Chapter 7

Tax Research for Compliance and

Tax Planning

Not always to get the lowest tax liability

Maximize after-tax return or benefits Some desire to minimize disputes

DistinguishTax Evasion – illegal acts Tax Avoidance –minimize taxes

legallyAbusive Tax Avoidance –

misapplying tax laws, some tax shelters

Tax Research Goals

Two different types of tax research exist:

Applied tax research Checks existing law, examines the

impact on a given situation. This textbook uses applied tax

research. Academic tax research

Often empirical, behavioral tax research

Some policy oriented for society at large

Occasionally theoretical

Tax Research - Defined

Determine the relevant facts. Facts include events and

both the taxpayers and IRS’s positions.

Many disputes have questions of fact.

Relevancy decided by applicable law.

“Relevant facts” are those that make a difference in how the law is applied.

“Colorable facts” are those that only some people consider relevant.

Tax Research Challenges

Find and examine relevant tax laws.

Apply the law to the facts to determine the tax consequences.

Alternative correct paths may exist.Inform the client of differing options.

Tax Research Challenges (cont’d)

Three types of tax practice for research: Tax Compliance

Completes tax returns (facts have already occurred)

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

Tax Litigation Lawyers handle tax litigation.

Tax Practice

Many alternative sources of tax law exist Legal databases - LexisNexis and

Westlaw. Specialized tax databases - RIA and

CCH. Research Institute of America (RIA) –

Checkpoint Commerce Clearing House (CCH) –

IntelliConnect Databases include both

Primary tax authorities: Code, Regs, & cases

Secondary authorities: tax services, treatises IRS publications, private letter rulings, …

Tax Research Databases

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

courts Hierarchy of tax law exists: Statutory law

Law passed by Congress, signed by President

US Constitution, tax treaties also part of top level

Primary Tax Authorities

Primary Tax Authorities

Administrative regulations Treasury Department releases

treasury regulations Internal Revenue Service creates

Revenue Rulings and Revenue Procedures

Court cases Judicial case decisions are law in

common law countries, such as the United States

Court hierarchy exists

Statutory law for federal taxation

commonly referred to as the Code or IRC Internal Revenue Code of 1986, as

Amended Found in Title 26 of the U.S. Code

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

The Code - Introduction

The Code - Introduction(cont’d)

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

known, the citation approach can access it quickly.

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

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

Always read subsection (a) carefully. Scan other subsections for

relevancy. If another code section is

referenced in a relevant part, examine that other section.

The Code - Sections

Citation to a regulation references the Code provision explained.

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

Treasury Regulations which interpret and clarify statutory law

Internal Revenue Service as part of the Treasury Department creates lesser authorities and enforces the law.

Administrative Authorities

Administrative Authorities

(cont’d) Three types of Treasury

Regulations Proposed Regs – trial balloons

– not authority Temporary Regs - no public

hearings, legally binding, but expire in 3 years

Final Regulations – go through public hearing process, follow the regulations or penalties exist

Two types of final regulations Legislative Regulations

Arise when Congress has delegated specific law-making authority to the Treasury Department

Interpretive RegulationsArise under the authority of Section

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

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

Treasury Regulations - Final

Revenue Rulings and Revenue Procedures Both issued by the IRS.

Revenue Rulings Apply the law to a specific set of

facts. Weaker than Treasury Regulations. Citation to a Rev. Rul. does not

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

Revenue Ruling & Revenue Procedures

Revenue Ruling & Revenue Procedures

(cont’d) Revenue Procedures

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

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

what the Code words really mean. Judicial Precedent

– Courts will follow prior case holdings

Judicial Sources

Judicial Sources (cont’d)

Federal court hierarchy exists Supreme Court is the highest

court Courts of Appeals is the second

highest Three alternative trial courts: Tax Court, District Court, &

Court of Federal Claims

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

Other trial courts consider only refunds.

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

U.S. Tax Court

U.S. Tax Court (cont’d)

Tax Court has two types of decisions

“Regular decision” - Chief judge decides if new legal principle announced

“Memorandum decision” applies prior principle to new facts

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

application of the law, not redetermination of facts.

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

13 court of appeals, 11 regional, DC and Federal –citation must identify the specific court

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

U.S. Court of Appeals

Considers few cases involving tax issues.

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

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

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

U.S. Supreme Court

The Code is the strongest authority Treasury Regulations are the

next strongest authority Supreme Court decision applies to all

courts and taxpayers. Circuit court decisions are either

precedent or influential on other courts.

Published IRS Revenue Rulings and Revenue Procedures are binding on IRS revenue agents, but not the courts

Evaluating Tax Authorities

1. Investigate the facts and identify issues

2. Collect the appropriate authorities

3. Analyze the research 4. Develop the reasoning and

conclusions 5. Communicate the results

Steps in Conducting Tax Research

IRS Circular 230 Governs practice before the IRS and

provides enforceable standards of conduct

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

for Tax Services Supplements the AICPA’s

Code of Professional Conduct CPA Exam tests students on tax

research

Standards for Tax