SOLUTIONS MANUAL for Federal Tax Research 12th Edition by Roby Sawyers; Steven Gill by ACADEMIAMILL

Federal Tax Research, 12th Edition

Page 1-1

SOLUTIONS MANUAL Federal Tax Research 12th Edition by Roby Sawyers; Steven Gill CHAPTER 1 INTRODUCTION TO TAX PRACTICE AND ETHICS

DISCUSSION QUESTIONS 1-1.

In the United States, the tax system is an outgrowth of the following five disciplines: law, accounting, economics, political science, and sociology. The environment for the tax system is provided by the principles of economics, sociology, and political science, while the legal and accounting fields are responsible for the system‘s interpretation and application. Each of these disciplines affects this country‘s tax system in a unique way. Economists address such issues as how proposed tax legislation will affect the rate of inflation or economic growth. Measurement of the social equity of a tax and determining whether a tax system discriminates against certain taxpayers are issues that are examined by sociologists and political scientists. Finally, attorneys are responsible for the interpretation of the taxation statutes, and accountants ensure that these same statutes are applied consistently.

Page 4

1-2.

The other major categories of tax practice in addition to tax research are as follows: •

Tax compliance

•

Tax planning

•

Tax litigation

Page 5

1-3.

Tax compliance consists of gathering pertinent information, evaluating and classifying that information, and filing any necessary tax returns. Compliance also includes other functions necessary to satisfy governmental requirements, such as representing a client during an Internal Revenue Service (IRS) audit.

Page 1-2

SOLUTIONS MANUAL

Page 5

1-4.

Most of the tax compliance work is performed by commercial tax preparers, enrolled agents (EAs), attorneys, and certified public accountants (CPAs). Noncomplex individual, partnership, and corporate tax returns often are completed by commercial tax preparers. The preparation of more complex returns usually is performed by EAs, attorneys, and CPAs. The latter groups also provide tax planning services and represent their clients before the IRS.

An EA is one who is admitted to practice before the IRS by passing a special IRS-administered examination, or who has worked for the IRS for five years and is issued a permit to represent clients before the IRS. CPAs and attorneys are not required to take this examination and are automatically admitted to practice before the IRS if they are in good standing with the appropriate professional licensing board.

Page 5 and Circular 230

1-5.

Tax planning is the process of arranging one‘s financial affairs to minimize any tax liability. Much of modern tax practice centers around this process, and the resulting outcome is tax avoidance. There is nothing illegal or immoral in the avoidance of taxation as long as the taxpayer remains within legal bounds. In contrast, tax evasion constitutes the illegal nonpayment of a tax and cannot be condoned. Activities of this sort clearly violate existing legal constraints and fall outside of the domain of the professional tax practitioner.

Page 6

1-6.

In an open tax planning situation, the transaction is not yet complete; therefore, the tax practitioner maintains some degree of control over the potential tax liability, and the transaction may be modified to achieve a more favorable tax treatment. In a closed transaction however, all of the pertinent actions have been completed, and tax planning activities may be limited to the presentation of the situation to the government in the most legally advantageous manner possible.

Federal Tax Research, 12th Edition

Page 1-3

Page 6

1-7.

Tax litigation is the process of settling a dispute with the IRS in a court of law. Typically, a tax attorney handles tax litigation that progresses beyond the final IRS appeal.

Page 6

1-8.

CPAs serve is a support capacity in tax litigation.

Page 6

1-9.

Tax research consists of the resolution of unanswered taxation questions. The tax research process includes the following:

Identification of pertinent issues;

Specification of proper authorities;

Evaluation of the propriety of authorities; and,

Application of authorities to a specific situation.

Page 6

1-10.

Circular 230 is issued by the Treasury Department and applies to all who practice before the IRS.

Page 7

1-11.

In addition to Circular 230, CPAs must follow the AICPA‘s Code of Professional Conduct and Statements on Standards for Tax Services. CPAs must also abide by the rules of the appropriate state board(s) of accountancy.

Page 7

1-12.

A return preparer must obtain 18 hours of continuing education from an IRS-approved CE Provider. The hours must include a 6 credit hour Annual Federal Tax Refresher course (AFTR) that covers filing season issues and tax law updates. The AFTR course must include a knowledgebased comprehension test administered at the conclusion of the course by the CE Provider.

Page 1-4

SOLUTIONS MANUAL

Limited practice rights allow individuals to represent clients whose returns they prepared and signed, but only before revenue agents, customer service representatives, and similar IRS employees. Page 10 and IRS.gov

1-13.

False. Only communication with the IRS concerning a taxpayer‘s rights, privileges, or liability is included. Practice before the IRS does not include representation before the Tax Court.

Page 7

1-14.

Section 10.2 of Subpart A of Circular 230 defines practice before the IRS as including:

matters connected with presentation to the Internal Revenue Service or any of its officers or employees relating to a client‘s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include the preparation and filing of necessary documents, correspondence with, and communications to the Internal Revenue Service, and the representation of a client at conferences, hearings, and meetings.

Page 7

1-15.

To become an EA an individual can (1) pass a test given by the IRS or (2) work for the IRS for five years. Circular 230, Subpart A, §§ 10.4 to 10.6.

Page 9

1-16.

EAs must complete 72 hours of continuing education every three years (an average of 24 per year, with a minimum of 16 hours during any year). Circular 230, Subpart A. § 10.6.

Page 9

1-17.

True. As a general rule, an individual must be an EA, attorney, or CPA to represent a client before the IRS. There are limited situations where others may represent a taxpayer; however, this fact pattern is not one of them. Since Leigh did not sign the return, she cannot represent the taxpayer, only Rose can.

Federal Tax Research, 12th Edition

Page 1-5

Pages 10–11

1-18.

The names of organizations that can be represented by regular full-time employees are found in Circular 230, § 10.7(c). A regular full-time employee can represent the employer (individual employer). A regular full-time employee of a partnership may represent the partnership. Also, a regular full-time employee of a trust, receivership, guardianship, or estate may represent the trust, receivership, guardianship, or estate. Furthermore, a regular full-time employee of a governmental unit, agency, or authority may represent the governmental unit, agency, or authority in the course of his or her official duties.

Page 10

1-19.

Yes. Circular 230, Subpart A, § 10.7.

Page 10

1-20.

True. A practitioner may be suspended or disbarred from practice before the IRS if he or she knowingly helps a suspended or disbarred person practice indirectly before the IRS.

Page 12

1-21.

A practitioner may not advise a client to take a position on a document, affidavit, or other paper submitted to the IRS unless the position is not frivolous. Circular 230 § 10.34(b).

Page 14

1-22.

Under Circular 230, an attorney, a CPA, or an EA may use mass media (e.g., T.V. and the Internet) for advertising purposes. Such media may not contain false, fraudulent, unduly influencing, coercive, or unfair statements or claims. Attorneys, CPAs, and EAs must also observe any applicable standards of ethical conduct adopted by the American Bar Association (ABA), the American Institute of Certified Public Accountants (AICPA), and the National Association of Enrolled Agents (NAEA). Additional standards and listing of items that may be included in mass media advertising are defined under § 10.30 of Subpart B in Circular 230.

Page 19

Page 1-6

1-23.

SOLUTIONS MANUAL

Under § 10.25 of Circular 230, partners of government employees cannot represent anyone for which the government employee-partner has (or has had) official responsibility. For instance, a CPA firm with an IRS agent could not represent any taxpayer who is (or was in the past) assigned to the IRS agent-partner.

Page 12

1-24.

Under § 10.21 of Circular 230, each attorney, CPA, EA, or enrolled actuary who knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper which the client is required by the revenue laws of the United States to execute shall advise the client promptly of the fact of such noncompliance, error, or omission.

Page 11

1-25.

According to Circular 230, the best practices rules are aspirational. Thus, a practitioner who fails to comply with best practices will not be subject to discipline by the IRS.

Page 14

1-26.

Best practices include the following: a.

Communicating clearly with the client regarding the terms of the engagement. For example, the advisor should determine the client‘s expected purpose for and use of the advice and should have a clear understanding with the client regarding the form and scope of the advice or assistance to be rendered.

Establishing the facts, determining which facts are relevant, evaluating the reasonableness of any assumptions or representations, relating the applicable law (including potentially applicable judicial doctrines) to the relevant facts, and arriving at a conclusion supported by the law and the facts.

Advising the client regarding the importance of the conclusions reached, including, for example, whether a taxpayer may avoid accuracy-related penalties under the Internal Revenue Code if a taxpayer acts in reliance on the advice.

Acting fairly and with integrity in practice before the IRS.

Pages 13–14

Federal Tax Research, 12th Edition

1-27.

Page 1-7

A practitioner must not give written advice if the practitioner:

bases the written advice on unreasonable factual or legal assumptions (including assumptions as to future events),

unreasonably relies upon representations, statements, findings, or agreements of the taxpayer or any other person,

does not consider all relevant facts that the practitioner knows or should know, or

in evaluating a Federal tax issue, takes into account the possibility that a tax return will not be audited, that an issue will not be raised on audit, or that an issue will be resolved through settlement if raised.

Page 15

1-28

This would be considered a conflict of interest and is generally prohibited under the AICPA Code of Professional Conduct. While you can accept the engagement if you disclose to both parties the nature of the relationship and obtain the consent of both parties, before accepting the engagement, you should consider your ability to act with objectivity and independence in discharging your responsibilities.

Pages 16-22

1-29

A preparer tax identification number (PTIN) is required of a compensated individual who prepares or assists with the preparation of all or substantially all of a tax return or claim for refund must have a PTIN. Normally, the individual must be an attorney, CPA, EA, or tax return preparer must obtain a PTIN in order to file tax returns for clients

Page 10

1-30.

Individuals who prepared tax returns for compensation must follow the rules under Circular 230 Subpart B —Duties and Restrictions Relating to Practice Before the Internal Revenue Service and Subpart C—Sanctions for Violation of the Regulations. Thus, they are generally held to the same standards of practice as persons who are eligible to practice before the IRS (Attorneys, CPAs, and EAs).

Page 1-8

SOLUTIONS MANUAL

Pages 6 and 11

1-31.

The AICPA‘s Code of Professional Conduct provides a philosophical foundation upon which the Rules of Conduct are based. The Principles of the Code of Professional Conduct suggest that a CPA should strive for behavior that is above the minimal level of acceptable conduct set forth by the rules. The code was designed to provide the following:

A comprehensive code of ethics and professional conduct;

A guide for practitioners in answering complex questions; and

Assurance to the public concerning the obligations and responsibilities of the accounting profession.

Pages 16-17

1-32.

Threats to complying with the Independence Rule include the following: •

Members not acting with objectivity due to an adverse interest

•

Advocacy threats

•

Familiarity threats due to a long or close relationship with a client

•

Management participation threats

•

Self-interest threats

•

Self-review threats

•

Undue influence threats

Page 18

1-33.

In a tax practice the CPA may be requested to blindly follow the guidelines of a government agency or the demands of an audit client. This rule prohibits such blind obedience. The code specifically recognizes that conflicts of interest may arise in tax contexts, including providing tax or personal financial planning services for several members of a family whom the member knows to have opposing interests or when referring a personal financial planning or tax client to an insurance broker or other service provider who refers clients to the member under an exclusive arrangement.

Page 20

Federal Tax Research, 12th Edition

1-34.

Page 1-9

The General Standards Rule includes the following:

1. The CPA must be able to complete all professional services with professional competence. 2. The CPA must exercise due professional care in the performance of all professional services. 3. The CPA shall adequately plan and supervise the performance of all professional services. 4. The CPA must obtain sufficient relevant data to afford a reasonable basis for any conclusion or recommendation in connection with the performance of any professional services. Competence encompasses not only technical subject matter but also knowledge of the profession‘s standards and the ability to exercise sound judgment in applying the technical knowledge. At the same time, the code is clear that the member does not assume a responsibility for infallibility of knowledge or judgment

Page 21

1-35. a.

No violation

1.520.001: Commissions and Referral Fees

No violation

1.600.001: Advertising and Other Forms of Solicitation

1.800.001: Form of Organization and Name Rule

2.400.090 or 3.400.090: Acts Discreditable Rule

Pages 19-21

1-36. 1.700.001 (Confidential Client Information Rule) does not apply in the following situations:

1. There is a conflict with the Compliance with Standards Rule [1.310.001] or the Accounting Principles Rule [1.320.001]. 2. The CPA is served with an enforceable subpoena or summons or must comply with applicable laws and government regulations. 3. There is a review of a CPA‘s practice under AICPA or state society authorization. 4. The CPA is responding to an inquiry of an investigative or disciplinary body of a recognized society, or the CPA is initiating a complaint with a disciplinary body.

Page 1-10

SOLUTIONS MANUAL

Pages 19-20

1-37.

The Statements on Standards for Tax Services, or SSTS, are a series of statements, issued by the AICPA, as to what constitutes appropriate standards for tax practice. The statements also delineate a member‘s responsibility to clients, the public, and the profession.

The stated objectives of the statements are as follows:

SSTS No. 1: Tax Return Positions. This statement sets forth the applicable standards for members when recommending tax return positions, or preparing or signing tax returns. This statement also addresses a member‘s obligation to advise a taxpayer of relevant tax return disclosure responsibilities and potential penalties.

SSTS No. 2: Answers to Questions on Returns. This statement sets forth the applicable standards for members when signing the preparer‘s declaration on a tax return if one or more questions on the return have not been answered.

SSTS No. 3: Certain Procedural Aspects of Preparing Returns. This statement sets forth the applicable standards for members concerning the obligation to examine or verify certain supporting data or to consider information related to another taxpayer when preparing a taxpayer‘s tax return.

SSTS No. 4: Use of Estimates. This statement sets forth the applicable standards for members when using the taxpayer‘s estimates in the preparation of a tax return. A member may advise on estimates used in the preparation of a tax return, but the taxpayer has the responsibility to provide the estimated data. Appraisals or valuations are not considered estimates for purposes of this statement.

SSTS No. 5: Departure from a Position Previously Concluded in an Administrative Proceeding or Court Decision. This statement sets forth the applicable standards for members in recommending a tax return position that departs from the position determined in an administrative proceeding or in a court decision with respect to the taxpayer‘s prior return.

SSTS No. 6: Knowledge of Error: Return Preparation and Administrative Proceedings. This statement sets forth the applicable standards for a member who becomes aware of (a) an error in a

Federal Tax Research, 12th Edition

Page 1-11

taxpayer‘s previously filed tax return; (b) an error in a return that is the subject of an administrative proceeding, such as an examination by a taxing authority or an appeals conference; or (c) a taxpayer‘s failure to file a required tax return.

SSTS No. 7: Form and Content of Advice to Taxpayers. This statement sets forth the applicable standards for members concerning certain aspects of providing advice to a taxpayer and considers the circumstances in which a member has a responsibility to communicate with a taxpayer when subsequent developments affect advice previously provided.

Pages 22-26

1-38.

False, SSTSs are enforceable for AICPA members who perform tax services. If a CPA is not a member of the AICPA, he or she is not subject to the SSTSs.

Page 22

1-39.

Under SSTS No. 1, a member should determine and comply with the standards, if any, which are imposed by the applicable taxing authority with respect to recommending a tax return position, or preparing or signing a tax return. If the applicable taxing authority has no written standards with respect to recommending a tax return position or preparing or signing a tax return, or if its standards are lower than the standards set forth in SSTS No. 1, then SSTS No. 1 must be followed.

Page 22

1-40.

SSTS No.1 provides that a member should have a good faith belief that a recommended position has a realistic possibility of being sustained if challenged. In addition, a member may recommend a tax return position if the member concludes that there is a reasonable basis for the position and advises the taxpayer to appropriately disclose that position. Thus, a member may prepare or sign a tax return that reflects a position if a member has a reasonable basis for the position and that position is appropriately disclosed.

Page 22

1-41.

Reasonable grounds for omitting an answer on a return include cases in which:

Page 1-12

SOLUTIONS MANUAL

The pertinent data are not readily available and are not significant to the determination of taxable income or loss or the resulting tax liability.

The taxpayer and the member are genuinely uncertain as to the meaning of the question on the return.

An answer is voluminous; however, assurance should be given on the return that the data can be supplied upon request.

Page 23

1-42.

In preparing a return, the member may ordinarily rely upon information that the taxpayer has provided. Although an examination of supporting documents is not required, the member should encourage the taxpayer to provide supporting documents, whenever appropriate.

Page 23

1-43.

A member may prepare tax returns that involve the use of the taxpayer‘s estimates, if, under the circumstances, it is impractical to obtain exact data and the estimated amounts appear reasonable to the member. Estimates may be appropriate where the keeping of precise records with respect to numerous items of small amounts is difficult to achieve, where data is not available as of the time for filing the return, or certain records are missing.

Pages 23-24

1-44.

The selection of the treatment of an item on a tax return should be based upon the facts and the law that is applicable at the time a return is prepared. Unless the taxpayer is bound by the IRS to the treatment of an item in later years, such as by a closing agreement, the disposition of an item in a prior year‘s audit does not govern the treatment of a similar item in a later year‘s return. Therefore, a member may sign a return that contains a departure from a treatment that was required by the IRS in a prior year return, provided the standards under SSTS No. 1 are adhered to.

Pages 24-25

1-45.

When a member learns of an error in a previously filed tax return, or the member becomes aware of an error during an administrative proceeding, he or she must advise the taxpayer promptly. This

Federal Tax Research, 12th Edition

Page 1-13

advice should include a recommendation of the appropriate measures that the taxpayer should take. The member is not obligated to inform the IRS of the error and may not do so without the taxpayer‘s permission, except as required by law.

Page 25

1-46.

SSTS No. 7. It states that the member must use judgment that reflects professional competence and serves the taxpayer‘s needs.

Page 26

1-47.

No, under Circular 230 and the SSTSs, advice may be either written or oral. SSTS No. 7 provides information on the form and content of advice to taxpayers for AICPA members and provides a list of factors that members should consider in determining whether the advice is written or oral.

Page 26

1-48.

No, tax compliance work for an audit client is allowed. It must be approved by the audit committee of the issuer.

Page 28

1-49.

Neither the ABA Code nor the Model Rules have the force of law. Each was designed to be adopted by the appropriate agencies that govern the practice of law in the various states. In many jurisdictions, the state Supreme Court is charged with policing the practice of law. In other states, the legislature assumes this responsibility.

Page 28

1-50.

An ethical dilemma occurs when someone is faced with a situation in which there are no clearly defined answers such as by regulation or law.

Page 28

1-51.

The major types of ethical reasoning are as follows:

Page 1-14

SOLUTIONS MANUAL

End-based ethical reasoning is where the ethical decision is the one that produced the most good for the largest number of people.

Rule-based ethical reasoning was based on German philosopher Immanuel Kant‘s idea that individual actions should be such that we would accept similar behavior from everyone else.

Care-based ethical reasoning advises one to make decisions that would result in the treatment you yourself would like to receive.

Page 29

1-52.

Professional ethical behavior is the result of the interaction of personal morality, social responsibility, business ethics, and other general ethical standards. When something is judged to be morally right or wrong (or good or bad), the underlying standards on which such judgments are based are called moral standards. The tax practitioner must be aware of social responsibility in areas such as environmental protection, equal opportunity, and occupational safety. Business ethics examines the moral and ethical problems that arise in a business environment. There is disagreement about whether a company has ethical responsibilities. Other ethical standards may include public policy, religious beliefs, and cultural values.

Pages 29-31

1-53.

Ethical issues involved in this case could include morality and business ethics. The moral issue involves the consideration of the ―right thing to do‖ with respect to the plane ticket. The business ethics issues involve maintaining the integrity of the firm.

1-54.

Unless the firm clearly allows staff to take home supplies (which likely would result in additional income to the staff members), this is clearly not ethical behavior. If Donna does work at home and the firm has clear policies allowing supplies to be taken home and used for work purposes, the behavior would be reasonable.

1-55.

CPAs are in little danger of entering into the unauthorized practice of law as long as they avoid providing general legal services. The issue that arises is not whether CPAs are rendering legal services but how much legal service is provided. Because of the lack of guidelines on this issue, the federal agencies seem to have taken a lead in attempting to solve this problem.

Federal Tax Research, 12th Edition

Page 1-15

Page 34

1-56.

To avoid being charged with the unauthorized practice of law, the following activities should be avoided. •

Expressing a legal opinion on a nontax matter

•

Drafting wills or trust instruments

•

Drafting contracts

•

Drafting incorporation papers

•

Drafting partnership agreements

Page 36

EXERCISES

1-57. a.

Subpart A, § 10.4(c)8: Eligibility for enrollment as an EA or enrolled retirement plan agent. Discussion of the criteria for enrollment before the IRS.

Subpart B, § 10.21: Knowledge of client‘s omission. Each attorney, CPA, EA, or enrolled actuary who knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper shall advise the client promptly of the fact of such noncompliance, error, or omission.

Subpart B, § 10.26 Notaries: A practitioner may not perform any official act as a notary public with respect to any matter administered by the IRS for which he or she is employed as counsel, attorney, or agent.

Subpart B, § 10.29 Conflicting interests: No tax practitioner can represent conflicting interests before the IRS unless he or she has the express consent of the directly interested parties.

Circular 230 1-58. a.

Subpart C, § 10.51(a)(12): Contemptuous conduct in connection with practice before the IRS, including the use of abusive language, making false accusations or statements, knowing them to be false, or circulating or publishing malicious or libelous matter.

Subpart A, § 10.6(e): Conditions for renewal. In order to qualify for renewal of enrollment, an individual, to practice before the IRS, must certify that he or she has satisfied the continuing

Page 1-16

SOLUTIONS MANUAL

professional education requirements. c.

Subpart A, § 10.3(f): Registered tax return preparers.

Subpart B, § 10.27: Fees. Discussion of provision that a practitioner may not charge an unconscionable fee for representing a client in a matter before the IRS. Also, a practitioner may not charge a contingent fee for preparing an original return.

Circular 230 1-59. a.

Subpart B, § 10.22(b): Reliance on others. Except as modified by §§ 10.34 and 10.37, a practitioner will be presumed to have exercised due diligence for purposes of this section if the practitioner relies on the work product of another person and the practitioner used reasonable care in engaging, supervising, training, and evaluating the person, taking proper account of the nature of the relationship between the practitioner and the person.

Subpart A, § 10.7(c)(1)(vi): An individual may represent any individual or entity, who is outside the United States, before personnel of the IRS when such representation takes place outside the United States.

Subpart B, § 10.24: Prohibits assistance from disbarred or suspended persons.

Subpart B, § 10.34: Defines standards for advising and signing returns.

Circular 230

1-60. a.

Subpart B, § 10.33: Discussion of adhering to the best practices in providing advice.

Subpart B, § 10.35: Provides standards on ―covered opinions.‖

Subpart B, § 10.36: Requires that a firm take reasonable steps to adhere to the ―covered opinions‖ section.

Subpart B, § 10.37: Describes situations in which a tax practitioner should not give written advice.

Circular 230

1-61. a.

Solicitation is discussed in Subpart B, § 10.30.

Negotiation of a taxpayer‘s refund checks is discussed in Subpart B, § 10.31.

Who may practice before the IRS is discussed in Subpart A § 10.3.

Authority to disbar or suspend from practice before the IRS is discussed in Subpart C, § 10.50.

Federal Tax Research, 12th Edition

Page 1-17

Circular 230

1-62. a.

Conflicting interests are discussed in Subpart B, § 10.39.

Disreputable conduct is discussed in Subpart C, § 10.51.

Assistance from disbarred or suspended persons is discussed in Subpart B, § 10.24.

Representing oneself before the IRS is discussed in Subpart A, § 10.7.

Circular 230

1-63. a.

Practice of law is discussed in Subpart B, § 0.32.

Information to be furnished is discussed in Subpart B, § 10.20.

Fees are discussed in Subpart B, § 10.27.

Responsibility for correcting errors is discussed Subpart, § 10.21.

Circular 230

1-64. a.

Best practices are discussed in Subpart B, § 10.33.

The return of client‘s records is discussed in Subpart B, § 10.28.

Tax return positions are discussed in Subpart B, § 10.34.

Due diligence is discussed in Subpart B, § 10.22.

Circular 230

1-65.

a. SSTS No. 1. In preparing a tax return, a member should have a good-faith belief that a recommended position has a realistic possibility of being sustained if challenged; otherwise such a position should not be recommended by the member. b. SSTS No. 4. A member may prepare tax returns that involve the use of the taxpayer‘s estimates if it is impractical to obtain exact data and if the estimated amounts appear reasonable to the member. c. SSTS No. 6. The member must advise the taxpayer promptly, whether or not the member prepared or signed the return in question, when he or she learns of an error in a previously filed tax return, an error in a return that is the subject of an administrative proceeding, or a taxpayer‘s

Page 1-18

SOLUTIONS MANUAL

failure to file a required return. However, the member is neither obligated to inform the IRS of the situation nor may he or she do so without the taxpayer‘s permission, except as provided by law.

Pages 22–25

1-66.

a. Lowell Bar Association v. Loeb. The preparation of ―simple‖ tax returns did not constitute the unauthorized practice of Massachusetts law because tax return preparation could not be identified as strictly within the legal discipline. b. Bercu. The court held that Bercu could have provided tax advice if it had been incidental to the tax return work he regularly performed for his clients. c. Sperry v. Florida. The U.S. Supreme Court held that a Federal statute that admitted nonattorneys to practice before Federal agencies (in this case, the Patent Office) took precedence over state regulation, thus CPAs and EAs were not engaged in the unauthorized practice of law when they were giving tax advice.

