisions (Prior Years), and 16 are
in Tax Court Summary Opinions.
(b) The Terms & Connectors search for work clothes employee deduction found 362
cases, of which 57 are in American Federal Tax Reports (Prior Years), 57 are in Tax
Court & Board of Tax Appeals Reported Decisions (Prior Years), 1 is in Tax Court
Memorandum Decisions (Current Year), 216 are in Tax Court & Board of Tax
Appeals Memorandum Decisions (Prior Years), and 31 are in Tax Court Summary
Opinions.
(c) The Terms & Connectors search for work /3 clothes employee deduction found 93
cases, of which 7 are in American Federal Tax Reports (Prior Years), 11 are in Tax
Court & Board of Tax Appeals Reported Decisions (Prior Years), 58 are in Tax Court
& Board of Tax Appeals Memorandum Decisions (Prior Years), and 17 are in Tax
Court Summary Opinions.
(The answer to this question is as of June 17, 2013).
5. Revenue Ruling 72-606:
(a) Citation: Rev. Rul. 72-606, 1972-2 C.B. 78.
(b) The ruling discusses Code Section 107.
(c) The facts of the ruling are as follows:
An old age home, which is affiliated with a religious organization under the authority of a
church denomination, designates part of the compensation paid to an ordained minister who
serves as the homes administrator as a rental allowance. The rental allowance equals the
rent the minister pays for his home. The home was incorporated as a not for profit charitable
and religious organization. The homes corporate name indicates a relationship to, and it
gives preference for admission to the members of, the church denomination. The corporation
is controlled, managed, and maintained by its board of directors. The board does not have to
be selected from members of the denomination, and the denominations approval is not
required for selection of board members. The homes financial support is received from
private donations, and it does not have to make its financial and other reports available to the
denomination. The home's articles of incorporation provide that upon dissolution its assets
will be turned over to the church denomination.
(d) The issue decided in the ruling is whether amounts received by the minister and
designated as rental allowance may be excluded from his gross income under
section 107 of the Internal Revenue Code of 1954.
(e) The IRS concluded that the minister cannot exclude the rental allowance payments
from his gross income, because of a lack of facts indicating that the old age home is
an integral agency of a church-related organization.
(f) Revenue Ruling 72-606 is cited in H-3165 (Examples of the rental allowance
exclusion.) of the Federal Tax Coordinator 2d.
(g) When checking the citator, Revenue Ruling 72-606 is cited in 2 cases (Flowers and
Toavs), both of which cite the ruling favorably. (As of June 17, 2013).
6. 1983 Tax Court Memorandum decision in the Tuer case:
(a) Case citation: Tuer, TC Memo 1983-441.
(b) Code Sections: Section 164 is specifically mentioned in the decision. Section 163 is
also implicated and is referenced indirectly in the courts opinion by a citation to
Treas. Reg. 1.163-1(b).
(c) Facts of the Case: During 1979, the petitioner and her children resided with her
parents in a home owned by her father. Petitioner's father was in poor health and
could not manage his financial affairs. Petitioner paid property taxes billed to her
father and mortgage payments due on the property. Petitioners father was obligated
make the mortgage payments. The IRS disallowed income tax deductions for the
amounts petitioner paid for the property taxes and mortgage interest. Petitioner also
claimed an estimated sales tax deduction of $700 on her tax return. The sales tax
deduction amount was determined by including in petitioners income loans received
from a bank and her employer.
(d) Issues Decided: (1) whether petitioner may deduct payments of property taxes and
mortgage interest on her father's residence, and (2) whether petitioner is entitled to a
sales tax deduction in excess of the amount allowed by the IRS.
(e) Courts Conclusions: (1) petitioner is not allowed to deduct payments of property
taxes and mortagage interest on her fathers residence, and (2) petitioners sales tax
deduction is limited to the amount calculated by the IRS, because loans are not
includible in income for purposes of the sales tax deduction.
(f) Relying solely on this decision, Nora Smith should not deduct the real property taxes
and mortagage interest she has been paying for her mother on Noras own income tax
return. The case indicates that only the person who is obligated to pay the taxes may
deduct them and mortgage interest cannot be deducted by a person who is not legally
obligated to pay the mortgage. Noras mother, not Nora, is the person who is legally
obligated to pay the real property tax and mortgage interest, and only Noras mother
can deduct those payments.
7. Citator:
(a) The Tuer decision is cited in 6 cases. (As of June 17, 2013).
(b) The Tuer case was distinguished in Amundson, TC Memo 90-1605.
(c) The petitioner in Amundson made payments on a mortagage for which petitioners
sister was liable to the lender. The major difference between Amundson and Tuer is
that in Amundson the petitioner had acquired a one-half interest in the residence from
his sister. As an owner of the property, the petitioner was entitled to deduct the
mortgage interest payments despite that he was not directly liable on the mortgage.
The court relied on Treas. Reg. 1.163-1(b).
8. McLeod case:
(a) Citation: McLeod v. U.S., 267 F. Supp. 213 (S.D. Al. 1967) or McLeod v. U.S., 21
AFTR2d 395 (DCt Al. 1967).
(b) IRS Decision: In 1968, the IRS issued an Action on Decision disagreeing with the
courts decision in McLeod. In February 2000, the IRS withdrew that 1968 Action on
Decision and issued a Revised Action on Decision (AOD 2000-001) acquiescing in
the result in McLeod.
(c) This information can be found by clicking on the citator button when viewing the
McLeod decision and then clicking on the citator results for McLeod and then clicking
on AOD 2000-001 within those results.
9. Amendment of IRC Section 351:
(a) Gulf Opportunity Zone Act of 2005, Public Law No. 109-135.
(b) The 2005 amendment added If there is not a real and meaningful likelihood that
dividends beyond any limitation or preference will actually be paid, the possibility of
such payments will be disregarded in determining whether stock is limited and
preferred as to dividends. at the end of subpara. (g)(3)(A) of Section 351. The
amendment is effective for transactions after 5/14/2003.
(c) The Joint Committee on Taxations report is available with respect to the Gulf
Opportunity Zone Act of 2005. The report says that the amendment clarifies that the
real and meaningful likelihood requirement . . . (which applies so that stock shall
not be treated as participating in corporate growth to any significant extent unless
there is a real and meaningful likelihood of the shareholder actually participating in
the earnings and growth of the corporation) applies also for purposes of determining
whether stock is not stock that is limited and preferred as to dividends.
10. Statements on Standards for Tax Services:
(a) Yes, a CPA may rely on information provided by third parties in preparing a clients
tax return. A CPA cannot rely on information if it appears to be incorrect, incomplete,
or inconsistent on its face. This is indicated in Paragraph 2 of SSTS No. 3.
(b) According to Paragraph 4 of SSTS No. 6, a CPA should inform the client of the error
and its potential consequences, and should recommend corrective action. This
paragraph also provides that, unless it is required by law, the CPA cannot inform the
IRS (or other government tax authority), without the clients consent.
(c) In accordance with Paragraph 6 of SSTS No. 6, the CPA should ask the client to
agree to disclosing the error to the IRS. If the client does not agree, Paragraph 6
provides that the CPA should consider whether to withdraw from representing the
taxpayer in the administrative proceeding and whether to continue a professional or
employment relationship with the taxpayer.