Pages 34-35

1-67.

False. See Circular 230, § 10.29.

1-68.

True. See Circular 230, § 10.7.

1-69.

These fees would all be contingent fees if the IRS challenges a tax position. Under Circular 230 § 10.27 A, Contingent fee is any fee that is based, in whole or in part, on whether or not a position taken on a tax return or other filing avoids challenge by the IRS or is sustained either by the IRS or in litigation. A contingent fee includes a fee that is based on a percentage of the refund reported on a return, which is based on a percentage of the taxes saved, or that otherwise depends on the specific result attained.

Circular 230

1-70.

Circular 230, § 10.32 (Practice of law) states that, ―Nothing in the regulations in this part may be construed as authorizing persons not members of the bar to practice law.‖

Circular 230

1-71.

d. Under Rule 1.100.001 of the AICPA Code of Conduct, CPAs cannot make self-laudatory

Federal Tax Research, 12th Edition

Page 1-19

statements not based on verifiable facts.

Page 20

1-72.

c. See Circular 230, § 10.30.

1-73.

c. Under Rule 1.800.001 of the AICPA Code of Conduct, CPAs cannot practice public accounting under a firm name that is misleading. A sole practitioner is not a company. The only exception is when a sole practitioner survives the death or withdrawal of all other partners or shareholders; he or she can continue to practice under a firm name for up to two years after becoming a sole practitioner.

Page 20

1-74.

b. SSTS No. 4 allows a member to use reasonable estimates in the preparation of a tax return.

Pages 23-24

1-75.

d. Under Rule 1.510.001of the AICPA Code of Conduct, CPAs are allowed to take contingent fees in tax matters if they are based on judicial proceedings or the findings of governmental agencies.

Page 18

1-76.

c. Under Rule 1.700.001 of the AICPA Code of Conduct, CPAs cannot reveal confidential client information without the consent of the client unless it is to an investigative body, trial board, quality review body, or court of law.

Pages 19-20

1-77.

a. SSTS No. 4 requires members to disclose to the IRS the use of estimates when fire or computer failure has destroyed the relevant records.

Pages 23-24

1-78.

d. Under Subpart A, § 10.7(c)(2)(i) of Circular 230, persons who are disbarred or suspended are not allowed to practice before the IRS.

Page 1-20

SOLUTIONS MANUAL

Circular 230

1-79.

b. Under Subpart B, § 10.21 of Circular 230, practitioners must notify clients of any noncompliance with the tax law. A similar rule is found in SSTS No. 6.

Page 11

1-80.

a. Circular 230, Subpart A, § 10.7(a) states that a taxpayer can appear on their own behalf before the IRS. b. 1.520.001 Commissions and Referral Fees Rule c. SSTS No. 3 Certain Procedural Aspects of Preparing Returns d. Under Statement on Standards for Tax Service (SSTS) No. 1, a member must have a good-faith belief that a recommended position has a realistic possibility of being sustained if challenged.

Circular 230, Pages 20, 22, 24

1-81.

a. Circular 230, Subpart C, § 10.51 states that a practitioner can be disbarred or suspended from practice before the IRS for disreputable conduct. b. The knowledge of client omissions rule is found in Circular 230, Subpart B, § 10.21. c. 1.400.200 Records Requests. Members must comply with the rules and regulations of authoritative regulatory bodies, such as the members‘ state board(s) of accountancy, when they perform services for a client and are subject to the rules and regulations of such a regulatory body. d. SSTS No. 5 Departure from a Position Previously Concluded in an Administrative Proceeding or Court Decision e. Under Statement on Standards for Tax Services (SSTS) No. 7, a member must use judgment that reflects professional competence and serves the taxpayer‘s needs.

Circular 230, Pages 22-26

1-82.

The parts of the EA exam are as follows: Part 1: Individual Income Taxes Part 2: Businesses Part 3: Representation, Practices, Procedures

Federal Tax Research, 12th Edition

Page 1-21

Visit www.irs.gov for more information on the EA exam.

1-83.

The Application for Enrollment to Practice Before the IRS is Form 23.

1-84.

a. California: Minimum three semester or four quarter units in accounting ethics or accountants‘ professional responsibilities b. Texas: The board requires that 3 passing semester hours be earned as a result of taking a course in ethics. c. North Carolina: The 150 semester hours required include a concentration in accounting, as defined by 21 NCAC 08A .0309, and 24 semester hours of coursework, which include one 3 semester hour course from at least 8 of the following 10 fields of study: communications, computer technology, economics, ethics, finance, humanities/social science, international environment, law, management, or statistics.

Page 1-22

SOLUTIONS MANUAL

CHAPTER 2 TAX RESEARCH METHODOLOGY DISCUSSION QUESTIONS

2-1.

The primary purpose of tax research is to aid in finding solutions to tax problems.

Page 46

2-2.

The basic steps in conducting tax research include the following:

Establish the Facts: This step involves the gathering of facts, including tax and nontax considerations.

Identify the Issues: The tax researcher must identify both issues of fact and issues of law. In so

Federal Tax Research, 12th Edition

Page 1-23

doing, the researcher must rely on a combination of education, training, and experience. Locate the Appropriate Authority: The researcher must locate authority relevant to the client‘s situation. Authority may include both primary and secondary authority.

Evaluate the Authority: This step in the tax research process requires the researcher to analyze the authority, including the current status of the authority and the precedential value of the authority.

Develop Conclusions and Recommendations: The researcher must arrive at his or her conclusions based on the first four steps of the tax research process.

Communicate the Recommendations: The final step in the research process is to communicate to the client the facts, assumptions, issues, sources of authority, and conclusions and recommendations.

Pages 47-56

2-3.

First, the researcher must understand the mechanical techniques that are used to identify and locate the tax authorities that relate to solving a problem. Second, the researcher must be creative and explore all of the relevant relationships among the facts and the problems at hand.

Page 50

2-4.

Significant tax facts that a tax practitioner might want to obtain could include any of the following: The client‘s tax entity(ies). The client‘s family status and stability. The client‘s past, present, and projected marginal tax rates. The client‘s legal domicile and citizenship. The client‘s motivation for the transaction. Relationships among the client and other parties involved in the transaction. Whether special tax rules apply. Whether the transaction is proposed or completed.

Pages 47-48

Page 1-24

2-5.

SOLUTIONS MANUAL

The researcher should be aware of the following pitfalls:

The researcher may attempt to research a problem before fully understanding the facts and circumstances relevant to the client‘s situation.

Often the researcher may have a tendency to ignore new questions that arise as the research task progresses.

The client may fail to provide all of the information that is vital to an accurate solution.

The tax researcher may approach a tax problem without considering other constraints on the solution to the problem, such as economic factors or personal preferences of the client.

Page 47-48

2-6.

2-7.

T (lower tax liability)

NT (economic constraints)

NT (personal preference)

NT (personal preference). Might also be classified as T, since the taxpayer‘s motivation for a potential transaction is known

NT (personal preference)

NT (family preference)

T (lower tax liability)

Federal Tax Research, 12th Edition

2-8.

Page 1-25

T (lower tax liability)

Research issues can be divided into two major categories, namely, fact issues and law issues. Fact issues are concerned with problems such as the dates of the transactions, the amounts involved in an exchange, reasonableness, intent, and purpose. Law issues arise when the facts are well established, but it is not clear which portion of the tax law applies.

Page 48

2-9.

The legal concept of collateral estoppel bars relitigation on the same facts or the same issues. Therefore, the tax practitioner must be certain that his or her case is researched fully and no issues have been overlooked. If an issue is not addressed in the original case, it may be lost forever.

Page 49

2-10.

The researcher must be aware of changes that occur over time, which might affect the outcome of the research. Applicable law or facts might be subject to changes that will cause the researcher to arrive at different conclusions and recommendations, even concerning completed research activities.

2-11. All tax authorities do not carry the same precedential value. The tax researcher must consider the source of the authority, including whether the source of authority is a primary or a secondary source, and the force of the authority. Primary authority comes from statutory, administrative, and judicial sources. In fact, statutory authority is the basis for all tax provisions.

Secondary authority consists of unofficial sources of tax information, such as tax journal articles, textbooks, and newsletters. The researcher should be cautious in relying upon secondary authority, which does not have precedential value, but which may be of assistance in clarifying or explaining the primary authority. In addition, the researcher must take into account new issues that have developed since the date of the authority.

Pages 51-52

Page 1-26

2-12.

SOLUTIONS MANUAL

Statutory sources include the Constitution, tax treaties, and tax laws that have been passed by Congress. Administrative authority includes the various rulings of the Treasury Department and the IRS. Judicial authority consists of the collected rulings of the various courts on federal tax matters.

Pages 52-53

2-13.

Pages 51-52

2-14.

Pages 51-52

2-15.

Pages 51-52

2-16.

A citator is a reference source that enables the researcher to follow the judicial history of court cases.

Page 53

2-17.

A tax service is a coordinated set of reference materials that organizes the tax authority into a useable format, making the Internal Revenue Code more accessible.

Federal Tax Research, 12th Edition

Page 1-27

Page 58

2-18.

TAXES: General tax practitioners

Journal of Taxation: Sophisticated tax practitioners

Practical Tax Strategies: General tax practitioners

The Tax Adviser: Members of the AICPA and other tax practitioners

The ATA Journal of Legal Tax Research: Tax academics and practitioners

Page 55

2-19.

All tax authority does not carry the same precedential value. In the process of evaluating the tax authority for the issue under consideration, it is possible that new issues, not previously considered, may become known. In this case, the researcher may be required to gather additional facts, find more pertinent authority, and evaluate the new issues.

Pages 51-52

2-20.

If a clear solution to a tax research problem has not been obtained, the practitioner must use professional judgment as to the proper conveyance of the research results to the client. In addition, the client might be informed of the alternative possible outcomes of the disputed transaction and give the best acceptable recommendation.

Page 55

2-21.

Include the following items in both the memorandum to the client file and the client letter: 1. A restatement of the pertinent facts from the researcher‘s perspective.

2. A summary of any assumptions that the researcher made in the course of his or her research.

Page 1-28

SOLUTIONS MANUAL

3. A summary of the issues addressed in the research process. 4. The applicable authority used to arrive at the researcher‘s conclusions and recommendations. 5. The researcher‘s conclusions and recommendations.

Generally, the memorandum to the client file will contain significantly more details than the letter to the client.

Pages 56-57

2-22.

Yes. In many research situations, a fact generates an issue that in turn may lead to an answer or the need for more facts. Similarly, once an answer is found to an issue, it may also cause a new issue to appear or the need to gather more information. The same situation occurs in evaluating authority. Frequently, there will be ambiguity between items of authority that will require the researcher to use his or her critical thinking skills. This may result in new issues becoming known. The researcher would then be required to gather additional facts, find additional pertinent authority, and evaluate the new issues.

Page 50

2-23.

Substantial Authority under Reg. § 1.6662-4(d)(3)(iii) includes the following:

a. The Internal Revenue Code and other statutory provisions

b. Proposed, temporary, and final regulations

c. Revenue rulings and procedures

d. Tax treaties and regulations there under

e. Court cases

Federal Tax Research, 12th Edition

Page 1-29

f. Congressional committee reports

g. The Blue Book

h. Private Letter Rulings issued after 10/31/76

i. Technical Advice Memoranda issued after 10/31/76

j. General Counsel Memoranda issued after 3/31/81

k. IRS Information and Press Releases

It is important to be familiar with the above sources because any position documented based on these authorities will prevent accuracy-related penalties associated with the item or return under review.

Page 52

2-24.

Online tax research systems provide a fast, cheap method for tax practitioners to access tax information that he or she could not afford to buy before the use of computers. Today‘s online systems allow the distribution of tax research information and entire tax services to multiple tax staff in both small and large CPA firms. They are accessible through the Internet and several public telecommunications networks. The materials that are available with these services are contained in databases that are stored at centralized computer locations. These databases may be accessed from remote locations with the use of a variety of compatible video devices and keyboards. Usually, they can be accessed via compatible handheld devices and computers that the user already owns.

Advantages of such a system over a standard printed service are the ability on the part of the user to index any significant item by using it as a search item in a query, and the ability for the user to tailor his or her query to fit the requirements of a specific tax problem, which can result in the research process being conducted with greater speed and thoroughness; that online services are updated much faster than printed tax services; that they are particularly useful in researching case law, since every word contained in a case is included in the database, which in turn enables the user to save time by directly accessing only those cases that contain the key terms of his or her search, that certain documents may be obtained only from the central computer library, and that it can be used to obtain regularly published documents to which the researcher does not have access.

Page 1-30

SOLUTIONS MANUAL

Pages 58-59

2-25.

Any of the following could be examples of Web addresses of three free online Internet sites where someone could find information on various aspects of taxation: ▪

http://taxsites.com

▪

www.irs.gov

▪

http://thomas.loc.gov

Page 53

2-26.

Citations not only document a preparer‘s research and provide a trail for reviewers to follow but also to support that the preparer has met the substantial authority standard. Citations in a memo immediately signal to a reader the types of documents and level of authority a researcher is relying upon.

Page 56

2-27.

Thomson Reuters Checkpoint: A Web-based tax research service that contains research material on federal, state, local, and international taxation. Checkpoint contains analytical material such as the Tax Coordinator 2d and the United States Tax Reporter.

CCH AnswerConnect: A Web-based tax research service that contains CCH‘s tax services (Tax Research Consultant and Federal Income Tax Reporter) and other federal, state, local, and international legal and tax information.

LexisAdvance Tax: Besides containing all federal and state tax research material, LexisNexis provides access to expert analytical materials from CCH, Tax Analysts, and BNA. In addition, LexisNexis has extensive libraries of newspapers, magazines, journals, and patent records and medical, economic, and accounting databases.

Westlaw and WestlawNext contain all federal, state, local, and international legal sources, including court cases, administrative releases, and statutory information. All government documents (e.g., IRS publications, court cases) are also available on this system.

Page 54

Federal Tax Research, 12th Edition

Page 1-31

2-28. The disadvantages of using a computerized tax service include the high cost of conducting a search and the broad nature of the database.

The database includes all of the pertinent documents needed to conduct a thorough tax research. However, a computerized tax service does not normally include any type of indices; therefore, the researcher must determine the keywords to utilize in his or her search request. If the request is not properly structured, the researcher will not locate the pertinent documents.

Pages 62-63

2-29.

Developing an effective search request requires that the researcher perform the following:

1. State the issue in the form of a question

2. Identify the keywords

3. Construct a computer research query

4. Select database and execute search

5. Interpret and refine the search

Pages 59-62

2-30. To reduce the number of retrieved documents to a reasonable number, the researcher should modify his or her request, usually by editing the last request transmitted to one that is narrower in scope and utilize more unique keywords.

Page 61

2-31.

The checkpoint search connectors discussed in the text are as follows: ▪

and: Finds documents with both chosen keywords in them

▪

or: Finds documents with either chosen keywords in them

▪

/n: Finds documents where the first chosen term is within ‘n‘ words of the second chosen term

▪

not: Finds documents with the term that precedes the connector but not the term following the

Page 1-32

SOLUTIONS MANUAL

connector

Page 60

2-32

(1) Primary (2) Primary (3) Primary (4) Secondary

Page 51-52

2-33.

―Engagement Time Cost‖ could impact an engagement by making the research costly for the client.

Page 62

2-34.

The ―Potential Tax Liability‖ in a situation by making the research cost exceed the tax savings.

Page 62

2-35.

The ―Accuracy Threshold‖ could impact how much time is spent on the project. As a general rule, the more accuracy needed by the client, the more research that needs to be done to reach a higher level of client comfort.

Page 62

2-36.

―Professional Ethics‖ could impact a tax engagement by requiring the researcher to achieve an appropriate comfort level for the research conclusion.

Page 63

2-37.

The four parts of the Uniform CPA Exam are as follows:

1. Auditing and Attestation (AUD)

2. Business Environment and Concepts (BEC)

Federal Tax Research, 12th Edition

Page 1-33

3. Financial Accounting and Reporting (FAR)

4. Regulation (REG)

The tax issues covered in the REG section of the Uniform CPA Exam include processes, procedures, accounting, and planning as well as federal taxation of property transactions, individuals, and entities. Ethics and professional and legal responsibilities are key components of the section, requiring that candidates be familiar with Treasury Department Circular 230, the AICPA Statements on Standards for Tax Services, and relevant IRS Code sections and regulations.

Page 63

EXERCISES

2-38.

All can be found online (however, a researcher may have to pay a subscription fee for access to them). For the second part of the question, the answer will vary by individual school campus library.

2-39.

All responses and answers will vary with the availability of tax research services available for student use on your campus. Information regarding how students can gain access to the system for research projects in your classes should be obtained by the instructor. If the tax research service is not available on your campus, the student will state so.

2-40.

Form 3903 and its instructions deal with moving expenses. IRS forms and publications can be accessed at https://www.irs.gov/forms-pubs.

2-41.

IRS Publication 3 is the Armed Forces‘ Tax Guide. IRS forms and publications can be accessed at https://www.irs.gov/forms-pubs.

2-42.

IRS Publication 575 deals with Pension and Annuity Income. IRS forms and publications can be accessed at https://www.irs.gov/forms-pubs.

2-43.

Form 1040-PR can be found at https://www.irs.gov/forms-pubs.

2-44.

Publication 1542 is no longer updated by the IRS. Instead, the IRS updates per diem rates in annual (or more frequent) IRS Notices. At the time of the book‘s printing, the most recent IRS Notice was Notice

Page 1-34

SOLUTIONS MANUAL

2016-58.

2-45.

Answers will vary over time.

2-46.

Issues that may be relevant in determining the tax consequences of these transactions include the following:

2-47.

Does the condemnation of the land constitute an involuntary conversion of § 1231 property?

If gain is realized, how is it computed?

If gain is recognized, is it ordinary income or capital gain?

Can any of the gain be deferred?

How is the award for damages treated?

Issues that may be relevant in determining the tax consequences of these transactions include the following:

Who has the liability for the tax on the $75,000, John, Marsha, or both?

Could John and Marsha‘s other income have any impact on the taxability of the $75,000?

Did John receive any benefit from the income and how might that affect any income tax liability?

Do John and Marsha live in a community property or common law state and what impact would that have on any tax liability?

2-48.

If John reimburses the bank for the $75,000, is it deductible to him?

Issues that may be relevant in determining the tax consequences of these transactions include the following:

Is the receipt of the restricted stock compensation to Dave?

Federal Tax Research, 12th Edition

2-49.

Is there any gain realized on the receipt of the stock? If so, how is the gain computed?

If gain is recognized on the receipt of the stock, is it ordinary income or capital gain?

Can any of the gain be deferred? If so, how?

What is Dave‘s basis in the restricted stock?

If Dave sells the stock after seven years, how will any gain or loss be taxed?

Issues that may be relevant in determining the tax consequences of these transactions include the following:

What are the tax consequences of rents received in advance?

Is Ericka a cash or accrual basis taxpayer?

If she is a cash basis taxpayer, how is the rent treated?

If she is an accrual basis taxpayer, how is the rent treated?

How are any expenses (e.g., depreciation and real estate taxes) associated with the rental income treated?

2-50.

The query should include several of the following keywords:

redemption call proceeds tax-exempt bonds municipal

2-51.

Page 1-35

The query should include several of the following keywords:

Page 1-36

SOLUTIONS MANUAL

treaty Germany fellowship income fellowship grant internship

Examples of queries include the following: ―Treaty Germany‖/10 & fellowship or internship (CheckPoint)

Treaty w/10 Germany and fellowship or internship (Lexis)

2-52.

The query should include several of the following keywords:

capitalize fringe benefits overhead build building slack time idle time employee employee costs addition factory

Examples of queries include the following:

capitalize & overhead & fringe /3 benefits (CheckPoint)

capitalize and overhead and fringe w/3 benefits (Lexis)

2-53.

The query should include several of the following keywords:

Federal Tax Research, 12th Edition

Page 1-37

retroactive election accounting accounting methods

Examples of queries include the following: ―accounting /20 method‖ and retroactive* (CheckPoint)

accounting w/20 method and retroactive (Lexis)

2-54.

Suitable search queries might be:

constructive /10 dividend (CheckPoint)

constructive w/10 dividend (Lexis)

2-55.

Issues that may be relevant in determining whether Sam Manuel may deduct the losses from his ―activity‖ include the following:

Is the activity considered a hobby or a business activity?

Is the fact that Mr. Manuel previously operated the activity on a full-time basis relevant to the question of whether the loss is deductible?

Does the taxpayer have the burden of proof in determining whether the activity is operated for income or profit?

Does Mr. Manuel have to establish a profit motive for each year that losses are incurred, or once a profit motive is established is this adequate proof for subsequent years?

Is the fact that the activity was conducted on a part-time basis by Mr. Manuel, who was a full-time employee of another entity, indicative that the activity must be a hobby and not a business carried on with intent to earn a profit?

Page 1-38

SOLUTIONS MANUAL

How much of his time does Mr. Manuel spend on this activity?

Does Mr. Manuel invest a significant amount of his money and other resources for the activity?

Does Mr. Manuel advertise and otherwise solicit buyers for his products?

Can Mr. Manuel substantiate the expenditures that he has incurred?

10.

Does Mr. Manuel keep detailed accounting records for the activity separate and apart from his other activities?

11.

Is a reasonable expectation of making a profit required in order to determine whether an activity is a trade or business?

2-56.

Examples of keywords: hobby, business, activity, losses, employee, profit

Issues relevant to the tax treatment of the payment received by the partner include the following:

Was the $125,000 payment received by Matthew Broadway a distribution in liquidation of his partnership interest?

If the payment is a payment in liquidation of Matthew‘s partnership interest, should the amount be treated as ordinary income or should the amount be treated as received in exchange for his interest in the partnership?

Will the entire payment be subject to the same tax treatment, or should $45,000 of the payment, representing the settlement of the fee dispute, be treated differently from the remainder of the payment?

Does the partnership use the cash or the accrual basis of accounting for tax purposes?

Under the partnership‘s method of accounting, when would the fee income be included in the partnership‘s ordinary income?

Was the fee accounted for in the partnership‘s prior year return or was the fee included in

Federal Tax Research, 12th Edition

Page 1-39

partnership income only upon settlement of the dispute in the year following the year of receipt?

Does the fact that the fee was placed in an escrow account until the dispute was settled influence the proper time for including the fee in income?

Does the constructive receipt doctrine apply to the partnership?

Does the assignment of income doctrine apply in this case to make the fee income taxable to Matthew Broadway, the partner who is withdrawing?

2-57

Examples of keywords: accrual, cash, accounting, partnership, distribution, constructive receipt

Issues which may be important in determining the allocation of the costs among the lots include the following:

Is the increase in fair market value of improved property indicative of the benefits derived by the property?

What was the taxpayer‘s purpose behind making the improvements?

Does the taxpayer intend to sell all six of the lots?

Do the street, water, and sewer improvements benefit the three undeveloped lots?

What was the fair market value of each lot immediately after the subdivision but prior to the improvements?

Are certain of the lots more desirable because of easier access, etc?

Is the relative sales price of each of the three single-family homes relevant for allocating the construction costs?

Examples of keywords: improvements, subdividing, real estate, realty, costs

Page 1-40

2-58.

SOLUTIONS MANUAL

Issues that may be relevant to the tax treatment of the proceeds from the sale of the home include the following:

Can Tom take advantage of the § 121 exclusion from the sale of a primary residence?

If Tom‘s gain is taxable, can he take advantage of the installment sale provisions?

If the property has previously been used for business (i.e. rental or home office), will there be any depreciation recapture?

What is the basis of the old home?

How was title of the old home held by Tom and his wife?

Does the divorce decree specify anything other than a 50/50 split of the residence between Tom and his wife?

2-59.

Examples of keywords: divorce, decree, house, residence, gain, exclusion, occupies, § 121

Additional information that would be helpful in this situation, based on relevant factors for determining a profit motive as listed in Regulation § 1.183-2, includes the following:

Does Vinny plan to continue his medical practice while he works on his winery?

If he does plan to continue working at his medical practice, does he plan to continue full time?

How much time and effort are he and/or his family members planning to devote to the winery?

If other family members will be helping with the winery, will they be leaving their occupations to have more time to help out?

Does he plan to carry on the winery endeavor in a business-like manner, keeping books and records, etc.?

Federal Tax Research, 12th Edition

Page 1-41

Did the taxpayer attempt to acquire knowledge about the winery business or talk to experts in the field?

Is the couple‘s wealth sufficient to maintain them if future profits don‘t materialize?

Does Vinny derive little personal or recreational pleasure from this activity?

Additional questions posed to the taxpayer.

No. What Vinny‘s two children now do for a living is irrelevant.

Will the winery be considered by the IRS to be a bona fide business with a profit motive or merely a hobby?

Additional research questions might include the following:

Is the taxpayer close to retirement age, and if so, how much will his retirement income be?

2-60.

How much in losses is the business expected to incur in the start-up years?

What were the start-up costs?

Where did the investment money come from?

What is the tax-entity form of the business?

What is the taxpayer‘s past, present, and projected marginal tax rates?

Are there special tax rules that apply to the winery business?

Additional information that would be helpful in this situation includes the following:

Was there any oversight of the accountant by the home office or by a CPA?

What types of internal controls, if any, were in place to prevent the embezzlement?

Page 1-42

SOLUTIONS MANUAL

Was there an audit performed by competent outside auditors?

What system, if any, did the taxpayer have in place to receive and review payroll tax deposits and remittances?

From additional questioning of the taxpayer.

Yes

N/A

e. Did the taxpayer exercise ―ordinary business care and prudence in providing for the payment of its tax liabilities‖ by establishing oversight of the manager‘s actions to the extent that, as a result, relief is mandated by the statute, warranting abatement of the penalties due to ―reasonable cause‖?

Additional research questions might include the following:

Has the taxpayer already submitted an offer in compromise to the IRS?

Have there been any arrangements made for the accountant to repay the embezzled funds?

If so, has the taxpayer remitted any funds to the IRS and, if so, how much?

Does the taxpayer have an unblemished history of making past payroll tax deposits on time?

2-61.

Additional information that would be helpful in this situation include the following:

What was the date of the divorce?

Is there a divorce decree that calls for the monthly fixed payments of $12,000?

Federal Tax Research, 12th Edition

Page 1-43

If so, does the divorce decree stipulate what the payments are for?

Are there any children involved from the marriage, and if so, is any of the $12,000 considered provision for child support?

Is the taxpayer legally required to continue the monthly payments after death of the exspouse?

Are the monthly payments being made in cash or property?

From additional questioning of the taxpayer.

The taxpayer‘s age is not necessarily significant to this issue.

Are tax payments on payments to an ex-spouse deductible?

Additional research questions might include the following:

What is the ex-spouse‘s financial situation, and has it changed significantly since the divorce?

2-62.

Has the ex-spouse since remarried?

Was there a prenuptial agreement?

Have the taxpayer‘s been living in the same household since the divorce?

The primary tax issues involved with this case are as follows:

Are lottery winnings considered ordinary income or capital gains?

What is the basis of a winning lottery ticket?

Is the assignment of rights to the winning to a third party considered constructive receipt of the winning to the taxpayer?

Page 1-44

SOLUTIONS MANUAL

Is the assignment of rights to a third party considered a capital investment?

Examples of keywords the following:

lottery installments future investment gross income capital gain lump-sum ordinary income

2-63.

The primary tax issues involved with this case are as follows:

Are there any restrictions on starting a business on an Indian Reservation?

Can an Indian tribe be a shareholder in an S corporation?

Is the Indian tribe a federally recognized tax-exempt organization?

What restrictions are there on tax-exempt organizations in S corporations?

Is an Indian tribe considered an ―individual‖ for federal income tax purposes?

Examples of keywords include the following: Indian tribe individual shareholder S corporation tax-exempt tribal government eligible

Federal Tax Research, 12th Edition

Page 1-45

CHAPTER 3 CONSTITUTIONAL AND LEGISLATIVE SOURCES

DISCUSSION QUESTIONS

3-1.

In Pollock v. Farmers’ Loan and Trust Co., the Supreme Court held that the income tax was unconstitutional, because it was a constitutionally prohibited direct tax. Supporters of the income tax proposed an amendment to the Constitution in order to dispense with the question of the constitutionality of the income tax. As a result, the 16th Amendment to the Constitution was ratified.

Page 77

3-2.

The 16th Amendment was ratified on February 3, 1913 and eliminated the claim that the Federal income tax was unconstitutional. Evidence of this fact can be found in the terminology of the amendment: ―The Congress shall have the power to lay and collect taxes on incomes, from whatever sources derived, without apportionment among the several States, and without regard to any census or enumeration.‖

Page 77

3-3.

The first U.S. Federal income tax was passed on August 5, 1861 to help the North pay for the cost of fighting the Civil War. It was allowed to expire in 1872. In 1894, another income tax act was passed by Congress, but the Supreme Court ruled it was unconstitutional as a prohibited ―direct tax.‖ The supporters of the income tax decided to amend the Constitution so that there would be no question as to the constitutionality of a Federal income tax. The proposed amendment was sent to the states on July 12, 1909 and ratified on February 3, 1913.

Pages 76–77

3-4.

In Flint v. Stone Tracy Co., the Supreme Court held that the corporate income tax passed in 1909 was constitutional because it was a special form of excise tax, rather than a direct tax.

Page 77

3-5.

Under Code § 6702, the maximum penalty a taxpayer is subject to is a $5,000 fine for filing a frivolous tax return as a form of protest against the IRS. This fine would be levied if the taxpayer files a blank tax return accompanied by a note suggesting that the Federal income tax is unconstitutional or that the taxpayer wishes to protest against the high percentage of tax revenues used to create nuclear weapons.

Page 1-46

SOLUTIONS MANUAL

Internal Revenue Code (IRC) § 6673 levies a penalty, not to exceed $25,000, if a taxpayer brings a frivolous matter before the Tax Court. This fine might be applied when the proceedings are found to have been instituted primarily to delay the revenue collection process and where the taxpayer‘s grounds for bringing the proceedings are found to be frivolous or groundless.

Page 79

3-6.

The Constitution is the source of all of the federal tax laws of the country. The Constitution expressly provides that Congress may not impose export taxes but may impose import taxes. In addition, the constitutional rights of due process and privacy of the citizen apply in tax, as well as nontax, environments.

The Constitution also requires that taxes imposed by Congress be uniform from state to state. Direct and per capita taxes are prohibited unless the revenues generated are apportioned to the population of the states from which they were collected.

Pages 79-80

3-7.

Tax treaties are agreements negotiated between countries concerning the treatment of individuals and companies subject to the tax laws of multiple countries. The primary purpose of these treaties is to eliminate the ―double taxation‖ that the taxpayer would face if his or her income were subject to tax in more than one country. Any tax matter may be covered in a tax treaty. Estate and gift taxation, withholding, and multinational corporate taxation problems can be addressed in a tax treaty.

Page 81

3-8.

Generally, when a tax treaty provision and an IRC provision conflict, the provision adopted later in time will prevail. The major exceptions to this rule are treaty provisions, which existed prior to enactment of the 1954 Code; such treaty provisions prevail over the existing provisions of the 1954 Code but not over later amendments to the 1954 Code.

Page 84

Federal Tax Research, 12th Edition

3-9.

Page 1-47

According to Article II, § 2 of the U.S. Constitution, the president creates treaties with other countries after receiving the advice and consent of the Senate.

Page 81

3-10.

Tax treaties can be found in both the online and printed versions of most tax services, the IRS Website, the Treasury Department, or the U.S. State Department.

Page 82

3-11.

Tax legislation generally begins in the Ways and Means Committee of the House of Representatives. The approved bill is then voted on by the full House of Representatives. The bill is then sent to the Senate Finance Committee, and after the bill is approved by the Finance Committee, it is voted on by the full Senate. The Joint Conference Committee resolves differences in the House and Senate versions of the tax bill, after which the revised bill must be approved by both the House and the Senate. The approved bill is then signed into law by the president and incorporated into the IRC, assuming the president does not choose to veto the bill.

Page 85

3-12.

Committee reports usually are available for the deliberations of the Ways and Means Committee, the Finance Committee, and the Joint Conference Committee.

Page 85

3-13.

Committee reports are an important tool for tax researchers in situations where the tax law is unclear, or when recent legislation has been passed. The committee reports generally explain the elements of the proposed changes to the tax law and the reasons for the proposals. The committee reports can provide insight concerning the meaning of a specific phrase of the statute or the intention of Congress concerning a certain provision of the law.

Page 85

3-14.

Committee reports are referred to by public law number and every bill that is passed by Congress is assigned such a number. In P.L. 100-203, the prefix refers to the 100th session of Congress that passed the law. The suffix indicates this is the 203rd bill that this session of Congress adopted.

Page 1-48

SOLUTIONS MANUAL

Page 86

3-15.

When new tax legislation is passed, the pertinent committee reports are printed in the Internal Revenue Service‘s weekly Internal Revenue Bulletin. The text of the committee reports pertaining to the 1954 Code can be found in the 1954 United States Code Congressional and Administrative News. All of the pre-1939 Revenue Act Committee Reports are reprinted in the 1939 Cumulative Bulletin.

PUBLISHER

PUBLICATION

GPO

Cumulative Bulletin (pre-2009 years only)

BNA

Primary Sources (since 1968 only)

CCH

Public Law Legislative History

RIA

RIA Checkpoint

RIA and Commerce Clearing House also publish a collection of committee reports (or excerpts thereof) whenever a major new tax law is passed. To find the appropriate committee reports that pertain to a particular statutory provision, the tax researcher can use reference materials that are included in most commercial tax services, or the index to the Cumulative Bulletin.

Page 88

3-16.

The floor debate report may also be useful to the tax researcher in that the report includes a summary of the floor discussions concerning the proposed bill. Where additional detailed information regarding the development of a provision is needed, the floor debate report may be of value.

Page 88

3-17.

After the 16th Amendment was ratified in 1913, Congress passed a series of revenue acts, each of which formed the entire income tax law of the United States. During the next two decades, Congress passed an additional revenue act every year or two. During the 1930s, this series of revenue acts and the task of rewriting frequently the entire tax statute had become unmanageable. Consequently, Congress replaced the revenue acts with the IRC of 1939.

Federal Tax Research, 12th Edition

Page 1-49

One major problem with the IRC of 1939 was the numbering system that was used. Specifically, the 1939 codification‘s numbering system did not leave adequate room for subsequent changes to the law. Therefore, the 1939 Code was replaced with a reorganized, more flexible codification in 1954. Due to extensive revisions to the code made as a part of the Tax Reform Act of 1986, the statute was renamed the IRC of 1986, which, as amended, constitutes the current tax law of the United States.

Page 88

3-18.

The major subdivisions of the code include the following: 1. Subtitles 2. Chapters 3. Subchapters 4. Parts 5. Sections 6. Subsections

Page 89

3-19.

Subtitles of the code are assigned a capital letter as a form of identification. Generally, each subtitle contains all of the tax provisions that relate to a well-defined area of the tax law.

Page 90

3-20.

In the citation § 101(a)(2)(B), the (a) stands for subsection (a), the (2) stands for paragraph (2), and the (B) stands for subparagraph (B) of § 101.

Pages 92-93

3-21.

In the citation § 1031(a)(3)(B), the (a) stands for subsection (a), the (3) stands for paragraph (3), and the (B) stands for subparagraph (B) of § 1031.

Pages 92-93

3-22.

There are some exceptions to the general formatting of code section citations. For example, Congress has inserted code sections in between other consecutive sections and has had to use a capital letter (e.g., §

Page 1-50

SOLUTIONS MANUAL

25A(b)(1) or § 280F(a)(1)) to accomplish this. Also, the code skips the subsections in certain cases, such as § 212(2).

Page 92

3-23.

Corporations are located in Subchapter C. Mutual funds are located in Subchapter M. Tax-exempt organizations are in Subchapter F.

Page 91

3-24.

§ 61 of the code contains the statute for the definition of gross income, § 163 for the interest deduction, and §§ 167, 168, and 169 for depreciation and cost recovery.

Page 94

3-25.

Section 152 of the code contains the statute for the definition of a dependent, § 166 for a bad debt deduction, and § 7701(a)(3) for alimony payments.

Page 95

3-26.

These words have very different logical meanings, and, even when the words are ―hidden‖ at the end of the previous clause or subparagraph, they may significantly change the outcome of a research project. The word ―and‖ is conjunctive; the word ―or‖ is disjunctive. If the word ―and‖ lies between two phrases, both of them must be true for the provision to apply to the client‘s problem. However, if the word ―or‖ lies between two phrases, then only one of them must be true for the provision to apply. The researcher must also be careful with words that modify percentage or dollar amounts. The phrases ―less than 50 percent,‖ ―more than 50 percent,‖ and ―not less than 50 percent‖ have very different meanings in determining whether the provisions of a section apply.

Pages 96-97

3-27.

It is true that not all statutory tax law is found in the IRC. Tax treaties and federal laws other than the code are two other statutory sources of tax law.

Page 99

Federal Tax Research, 12th Edition

Page 1-51

EXERCISES

3-28.

a. Title 26

b. Subtitle A

c. Chapter 1

d. Subchapter B

Page 91

3-29.

a. Title 26

b. Subtitle A

c. Chapter 1

d. Subchapter P

Page 91

3-30.

a. Answers will vary with time. Because of the scale of the 2017 Tax Cuts and Jobs Act and the relative dearth of tax legislation through the date of publication, many of the most recent committee reports will refer to P.L. 115-97. An example of the public law associated with a recent conference committee report is P.L. 115-97, which requires the use of the Chained Consumer Price Index for inflation adjustments.

b. Answers will vary with time. An example of the public law associated with a recent committee report is P.L. 114-113, which extends an exclusion of income to student work–service–learning programs.

c. Answers will vary with time. An example of the public law associated with a recent committee report is P.L. 115-97, which creates a limit on the amount of interest that is deductible in a given year.

3-31.

a. Answers will vary with time. An example of a recent House committee report is H. Rep. 114-542 (to accompany H.R. 3209), P.L. 114-184, Recovering Missing Children Act, which reports on P.L. 114-184.

Page 1-52

SOLUTIONS MANUAL

The provision expands the authority of the IRS to share information with certain law enforcement in cases of missing children.

b. Answers will vary with time. An example of a recent conference committee report is Conf. Rep. 114357, P.L. 114-94, Fixing America‘s Surface Transportation (FAST) Act, which reports on P.L. 114-94. The provision requires the State Department to refuse to issue or renew a passport if the taxpayer has a seriously delinquent tax liability.

c. Answers will vary with time. An example of a recent Senate committee report is S. Rep. 114-3 (to accompany H.R. 22), P.L. 114-94, Hire More Heroes Act of 2015, which reports on P.L. 114-94. The provision does not count employees with health care through TRICARE or the Veterans Administration to be counted toward the 50 employee count for qualifying as a small business.

3-32.

a. Answers will vary with time. In 2019, the Chair was Richard Neal of Massachusetts.

b. Answers will vary with time. In 2019, there were 42 members.

c. Answers will vary with time and location. A list of current members can be found here: https://waysandmeans.house.gov/about/committee-members

d. Answers will vary with time. In 2017, there were six subcommittees: Health, Oversight, Social Security, Select Revenue Measures, Trade, and Worker and Family Support. Current subcommittees can be found at https://waysandmeans.house.gov/subcommittees

3-33.

Estate and gift taxes

Procedure and administration

Income taxes

Employment taxes

Page 91

3-34.

Chapters of the code are numbered, although not continuously, from 1 to 100. These chapter numbers do not start over at each subtitle but rather are consecutive throughout the IRC. Each chapter contains the tax provisions that relate to a more narrowly defined issue than is addressed by the subtitles.

Federal Tax Research, 12th Edition

Page 1-53

Pages 90-91

3-35.

Estate taxes

Administration/Information

Normal taxes and surtaxes

Gift taxes

Page 91

3-36.

A subchapter typically is a group of provisions that relate to a specific area of tax law. Subchapters sometimes are divided into parts, which may be divided into subparts. Capital letters are used to denote subchapters, and the lettering scheme starts over with each chapter. Thus, there may be a Subchapter A in each chapter.

Many times, tax practitioners use the subchapter designation as a shorthand reference to identify a certain area of taxation.

Page 90

3-37.

Corporate distributions and adjustments

Estates, trusts, beneficiaries, and dependents

Partnerships and partners

S corporations and their shareholders

Page 91

3-38

§ 55(b)(1)(A)(ii)

3-39

§ 263A(1)(A)

3-40.

Corporate distributions and adjustments

Partners and partnerships

Tax treatment of S corporations and their shareholders

Accounting methods and periods

Page 1-54

SOLUTIONS MANUAL

Page 91

3-41.

Computation of taxable income

Accounting periods and methods

Insurance companies

Exempt organizations

Page 91

3-42.

Subchapter D

Subchapter K

Subchapter C

Subchapter H

Page 91

3-43.

Estates, trusts, beneficiaries, and decedents

Determination of tax liability

Natural resources

Capital gains and losses

Page 91

3-44.

3-45

§§ 21-54AA

§§ 331-346

§§ 241-250

§§ 1-5

Tax on self-employment income; §§ 1401-1403

Page 91

Federal Tax Research, 12th Edition

3-46.

Deferred compensation

Banking institutions

Capital gains and losses

Insurance companies

Page 1-55

Page 91

3-47.

The official name of P.L. 115-123 is the Bipartisan Budget Act of 2018. It was enacted in 2018. Note: Can be found at various locations, including RIA Checkpoint.

3-48.

The official name of P.L. 114-292 is the Combat-Injured Veterans Tax Fairness Act of 2016. It was enacted in 2016. Note: Can be found at various locations.

3-49.

Code sections can be divided into subsections, paragraphs, subparagraphs, and clauses. Subsections are denoted by lowercase letters, paragraphs by numbers, and subparagraphs by capital letters, and clauses by lower-case roman numerals.

Pages 92-93

3-50.

Each code section number is used only once throughout the code.

Page 92

3-51.

Definition of gross income

Trade or business deductions

Individual tax rates

Production-of-Income Expenses

Page 94

3-52.

Deductions for adjusted gross income

Interest deduction

Corporate tax rates

Deduction for taxes

Page 1-56

SOLUTIONS MANUAL

Page 94

3-53.

Subtitle A (income taxes)

Chapter 1 (normal taxes and surtaxes)

Subchapter B (computation of taxable income)

Part VII additional itemized deductions for individuals

Page 91

3-54.

Subtitle B (estate and gift taxes)

Chapter 11 (estate taxes)

Subchapter A (estates of citizens or residents)

Part III gross estate

Section 45C. Title: Clinical testing expenses for certain drugs for rare diseases or conditions.

3-55.

There shall be allowed a tax credit for the taxable year for an amount equal to 50 percent of the qualified clinical testing expenses for the taxable year.

Section 141. Title: Private activity bond; qualified bond. This section defines ―private activity bond‖ and qualified bonds. A ―private activity bond‖ means any bond issued as part of an issue that meets (a) the private business use test of paragraph (1) of subsection (b), and (b) the private security or payment test of paragraph (2) of subsection (b), or (c) the private loan financing test of subsection (c).

Section 166. Title: Bad debts. For wholly worthless debts, there shall be allowed as a deduction any debt that becomes worthless within the taxable year. Furthermore, for partially worthless debts, when a debt is recoverable only in part, the Secretary may allow such debt, in a dollar amount not in excess of the part charged off within the taxable year, as a deduction.

3-56.

N/A

Federal Tax Research, 12th Edition

Page 1-57

Section 117. Title: Qualified scholarships. Gross income does not include any amount received as a qualified scholarship, as defined in § 117(b)(1), by an individual who is a candidate for a degree at an educational organization described in § 170(b)(1)(A)(ii).

Section 165. Title: Losses. There shall be allowed by a deduction any loss sustained during the taxable year and not compensated by insurance or otherwise. Discussion on losses include limitations on losses of individuals, wagering losses, theft losses, capital losses, worthless securities, treatment of casualty gains and losses, disaster losses, and treatment of certain losses in insolvent financial institutions.

Section 304. Title: Redemption through use of related corporations. For purposes of §§ 302 and 303, if (a) one or more persons are in control of each of two corporations, and (b) in return for property, one of the corporations acquires stock in the other corporation from the person (or persons) so in control, then such property (unless paragraph (2) applies) shall be treated as a distribution in redemption of the stock of the corporation acquiring such stock.

N/A

Section 25A. Title: American Opportunity and Lifetime Learning credits. In the case of an

3-57.

individual, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year the amount equal to the sum of— (1) the American Opportunities Tax Credit, plus (2) the Lifetime Learning Credit. b.

Section 67. Title: 2 percent floor on miscellaneous itemized deductions. In the case of an individual, the miscellaneous itemized deductions for any taxable year shall be allowed only to the extent that the aggregate of such deductions exceeds 2 percent of adjusted gross income. Note that deduction is currently suspended through 2025.

Section § 280G, Title: Golden parachute payments. No deduction shall be allowed under this chapter for any excess parachute payment. The term ―excess parachute payment‖ means an amount equal to the excess of any parachute payment over the portion of the base amount allocated to such payment.

N/A

Page 1-58

SOLUTIONS MANUAL

3-58. National commercial publishers, such as Commerce Clearing House (CCH) and the Research Institute of America (RIA), publish electronic versions of the code. In addition, the code may be found at the Cornell Law School Website, and in Title 26 of the United States Code.

Page 94

3-59.

The task can be accomplished by using the Cross Reference Table 2 of the CCH service.

Page 95

3-60.

Most code sections contain a general rule followed by situations under which the taxpayer is excepted from the general rule. In some cases, the exceptions to the general rule are further modified to provide for exceptions to the general exceptions. Some exceptions are not addressed within the same section, but instead are discussed in a separate section of the code. All relevant provisions must be carefully read.

The words ―and‖ and ―or‖ have different logical meanings and could have a significant impact on the outcome of a research project. If the word ―and‖ lies between two phrases, both of them must be true for the provision to apply to the client‘s problem. In contrast, if the word ―or‖ lies between two phrases, then only one of them must be true for the provision to apply.

When analyzing a provision that recently has been changed by Congress, a researcher must be very careful to cross-reference all of the uses of terms whose definitions have been affected by the new law.

The researcher must be aware of the effective dates of the various changes in the code. A provision may not go into effect immediately upon its adoption by Congress. The date of the tax act with which the change in law is passed is not indicative of the effective date of the provision. Often, various provisions under the same tax law will become effective at different dates and, in fact, may have effective dates that precede the date of the tax act. Similarly, when a provision of the tax law is deleted from the code, the provision may be left in effect for a designated period of time before it actually expires.

The researcher must be careful with words or phrases that modify percentage or dollar amounts. For example, the phrases ―less than 50 percent,‖ ―more than 50 percent,‖ and ―not less than 50 percent‖ have different meanings in deciding whether the provisions of a code section apply to a

Federal Tax Research, 12th Edition

Page 1-59

given situation. The researcher must also distinguish among such terms as ―30 days‖ and ―one month‖ because they usually identify different time periods as they are used in the code.

Pages 96–97

3-61.

Not all of the answers to a tax question can be found in the code. The code may be silent with respect to the problem at hand, the application of the code to the situation may not be clear, or code sections may appear to be in conflict. In such situations, the researcher may have to look to other sources, such as administrative rulings, judicial authorities, tax treaties, or secondary sources of the law, for example, as articles in periodicals.

Page 99

3-62.

Yes, the income tax treaty was signed in 2003. An amended protocol was signed in 2013 but has not been ratified by the Senate.

Yes, the income tax treaty was signed in 2001.

Yes, the income tax treaty was signed in 1980.

Yes and No. The terms of the tax treaty with Vietnam was signed in 2015 but remains unratified by the Senate (and therefore unsigned by the President) as of the date we go to print.

3-63.

Yes, there is an income tax treaty between the United States and Australia. It was signed in 1982 with technical explanations and protocols released in 2001.

Yes, there is an income tax treaty between the United States and Iceland. It was signed in 2007.

Yes, there is an income tax treaty between the United States and Jamaica. It was signed in 1980.

Yes, there is an income tax treaty between the United States and Sri Lanka. It was signed in 1985. A technical protocol revising the treaty was signed in 2002.

3-64.

Student answers will contain name of the computer tax service used.

Page 1-60

Section 117 of the IRC has four subsections included.

Section 117(b) has two paragraphs.

Section 117(d)(2) has two subparagraphs.

N/A

3-65.

Student answers will contain name of the computer tax service used.

Section 385 of the IRC has three subsections included.

Section 385(b) has five paragraphs.

N/A

3-66.

3-67.

SOLUTIONS MANUAL

Student answers will contain name of the computer tax service used.

Section 280C of the IRC has eight subsections included.

Section 280C(b) has four paragraphs.

Section 280(C)(b)(2) has two subparagraphs.

N/A

Section 843, added by P.L. 84-429, effective January 1, 1955.

Section 131, added by P.L. 97-473, applicable to tax years beginning after December 31, 1978.

Section 469, added by P.L. 99-514, the Tax Reform Act of 1986.

Section 199, added by P.L. 108-357, the American Jobs Creation Act of 2004. This information can be obtained from the legislative history that follows each section in the code

Federal Tax Research, 12th Edition

Page 1-61

and from the finding lists of most commercial tax services.

3-68.

3-69.

Section 32 is found in Subtitle A, Chapter 1, Subchapter A.

Section 172 is found in Subtitle A, Chapter 1, Subchapter B.

Section 2039 is found in Subtitle B, Chapter 11, Subchapter A.

Section 6013 is found in Subtitle F, Chapter 61, Subchapter A.

Subchapter B:

3-70.

Section 61

Gross income defined

Section 62

Adjusted gross income defined

Section 63

Taxable income defined

Subchapter E: Section 441

Period for computation of taxable income

Section 442

Change of annual accounting period

Section 443

Returns for a period of less than 12 months

Subchapter J: Section 641

Imposition of tax

Section 642

Special rules for credits and deductions

Section 643

Definitions applicable to subparts A, B, C, and D

Subchapter S: Section 1361

S corporation defined

Section 1362

Election; revocation; termination

Section 1363

Effect of election on corporation

No equivalent

Section 1012

Section 61

Sections 301 and 316

Section 701

Page 1-62

3-71.

SOLUTIONS MANUAL

Section 101. Each of the following code sections listed reference § 101 as of June 2019: §§ 61, 72, 953, 6039I, 6050Q, 6050Y, 7702, and 7702B.

Section 307. Each of the following code sections listed reference § 307 as of June 2019: §§ 307, 312, 1223, and 3121.

Section 446. Each of the following code sections listed reference § 446 as of June 2019: §§ 404A and 6110.

Note: Students should also state which computer tax service was used to complete the exercise.

3-72.

Article I, § 8

3-73.

Sections 1361, 1362, 1363, 1366, 1367, 1368, 1371, 1372, 1373, 1374, 1375, 1377, 1378, and 1379; may also include §§ 6241 through 6245.

Sections 541 through 547.

Sections 2501 through 2505, 2511 through 2516, 2518, 2519, and 2522 through 2524.

Sections 446 through 448, 451, 453, 453A, 453B, 454 through 457, 457A, 458, 460, 461, 464, 465, 467, 468, 468A, 468B, 469, 470 through 475, and 481 through 483; may also include §§ 441 through 444.

3-74.

As of June 2019, there are 28 members chaired by Chuck Grassley. This information is subject to change after every election. The student should state where he or she found this information (e.g., https://www.finance.senate.gov/about/membership).

3-75.

a. No bill of attainder or ex post facto law shall be passed.

b. The Congress shall have power to lay and collect taxes, duties, imposts, and excises to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imports, and excises shall be uniform throughout the United States.

c. He [the President] shall have power, by and with the advice and consent of the Senate, to make treaties,

Federal Tax Research, 12th Edition

Page 1-63

provided Page 110 two thirds of the Senators present concur; and he shall nominate, and by and with the advice and consent of the Senate, shall appoint ambassadors, other public ministers and consuls, judges of the Supreme Court, and all other officers of the United States, whose appointments are not herein otherwise provided for, and which shall be established by law: but the Congress may by law vest the appointment of such inferior officers, as they think proper, in the President alone, in the courts of law, or in the heads of departments.

The student should state where he or she found this information.

3-76.

The solution to this exercise will vary from student to student. Most will use an Internet site like congress.gov to find a Ways and Means or Finance Committee Report.

The student should state where he or she found this information.

Page 1-64

SOLUTIONS MANUAL

CHAPTER 4 ADMINISTRATIVE REGULATIONS AND RULINGS

DISCUSSION QUESTIONS 4-1.

The Internal Revenue Service, part of the U.S. Treasury Department, is responsible for the administration of the income tax law.

Page 110

4-2.

§ 7805(a) authorizes the Treasury Secretary (or his/her delegate) to prescribe the rules and regulations necessary to administer the code. This code section gives the IRS the general authority to issue binding rules and regulations concerning Title 26 of the U.S. Code.

Page 110

4-3.

The four pronouncements that are most important to tax research are regulations, revenue rulings, revenue procedures, and letter rulings. The IRS issues other notices that are generally less important than these four.

4-4.

Regulations constitute the IRS‘s official interpretation of a portion of the Internal Revenue Code. Treasury decisions are documents that explain and contain the text of a final or temporary decision. Treasury decisions are published in the Federal Register and sometime later, in the Internal Revenue Bulletin.

Pages 110-111

4-5.

Although a proposed regulation has not yet been incorporated into the official administrative tax law, it should not be ignored because they generally represent the IRS‘ current understanding of an issue and many of the provisions of the proposed regulation may eventually become part of the final regulation.

Page 111

4-6.

General regulations are issued under the general authority granted to the IRS to interpret the language of the code, usually under a specific code (or committee report) directive of Congress, and with specific Congressional authority.

With respect to legislative regulations, the IRS is directed by Congress to fulfill a law-making function, and to specify the substantive requirements of a tax provision. Regulations ordered by the code in this manner carry the authority of the statute itself and are not easily challenged by taxpayers.

Federal Tax Research, 12th Edition

Page 1-65

Page 112 Page 110

4-7.

Temporary regulations are issued to provide the taxpayer with some immediate guidelines concerning a new provision of the law. Until a temporary regulation is replaced with the final regulation, the tax researcher should treat the temporary regulation as though it were finalized and assign it the presumption of the force of law. Consequently, it is important to distinguish between temporary and proposed regulations. Temporary regulations are fully in effect and must be followed until they are superseded, whereas proposed regulations are not in effect and are issued to solicit comments and to expose the IRS‘s proposed interpretation of the law.

Pages 111–112 4-8.

Regulations are generally viewed as having the full force and effect of law. Consequently, a taxpayer‘s challenge to a regulation typically must assert an improper exercise of IRS power, or an overly broad application of a rule that is not authorized by the code.

When questioning the validity of a regulation, the tax researcher must be aware of the accuracy penalties that Congress has enacted. If a practitioner chooses to ignore an administrative element of the tax law, he or she must possess substantial authority to do so to avoid these penalties.

Pages 112-113

4-9.

Under § 7805(b), a regulation is effective on the date on which the regulation was filed in the Federal Register. However, there are several exceptions, which allow a new regulation to apply retroactively (see text).

Page 113

4-10.

A revenue ruling is an official pronouncement of the National Office of the IRS, and it deals with the application of the code and regulations to a specific factual situation, which usually has been submitted by a taxpayer. Consequently, most revenue rulings indicate how the IRS will treat a given taxpayer‘s transaction.

Page 116-117

4-11.

A revenue ruling usually includes several features. Typically, the ruling begins with a statement of the issues that are involved. Then, those facts that will bear upon the IRS‘s analysis and conclusion are stated in summary fashion. In the laws and analysis section of the ruling, the service identifies and discusses the applicable statutes, regulations, and court cases that relate to the factual situation. Finally, the IRS holding

Page 1-66

SOLUTIONS MANUAL

is stated, usually accompanied by an explanation as to how and why the IRS arrived at the conclusion to treat the transaction in this matter.

Pages 117-120

4-12.

Online and commercial tax services present finding lists and other references used to examine the status of a ruling.

4-13.

Although a revenue procedure may not be useful in arriving at a solution to a technical tax problem, such pronouncements are important in that they provide information to the public as to the handling of certain administrative matters. The practitioner should be familiar with the relevant revenue procedures to implement recommendations or conclusions.

Page 122

4-14.

Letter rulings are issued in several forms, including private letter rulings, determination letters, and technical advice memoranda. The IRS does not publish any of these rulings in an official collection, but they are available from several commercial sources.

Page 123

4-15.

The National Office of the IRS issues private letter rulings in response to a taxpayer‘s request for the IRS‘s position on a specified tax issue. The taxpayer asks the IRS to disclose its interpretations of the code, regulations, and pertinent court cases for a transaction, which the taxpayer describes.

Page 123

4-16.

When the IRS comes across an unusual transaction that it believes to be of general interest, or when it receives many private letter ruling requests concerning very similar factual situations, a private letter ruling may be converted into revenue ruling form and published in official administrative sources.

Page 126

4-17.

A determination letter is similar in purpose and nature to a private letter ruling, except that it is issued by the local IRS office, rather than by the IRS‘s National Office. Determination letters usually relate to a completed transaction and most often concern transactions that are not overtly controversial.

Page 126

Federal Tax Research, 12th Edition

4-18.

Page 1-67

A technical advice memorandum is issued by the IRS‘s National Office, making it similar in this regard to Page 110 the private letter ruling. The technical advice memorandum concerns a completed transaction and is often requested by an IRS agent when a question arises during an audit that cannot be answered satisfactorily by the local IRS office.

Technical advice memoranda are not included in any official IRS publication, but they are open for public inspection and are available from several commercial sources.

Page 126

4-19.

The precedential value of any of these written determinations is strictly limited. Overall, such pronouncements may not be cited as authority in a tax matter by either the taxpayer or the IRS. However, letter rulings can be used as ―examples‖ of IRS treatment of similar factual patterns when dealing with the IRS. In addition, taxpayers may rely on private letter rulings, technical advice memoranda, actions on decisions, general council memoranda, and other similar documents published by the IRS in the Internal Revenue Bulletin, to avoid certain understatement of tax penalties.

Page 127

4-20.

§ 6110 authorizes the public inspection of unpublished IRS letter rulings, which includes private letter rulings, determination letters, technical advice memoranda, and chief counsel advice.

Pages 126

4-21.

The code specifically limits the precedential use of any IRS written determination. In general, such pronouncements may not be cited as authority in a tax matter by either the taxpayer or the IRS. Thus, written determinations are useful strictly in providing ―examples‖ of IRS treatment of similar factual patterns for the tax researcher or the IRS agent with respect to the tax problem of the party who requested the determination.

Page 127

4-22.

The Internal Revenue Bulletin (IRB) is currently published online weekly by the IRS. The IRB can contain any of the following:

Federal Tax Research, 12th Edition

Page 1-67

Revenue rulings Revenue procedures IRS acquiescences and nonacquiescences New tax (public) laws Committee reports Procedural rules New tax treaties Treasury decisions Other notices

Pages 128–130

4-23.

IRB stands for Internal Revenue Bulletin, which is a weekly publication in which both revenue rulings and revenue procedures are first published. C.B. stands for Cumulative Bulletin, which is a bound book containing the ordered contents of many IRBs. Thus, if one finds ―IRB‖ in a citation, this refers to the location in the weekly Internal Revenue Bulletin, while ―C.B.‖ refers to the location in the Cumulative Bulletin. The Cumulative Bulletin is no longer published.

Page 120

4-24.

Revenue rulings are official pronouncements of the National Office of the IRS. They generally indicate how the IRS will treat a certain type of taxpayer transaction. Although revenue rulings do not carry the force and effect of a regulation, they are an excellent source of information and guidance. Revenue procedures are information releases from the National Office of the IRS, generally relating to how taxpayers should handle certain procedural matters before the IRS.

Pages 116–123

4-25.

The service issues acquiescences and nonacquiescences as actions on decision (AOD), which are published in the Internal Revenue Bulletin and, thereafter, in the Cumulative Bulletin. The Internal Revenue Bulletin Index lists acquiescences and nonacquiescences alphabetically and in code section order. A citatory also can be used to locate and interpret acquiescence and nonacquiescence decisions.

Pages 130–131

Page 168

SOLUTIONS MANUAL

4-26. Yes, the IRS can change its position on acquiescences or nonacquiescences by withdrawing the original pronouncement. This may occur due to a contrary holding in a subsequent court case, or a change in the agency‘s policy concerning the issue.

Page 130

4-27.

No. When the IRS loses an issue or decision in court, the commissioner may announce an acquiescence of nonacquiescence to the decision. Neither is issued if the IRS prevails in a court case, because it likely agrees with all pertinent holdings.

Page 130

4-28.

A technical memorandum (TM) is prepared in the production of a proposed regulation and is issued from the office of the IRS‘s chief counsel.

A general counsel Memoranda (GCM) is generated upon the request of the IRS, will typically assist the service in the preparation of revenue rulings and private letter rulings, and is issued from the office of the IRS‘s chief counsel.

An action on decision (AOD) is prepared when the IRS loses a case in a court. It conveys the IRS‘s decision to acquiesce or nonacquiesce, and is issued by the IRS‘s chief counsel.

Pages 127, 130–132

4-29.

CCNs is temporary directive the IRS National Office uses to disseminate policies, procedures, instructions, and/or delegations of authority to chief counsel employees.

SCA is guidance provided by the IRS National Office to IRS service centers and related IRS functions concerning their tax administration responsibilities.

CCA is written advice or instruction from the IRS national office issued to field employees.

Page 131–132

Federal Tax Research, 12th Edition

4-30.

Page 1-69

IRS announcements concern items of general importance to taxpayers and contain guidance involving substantive interpretations of the code or other provisions of the law that usually have short-term application. A tax practitioner may rely on an IRS announcement as authority for an action but should confirm his or her understanding of the released material using appropriate research techniques.

Page 132

4-31.

IRS notices concern items of general importance to taxpayers and contain guidance involving substantive interpretations of the code or other provisions of the law that usually have long-term application. A tax practitioner may rely on an IRS notice as authority for an action, but should confirm his or her understanding of the released material using appropriate research techniques.

Page 132

4-32.

These publications typically do not cite the code, regulations, or other authority upon which they rely. More importantly, the service disclaims any responsibility for damages the taxpayer may suffer in relying upon the publications, and the service may take positions that are contrary to those included in the publications in certain court cases or appeals hearings. In addition, these documents are prepared from the government‘s point of view and may not disclose the existence of unfavorable court rulings with respect to the issue involved.

Pages 133–134

EXERCISES 4-33.

Reg. § 1.212-3

| ----------- Type of Reg. (1 = Income tax) | -------- Related Code § (212—Expenses for production of income) | ------ Regulation Number (3)

Page 114

4-34.

Reg. § 20.2039-1(a) a.

The ―20‖ stands for Regulation type 20—Estate tax.

Page 170

4-35.

SOLUTIONS MANUAL

The ―2039‖ stands for Code Section 2039—Annuities.

The ―1‖ stands for Regulation Number 1.

The ―(a)‖ stands for Regulation Paragraph (a).

Reg. § 1.274-6T(a)(2) a.

The ―1‖ stands for Regulation type 1—Income tax.

The ―274‖ stands for Code Section 274—Disallowance of certain entertainment, expenses, and so on.

4-36.

4-37.

4-38.

The ―6T‖ stands for temporary regulation Number 6.

The ―(a)‖ stands for Regulation Paragraph (a).

The ―(2)‖ stands for Regulation Subparagraph (2).

26 CFR § 163-10(a)(2) a.

The ―26‖ stands for Title 26 of the U.S. Code

The ―163‖ stands for Code Section 163—Interest.

The ―10‖ stands for Regulation Number 10.

The ―(a)‖ stands for Regulation Paragraph (a).

The ―(2)‖ stands for Regulation Subparagraph (2).

26 CFR § 1.61-21(a)(3) a.

The ―1‖ tells us the regulation type—in this case, an income tax regulation.

The ―26‖ stands for Title 26 of the U.S. Code

The ―61‖ stands for Code Section 61—Gross income.

The ―21‖ stands for Regulation Number 21.

The ―(a)‖ stands for Regulation Paragraph (a).

The ―(3)‖ stands for Regulation Subparagraph (2).

301

Federal Tax Research, 12th Edition

4-39.

4-40.

Employment tax

Procedures and administration

Gift tax

Statement of procedural rules

Estate tax

Page 1-71

Rev. Rul. 2013-5, 2013-9 IRB 525.

2013 is the year the ruling was issued. 5 is the ruling number for the year. 2013-9 is the weekly issue of the Internal Revenue Bulletin. IRB is the abbreviation for the Internal Revenue Bulletin. 525 is the first page number of the ruling in the Internal Revenue Bulletin.

This citation can be interpreted as follows: the ruling is found in the ninth weekly Internal Revenue Bulletin to be published in 2013, beginning at page 525.

Pages 120

4-41.

Rev. Rul. 96-41, 1996-2 CB 8.

96 is a reference to the year the ruling was issued (1996).

41 is the ruling number for the year.

1996-2 is the volume number of the Cumulative Bulletin (Volume 2 of 1996).

CB is the abbreviation for the Cumulative Bulletin.

8 is the page number.

Pages 120

4-42.

Rev. Rul. 2002-55, 2002-2 C.B. 529.

Pages 120

4-43.

Rev. Proc. 94-36, 1994-1 C.B. 682.

Page 172

SOLUTIONS MANUAL

Pages 120

4-44.

Rev. Proc. 2001-5, 2001-2 C.B. 164.

Page 122

4-45.

Private Letter Ruling 9615032

96 denotes the year in which the ruling was issued. 15 denotes the week of the year in which the ruling was issued. 032 denotes the number of the ruling issued during that week.

Page 127

4-46.The elements of the citation, Rev. Proc. 2013-14, 2013-3 IRB 283 are as follows:

Rev. Proc. stands for revenue procedure, which is a release of procedural information from the IRS. 2013-14 specifies that the cited revenue procedure is the 14th issued in 2013. 2013-3 is the weekly issue of the Internal Revenue Bulletin (the third week of 2013). IRB is the abbreviation for the Internal Revenue Bulletin. 283 is the page number where the revenue procedure starts in the Internal Revenue Bulletin.

Page 122

4-47.

The elements of the citation, Rev. Proc. 2000-41, 2000-2 C.B. 317 are as follows:

Rev. Proc. stands for revenue procedure, which is a release of procedural information from the IRS. 2000-41 specifies that the cited revenue procedure is the 41st issued in 2000.

Federal Tax Research, 12th Edition

Page 1-73

2000-2 is the volume number of the Cumulative Bulletin (Volume 2 of 2000). C.B. is the abbreviation for the Cumulative Bulletin. 371 is the page number where the revenue procedure starts in the Cumulative Bulletin.

Page 122

4-48.

Publication 17 is an IRS Publication entitled Your Federal Income Tax (for Individuals).

Publication 225 is an IRS Publication entitled Farmer’s Tax Guide.

Publication 334 is an IRS Publication entitled Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ).

4-49.

Publication 54 is Tax Guide for U.S. Citizens and Resident Aliens Abroad.

Publication 503 is Child and Dependent Care Expenses.

Publication 519 is U.S. Tax Guide for Aliens.

4-50.

Revenue Ruling 2018-20 obsoleted a series of prior revenue rulings that provided exemption from FICA for tax-exempt organizations and which provided for waiver of exemption. The rulings obsoleted are: Rev. Rul. 55-470; Rev. Rul. 56-188; Rev. Rul. 58-270; Rev. Rul. 71-276; Rev. Rul. 74-415; Rev. Rul. 74-493; Rev. Rul. 77–159; Rev. Rul. 77-315; Rev. Rul. 78-7; and Rev. Rul. 80337.

4-51.

Technical advice memorandum—is the value of meals and snacks provided by an employer gross income.

Field service advice—treatment of a refund when taxpayer goes from Chp 7 bankruptcy to Chp. 13.

Private letter ruling—60-day rollover of IRA extension.

Page 174

SOLUTIONS MANUAL

Service center advice—ban on earned income credit.

4-52.

Reg. § 1.162-24(a)(2)(ii).

4-53.

Reg. § 1.1362-1(b).

4-54.

LLC granted extension to make check-the-box election.

Process for granting scholarships will not be a taxable expenditure nor taxable to scholarship recipient.

4-55.

Use of FIFO and the simplified production method to account for inventories.

Cost to convert to just-in-time manufacturing process are capitalizable not deductible.

Application of the tax benefit rule when the state and local tax deduction is limited.

Treatment of use of smartcards and debit cards for qualified transportation fringe.

Certain payments to military participants are not includable in gross income.

Tool allowances for auto repair employees based on estimated hours are not part of an accountable plan.

4-56.

4-57.

Retroactive application of 50% ―bonus‖ depreciation in 2014.

Limitation of depreciation for autos placed in service in 2019.

Casualty loss caused by deterioration of concrete foundations.

Revisions to certain real property depreciation tables.

Announcement 2019-4, 2019-21 IRB 1192. IRS has revoked its determination that 20 different organizations qualify as organizations described in Code § 501(c)(3); and Code § 170(c)(2).

Federal Tax Research, 12th Edition

Page 1-75

4-58.

Notice 2019-22, 2019-14 IRB 931. Phase out of the credit on electric vehicles made by General Motors.

4-59.

Private Letter Ruling 201838001. IRS granted an extension for a taxpayer to extend the time for which to make an election to forego additional ―bonus‖ depreciation.

4-60.

Technical Advice Memorandum 201837014. Organization did not receive unrelated business taxable income from advertising under the terms of the agreement with publisher in connection with publishing journal.

4-61.

IRS announced disbarments, suspensions, and censures of attorneys, enrolled agents, and CPAs.

Donor organizations are not tax-exempt under § 501(c).

Announcement indicating information contained within certain IRS Forms was updated by the release of a regulation and is incorrect.

4-62.

Guidance on five year deferral of recognition of certain stock-based compensation under § 83.

It provides the permissible interest rates allowed when computing the current liability of pension plans.

4-63.

Raised the threshold for travel and entertainment expenses from $25 to $75.

IRS notice 2018-38 reminds corporate taxpayers to use a blended rate for fiscal year ends that overlap the 2017 and 2018 calendar years.

IRS notice 96-63 invites public comments on proposed changes to procedures for requesting private letter rulings under § 457.

4-64.

IRS notice 2016-40 provides information on the Work Opportunity Tax Credit.

TAM 201740018 deals with the inclusion of clinical trial expenses as part of qualified research expenses for purposes of the research credit.

TAM 200849015 discusses the inclusion of gift card income and the deduction for costs.

TAM 7953001 covers issues related to valuing a closely held corporation with respect to estate taxes.

Page 176

4-65.

SOLUTIONS MANUAL

TAM 200703019 discusses relief from the retroactive effect of the revocation of a determination letter.

TAM 201734007 discusses the application of common law marriage to the filing status of two individuals.

4-66.

4-67.

TAM 9853001 discusses unrelated business income for an exempt agricultural organization.

TD 9847 discusses the qualified business income deduction.

TD 9680 discussed the types of expenses that qualify as research and experimentation.

TD 9567 discusses reporting of foreign financial assets.

The student will also state which computer tax service was used to complete the exercise.

§ 119. One Treasury regulation has been issued: Reg. § 1.119-1 Meals and lodging furnished for the convenience of the employer.

§ 162. There are 31 final regulations, 2 temporary regulations, and 3 proposed regulations at the time we went to print. The final regulation is Reg § 1.162(l)-1. Deduction for health insurance costs of self-employed individuals but the highest ―numbered‖ regulation is Reg § 1.162-32. Expenses paid or incurred for lodging when not traveling away from home.

§ 121. The following Treasury regulations have been issued: Reg. § 1.121-1 through Reg. 1.121-5.

§ 338. The following 13 Treasury regulations and 3 proposed regulations have been issued:

Reg. § 1.338-0 Outline of topics Reg. § 1.338-1 General principles; status of old target and new target Prop. Reg. §1.338-1

Federal Tax Research, 12th Edition

Page 1-77

Reg. § 1.338-2 Nomenclature and definitions; mechanics of the § 338 election Reg. §1.338-3 Qualification for the § 338 election Reg. § 1.338-4 Aggregate deemed sale price; various aspects of taxation of the deemed asset sale Reg. § 1.338-5 Adjusted grossed-up basis Reg. § 1.338-6 Allocation of ADSP and AGUB among target assets Prop. Reg. § 1.338-6 Allocation of ADSP and AGUB among target assets Reg. § 1.338-7 Allocation of redetermined ADSP and AGUB among target assets Reg. § 1.338-8 Asset and stock consistency Reg. § 1.338-9 International aspects of § 338 Reg. § 1.338-10 Filing of returns Reg. § 1.338-11 Effect of § 338 election on insurance company targets Prop. Reg. § 1.338-11 Effect of § 338 election on insurance company targets Reg. § 1.338(h)(10)-1 Deemed asset sale and liquidation Reg. § 1.338(i)-1 Effective/applicability date

4-68.

§ 25A There have been six regulations and four proposed regulations issued. The last one is Reg. § 1.25A-5.

§ 166 Ten Treasury regulations has been issued and one proposed regulation. The last final is Reg. § 1.166-10.

§ 180 There have been two regulations issued. The most recent one is Reg. § 1.180-2 Time and manner of making election and revocation.

§ 305 There have been eight regulations issued and three proposed regulations. The highest numbered one is Reg. § 1.305-8 Effective dates.

4-69.

The current status of each of the following revenue rulings:

Rev. Rul. 2014-27: This revenue ruling was corrected by Rev. Rul. 2014-33.

Rev. Rul. 90-65: This revenue ruling was clarified by Ann. 91-15, 1991-5 IRB 49 and was revoked by Rev. Rul. 2015-11, 2015-21 IRB 975.

Page 178

SOLUTIONS MANUAL

Rev. Rul. 87-34: Currently, this revenue ruling stands as is. There have been no amplifications, superseding, or revocations of Rev. Rul. 87-34.

4-70.

Rev. Rul. 2002-80: This revenue ruling stands as is. It is amplifying Rev. Rul. 2002-3.

Rev. Rul. 2001-31: This revenue ruling has been amplified by Rev Rul 2002-89, 2002-2 CB 984 and Rev Rul 2002-90, 2002-2 CB 985.

4-71.

Rev. Rul 98-13: This revenue ruling was revoked by Rev. Rul. 2001-2.

Rev. Rul. 2019-22 is found at 2019-14 I.R.B 931

The phase out of the electric vehicle credit for General Motors.

If a new qualified plug-in electric drive motor vehicle sold by General Motors, LLC is purchased for use or lease on or after April 1, 2019, the allowable credit is as follows:

(1) For vehicles purchased for use or lease on or after April 1, 2019, and on or before September 30, 2019, the credit is 50 percent of the otherwise allowable amount determined under § 30D(b); (2) For vehicles purchased for use or lease on or after October 1, 2019, and on or before March 31, 2020, the credit is 25 percent of the otherwise allowable amount determined under § 30D(b); (3) For vehicles purchased for use or lease on or after April 1, 2020, no credit is allowable.

4-72.

The number assigned to the written determination at 2002-2 C.B. 333 is: Rev. Rul. 2000-43, 20002 C.B. 333.

The subject matter of this revenue ruling is: An accrual-basis S corporation may not elect under § 170(a)(2); to treat a charitable contribution as paid in the year authorized by the S corporation‘s board of directors if the contribution is paid by the S corporation after the close of the tax year.

4-73.

The number assigned to the written determination at 2004-10 I.R.B. 550 is: Rev. Rul. 2004-24, 2004-10 I.R.B. 550.

Federal Tax Research, 12th Edition

Page 1-79

The subject matter of this revenue ruling is: IRS identified circumstances in which real estate investment trust‘s (REIT‘s) income from providing parking facilities at its rental real properties qualifies as rents from real property under § 856(d).

4-74.

4-75.

The number assigned to the written determination at 2007-17 I.R.B. 990 is: T.D. 9318.

The subject matter is self-constructed property for purposes of § 263A.

The number assigned to the written determination at 2006-40 I.R.B. 528 is: T.D. 9284.

The subject matter is the ability of the IRS to enter into agreements that extend the statute of limitations.

4-76.

This notice has been declared obsolete, as of 2/14/2012, by temporary and final regulations.

The current status of revenue ruling 2000-44 is that is has been obsoleted by final regulations issued in 2016.

The current status of Revenue Procedure 89-31 is that this Rev. Proc. has been modified by Rev. Proc. 92-66, 1992-2 CB 428.

The current status of Announcement 99-110 is that it has not been modified or superseded, so it is still current.

4-77.

The current status of Notice 2015-79 is that it has been obsoleted as of 4/4/2016 by regulations reflected in TD 9761.

The current status of Revenue Ruling 2004-28 is that it has not been modified or superseded, so it is still current.

The current status of Revenue Procedure 93-15 is that it has been obsoleted by Rev. Proc. 200418, 2004-1 CB 529.

Announcement 2014-24 has not been modified or superseded, so it is still current.

Page 180

4-78.

SOLUTIONS MANUAL

Amounts paid by a member of a tax-exempt business league to the business league for deposit into a strike fund, where the funds would revert to the taxpayer if the fund were terminated, are considered capital expenditures and are not currently deductible, according to TAM 9237011. A technical advice memorandum, however, may not be relied upon by taxpayers other than those addressed in the memorandum, although it gives a good indication of the IRS position on the subject. If the taxpayer wants absolute certainty with respect to how the IRS will treat this issue on a specific tax return, a letter ruling should be requested.

4-79.

§ 2042 provides that the value of the gross estate of a decedent shall include the proceeds of all life insurance policies on the decedent‘s life receivable by beneficiaries other than the decedent‘s executor to the extent the decedent possessed ―incidents of ownership‖ in the policy. Assuming the decedent does not have incidents of ownership in the policy upon death, the proceeds should not be included in the decedent‘s gross estate. A computer search should return a number of letter ruling hits, for example, see PLR 9233006.

4-80.

Yes, a veterinary medical corporation is a personal service corporation for purposes of the required 34 percent tax rate, provided the corporation otherwise qualifies as a personal service corporation under the applicable code section(s) (see Rev. Rul. 92-65 and Rev. Rul. 91-30). However, note that the current rate applicable to personal service corporations is 21%.

4-81.

Yes, taxpayers who claim an itemized deduction for the interest they pay on adjustable rate mortgages and receive a refund from their mortgage company in a following year must include the refund as income. Taxpayers who claimed the standard deduction rather than an actual interest deduction are not required to include the refund in income (see Announcement 92-172).

4-82.

Yes, loan origination fees paid by the buyer with regard to VA and FHA loans may be treated as deductible points in the year of the sale (see Rev. Proc. 92-12 and Rev. Proc. 94-27).

Federal Tax Research, 12th Edition

Page 1-81

CHAPTER 5 JUDICIAL INTERPRETATIONS DISCUSSION QUESTIONS 5-1.

Either the taxpayer or the IRS may initiate legal proceedings in the federal court system.

Page 144

5-2.

The federal court system consists of three trial courts—the Tax Court, the district courts, and the U.S. Court of Federal Claims—and two levels of appellate courts—the U.S. Court of Appeals and the U.S. Supreme Court.

Page 145

5-3.

No. An appeal from any of the three trial courts is to the U.S. Court of Appeals. The parties have no direct access to the Supreme Court.

Page 145

5-4.

In most cases involving issues of the tax law, the taxpayer has the burden of proof. The burden of proof is placed on the taxpayer by statute, under the Internal Revenue Code. There are certain designated areas of the tax law where the burden of proof is on the government.

Pages 146–147

5-5.

The U. S. Tax Court is a specialized trial court that hears only federal tax cases.

Page 149

5-6.

The Tax Court was established in 1926 as the Board of Tax Appeals (BTA). At that time, it was an administrative board of the Treasury Department, rather than a true judicial court. In 1943, the BTA became the U. S. Tax Court, an administrative court, and in 1969, its status was upgraded to that of a full judicial court, with enforcement powers.

Page 149

5-7.

Nineteen judges hear Tax Court cases; however, normally a case is presented before only one of the 19 judges. Each judge is appointed to a 15-year term by the president, with the advice and

Page 182

SOLUTIONS MANUAL

confirmation of the Senate. Periodically, the chief judge of the court designates additional temporary Tax Court judges to hear cases. Page 149

5-8.

No. Taxpayers need not travel to Washington, D.C., because the Tax Court judges travel to various cities throughout the country and hear cases in these locations. In fact, the Tax Court is available to hear taxpayer cases in every major city of the United States several times each year.

Page 150

5-9.

No. Taxpayers cannot request jury trials before the Tax Court.

Page 150

5-10.

If a tax case involves an unusual, important, or novel issue, more than one judge, or the entire Tax Court, might hear the case. This rare occurrence is identified as an en banc sitting of the court.

Page 147

5-11.

A regular decision generally involves a new or unusual point of law, as determined by the chief judge of the court. If the chief judge believes that the decision concerns only the application of existing law or an interpretation of factual questions, the decision is issued as a memorandum decision. Summary decisions are issued in cases tried under the small case procedures and have no precedential value.

Pages 151–152

5-12.

When confronted with opposite holdings, the Tax Court will follow the court of appeals holding, if any, that has direct jurisdiction over the taxpayer whose case is before the Tax Court (the Golsen Rule). If the court of appeals that has jurisdiction over the taxpayer has not ruled on the matter, the Tax Court will decide the case based on its own interpretation of the statute. The Tax Court may reach opposite decisions, based upon identical facts, for taxpayers differentiated solely by the geographical area in which they live.

Pages 151–152

5-13.

The Tax Court maintains a small cases procedure, similar to a small Court of Federal Claims. If the amount of the disputed deficiency does not exceed $50,000, a taxpayer‘s case may be heard before the small cases procedure, upon approval of the Tax Court. The hearing is conducted as informally as

Federal Tax Research, 12th Edition

Page 1-83

possible, and the taxpayer may represent him- or herself. The taxpayer may be represented by an attorney. Neither written briefs nor formal oral arguments are required in the small cases procedure.

Page 152

5-14.

Regular Tax Court decisions are published by the Government Printing Office (GPO) in a set of bound reporters, called the Tax Court of the United States Reports.

The temporary citation is structured as follows: Breakell III, Walter J., 97 T.C.

, No. 18 (1991)

97 is the volume number. T.C. is the abbreviation for the Tax Court Reporter. indicates the page number, which is to be determined later. No. 18 is the number of the case. (1991) is the year of the decision.

Note that the temporary citation includes no page number for the case, because it has not yet been officially published.

The permanent citation for the same case: Breakell III, Walter J., 97 T.C. 202 (1991)

97 is the volume number. T.C. is the abbreviation for the Tax Court Reporter. 202 indicates the page number, which is to be determined later. No. 18 is the number of the case. (1991) is the year of the decision.

Pages 152–153

5-15.

General Citation: Chira, David, T.C. Memo 1991-309 T.C. Memo is a reference to a Tax Court memorandum decision. Year opinion issued:

1991

Page 184

SOLUTIONS MANUAL

Decision number:

309

Permanent Citation, CCH: Chira, David, 62 TCM 86 (1991)

Volume number: Reference to CCH Reporter: Page number: Year opinion issued:

62 TCM 86 1991

Permanent Citation, RIA: Chira, David, T.C. Memo 19 91-309

T.C. Memo is the Thomson Reuters Tax Court Memorandum reporter. 2006-179 is the paragraph number. Year opinion issued: 1991 (derived from paragraph number)

Pages 153–154

5-16.

The district courts hear cases involving legal issues that are based upon the entire U.S. Code, and not just the Internal Revenue Code.

Page 154

5-17.

Tax Court summary opinions, which are small cases decisions, cannot be used as precedents when dealing with the IRS; however, they do provide insight into how the Tax Court has treated similar tax situations.

Page 152

5-18.

The taxpayer must submit the disputed tax to the government before his case will be heard in either the district court or the Court of Federal Claims. This procedure is not necessary for a case to be heard in the Tax Court.

Pages 154 and 156

Federal Tax Research, 12th Edition

5-19.

Page 1-85

The district court or U.S. Court of Federal Claims would be appropriate for the taxpayer because these courts can address only the specific issue or issues that are involved in the case. The Tax Court may examine an entire return.

Page 149

5-20.

The Tax Court would be most suited for a taxpayer litigating an issue of a technical tax nature. Tax Court judges are tax law specialists, and therefore, should be better able to understand and discuss technical issues in the tax law than would a judge in the general trial courts (a district court or the U.S. Court of Federal Claims).

Page 149

5-21.

A federal district court is not a national court. Numerous district courts are located throughout the United States, and each is assigned a geographical area to serve. The designated district can be as small as one individual city or as large as an entire state. The taxpayer most often takes his or her case before the district court, which has jurisdiction over the location in which he or she lives or conducts business. District court cases are heard before one judge.

Page 154

5-22.

West Publishing—Federal Supplement Series

Kim, Joo T. v. U.S., 709 F.Supp 932 (D.Ct. Ca., 1989)

CCH—United States Tax Cases

Kim, Joo T. v. U.S., 89-1 USTC &9160 (D.Ct. Ca., 1989)

RIA—American Federal Tax Reports Second Series

Kim, Joo T. v. U.S., 63 AFTR2d 89-713 (D.Ct. Ca., 1989)

Volume Number

West

CCH

RIA

709

89-1

Page 186

SOLUTIONS MANUAL

Name of Reporter

F.Supp

USTC

AFTR2d

Page/Paragraph No.

932

9160

89-713

Court Issuing Opinion

District Court—California

Year Opinion Issued

1989

Page 155

5-23.

The West citation (F.Supp) is referred to as the primary citation for a case, and the CCH and RIA reporters are used to construct secondary citations, since they only contain tax decisions.

Page 155

5-24.

The U.S. Court of Federal Claims hears cases concerning all monetary claims against the federal government, only one type of which involves tax refunds.

Page 156

5-25.

Sixteen judges are appointed to the U.S. Court of Federal Claims.

Page 156

5-26.

The Court of Federal Claims is a national court, which is located in Washington, D.C. However, because the Court of Federal Claims judges travel to major cities and hear cases in these locations, in a manner similar to the Tax Court, one need not go to Washington, D.C., to present a case.

Page 156

5-27.

U.S. Court of Federal Claims Reporter—West Publishing:

Slatter, Frank v. U.S., 15 Fed.Cl. 79 (1988).

United States Tax Cases—CCH:

Slatter, Frank v. U.S., 89-1 USTC &9,110 (ClsCt).

American Federal Tax Reports—RIA

Federal Tax Research, 12th Edition

Page 1-87

Slatter, Frank v. U.S., 62 AFTR2d 89-556 (ClsCt).

West

CCH

RIA

Volume Number

89-1

Name of Reporter

Fed. Cl.

USTC

AFTR2d

Page/Paragraph No.

9,110

89-556

Court Issuing Opinion

Court of Federal Claims

Year Opinion Issued

1988

Page 156

5-28.

Congress has created 13 courts of appeals. Eleven are geographical, responsible for cases, which originate in designated states; one is assigned to Washington, DC; and one is known as the Court of Appeals for the Federal District.

The court of appeals considers issues in both tax and nontax litigation. The Court of Appeals for the Federal District hears only cases, which originate in the Court of Federal Claims. The other courts of appeals consider issues, which are brought from the Tax Court or a district court, for assigned geographical regions.

Page 157

5-29.

a. Fifth b. Second c. Ninth d. Tenth e. Federal

Page 158

5-30.

a. Ninth b. Seventh c. Fourth d. First

Page 188

SOLUTIONS MANUAL

e. Ninth

Page 158

5-31.

Typically, a three-judge panel hears a court of appeals case.

Page 157

5-32.

Federal Reporter, Second Series—West Publishing:

Roberts, John W. v. U.S., 858 F.2d. 698 (CA-11, 1988).

United States Tax Cases—CCH:

Roberts, John W. v. U.S., 1988-1 USTC 89, 9153 (CA-11).

American Federal Tax Reports—RIA:

Roberts, John W. v. U.S., 62 AFTR2d 88-5885 (CA-11, 1988).

West

CCH

RIA

Volume Number

858

Name of Reporter

F2d

USTC

AFTR2d

Page/Paragraph No.

698

9,153

88-5885

Court Issuing Opinion

Court of Appeals, 11th Circuit

Year Opinion Issued

1988

Pages 158–159

5-33.

No. Jury trials are not available before the court of appeals.

Page 157

5-34.

The U.S. Supreme Court is the highest court in the nation. Its judicial power extends ―to all cases of

Federal Tax Research, 12th Edition

Page 1-89

law and equity, arising under this Constitution, the laws of the United States, and treaties .... ‖ The Supreme Court meets and hears cases only in Washington, D.C.

Page 159

5-35.

A U.S. citizen does not have an automatic right to have his or her case heard by the Supreme Court. The Court‘s permission to present the case is petitioned by a writ of certiorari. Under this procedure, if the Court decides to hear the case, the certiorari is granted. If the Court refuses to hear the case, the certiorari is denied.

Page 159

5-36.

The Supreme Court is a nine-justice panel, and all nine justices hear every case, which is granted certiorari by the Court.

Page 159

5-37.

In most cases, those petitions that are granted in the tax area are for cases that involve either a conflict among the federal circuits or a tax issue of major importance.

Page 159

5-38.

In denying a petition for certiorari, the Supreme Court is not ―upholding‖ or in any way confirming a lower court decision. Rather, the Court simply did not find the case to be interesting or important enough to consider during its limited sessions. The lower court‘s decision does stand, but it cannot be inferred that this decision is necessarily correct or should be followed in the future by other taxpayers with similar situations.

Pages 159–160

5-39.

United States Supreme Court Reports—GPO:

U.S. v. Dalm, Francis L., 494 U.S. 596 (1990).

Supreme Court Reports—West:

Page 190

SOLUTIONS MANUAL

U.S. v. Dalm, Francis L., 110 S.Ct. 1361 (1990).

United States Tax Cases—CCH:

U.S. v. Dalm, Francis L., 90-1 USTC &50,154 (USSC).

American Federal Tax Reports—RIA:

U.S. v. Dalm, Francis L., 65 AFTR2d 1210 (USSC, 1990).

The format of the citations is the same as those presented in previous questions: Case name Volume number Name of reporter Page/Paragraph number Court issuing opinion (It is not necessary to list the court for the first two citations, because these reporters only contain Supreme Court cases.) Year opinion issued

Page 160

5-40.

A taxpayer may request a jury trial only before a federal district court. A jury trial is not available in any of the other trial courts, appellate courts, or the Supreme Court.

Page 154

5-41.

A court of appeals decision is important as a precedent in its own circuit. Each circuit is independent of the others and must follow only the decisions of the Supreme Court. Because the Supreme Court hears very few tax cases, the court of appeals generally represents the final authority. Most important to the taxpayers are decisions issued by the court of appeals for the circuit in which the client works or resides.

Page 157

5-42.

(a) The 104 stands for the volume number.

Federal Tax Research, 12th Edition

Page 1-91

(b) The T.C. is the citation for the U.S. Tax Court reporter.

Pages 152–153

5-43.

The O’Dell decision is from the Tax Court of the United States, and is a memorandum decision. Case name: O‘Dell Volume number of TCM reporter: 98 Reference to CCH Tax Court Memo Reporter: TCM First page in reporter that includes the case: 86 Year opinion issued: 2009

Pages 152–153

5-44.

The Simons-Eastern decision came from the District Court of Georgia. F. Supp. tells the tax researcher, it is a case before 1998.

Page 155

5-45.

a. The United States Court of Federal Claims

b. Unable to determine the court

c. Unable to determine the court

d. The U.S. Supreme Court

Various pages from the text.

5-46.

A case headnote is a brief case summary at the beginning of a case, which is usually inserted by the court reporter editors. They are useful to the researcher by helping to quickly determine if a particular case is of interest.

Pages 160–161

Page 192

5-47.

SOLUTIONS MANUAL

a. Tax Court

b. Tax Court

c. Tax Court Small Cases Procedure

d. U.S. Court of Federal Claims

Various pages from the text.

EXERCISES 5-48.

a. The issue involved is what constitutes a violation of the anti-cutback rule in pension plans. The court was to determine whether changing the definition of disqualifying postretirement employment caused a reduction in benefits.

b. The court found that the anti-cutback rule was violated.

5-49.

a. The issue involved a tax protestor claiming that the IRS, justice department, and various officials engaged in records falsification as part of substitute return process and seek to enjoin such practices and related activities. It was dismissed pursuant to AIA‘s tax bar. Alternative requests that district court intercede in pending criminal investigations of his and other nonfilers‘ income tax avoidance allegedly ongoing before federal grand jury in another district were unsupported and/or otherwise failed for lack of standing. b. The taxpayer‘s claims were dismissed. Alternative requests that district court intercede in pending criminal investigations of his and other nonfilers‘ income tax avoidance allegedly ongoing before federal grand jury in another district were unsupported and/or otherwise failed for lack of standing.

5-50.

a. The issue is whether a spouse of a deceased taxpayer can carryover an AMT credit from her deceased spouse when the credit was generated in a premarriage year.

b. The Tax Court held the credit did not carryover to remaining spouse in spite of no direct guidance in the code or regulations. Instead, the court relied on interpretations on similar rules under NOLs

Federal Tax Research, 12th Edition

Page 1-93

and other guidance on deductions for married individuals.

5-51.

a. The issues involved are the shifting of the burden of proof to the IRS, the avoidance of hobby loss limitation under a profit motive for an activity, and excuse for substantial understatement penalty due to reliance on professional advisors.

b. The court decided with the IRS on all issues. The burden of proof was not shifted to the IRS, the activity did not rise to level of profit motive to permit deductions, and reliance on professionals was not supported by evidence.

5-52.

a. The issue is whether the taxpayer should include nonemployee compensation in his gross income.

b. The Tax Court (small case summary opinion) held that the $3,843 of nonemployee compensation was includable in gross income.

5-53.

a. The issue dealt with unreported income for a married couple claiming status as a 501(d) organization. b. The court held that there was no such organization and the IRS‘ deficiency was due.

5-54.

a. The issue involved is the timely filing of a refund claim by a taxpayer. b. The court found that the refund claim was not timely filed and the taxpayer‘s claims of a lack of opportunity to file were rejected.

5-55.

a. What court heard the case? U.S. Tax Court

b. Who was the judge(s)? Judge Holmes

c. In what year was the case decided? 2015

d. What was the issue(s) involved? The issue involved the timing of the deduction of field packing materials.

Page 194

5-56.

SOLUTIONS MANUAL

a. What court heard the case? U.S. Tax Court

b. Who was the judge(s)? Judge Halpern

c. In what year was the case decided? 2015

d. What was the issue(s) involved? The issue involved was the exclusion of workers‘ compensation payments made to a retired police officer related to unused vacation and sick time that accrued while the police officer was on temporary disability.

5-57.

a. What court heard the case? U.S. Tax Court

b. Who was the judge(s)? Judge Nega

c. In what year was the case decided? 2014

d. What was the issue(s) involved? Whether gain must be recognized when a taxpayer sells a principal residence under and installment sale and then must reacquire the residence due to default on the installment note.

5-58.

a. What court heard the case? U.S. Tax Court

b. Who was the judge(s)? Judge Foleyr

c. In what year was the case decided? June 5, 2013.

Federal Tax Research, 12th Edition

Page 1-95

d. What was the issue(s) involved? The issue is whether a taxpayer is entitled to various deductions for employee business expenses.

5-59.

a. What court heard the case? U.S. Tax Court

b. Who was the judge(s)? Judge Goeke

c. In what year was the case decided? 2015

d. What was the issue(s) involved? There were three issues: (1) substantiation of travel expense deductions, (2) deductibility of a home office, and (3) substantial underpayment penalties.

5-60.

a. What court heard the case? The U.S. Tax Court

b. Who was the judge(s)? Judge Parker

c. What tax year(s) is in question and in what year was the case decided? Tax years in question were 1977, 1978, 1979, 1980, 1981, and 1982; the case was decided in 1992.

d. What Code section(s) was at issue? § 162 was at issue.

e. What was the issue(s) involved? The issue involved was deductibility of fines and penalties (whether an amount paid by a taxpayer-corporation to set up an environmental fund was actually considered a criminal fine).

f. Which party prevailed in the decision? The party that prevailed was the defendant in largest part; the taxpayer-corp.‘s $8 million

Page 196

SOLUTIONS MANUAL

contribution to an environmental fund created to alleviate the effects of its toxic product, was in substance a fine or penalty, and was not a deductible business expense. However, the petitioner was able to deduct costs incurred in creating the endowment.

5-61.

a. What court heard the case? The Tax Court, small case procedure

b. Who was the judge(s)? Judge Haines

c. What tax year(s) is in question and in what year was the case decided? The tax years in question were 2007 and 2008, and the case was decided in 2013.

d. What code section(s) was at issue? §§ 162; 274; 280F were at issue.

e. What was the issue(s) involved? The issues involved were: (1) if the taxpayer is entitled to Schedule A itemized deductions related to his automobile because he failed to substantiate his business mileage for the years at issue. (2) also if the taxpayer was not entitled to the Schedule A itemized deductions because he was an employee and not an independent contractor.

f. Which party prevailed in the decision? The party that prevailed in the decision was the IRS, the mileage was not deductible.

5-62.

a. What court heard the case? U.S. Tax Court, small cases procedure

b. Who was the judge(s)? Judge Panuthos

c. What tax year(s) is in question and in what year was the case decided? The tax year in question was 2010. The case was decided on November 9, 2015.

d. What Code section(s) was at issue? Primarily § 61 was at issue but also §§ 6201 and 6651, which relate to the penalties assessed

Federal Tax Research, 12th Edition

Page 1-97

e. What was the issue(s) involved? The petitioner did not properly include income on his 2010 tax return.

f. Which party prevailed in the decision? The IRS prevailed on the issue of the unreported income and that incarceration was not reasonable cause for failing to file.

5-63.

a. What court heard the case? U.S. Court of Federal Claims

b. Who was the judge(s)? Judge Futey

c. What tax year(s) is in question and in what year was the case decided? The tax years in question were 1988–2003. The case was decided on August 9, 2011.

d. What code section(s) was at issue? Sections 7422 and 172 were at issue.

e. What was the issue(s) involved? The issue was if a taxpayer must follow the precise rules of the Internal Revenue Code when deducting net operating losses (―NOLs‖), which are generally defined as the excess of deductions over gross income.

f. Which party prevailed in the decision? The IRS prevailed.

5-64.

a. What court heard the case? U.S. Court of Appeals, Ninth Circuit

b. Who was the judge(s)? Circuit Judges Schroeder, Pregerson, and Nguyen

c. What tax year(s) is in question and in what year was the case decided? The tax years in question were 2003,2005, 2006, and 2007. The case was decided on November

Page 198

SOLUTIONS MANUAL

24, 2014.

d. What Code section(s) was at issue? Section 165 was at issue.

e. What was the issue(s) involved? Gambling loss deductions denied due to lack of substantiation.

f. Which party prevailed in the decision? The U.S. government (the respondent–appellee) prevailed.

5-65.

a. What court heard the case? U.S. Court of Appeals, Eighth circuit

b. Who was the judge(s)? Circuit Judges Arnold, Beam, and Senior District Judge Bogue

c. What tax year(s) is in question and in what year was the case decided? The years in question were 1978–1982. The case was decided on April 2, 1991.

d. What Code section(s) was at issue? Section 482 was at issue.

e. What was the issue(s) involved? The issue involved was whether amounts that were paid to the personal service corporations of professional hockey players and then put into pension plans were taxable to the players.

f. Which party prevailed in the decision? The players (appellants) prevailed.

5-66.

a. What court heard the case? U.S. Supreme Court

b. Who was the judge(s)? All nine Supreme Court judges.

Federal Tax Research, 12th Edition

Page 1-99

c. What tax year(s) is in question and in what year was the case decided? The tax years in question were years 1994–1996. The case was decided on April 4, 2008.

d. What Code section was at issue? §§ 7422(a) and 651(a) were at issue.

e. What was the issue(s) involved? The issue involved was whether a coal company could claim a refund for taxes after not filing a claim within the statute of limitations.

f. Which party prevailed in this decision? The IRS prevailed.

5-67.

a. CITATION: Sorensen, T.C. Memo 1994-175 ISSUE: Whether petitioner, Shauna Sorensen, is entitled to ―innocent spouse‖ relief under §§ 6013(e) with respect to the substantial understatement resulting from transactions involving First Western Government Securities reflected on the petitioner‘s 1979 joint income tax return (Richard L. Bernacchi and Shauna E. Sorensen) as petitioners. FACTS: The respondent determined a deficiency in petitioners‘ federal income tax for the 1979 taxable year in the amount of $ 196,182 and an addition to tax under § 6653(a) in the amount of $9,809. Petitioners separated in April 1981. In 1981, petitioner met with Charles Weise, accountant, to get financial and tax advice regarding dissolution of marriage with Bernacchi. Weise questioned petitioner about First Western investment. The petitioner recognized the name but was unable to provide Weise with any information about the investment. Petitioner had little if any direct contact with tax shelter investment of tax that gave rise to an improper loss deduction on the 1979 return. Petitioner argues that she should be relieved of her tax liability for the year at issue since she was an innocent spouse within the meaning of § 6013(e).

HOLDING: The U.S. Tax Court concluded that Sorensen, who had reason to know that a return filed with her husband contained a substantial understatement of tax, was not entitled to innocent spouse relief under § 6013(e).

ANALYSIS: (1) Spouses filing a joint tax return are jointly and severally liable for the tax arising therefrom. Section 6013(e) requires that the substantial understatement of tax, with respect to which the alleged innocent spouse can be relieved of liability, must be attributable to grossly erroneous items of the

Page 1100

SOLUTIONS MANUAL

other spouse. The petitioner does not qualify for innocent spouse status because the items in issue are not solely items ―of‖ Bernacchi but of both petitioners. California state community property laws do not attribute any of the nonexistent loss to her but instead solely to her husband. However, Sorensen‘s involvement in the family‘s financial affairs, her general understanding of the tax consequences of other investments, and her high level of education should have given her reason to comprehend that the return contained a substantial understatement of tax liability attributable to the improper loss deduction. The large amount of the loss and awareness of the investment should have given her ample notice that the return had a substantial understatement. Furthermore, since no evidence pointed to Sorensen as sharing in the tax benefits from the loss deduction, she did not demonstrate that it would be inequitable to hold her liable for the income tax on the jointly filed return.

b. CITATION: Keller, 84-1 USTC 9194 ISSUE: Whether Keller, a limited partner, could deduct in 1973 his distributed share of a partnership‘s losses attributable to intangible drilling and development costs (IDC) prepaid in 1973 by the cash basis partnership for drilling services to be rendered in later years.

FACTS: Stephen Keller, petitioner, in 1973 invested $50,000 in a limited drilling partnership. On its 1973 partnership tax return, the drilling partnership reported an ordinary loss of $1,373,257. Keller, in turn, deducted a $50,000 ordinary loss on his 1973 income tax return as his distributive share of the loss. The commissioner disallowed the drilling partnership‘s deductions to IDC prepaid in 1973 for drilling services not to be rendered until after 1973. Accordingly, the commissioner determined Keller‘s share of the partnership loss to be instead $21,595 and notified him of a $14,202 tax deficiency. The Tax Court upheld the commissioner‘s determinations of nondeductibility in 1973, except for those prepayments made pursuant to turnkey drilling contracts. The Tax Court then applied a three-part test to determine the IDC.

HOLDING: The U.S. Court of Appeals, Eighth Circuit, concluded that the Tax Court did not err in analyzing the timing of IDC deductions under the three-part tests. The Tax Court‘s application of the three considerations to the facts in this case was not clearly erroneous. Accordingly, the judgment of the Tax Court is affirmed.

ANALYSIS: In resolving the issue, the Tax Court, sitting as a whole, weighed three considerations: (1) whether the expenditure was a payment or a deposit, (2) whether the prepayment was made for a business purpose or for tax avoidance, and (3) whether the prepayment resulted in a material distortion of income. The Tax Court property held that the prepayment under footage and day work drilling contracts and under third-party well-servicing contracts constituted refundable deposits, were not made for any business

Federal Tax Research, 12th Edition

Page 1-101

purpose, and were not deductible in the year of the prepayment. In addition, prepaid well charges were not deductible because of a material distortion of income and the lack of purpose for the prepayment other than acceleration of tax deductions. The Eighth Circuit U.S. Court of Appeals found that the U.S. Tax Court did not err in determining the timing of the intangible drilling and development costs (IDC) using a three-part test.

c. CITATION: Washington, 77 T.C. 601.

ISSUES: (1) Is Washington entitled to a deduction under § 215(a) for the temporary support of his wife by making mortgage and utility payments during 1977 when both resided in the same house? (2) Are Washington and his wife, Jean, ―separated‖ within the meaning of that term as used in § 71(a)(3) for the purposes of Washington‘s alimony deduction?

FACTS: Washington filed for divorce from his wife in April 1977. His wife filed a counterclaim for divorce and sought temporary support from Washington. They both continued to live in the same house for the remainder of the year. On August 1, 1977, the Circuit Court for Wayne County, Michigan, ordered Washington to make all mortgage payments on the house and pay the utility bills. Washington claimed an income tax deduction for the above mortgage and utility payments as alimony. The deduction was disallowed by the IRS.

HOLDINGS: The U.S. Tax Court held that Washington is not entitled to a deduction under § 215(a), I.R.C. 1954, for the mortgage and utility payments. Washington and his wife were not ―separated‖ within the meaning of § 71(a)(3) when the payments were made because they were living in the same house.

ANALYSIS: The Court of Appeals for the Eighth Circuit, in reversing the Tax Court on this issue, held that the requirement that the parties be ―separated and living apart‖ may be met as a factual matter, even though they occupy the same residence, provided they occupy separate quarters. The U.S. Tax Court respectfully disagreed with the Court of Appeals for the Eighth Circuit and consequently adhered to the rationale of its prior opinion on this issue in the case Sydnes 577 F.2d. 60 (CA-8, 1978). Since the U.S. Tax Court held that Washington and his wife, Jean, were not ―separated‖ during the period from August 1 through December 31, 1977, none of the mortgage and utility payments paid by Washington would be includable in Jean‘s gross income, and therefore, no deduction is allowable to Washington under § 215(a). Section 71(a)(3) requires a wife to be ―separated‖ from her husband. This is further discussed in § 7701(a)(17). Regulation 1.71-1(b)(3) requires a wife and husband to be ―separated and living apart.‖ It is the Tax Court‘s view that Congress intended that a husband and wife should not be treated as ―separated and living apart‖ when both are living under the same roof. Because Washington and Jean were not

Page 1102

SOLUTIONS MANUAL

―separated‖ when the payments were made, so the mortgage and utility payments were not includable in Jean‘s gross income and Washington is not entitled to a deduction for alimony payment as stated in §§ 215(a) and 71(a)(3).

d. CITATION: Tellier, 17 AFTR2d 633 66-194 (USSC, 1966). ISSUES: (1) Were Tellier‘s business expense deductions, legal expenses of an unsuccessful defense in a criminal prosecution, ―ordinary‖ and ―necessary‖ in the conduct of his securities dealing business under § 162? (2) Does the business expense deduction place an additional financial burden through income tax laws on one charged with criminal activity?

FACTS: The respondent, Walter F. Tellier, was engaged in the business of underwriting the public sale of stock offerings and purchasing securities for resale to customers. In 1956, Tellier was brought to trial upon a 36-count indictment that charged him with violating the fraud section of the Securities Act of 1933 and the mail fraud statute, and with conspiracy to violate these statutes. Tellier was found guilty on all counts and was sentenced to pay $18,000 fine and to serve four and a half years in prison. This criminal judgment was confirmed on appeal. The criminal charges against Tellier found their source in his business activities as a securities dealer. Tellier‘s legal fees, paid in defense against those charges, therefore clearly qualify as ―expenses paid or incurred . . . in carrying on any trade or business‖ within the meaning of § 162(a), as discussed in Gilbert, 11 AFTR2d 758 (CA-2, 1956). In his unsuccessful defense of this criminal prosecution, Tellier incurred and paid $22,964.20 in legal expenses in 1956. He claimed an income tax deduction for that amount on his 1956 federal income tax return.

HOLDINGS: The U.S. Supreme Court affirmed the decision of the Court of Appeals for the Second Circuit. The commissioner disallowed the business expense deductions as stated in § 162. Tellier was forced to pay the legal expenses he claimed as a deduction on his 1956 federal income tax return to the amount of $ 22,964.20. The U.S. Supreme Court declines to distort the income tax laws to serve a purpose for which they were neither intended nor designed for this usage by Congress. Therefore, the Supreme Court finds no warrants to attach additional financial burden that Congress neither expressly nor implicitly directed.

ANALYSIS: (1) There can be no serious question that the payments deducted by Tellier were expenses of his securities business under the decisions of the Supreme Court. In Gilmore, 11 AFTR2d 758 (CA-2, 1956), the Supreme Court held that ―the origin and character of the claim with respect to which an expense was incurred, rather than its potential consequences upon the fortunes of taxpayer, is the controlling basic test of whether the expense was ―business‖ or ―personal‖‖ within the meaning of § 162(a). The IRS

Federal Tax Research, 12th Edition

Page 1-103

concedes that Tellier legal expenses were ―ordinary‖ and ―necessary‖ expenses within the meaning of § 162(a). The Supreme Court defines the term ―necessary‖ as imposing only the minimal requirement that the expense be ―appropriate and helpful‖ for ―the development of Tellier‘s business.‖ The legal expenses deducted by Tellier were not capital expenditures. They were incurred in his defense against charges of past criminal conduct, not in the acquisition of a capital asset. The Supreme Court established that counsel fees comparable to those here involved are ordinary business expenses, even though a ―lawsuit affecting the safety of a business may happen once in a lifetime,‖ and are not deductible.

(2) Although the legal fee expenditures of Tellier meet the literal requirements of § 162(a), their deduction must nevertheless be disallowed on the grounds of public policy. The view of ―public policy‖ finds considerable support in other administrative and judicial decisions. It finds no support in any regulations or statues of the Supreme Court, and we believe no such ―public policy‖ exception to the plain provisions of § 162(a) is warranted in the circumstances presented by this case. Federal income tax is a tax on net income, not a sanction against wrongdoing. Income from a criminal enterprise is taxed at a rate no higher and no lower than income from more conventional sources. As stated in the court case, Sullivan, 274 U.S. 259, ―The fact that a business is unlawful [does not] exempt it from paying the taxes that if lawful it would have to pay.‖ In the court case Tank Truck Rentals, 356 U.S. 30, the Supreme Court upheld the disallowance of deductions claimed by the taxpayers for fines and penalties imposed upon them for violating state penal statutes. Thus, denying a deduction for expenses incurred in the unsuccessful defense of a criminal prosecution would impose a financial burden in a measure dependent on the cost of the defense and Tellier‘s tax bracket.

5-68.

a. CITATION: Rownd, T.C. Memo 1994-465

ISSUE: Whether the petitioner, Rownd, is entitled to dependency exemptions for his two children under § 151.

FACTS: Petitioner, Van L. Rownd, married Joan G. Rownd on March 22, 1969, and two children were born of their marriage, William and Chris. Petitioner divorced from Joan G. Rownd on May 8, 1989. The written property settlement provided that the petitioner‘s former wife gained permanent custody of the children, who were minors at the time, and was entitled to claim the dependency exemptions for them for income tax purposes. As part of the divorce decree, Van Rownd had to pay his former wife $500 per month, per child, until such child reached the age of 18. In addition, the divorce decree required the petitioner to pay for the cost of a four-year college education, for any related incidental expenses for both of his children, pay to maintain his children‘s health insurance, and pay for their medical expenses. During 1990, William was a high school sophomore, and Chris was a college freshman attending the University of

Page 1104

SOLUTIONS MANUAL

Georgia. Petitioner paid his former wife $8,100 in child support for William and none for Chris because Chris was 19 years old (no longer a minor). Petitioner‘s former wife provided less than half of the children‘s support. Petitioner argues that since he paid more than half of the children‘s support during 1990, he is entitled to claim dependency exemptions for them. HOLDING: The U.S. Tax Court held that Rownd provided over half of his son‘s, Chris‘, support during 1990 and therefore is entitled to claim Chris as a dependent.

ANALYSIS: § 151(a) allows a taxpayer an annual exemption amount for each dependent as defined by § 152. Generally, in the case of divorced parents, the custodial parent can claim the exemption where there exists a divorce decree and a child is in the custody of one or both of the parents for more than half of the year. With regard to his younger son, William, age 15 in 1990, the petitioner testified that he had entered into an oral agreement modifying the divorce decree, whereby he would be entitled to claim William as a dependent. However, because the petitioner does not meet the requirement as defined in § 152(e)(2) for the noncustodial parent to obtain exemption, he cannot claim a dependency exemption for William. The petitioner contends that, with respect to his older son Chris, age 19 in 1990, the support test of § 152(a) controls the case. Although the former wife was given custody, as defined by Reg. § 1.152-4(b), and entitlement to declare her minor children as dependents, this is not the case for Chris. Since Chris has reached majority, upon attaining age 18 under Georgia law, prior to the year at issue, the custody and the income tax provisions of the settlement agreement included in the divorce decree no longer applied to Chris in 1990. Since the divorce decree‘s custody and dependency provisions were not applicable to Chris in 1990, and since Chris was a full-time student as described in § 151(c)(4), the support test as required by § 152(a). A son who receives over half of his support from the taxpayer is within the § 152(a) definition of the term ―dependent.‖ The petitioner paid directly to Chris for tuition, books, and living expenses, along with providing health and life insurance and paying all of his medical expenses. During the year at issue, Chris‘ mother provided him with no support.

b. CITATION: Arnes Joann, 93-1 USTC & 50,016

ISSUE: Whether the taxpayer, Joann Arnes, must recognize for income tax purposes the gain that she realized when, pursuant to a divorce settlement, a corporation redeemed her half of the stock in the corporation, the remaining stock of which was owned by her former husband.

FACTS: Joann Arnes, the taxpayer-appellee married John Arnes in 1970. In 1980, they formed a corporation, Moriah, to operate a McDonald‘s franchise. The corporation issued 5,000 shares of stock in the joint names of John Arnes and Joann Arnes. In 1987, the couple agreed to a divorce. John and Joann

Federal Tax Research, 12th Edition

Page 1-105

Arnes entered into an agreement to have their corporation redeem Joann Arnes‘ 50 percent interest in the outstanding stock for $450,000. The agreement was incorporated into the divorce decree, dated January 7, 1988. Joann Arnes surrendered her 2,500 shares to the corporation on December 17, 1987, and the corporation canceled her stock certificate on May 4, 1988, then issuing another 2,500 shares to John Arnes. On her 1988 federal income tax return, Joann reported that she sold her stock in Moriah on January 2, 1988, for a price of $450,000, basis of $2,500, for a profit of $447,500. She received $178,042 in 1988 as part of the sales price; the remaining amount of $177,045 was treated as a long-term capital gain and the remainder of that as a recovery of her portion of the basis. On December 27, 1989, she filed a timely refund, not claiming the gain on the transfer of her stock because the transfer was made pursuant to a divorce instrument. HOLDINGS: The U.S. Court of Appeals, Ninth Circuit, held that Joann‘s transfer to Moriah Corporation did relieve John of an obligation, and therefore constituted a benefit to John as a constructive transfer to John, who then transferred the stock to Moriah Corporation. The transfer of $450,000 from the corporate treasury, in exchange for Joann‘s stock, need not escape taxation or be required to recognize any gain on the transfer of her stock because it is subject to § 1041. The tax result for Joann is the same as if she had conveyed the property directly to John. ANALYSIS: The government contends that the gain resulting from Moriah‘s redemption of Joann Arnes‘ stock does not qualify for exemption under § 1041, which is limited to transfers made directly to one‘s spouse or former spouse, or transfers made into trust for that person. The government contends that Joann‘s transfer to Moriah is outside the scope if the exemption. Whether the redemption of Joann‘s stock by a third party, in this case Moriah corporation, can be construed as a transfer to John, pursuant Reg. § 1041-1T depends upon the meaning of ―on behalf of.‖ The district court interpreted the regulation as meaning that a transfer was made ―on behalf of‖ John Arnes if he received a benefit from the transfer. The court concluded that John did receive a benefit, due to the inclusion in the martial property agreement that settled all community property claims of Joann. Although John and Joann were the sole stockholders in Moriah, the obligation to purchase Joann‘s stock was John‘s, not Moriah. John was liable, with Moriah, for the payments due Joann. The government asserts that an example in Reg. § 1.1041-1T describes a situation in which a corporation wholly owned by one spouse sells property to the other spouse that is not construed to be not subject to the § 1041 exemption. However, the above example does not apply to the Arnes transaction because Moriah was owned half by John and half by Joann.

69.

a. CITATION: Willie Nelson Music Co., 85 T.C. 914

ISSUE: Whether the Willie Nelson Music Company can obtain motions to seal records up to the time of the

Page 1106

SOLUTIONS MANUAL

income tax deficiency trial to prevent annoyance, embarrassment, and oppression for Willie and Connie Nelson, nationally known personalities.

FACTS: A notice of deficiency was issued on October 15, 1984, to petitioners Willie H. Nelson and Connie Nelson for income tax deficiencies and additions. A case was called before the court on the petitioners‘ motions to seal filed in each case on May 16, 1985. In their motions to seal, petitioners seek a protective order sealing the entire record of both cases (including but not limited to all pleadings, depositions, exhibits, papers, and filings) to be opened only by order of the court. In addition, the order would be direct that the parties and their counsel in these cases be prohibited from disclosing to the media or public the contents of the sealed records. At the hearing, the petitioners‘ counsel modified his motions in requesting that the records be sealed only up to the time of the trial. Petitioners argue that Willie H. and Connie Nelson as nationally known personalities are subject to ―intense and continual‖ scrutiny by the media. Because the Willie Nelson Music Co. is wholly owned and controlled by the Willie H. and Connie Nelson, the company is also subject to ―intense and continual‖ scrutiny by the media as well. The petitioners assert that they have been seriously and irreparably damaged by the public‘s impressions. Petitioners maintain that the damage is caused in part by newspaper headlines, which indicate the petitioners are subject to criminal prosecution, thus causing undue embarrassment and considerable emotional distress, along with financial injury.

HOLDING: The U.S. Tax Court held that the petitioners have demonstrated no probative evidence of good cause to outweigh the public interests. Although petitioners are nationally known entertainers, this is not a good enough reason to seal the records up to the time of the trial. Since good cause has not been demonstrated, the petitioners‘ motions will be denied.

ANALYSIS: Official records of all courts, including the U.S. Tax Court, shall be open, available to the public for inspection, and copying. However, the right to inspect and copy judicial records is not absolute. The U.S. Tax Court has broad discretionary powers to control and seal, if necessary, records and files in its possession, and the standard for review is for abuse of discretion. To determine whether the sealing of the records in any manner is appropriate, in exercising their discretion, the Tax Court must weigh the interests of the public. The presumptive right to access may be rebutted by showing that there is a sufficient counterinterest to outweigh the public interest in accessing the records and demonstrating good cause. A party must bring forth testimony and factual evidence to support claims of harm that would occur as a consequence of disclosure. Nevertheless, petitioners have not demonstrated any harm (financial or otherwise) that they have suffered or will suffer if their motions are denied. By the petitioners merely asserting annoyance and embarrassment is wholly insufficient to demonstrate good cause. This is further supported by the fact that the petitioners did not show one instance where public scrutiny would or has

Federal Tax Research, 12th Edition

Page 1-107

taken place. In the court‘s view, Willie Nelson‘s popularity and desirability as a performer has remained intact and increased as a result.

b. CITATION: Green v. U.S. 117 AFTR 2d 2016-700

ISSUE: Whether a charitable contribution by a trust is deductible when the contribution was inadvertently issued by a related corporation rather than the trust. FACTS: The Green‘s created the Trust that expressly authorizes the Trust to ―distribute to charity such amounts … as the [Trustee] determines appropriate.‖ Hob-Lob Limited Partnership operates many Hobby Lobby stores. The Trust is a 99% limited partner in Hob-Lob. Hobby Lobby Inc. made a $4.75 million donation to a qualified charity. The Trustee purports that the contributions were inadvertently issued by Hobby Lobby Inc. but were actually made by Hob-Lob. The contributions were accounted for in HobLob‘s audited financial statements. The Trust filed a tax return claiming the charitable contributions as a partner of Hob-Lob. HOLDINGS: The U.S. District Court, Western District of Oklahoma, found that the payment of the contribution by Hobby Lobby was a simple clerical error that was corrected when discovered. The contribution was permitted to the Trust. ANALYSIS: The IRS argued that ―deductions cannot be exchanged or sold or otherwise distributed among taxpayers‖ because to do so would allow taxpayers to rewrite history to maximize credits and deductions (Nat‘l Alfalfa Dehydrating & Milling Co., 417 U.S. 134 (1974)). The court disagreed finding that in Alfalfa, unlike the present case, the transaction was structured intentionally, not a mistake. The court felt that adequate evidence existed to support that the contribution by Hobby Lobby was intended to be by HobLob. The court felt that denying a deduction due to a clerical error was contrary to the policy of permitting a charitable contribution and is beyond the scope of what the Supreme Court held in Alfalfa.

5-70.

a. CITATION: Gregory v. Helvering, 55 S.Ct. 266; 293 U.S. 465; 35-1 USTC 9043; 14 AFTR 1191.

ISSUES: (1) Does the transfer of shares of corporate stock constitute a reorganization? (2) Does the sale of the stock of the new corporation result in capital gain or ordinary income?

FACTS: Taxpayer owned all of the stock of a corporation, which owned 1,000 shares of stock in another corporation. The taxpayer organized a new corporation to which the old corporation transferred the 1,000 shares of stock.

Page 1108

SOLUTIONS MANUAL

All of the stock of the new corporation was then transferred directly to the taxpayer. Three days later, the new corporation dissolved, and the 1,000 shares of stock, being all of the corporate assets, were distributed to the taxpayer in complete liquidation.

The stock was immediately sold by the taxpayer and the profit was reported as a capital gain.

HOLDING: (1) No reorganization was effected in that the transfer of assets by the taxpayer from one corporation to the other was in pursuance of a plan having no relation to the business of either. (2) As a consequence of the first holding, the gain constitutes dividend income.

ANALYSIS: Section 112 of the Revenue Act of 1928 allowed the tax-free transfer of assets from one corporation to another corporation owned or controlled by the same shareholders. Gregory contended that because the transaction met the explicit requirements of the statute, the reorganization was tax-free. The IRS argued that the transaction was not the kind intended to be covered by § 112 and therefore not tax-free.

The Supreme Court ruled in favor of the IRS. In an opinion written by Justice Sutherland, the Court reasoned that the transfer referred to in the statute was one made in pursuance of a business purpose, so that this transaction, which complied with the explicit requirements of the statute but had no business purpose, was not within the scope of the statute. This decision created judicial the ―Business Purpose Test‖ for step transactions.

b. CITATION: Hunt, T.C. Memo. 1965-172.

ISSUE: Is the petitioner entitled to deduct the amount paid as a loan discount to assist the purchaser of his house in obtaining an FHA insured loan, the proceeds of which were used as the major portion of the purchase price of the house?

FACTS: Taxpayer sold his house on 12/6/62 for $12,500. The purchaser of the house obtained an FHAinsured loan for $12,100, as financing for the house. The difference was attributable to the seller‘s commission and the loan discount. This discount was charged to the taxpayer by the seller and the taxpayer deducted the amount on his return as interest.

HOLDING: The amount of the loan discount was not deductible as interest, since the taxpayer received no benefit from the purchaser‘s loan. The taxpayer‘s action in paying the loan discount was voluntary since nothing indicates he was compelled to sell the house to an FHA purchaser.

Federal Tax Research, 12th Edition

Page 1-109

ANALYSIS: Taxpayers are not entitled to deduct as interest an amount paid as a loan discount to assist the purchaser of his house in obtaining a Federal Housing Administration insured loan, the proceeds from which were used as the major portion of the purchase price of the house

5-71.

a. CITATION: Fulcher, Douglas R., T.C. Summary Opinion 2003-157

ISSUE: Is the petitioner liable for the 10-percent additional tax under § 72(t) for early distributions from two qualified retirement plans? FACTS: Petitioner‘s legal residence at the time the petition was filed was Martinsville, Virginia. During 1999, petitioner received the following distributions from two qualified individual retirement accounts: Nationwide Life Insurance Co.

$5,000.00

First National Bank

$3,943.33

Total distributions

$8,943.33

Both institutions issued to petitioner Forms 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, and so on. The Form 1099-R from Nationwide Life Insurance Co. stated that the taxable amount of the $5,000 distribution was $4,700.47. On his federal income tax return for 1999, petitioner included $8,643.80 as income, representing the taxable distributions from the two plans. In the notice of deficiency, respondent determined that petitioner was liable for the additional tax under § 72(t) for early distributions from qualified retirement plans. Petitioner contends he is not liable for the additional tax because the proceeds of the distribution were used to purchase a home as a first-time homeowner under § 72(t)(8). During 1999, petitioner was employed by several employers doing electrical maintenance work. Petitioner married on July 1, 1999, and he and his spouse purchased a home in August 1999, into which they moved. Sometime in December 1999, petitioner and his spouse separated; however, petitioner continued living in the house. Petitioner had previously been married but was divorced in 1990. During the first marriage, petitioner served in the United States military, and he and his spouse never purchased a home. His testimony is that the home purchased in August 1999 was the first home he had ever purchased, and that the proceeds of the two distributions in question were applied to the $54,000 purchase price for the home. Respondent presented no evidence to discredit petitioner‘s testimony, nor did respondent present any other evidence to establish that the August 1999 home purchase was not petitioner‘s first home purchase, or that the individual retirement accounts proceeds in question were not applied to the purchase price of the home.

Page 1110

SOLUTIONS MANUAL

HOLDING: On this record, the Court is satisfied that the distributions in question constituted distributions that were used by petitioner in the acquisition of a principal residence, and that such distributions were qualified first-time homebuyer distributions within the intent and meaning of § 72(t)(8). Petitioner, accordingly, is sustained on the sole issue before the Court. ANALYSIS: § 72(t)(1) imposes a 10-percent additional tax on early distributions from qualified retirement plans. There are several situations, however, in which the additional tax does not apply. Pertinent to this case is § 72(t)(2)(F), which provides generally that the additional tax does not apply to distributions that qualify as first-time homebuyer distributions as defined in § 72(t)(8). Section 72(t)(8)(A) provides generally that the term ―qualified first-time homebuyer distribution‖ means any payment or distribution received by an individual to the extent such payment or distribution is used by the individual before the close of the 120th day after the day on which such distribution or payment is received to pay qualified acquisition costs with respect to a principal residence of a first-time homebuyer who is such individual, the spouse of such individual, or any child, grandchild, or ancestor of such individual or the individual‘s spouse. Section 72(t)(8)(D) defines a first-time homebuyer as an individual (and, if married, his spouse) who had no present ownership interest in a principal residence during the two-year period ending on the date of acquisition of the principal residence in question. Other provisions in that section are not pertinent here.

b. CITATION: The Boeing Company and Consolidated Subs., 91 AFTR 2d 2003-1088 (123 S.Ct. 1099)

ISSUE: This suit concerns tax provisions enacted by Congress in 1971 to provide incentives for domestic manufacturers to increase their exports and in 1984 to limit and modify those incentives. The specific question presented involves the interpretation of a Treasury Regulation (26 CFR § 1.8618(e)(3) (1979)) promulgated in 1977 that governs the accounting for research and development (R&D) expenses under both statutory schemes. Do the statute and certain regulations give Boeing Company an unqualified right to allocate its company-sponsored R&D expenses to the specific products to which they are factually related and to exclude such R&D from treatment as a cost of any other product? FACTS: Petitioners (and cross-respondents) are the Boeing Company and subsidiaries that include a DISC and an FSC. For over 40 years, Boeing has been a world leader in commercial aircraft development and a major exporter of commercial aircraft. During the period at issue in this litigation, the dollar volume of its sales amounted to about $64 billion, 67 percent of which were DISC-eligible export sales. The amount that Boeing spent on R&D during that period amounted to approximately $4.6 billion. During the tax years at issue here, Boeing organized its internal operations along product lines (e.g., aircraft models 727, 737, 747, 757, 767) for management and accounting purposes, each of which constituted a

Federal Tax Research, 12th Edition

Page 1-111

separate ―program‖ within the Boeing organization. For those purposes, it divided its R&D expenses into two broad categories: ―Blue Sky‖ and ―Company-Sponsored Product Development.‖ The former includes the cost of broad-based research aimed at generally advancing the state of aviation technology and developing alternative designs of new commercial planes. The latter includes product-specific research pertaining to a specific program after the board of directors has given its approval for the production of a new model. With respect to its $1 billion of ―Blue Sky‖ R&D, Boeing‘s accounting was essentially consistent with 26 CFR § 1.861-8(e)(3) (1979). Its method of accounting for $3.6 billion of ―Company Sponsored‖ R&D gave rise to this litigation. Boeing‘s accountants treated all of the company-sponsored research costs as directly related to a single program, and as totally unrelated to any other program. Thus, for DISC purposes, the cost of companysponsored R&D directly related to the 767 model, for example, had no effect on the calculation of the ―combined taxable income‖ produced by export sales of any other models. Moreover, because immense company-sponsored research costs were routinely incurred while a particular model was being completed and before any sales of that model occurred, those costs effectively ―disappeared‖ in the calculation of the CTI even for the model to which the R&D was most directly related. Almost half of the $3.6 billion of company-sponsored R&D at issue in this suit was allocated to programs that had no sales in the year in which the research was conducted. That amount (approximately $1.75 billion) was deducted by Boeing currently in the calculation of its taxable income for the years at issue, but never affected the calculation of the CTI derived by Boeing and its DISC from export sales. Pursuant to an audit, the Internal Revenue Service reallocated Boeing‘s company-sponsored R&D costs for the years 1979–1987, thereby decreasing the untaxed profits of its export subsidiaries and increasing the parent‘s taxable profits from export sales. Boeing paid the additional tax obligation of $419 million and filed this suit seeking a refund. Relying on the decision of the Eighth Circuit in St. Jude Medical, Inc. v. Commissioner, 34 F.3d 1394 [74 AFTR 2d 94-6166] (1994), the district court entered summary judgment in favor of Boeing. It held that 26 CFR § 1.8618(e)(3) (1979) is invalid as applied to DISC and FSC transactions because the regulation‘s categorical treatment of R&D conflicted with congressional intent that there be a ―direct‖ relationship between items of gross income and expenses ―related thereto,‖ and with a specific DISC regulation giving the taxpayer the right to group and allocate income and costs by product or product line. The Court of Appeals for the Ninth Circuit reversed, 258 F.3d 958 [88 AFTR 2d 2001-5317] (2001), and the U.S. Supreme Court granted certiorari to resolve the conflict between the Circuits, 535 U.S. 1094 (2002). HOLDING: The U.S. Supreme Court affirmed the Ninth Circuit Court of Appeals opinion.

Page 1112

SOLUTIONS MANUAL

ANALYSIS: Section 861 of the Internal Revenue Code distinguishes between United States and foreign source income for several different purposes. See 26 U.S.C. § 861. The regulation at issue in this suit, 26 CFR § 1.861-8(e)(3) (1979), was promulgated pursuant to that general statute. Separate regulations promulgated under the DISC statute, 26 U.S.C. §§ 991– 997, incorporate 26 CFR § 1.861-8(e)(3) (1979) by specific reference. See § 1.9941(c)(6)(iii) (citing and incorporating the cost allocation rules of § 1.861-8). Boeing does not claim that its method of accounting for company-sponsored R&D complied with § 1.8618(e)(3). Rather, it argues that § 1.861-8(e)(3) is so plainly inconsistent with congressional intent and with other provisions of the DISC regulations that it cannot be validly applied to its computation of CTI for DISC purposes. Boeing argues, in essence, that the statute and certain specific regulations promulgated pursuant to 26 U.S.C. § 994 give it an unqualified right to allocate its company-sponsored R&D expenses to the specific products to which they are ―factually related‖ and to exclude any allocated R&D from being treated as a cost of any other product. The relevant statutory text does not support its argument. Boeing also advances two arguments based on the text of specific DISC regulations. The first resembles its argument based on the text of § 861 and the second relies on regulations providing that certain accounting decisions made by the taxpayer shall be controlling. The regulations included in 26 CFR § 1.994-1 (1979) set forth intercompany pricing rules for DISCs. They generally describe the three methods of determining a transfer price, noting that the taxpayer may choose the most favorable method and may group transactions to use one method for some export sales and another method for others. See ibid. With respect to the CTI method used by Boeing, there is a rule, § 1.994-1(c)(6), that describes the computation of CTI. The rule broadly defines the CTI of a DISC and its related supplier from a sale of export property as the excess of gross receipts over their total costs ―which relate to such gross receipts.‖ Subdivision (iii) of that rule, on which Boeing relies, provides: ―Costs (other than cost of goods sold) which shall be treated as relating to gross receipts from sales of export property are (a) the expenses, losses, and other deductions definitely related, and therefore allocated and apportioned, thereto, and (b) a ratable part of any other expenses, losses, or other deductions which are not definitely related to a class of gross income, determined in a manner consistent with the rules set forth in § 1.861-8.‖ § 1.994-1(c)(6)(iii) (emphasis added). Boeing interprets the emphasized words as prohibiting a ratable allocation of R&D expenditures that can be ―definitely related‖ to particular export sales. The obvious response to this argument is provided by the final words in the paragraph. Whether such an expense can be ―definitely related‖ is determined by the rules set forth in the very regulation that Boeing challenges, § 1.861-8. Moreover, it seems quite clear that the secretary could reasonably determine that expenditures on 767 research conducted in years before any 767s were sold were not ―definitely related‖ to any sales, but should be treated as an indirect cost of producing the gross income derived from the sale of all planes in the transportation equipment category.

Federal Tax Research, 12th Edition

Page 1-113

Boeing also argues that the regulations expressly allow it to allocate and apportion R&D expenses to groups of export sales that are based on industry usage rather than SIC categories. The regulations providing the strongest support for this argument are §§ 1.994-1(c)(7)(i) and (ii)(a), which control the grouping of transactions for the purpose of determining the transfer price of sales of export property, and § 1.994-1(c)(6)(iv), which governs the grouping of receipts when the CTI method of transfer pricing is used. As the Court understands the statutory and regulatory scheme, it gives controlling effect to three important choices by the taxpayer. First, the taxpayer may elect to deduct R&D expenses on an annual basis instead of capitalizing and amortizing those costs. See 26 U.S.C. § 174(a)(1). Second, when engaging in export transactions with a DISC, the taxpayer may choose any one of the three methods of determining the transfer price. See § 994(a). Third, the taxpayer may decide how best to group those transactions for purposes of applying the transfer pricing methods. See 26 CFR § 1.9941(c)(7) (1979). Conceivably, the taxpayer could account for each sale separately, by product lines, or by grouping all of its export sales together. These regulations confirm the finality of the third type of choice (i.e., which groups of sales will be evaluated under one of the three alternative transfer pricing methods) but do not speak to the questions answered by the regulation at issue in this suit—namely, whether or how a particular research cost should be allocated and apportioned. Nor does § 1.994-1(c)(6)(iv) support Boeing‘s argument. It provides that a ―taxpayer‘s choice in accordance with subparagraph (7) of this paragraph as to the grouping of transactions shall be controlling, and costs deductible in a taxable year shall be allocated and apportioned to the items or classes of gross income of such taxable year resulting from such grouping.‖ The regulation makes clear that if the taxpayer selects the CTI method of transfer pricing (as Boeing did), then the taxpayer may choose to group export receipts according to product lines, two-digit SIC codes, or on a transaction-by-transaction basis. Ibid. The regulation also establishes that there shall be an allocation and apportionment of all relevant costs deducted in the taxable year. Ibid. Notably, however, the regulation simply does not speak to how costs should be allocated among different items or classes of gross income and apportioned between the DISC and its parent once the taxpayer (pursuant to § 1.994-1(c)(6)) groups its gross receipts. Treasury Regulation § 1.8618(e)(3) fills this gap by providing that R&D expenditures that are related to all income reasonably connected with the taxpayer‘s relevant two-digit SIC category or categories are ―allocable to all items of gross income as a class ... related to such product category (or categories).‖ 26 CFR § 1.861-8(e)(3) (1979) (emphasis added). 5-72.

a. CITATION: Thornton v. Commissioner, 92 AFTR 2d 2003-6609 ISSUE: Is there an extension of time allowed for this taxpayer past the 90-day Notice of Deficiency letter?

Page 1114

SOLUTIONS MANUAL

FACTS: On May 15, 2001, the Internal Revenue Service mailed a statutory notice of deficiency to the taxpayer notifying him of an understatement of tax. On August 20, 2001, the taxpayer filed a petition for redetermination of the deficiency. The IRS then moved to dismiss the case in the Tax Court. The case was dismissed and then appealed by the taxpayer. HOLDING: The U.S. Court of Appeals, Second Circuit, affirmed the judgment of the Tax Court. ANALYSIS: Under § 6213, a taxpayer has 90 days to dispute a § 6212 statutory notice of deficiency. In this case, the taxpayer did not respond until 97 days after the notice was mailed. The facts such as the notice mailed date and the petition date were undisputed by the taxpayer. The Tax Court had no jurisdiction over the case because under Commissioner v. McCoy, 484 U.S. 3, 6–7, the court has limited jurisdiction from the time the notice is mailed, and the taxpayer has 90 days to respond. Since the taxpayer did not respond within the 90 days, the Tax Court had no jurisdiction and had to dismiss the case. The appellate court agreed with this decision. b. CITATION: Stamoulis v. Commissioner, T.C. Summary Opinion 2007-38 ISSUE: Is this petitioner entitled to a charitable contribution deduction in excess of the amount allowed and is the underpayment of tax due to negligence or intentional disregard? FACTS: The petitioner was a resident of New York and was employed as an investment banker. The 2002 return of the taxpayer showed an AGI of $114,819. The taxpayer is a self-diagnosed ―impulse buyer‖ of clothing. The taxpayer buys designer clothing and then donates it to thrift stores. This is the taxpayer‘s routine every year. In 2002, the taxpayer claimed a charitable contribution deduction of $55,764, which included cash donation, property donations, and a carryover from prior years. The major thrift store recipient has a form that is completed by the donor without any verification from the thrift store. The IRS disallowed the entire charitable deduction and imposed a penalty. HOLDING: The U.S. Small Claims Tax Court modified the contribution allowed to cash donations of $1,053 and property donations of $8,949; the underpayment of tax penalty was adjusted to only be calculated on the cash donation and carryover negligence. ANALYSIS: Under § 6001, taxpayers are required to meet sufficient record-keeping requirements in order to be entitled to deductions. Reg. § 1.170A-13 specifies the record keeping necessary for charitable contributions and requires either a cancelled check, a receipt showing the proper information, or other reliable written records. In the case of a large deduction, substantiation requirements are stricter. When deductions are greater than $500, additional information is required, which includes the date of acquisition and the cost or basis of the property contributed. The taxpayer did maintain the proper documentation.

Federal Tax Research, 12th Edition

Page 1-115

The taxpayer used her own estimates to determine the fair market value of the property contributed. The court recognizes that valuations such as these are inexact. (Stanley Works, 87 TC 389). However, the court still believes that the taxpayer‘s values are grossly overestimated. The court recalculated the property donations using a more conservative estimate. The other issue is whether the overstated contribution constitutes negligence or intentional disregard to the rules under § 6662(a). In the regulations, § 1.1662-3(b)(1) states ―negligence‖ means ―any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws.‖ The taxpayer did make a reasonable effort to substantiate the property deductions, but there was no record of the cash contributions or the carryover amount. Therefore, the underpayment penalty can only be calculated on the latter two types of contribution deductions. 5-73.

Citation (1): U.S. v. D’ambrosia, 90 AFTR 2d 2002-7664 (CA-7, 2002) Citation (2): U.S. v. D’ambrosia, 313 F3d 987 (CA-7, 2002) The issue in this case was: Should taxpayers‘ sentences for conspiring to defraud the IRS and making false statements and other related crimes be affirmed, which would state that imposing four-level organizerleader enhancement to tax conspiracy sentences partly on basis of taxpayers‘ wagering offenses was proper, regardless of whether their tax conspiracy and wagering offenses should have been grouped?

5-74.

Citation (1): Baral v. U.S., 85 AFTR 2d 2000-941 (USSC, 2000) Citation (2): Baral v. U.S., 120 S. Ct. 1006 (USSC, 2000) Citation (3): Baral v. U.S., 2000-1 USTC ¶50226

The issue in this case was: Should the U.S. Supreme Court affirm the decision that § 6511(b)(2)(A) barred the taxpayer‘s untimely claim for credit of overpaid tax withholdings and estimated tax remittances?

5-75.

Citation (1): Falstone, Inc. v. Comm., 91 AFTR 2d 2003-2613 Citation (2): Falstone, Inc. v. Comm., 79 CCH TCM 1593 Citation (3): Falstone, Inc. v. Comm., 2003-2 USTC ¶50555

The issue in this case was: Should a U.S. Virgin Island inhabitant be required to pay tax on worldwide income it received prior to the Tax Reform Act of 1986?

Page 1116

SOLUTIONS MANUAL

CHAPTER 6 Thomson Reuters Checkpoint

DISCUSSION QUESTIONS

6-1.

The function of commercial tax services is to facilitate efficient, effective, and comprehensive searches by organizing primary and secondary tax law sources. They also provide editorial content not available elsewhere.

Page 174

6-2.

While practitioners can retrieve most primary tax sources at no cost, this free access does not translate into more effective research. This is because there is a voluminous amount of information and this takes time to sort, read, and comprehend, which can lead to information overload and inefficiency. All this information must be managed; otherwise, using the Internet for tax research is not effective. Consequently, Internet access to primary sources cannot substitute for a subscription to comprehensive tax services.

Page 174

6-3.

The four primary ways to search in Checkpoint are (1) keyword, (2) contents, (3) index, and (4) citation. A keyword search is similar to using a search engine on the Internet such as Bing or Google. One additional step that distinguishes a Checkpoint search from a typical search is the selection of the databases from which to search. Simply enter the keywords and search the selected databases. A contents search is similar to flipping through the table of contents in a printed book. Each of the databases in Checkpoint (both primary and editorial) contains a table of contents that can be browsed through to identify the ―chapter‖ that contains the relevant information. An index search is similar to a contents search except instead of the table of contents, the alphabetically organized index of the database can be browsed for the topics of import. A citation search is used when the source document of importance is already known and the researcher simply wants to go directly to that document.

Page 176

Federal Tax Research, 12th Edition

6-4.

Page 1-117

Annotated databases are organized by the numerical structure of code. As a result, an annotated service usually keys off a code section. The contents of that portion of an annotated database conveniently contain the related regulations, explanations, and annotations (which are cases and rulings that affect that section). A topical service divides the tax law into its functional components and organizes these components by topic.

Page 177

6-5.

Student responses may vary as the left sidebar is used like an additional tab in the search process in Checkpoint. The left sidebar provides the following: Practice Areas, quick access to both index and citation search from the search screen.

Page 178

6-6.

Checkpoint subscriptions may vary and the practice areas may also vary. The following table presents some of the more common practice areas and a description.

Federal tax

A number of databases covering issues related to federal taxation, including explanations, tools, and practice aids to assist the tax professional. It also includes primary source material

State and local

State tax primary and editorial information organized by state

Pension and benefits

Legislative and regulatory information, both primary and editorial, related to pension and benefits compliance areas such as ERISA, COBRA, PBGC, and other pension related issues

Estate planning

Coverage of topics of interest to estate and financial planning professionals

International

A variety of legal, editorial, and news sources related to international trade, tariffs, and regulations

Accounting and audit

Various products and services covering issues related to accounting and auditing

Page 178

Page 1118

SOLUTIONS MANUAL

6-7.

Legislative: Internal Revenue Code, various other statutes that affect tax, public laws that affect taxes, archived code, the U.S. Constitution. Administrative: Regulations (final proposed and temporary); Circular 230; administrative rulings such as revenue rulings and revenue procedures; IRS Notices, nnouncements and releases; letter rulings and memoranda. Judicial: Trial level (tax, district) court decisions, appellate-level decision and Supreme Court decisions that are tax related.

Page 179

6-8.

Primary source materials form the backbone of tax law. Primary materials are typically the source of ―substantial authority‖ relied upon by researchers. Editorial materials are those that are prepared by subject area experts for the commercial tax service. Editorial materials are written to be more understandable and often provide links to the primary materials when available. Often researchers will use editorial materials to better understand the primary sources.

Pages 174, 181

6-9.

The three editorial services provided by Checkpoint are Federal Tax Coordinator (FTC), United States Tax Reporter (USTR), and the Federal Tax Handbook. The FTC is the most comprehensive editorial source provided by Checkpoint. It is organized by topic and contains a thorough explanation of each topical area and links to primary sources. The USTR is organized by code section, and within each code section the regulations, explanations, committee reports, and annotations (court cases dealing with the code section) can be found adjacent to the section itself. For tax concepts that cover multiple code sections, the USTR would need to be examined in each code section for a comprehensive review. The Federal Tax Handbook is a topically organized editorial source that provides brief explanations of most significant area of tax law. Because it is less comprehensive, it can be much quicker to use.

Pages 181–182

6-10.

Performing a keyword search for all the Checkpoint databases at once is likely to produce results that contain too many irrelevant sources rending the search useless. A more directed search increases the probability that the researcher will find the relevant tax law more quickly.

Federal Tax Research, 12th Edition

Page 1-119

Pages 183–184

6-11.

The footnotes found in the Checkpoint editorial materials provide a trail that the researcher can follow from editorial materials back to the primary sources. Recall that this is critical since ―substantial authority‖ to support a tax position generally requires primary source authority.

Page 204

6-12.

The Related Information buttons allow the researcher to quickly find related sources of tax law to the document that currently find themselves in. By using the Related Information buttons, the researcher has immediate access to explanations, primary sources, regulations, and many other documents that can help the researcher understand the current document.

Pages 188–189 and 198

6-13.

A terms and connectors search lets you search for documents by specifying words and phrases that describe your research question, along with specialized search connectors to filter and customize the search to get more specific results. The intuitive search method uses regular written language phrases to generate search results.

Page 184

6-14.

The Boolean connectors are as follows: &, AND: Finds results that contain both terms OR, |: Finds results that contain either term NOT, ^: Finds results that contain the first term but not the second term The proximity connectors are as follows: /n: Finds results where the second terms is within n words of the first term pre/#: Finds results where the second term is within # words of the first term /s: Finds results where the terms are within 20 words of each other (any order) pre/s: Finds results where the terms are within 20 words of each other (exact order) /p: Finds results where the terms are within 50 words of each other (any order) Pre/p: Finds results where the terms are within 50 words of each other (exact order) atleast#(): Finds results where the terms appears at least # times

Page 1120

SOLUTIONS MANUAL

Wildcard characters are as follows: *: any character or number of characters can follow the string ?: any character can appear at that position in the string -: compound words that may or may not have the hyphen (e.g., e-mail, email, e mail) #: disables automatic use of plural

Pages 190–191

6-15.

An index search benefits from the creation of the index, which requires the tax meaning and context of the words to be considered. For example, a keyword search finds every location that word is presented; however, an index will contextualize the word and provide subheadings under the keyword to reduce the number of irrelevant sources examined. In this way, the expertise of the individual that built the index is utilized.

Page 191

6-16.

A keyword search can be performed inside an index search. This allows the researcher to advance forward through the index by jumping from keyword to keyword using the Navigate by Keyword feature.

Page 194

6-17.

A search for ―dependent‖ results in any document with dependent or dependents. A search for ―dependent‖ provides the exact same result (since dependent is a single search term and not a phrase, adding quotes results in no changes in the result). Using the wildcard version depend* expands the search to include terms such as dependent, dependency, and depending. Synonyms include child, juvenile, minor, and ward.

Page 191

6-18.

A contents search generally requires some experience or knowledge of the structure or organization of the source of tax law to be searched. For example, the structure of the Federal Tax Coordinator is topical by broad areas such as ―income‖ and then varies across different types of entities (e.g., individual v. corporation). Some preexisting knowledge of the way the database is structured will prevent the researcher from having to drill down into unrelated documents over and over again until the relevant source is found. In a similar way, a working knowledge of the code will assist the researcher in finding relevant tax materials using a contents search in an annotated service such as the United States Tax Reporter.

Federal Tax Research, 12th Edition

Page 1-121

Page 195

6-19.

A citation search is a quick way to find a specific tax law or ruling based on the citation of that law or ruling. If, for example, you are searching for a specific code section, citation search may be the fastest way to find that code section—in Checkpoint, simply click Search by Citation and enter the citation. A citator, on the other hand, allows the researcher to examine other cases or rulings that have been issued subsequently to the document of interest that cites that document. This is used to help verify that the current document is the most recent or prevailing law. Checkpoint uses RIA‘s citator, which can be accessed by either using the Citator link from the document of interest or by finding the specific case or ruling citation for which the analysis is required in the table of contents.

Pages 197, 200

6-20.

The precedential value of cases is its legal authority that considered when judges are writing opinions in subsequent cases having similar facts or legal issues. The law attempts to maintain continuity in treatment of similar issues so individuals can anticipate the application of the law to their own situations.

Page 200

6-21.

The tax law changes daily due to new legislation, issuance of regulations, administrative pronouncements, and court cases. Since the tax law is constantly evolving, researchers must determine if subsequent events have affected the legal standing of the sources upon which the tax solution relies. Checkpoint has the RIA Citator to assist the researcher to examine any updates or changes to an area of tax law over a window of time.

Pages 202–203

6-22.

A citator is a research tool that allows the tax researcher to both determine the history of a case and evaluate the strength of its holdings. A citator may also facilitate locating cases more on point with the client‘s facts.

Pages 200–201

6-23.

Page 1122

SOLUTIONS MANUAL

refers to another case, it cites the latter case. The name of the cited case and where it can be found is referred to as a citation.

Page 201

6-24.

A citator does not provide all types of information about a case or a ruling. Citators do not guide the researcher to documents related to the case or ruling that do not specifically cite it nor do they indicate when a case or ruling is no longer effective because of changes in the code, unless the code itself specifically identifies the document or a subsequent document makes specific reference to the case being superseded by the code.

Page 201

6-25.

An article found that is on point with the tax issues allows the practitioner to use the author of the article as a research associate, by capitalizing on the author’s expert judgments and references on the relevant topic, thereby saving hours of research time. The article’s references can lead the practitioner to the pertinent primary tax sources. Researchers who ignore the tax periodicals might be accused, at best, of reinventing the wheel and, at worst, of professional malpractice.

Page 209

6-26.

Generally, only primary sources of tax law, such as the code, regulations, or revenue rulings, are cited as authority in professional tax research. Tax journals and newsletters are considered secondary sources of the tax law. Traditionally, citing articles in professional tax research is limited to two situations: (1) If the researcher is referring to the author‘s analysis and conclusions as stated in an article, (2) if the researcher cannot find any controlling primary sources of law and a secondary source addresses the issue.

Page 209

EXERCISES The answers to the exercises are valid as of July, 2019. It is likely that there will be changes in the legal services and the tax law after this manual is published. Further, it is likely that the services available to the students will not be identical to the services available to the authors of this manual. Consequently, the student responses may vary from those provided.

Federal Tax Research, 12th Edition

6-27.

Page 1-123

a. The RIA Checkpoint thesaurus alternatives for like-kind are 1031, like kind, likeclass, and likekind. b. The Federal Tax Coordinator is not expandable. The areas of the FTC are available from the main search page separately (Analysis (FTC), Checklists, Client Letters). c. The Search page indicates 1954 but there are actually four rulings dated 1953 in the database. d. The three points for accessing current legislation are (1) search left sidebar: Legislation search; (2) Primary source materials: Current pending/enacted legislation (RIA); (3) Legislation (editorial analysis and source material).

6-28.

a. Student responses will vary date of search. RIA Tax Watch is available in the left-hand margin

under Go To. Click Tax Watch, and the articles are listed chronologically with the most recent article first. b. The first two choices that are made when using the USTR Code Section are (1) choose the USTR Tax Type (income, estate and gift, and excise) and (2) Choose Current or Repealed (Current or Repealed). c. The templates available in the Form/Line Finder are Tax Year, Form Number, Form/Schedule Line Number, and Schedule. d. The ―i-Tables‖ include AFR Tables and IRS Valuation Tables, which include Table B: Interest for a term certain; Table R(2): Two-life factors (other than CRUTs); Table S: Single-life factors; Table U(2): Two-life factors (CRUTs).

6-29.

The templates for Estate Planning Practice Area are Current Code, Final & Temporary Regulations, Preambles to Final Regulations and Proposed Regulations. The templates for Payroll Area are Final & Temporary Regulations, and Proposed Regulations.

The oldest available General Council Memorandum available is from 1962.

The exact date is January 8, 1962.

The Date Range Search only applies to federal cases. The oldest cases available are AFTR – 1860; TC & BTA – 1924; TC & BTA Memos – 1928; and Tax Court Summary Opinions

2001. Note that to find the oldest Tax Court Summary Opinion using Search by Date, the oldest date allowed must have year 1860 and then search through the current date with no keyword. Once the search results are provided, click the Table of Contents tab for the search results and each year will be presented. e.

The two revenue rulings discussing § 1250 are 77-21 and 72-550.

Page 1124

6-30.

SOLUTIONS MANUAL

Estimate your income tax for the upcoming year.

Using the Don‘t Delay Your Savings tool with the following inputs: Years to wait = 5, Starting amount = $0, Years = 30, Rate = 6%, and constributions = $200, the difference is $59,935.

The 15-year term saves $23,529 in interest but will cost $304 extra per month.

Student responses will vary depending on the tax year that the research was performed. In 2019, the marginal rate = 12%, the average rate = 5%.

6-31.

The title of § 178 is Amortization of cost of acquiring a lease.

The Regulations issued on § 178 are as follows: Reg § 1.178-1. Depreciation or amortization of improvements on leased property and cost of acquiring a lease Prop Reg § 1.178-1. Depreciation or amortization of improvements on leased property and cost of acquiring a lease

Section 168.

The FTC paragraph that furnishes an analysis of § 178(a) is L-6504. The explanations paragraphs linked to all of § 178 are L-6504, L-7971, L-12501, and L-17028.

The case can be found in annotations (e.g., Related Information button for annotations) and in Kermit Eucker et al. (1983) 81 TC 983.

6-32.

The Checkpoint primary databases with indexes are the Current Code, Final & Temporary Regulations and Proposed Regulations. The Federal Tax Coordinator, USTR, and Federal Tax Handbook also have indexes but they are not primary materials.

The FTC paragraphs discussing the excise tax for racing tires are W-2605 and W-2606.

Rev Rul 57-218, 1957-1 CB 369.

Section 4131.

Use the history-related information button to reveal the history of § 4131. The change was dated

August 5, 1997.

Federal Tax Research, 12th Edition

Page 1-125

According to the house report (COMREP ¶41,311.03): Amounts equal to net revenues from this excise tax are deposited in the Vaccine Injury Compensation Trust Fund to finance compensation awards under the Federal Vaccine Injury Compensation Program for individuals who suffer certain injuries following administration of the taxable vaccines. This program provides a substitute federal, ―no fault‖ insurance system for the State-law tort and private liability insurance systems otherwise applicable to vaccine manufacturers. All persons immunized after September 30, 1998, with covered vaccines must pursue compensation under this federal program before bringing civil tort actions under State law.

6-33.

The FTC paragraph introducing expensing advanced mine safety equipment is ¶L-9940.

The FTC paragraph that defines advanced mine safety equipment is ¶L-9943.

The USTR paragraph that discusses this topic is ¶EXP179E4.

The primary source is cited by both the FTR and USTR as the source is § 179E.

Not very detailed. It simply states that ―Taxpayers can elect to expense 50% of the cost of qualified advanced mine safety equipment property placed in service before 2018.‖ Because this election expired at the end of 2017 (and has not been extended as of 2019), it is possible that future Handbooks will be silent on the issue.

6-34.

The directions for line 24 on Schedule 1 of the 2018 Form 1040 are found in paragraph number ¶132.1; Certain business expenses of reservists, performing artists, and fee-based government officials.

EXP ¶1794.02 discusses what qualified real property is for purposes of § 179.

Committee reports, regulations, explanations, annotations and advanced annotations are all presented.

The Supreme Court cases issued in 2018 are: Marinello, II v. U.S. 138 S. Ct. 1101 3/21/2018

Wisconsin Central Ltd., et al., v U.S. 138 S. Ct. 2067 6/21/2018 e.

There were no Supreme Court cases on income taxes included in Checkpoint for 2017. This

reflects how only relevant tax cases are included in Checkpoint.

Page 1126

6-35.

SOLUTIONS MANUAL

The practice areas will vary depending on the library‘s subscriptions. Possible responses are Federal, State & Local, Estate Planning, Pension & Benefits, International, Payroll, Accounting, Audit & Corporate Finance, All Practice Areas.

The materials offered in the Archive Materials for 2016 are Annotations, Explanations, Federal Tax Handbook, Internal Revenue Code, IRC History, and IRS Publications.

It would be useful to use the Archive Materials if the practitioner had a client with a return audited

for a prior year or a client who had not filed returns for a particular previous year. d.

The repealed § 199 covered the domestic production activities deductionand was repealed by §

13305(a) of P.L. 115-97, effective for tax years beginning after 12/31/2017.

6-36.

Student responses will vary. Possible responses include Accelerated Debt Payoff, Consolidation Loan Investment, Credit Card Optimizer, Credit Card Pay Off, How Much Do You Owe?, Personal Debt Consolidation, and Rolldown Your Credit Card Debt.

From the Support and Product Training area on the Home tab or from the Help button at the top of the screen.

A nickname for a transaction in which a partner contributes an asset which is combined and managed with the other assets of the partnership, followed by a distribution of another asset out of the partnership to the partner.

6-37.

McCarthy et al. v. U.S. with parallel citations of 807 F.2d 1306 and 87-1 USTC ¶9101.

U.S. Court of Appeals, Sixth Circuit.

The court examined the amortization of broadcast rights and the amortization of certain fees incurred in acquiring a business.

The two types of fees are the legal fees associated with the loan to purchase the Yankees and the fees incurred to organize the partnership that owned the Yankees. The loan fees were permitted as amortizable over the life of the loan. The partnership organization costs are considered part of the basis of the Yankees and must be capitalized.

McCarthy has not been cited in the RIA Citator. It modifies its previous judicial history—the District Court case on the same issues (56 AFTR 2d 85-5612).

In 2004, § 886(a) of P.L. 108-357 amended § 197(e)(6), thus opening the door for the amortization of broadcast rights for sports franchises.

Federal Tax Research, 12th Edition

6-38.

Page 1-127

Use Find by Citation and search cases for Santa Clara Valley. The citation for the case is 106

AFTR 2d 2010-7370.

There are four cases listed by the RIA Citator (Of these, only one (107 AFTR 2d 2011-402) deals with the self-incrimination issued discussed in the 2010 case.

6-39.

Use Find by Citation using More and search AFTR for Parker or Find by Citation and search cases

for case name Parker. Parker v. Comm. is 79 AFTR 2d 97-2889 or 117 F3d 785 or 97-1 USTC ¶50480.

Only once by the First, in Marino 93 AFTR 2d 2004-906. Use Ctrl-F to search the page for CA1.

The RIA Citator lists only one case: Stuart M Smith Jr. TC Memo 2000-244. Use Ctrl-F to search

the page for distinguished.

6-40.

There are 16 results at the time we went to print. The citator covers Revenue Procedures, Tax Court Memoranda, Announcements, and Notices, all of which may have 2009-47 (if students list only the court cases, it is because they did not expand to show all the results of the search).

The title of Rev. Proc. 2009-47 is High-low per diem method for lodging meal and incidental expenses.

This procedure superseded Notice 2008-59.

This procedure was modified by Rev. Proc. 2010-39.

Rev. Proc. 2010-39 is not longer in effect and was superseded by Rev. Proc 2011-47. This revenue procedure relates to a changing per diem amount; it is likely to be superseded each year. Starting in 2011, the changing information in the revenue procedure was updated using an IRS Notice in lieu of a new Rev Proc each year.

6-41.

The citation for the Gwendolyn A. Ewing case is 118 TC 494 and it addresses § 6015, innocent spouse relief, jurisdiction of the Tax Court for equity relief.

The original Gwendolyn A. Ewing case (118 TC 494) is the same case as Gwendolyn A. Ewing, 122 TC 32. Upon appeal, the Tax Court findings were reversed in Gwendolyn A. Ewing, 97 AFTR 2d 2006-1224 , 439 F3d 1009 (CA9, 2/28/2006). Lastly, the original Tax Court decision was overruled by legislation as discussed in David Bruce Billings (127 TC 7).

The Gwendolyn A. Ewing case is annotated in the United States Tax Reporter at ¶60,155.01(5), ¶60,155.04(5), and ¶60,155.04(10). To find this information, use the related information links for annotations from the case.

The Haag case favorably discusses the Ewing case at 94 AFTR 2d 2004-6667.

Page 1128

6-42.

SOLUTIONS MANUAL

Corn Products can be cited as 47 AFTR 1789, 350 US 46, 76 S.Ct. 20, and 55-2 USTC ¶9746.

Using the Filter by U.S. option at the top of the citator, nine Supreme Court cases have cited Corn Products.

The court cites Bittker, Federal Taxation of Income, Estates, and Gifts.

Excepting Alderson, virtually all the cases citing Arkansas Best follow or cite favorably the decision. As a result, the ruling would appear to remain valid.

The tax law was changed first through the regulations and then through the code itself, rendering application of Arkansas Best and Corn Products to a reduced number of situations.

6-43.

The tax years considered in Deluxe Check Printers, Inc. (15 Cl Ct 175) are 1976, 1977, and 1978. Upon appeal, the Federal Circuit Court of Appeals (64 AFTR 2d 89-5327; 885 F2d 848) reversed the liability and affirmed as to the interest payment.

The doctrine that is the basis for part B of the Court of Federal Claims case is the Doctrine of Variance and is discussed at T-6802 & T-6802.1in the FTC.

The cases and rulings distinguish that themselves from the Deluxe Check Printers Court of Federal Claims decision are as follows: BCS Financial Corp v. U.S., 78 AFTR 2d 96-5766, 930 F Supp 1279; and Sierra Pacific Resources and Subs. v. U.S., 90 AFTR 2d 2002-7511 , 56 Fed Cl 376; IRS Letter Rulings 9643001 & 9702002.

The number of cases cited by the Deluxe Check Printers decision could be from 21 to 23 depending on whether the students count every case or leave out cases with the same name (Rockefeller, Winthrop) and the Deluxe Check Printers. This seems like a reasonable number for a case to cite.

6-44.

The complete citation is Rev Rul 2001-60, 2001-2 CB 587.

Rev Rul 2001-60 modified and amplified Rev Proc 99-49 (199-2 CB 725) and modified and superseded Rev Rul 55-290 (1955-1 CB 320).

The documents that favorably cite Rev Rul 2001-60 are Rev Proc 2002-1 (2002-1 CB 41), Rev Proc 2002-3 (2002-1 CB 125), Rev Proc 2002-9 (2002-1 CB 353), Rev Proc 2011-14 (2011-4 IRB 330), and IRS Letter Ruling 201650014.

Rev Rul 2001-60 discusses capital expenditures—improvements to business or property—golf course greens.

Federal Tax Research, 12th Edition

Page 1-129

CHAPTER 7 CCH AnswerConnect

DISCUSSION QUESTIONS

7-1.

Page 218

7-2.

Page 218

7-3.

The three primary ways to search in AnswerConnect are (1) keyword, (2) topical, and (3) annotated. A keyword search is similar to using a search engine on the Internet, such as Bing or Google. Simply enter the keywords and search the entire library of tax law. A topical search allows the researcher to browse or search the existing list of topics to identify the area of relevance. An annotated search starts with identification of the relevant code section and then uses the relevant information links to explanations and annotations to derive support for research conclusions.

Page 220

7-4.

Page 1130

SOLUTIONS MANUAL

the related regulations, explanations, and annotations (which are cases and rulings that affect that section). A topical service divides the tax law into its functional components and organizes these components by topic.

Page 221

7-5.

AnswerConnect permits the researcher to simply enter the code section number. The search engine is built to identify code sections as code sections and not just simple text. Code sections can also be found by browsing the All Federal Tax item in the Federal Tax practice area.

Page 235

7-6.

Page 218

7-7.

The only secondary source that remains as a stand-alone database in AnswerConnect is the Master Tax Guide. The Master Tax Guide is a topically organized editorial source that provides brief explanations of most significant area of tax law. Because it is less comprehensive, it can be much quicker to use. All other secondary databases are now integrated into the AnswerConnect explanations and annotations.

Page 223

7-8.

Search results can be ordered either by most relevant (as determined by AnswerConnect) or by most recent.

Pages 224–225

7-9.

Answer Connect uses Topics, Explanations, and Annotations as secondary sources documents.

Federal Tax Research, 12th Edition

Page 1-131

Pages 226, 235–236

7-10.

Keywords are highlighted on virtually all of the documents that are linked from the search results. Using the double arrows, a research can skip from the first key term in a paragraph to the first key term in the subsequent paragraphs.

Page 226

7-11.

A topical search allows the researcher to utilize the library of topics constructed and organized by subject matter experts. In addition, AnswerConnect has broad topical areas and then subtopics under each that permit the researcher to gain a general understanding of the issue before investigating the details.

Page 220

7-12.

A keyword search can be performed inside of a topical search. This allows the researcher to advance forward through the topic list by jumping from keyword to keyword. Alternatively, most browsers support a Ctrl-F search function.

Pages 233–234

7-13.

An annotated search generally requires some experience or knowledge of the structure or organization of the source of tax law to be searched. A working knowledge of the IRC will assist the researcher in finding relevant tax materials using an annotated service.

Page 234

7-14.

The precedential value of a case is its legal authority that is considered when judges are writing opinions in subsequent cases having similar facts or legal issues. The law attempts to maintain continuity in treatment of similar issues so individuals can anticipate the application of the law to their own situations.

Pages 237–238

Page 1132

SOLUTIONS MANUAL

7-15. The tax law changes daily due to new legislation, issuance of regulations, administrative pronouncements, and court cases. Since the tax law is constantly evolving, researchers must determine if subsequent events have affected the legal standing of the sources upon which the tax solution relies.

Page 237

7-16.

Page 238

7-17.

A cited case is the case that is being analyzed for its history or precedential value. It can also be referred to as the main case. Citing cases are those cases that have made reference to the cited case. When one case refers to another case, it cites the latter case. The name of the cited case and where it can be found is referred to as a citation.

Page 239

7-18.

Pages 239

7-19.

Page 244

7-20.

Generally, only primary sources of tax law, such as the code, regulations, or revenue rulings, are cited as

Federal Tax Research, 12th Edition

Page 1-133

authority in professional tax research. Tax journals and newsletters are considered secondary sources of the tax law. Traditionally, citing articles in professional tax research is limited to two situations: (1) if the researcher is referring to the author‘s analysis and conclusions as stated in an article, (2) if the researcher cannot find any controlling primary sources of law and a secondary source addresses the issue.

Page 244

EXERCISES The answers to the exercises are valid as of August, 2019. It is likely that there will be changes in the legal services and the tax law after this manual is published. Further, it is likely that the services available to the students will not be identical to the services available to the authors of this manual. Consequently, the student responses may vary from those provided.

7-21. a. The title of § 641 is Imposition of Tax. b. There are five committee reports for § 448. c. Section 385 lists two cases: a trial level and appelate case related to the Sensenigs. d. Subsection (g) was stricken from § 851 by P.L. 105-34. This can be found under the History tab of § 851. 7-22. a. There are three subtopics under Kiddie Tax, which is located under the Individuals main topic and can be found under Federal Tax Topics. b. Under the Kiddie Tax: Unearned Income of a Child Topic, interest on tax exempt bonds is not considered unearned income. c. Anne Bowker curated Branch Profit Tax, which can be found under the International Taxation main topic and then Foreign Corporations and Other Foreign Entities. By typing ―branch‖ into the search for topics box, this topic will be the only suggested topic. d. There are nine topics on corporate reorgnizations. e. There are mulitple types of corporate reorganizations, which are all brought up in the search.

7-23.

Page 1134

SOLUTIONS MANUAL

a. Expenses and Interest relating to Tax-Exempt Income. b. There are four regulations (three final, one proposed). c. Under Explanations of § 265, a gain realized by a corporation upon a plan of complete liquidation is not wholly exempt income. Go to § 265 and click the Explanations tab and Ctrl-F for Hawaiian. d. Under § 265 Tools, a statement under § 1.265-1(d) is available.

7-24. a. In most relevant order, IRC § 1 is the first listed item. It is also the first item if sorted by most recent. b. The Standard Federal Tax Reporter is no longer provided in the latest verstion of CCH AnswerConnect. This question was intended to require the student to perform a keyword search for ―63‖ to determine the standard deduction for taxable years 2018–2025 for a single taxpayer according to IRC § 63. Under § 63(c)(7)(A)(i), the standard deduction is $12,000. c. As we go to print, the suggested search that is most likely to provide the current year standard deduction is ―What is the standard deduction in 2018 and 2019.‖ Answers will vary by year of search. d. Quick answers are provided in Questions and Answers and as we go to print, the standard deduction for 2019 is $12,200. Answers will vary by year. The purpose of parts (b), (c), and (d) of this question are to demonstrate that the code is not always the best source to identify current amounts that may be adjusted for inflation each year. e.Two topics result from the search. In addition to the topic discussing the standard deduction, a second topic dealing with IRS standards for evaluating offers in compromise is shown. The standard deduction amounts are communicated by the IRS through a revenue procedure. Revenue Procedure 2018-57 and Rev. Proc. 2019-44 are the two most recent primary source documents that provide the standard deduction amount. 7-25. a.

Sections 4161 and 4162

3 percent

None. Because AnswerConnect has provided only § 4161(a), there are no other sources to examine.

Yes. The entire IRC section has related documents, while the subsection does not.

Under Cases and Admin Guidance, there is a tab for Annotations. The Annotation for Indian Tribes Rev. Rul. 94-81 states that there is no tax on sport fishing equipment to Indian tribes if the equipment is used essentially in Indian tribal governmental functions.

Federal Tax Research, 12th Edition

7-26.

Page 1-135

No. This history does not cover cost-of-living increases in the tax brackets.

The most likely topic is Tax Rates and Tables for Individuals under the Individuals main topic.

Either of the Smart Charts in this topic will provide the income brackets for 2011. Income over $379,150 is taxed at 35 percent for a single taxpayer.

It would be useful to know prior year rates if a client is being audited for that year or if he or she failed to file tax returns in a prior year.

7-27.

There are five explanations and two topics as we go to print. None of them deal directly with the election.

Four

Under the Presumption and Election under the Hobby Loss Rules topic, there is a link to § 183(a) in the text of the paragraph on Election to Postpone Determination.

The first topic is the one discovered in the search in part (c), the second search terms were more effective because they used the terms used in the database and brought the most relevant source to the top of the results list. Replacing ―hobby‖ with ―profit motive‖ shows that understanding the language of the tax law can be critical in finding the proper documents.

7-28.

7-29.

The Internal Revenue Code documents do not cover the election.

Section 183 covers this issue, specifically § 183(d).

It does not. It basically says the election will be made based on the instructions of the secretary.

Nothing.

Reg. § 12.9 covers the issue. It is a temporary regulation dating back to 1974 (T.D. 7308).

IRS Notice 2016-55 discussed the treatment of leave-based donation programs to aid victim of severe storms and flooding that occurred in Louisiana in August of 2016.

William C. Hood.

IRS Pub 583 Starting a Business and Keeping Records was last published in 2015.

Public Law 116-25 is the Taxpayer First Act, signed into law in July 2019.

Page 1136

7-30.

SOLUTIONS MANUAL

Notice 2010-10 is located at IRB 2010-3, 299, issued December 18, 2009.

There are 67 document s in Administrative Guidance and it is not clear how many mention specifically Notice 2010-10.

7-31.

Notice 2010-10 is mentioned in only Notice 2012-3.

William H. George 26 TC 396. This can be found easily using a keyword search for William

George 1956. b.

Under the main title Reorganization is ―What Are the Different Types of Corporate Reorganizations?‖.

Section 368(a)(1)(C). Found in the headnotes to the court case or via the green IRC section link.

Revenue Ruling 78-47, 1978-1 CB 113 issued January 01, 1978, titled ―Reorganization; ‗substantially all‘ assets transferred,‖ cite the George case favorably. The student would either have to read the revenue ruling or use a different citator to determine how the revenue ruling treats the case.

7-32. a.

93 TC 67 is the National Starch and Chemical Corp. but is also referred to as INDOPCO, CCH Dec. 45,851, 93 TC No. 67, 93 TC No.7.

The Treasury Decision 9568 was filed in the Federal Register through TD 9568 on December 6, 2011. It applies to §§ 367, 482, 861, and 6662. It was corrected on 1/24/2012 and 2/13/2012.

7-33.

The complete Cumulative Bulletin citation for Revenue Ruling 1955-290 is Revenue Ruling 1955290, 1955-1 CB 320. It has been modified and superseded by Revenue Ruling 2001-60.

The tax issue addressed in Revenue Ruling 1955-290 is whether expenditures incurred in the original construction of greens on golf courses are capital costs to be added to the original cost of the land and not subject to depreciation.

One case cites Revenue Ruling 1955-290, which is Edinboro Co., DC, 63-2 USTC ¶9759, 224 F Supp 301.

7-34.

Rev. Proc. 2002-19 (Mar. 14, 2002) addresses accounting methods: Involuntary change in accounting method: Adjustment period: Advance consent: Automatic change in accounting method. It involves §§ 446 and 481 and Statement of Procedural Rules § 601.204.

Federal Tax Research, 12th Edition

Rev. Proc. 2002-19 has been amplified and clarified by Rev Proc 2002-54.

The types of pronouncements citing this procedure are announcements, notices, revenue

Page 1-137

procedures, revenue rulings, and treasury decisions. The most current pronouncement is citing this procedure is Rev. Proc. 2015-13.

7-35.

Citation for Gwendolyn A. Ewing case is 2006-1 USTC ¶50,191; 439 F3d 1009 and it addresses Code Section 6015, innocent spouse relief, jurisdiction of the Tax Court for equity relief.

The Ninth Circuit Court of Appeals (2006-1 USTC ¶50,191) reversed and vacated the Tax Court decisions (122 TC 32 and 118 TC 494). Student cannot tell from CCH Citator that the original Tax Court decisions were overruled by legislation as discussed in David Bruce Billings (127 TC 7).

The student cannot tell from the CCH Citator how the Haag case treats the Ewing case because CCH provides no symbol or word evidence. The student would have to read the Haag case to determine that it treats the Ewing case favorably.

Page 1138

SOLUTIONS MANUAL

CHAPTER 8 OTHER TAX SERVICES AND TAX PERIODICALS

DISCUSSION QUESTIONS

8-1.

When a BNA portfolio is on-point with the tax issues, the practitioner can use the portfolio‘s authors as a research associate, by capitalizing on the authors‘ expert judgments and references on the relevant topic, thereby saving hours of research time. BNA portfolios cover tax issues in a comprehensive manner.

Page 283

8-2.

Each BNA Tax Management Portfolio begins with a Portfolio Description, which gives a brief overview of the topic and the order in which the materials will be presented. The Table of Contents would follow this description. The remainder of the Portfolio contains two sections: (A) Detailed Analysis and (B) Working Papers.

Page 256 8-3.

The Working Papers section of the BNA Tax Management Portfolios is perhaps the service‘s most unique and useful feature. This portion includes practitioner checklists; reproduced IRS forms, occasionally filled in for an illustrative fact situation; computation worksheets; sample draft agreements and contract clauses; sample board or shareholder resolutions and employment contracts; reproductions of pertinent primary sources; and other practical materials that would assist the professional in implementing tax planning techniques and procedures.

Page 257

8-4.

The Westlaw service is legally oriented because it was designed by attorneys for attorneys. Its orientation is evident in its structure and its emphasis on citators and citating.

Page 258

8-5.

The opening screen in Westlaw is designed to look like any Internet search using any typical browser.

Page 259

8-6.

Checkpoint and AnswerConnect interpret a space between words as an ―and,‖ whereas Westlaw interprets the space as an ―or.‖ Lexis Advance Tax and Nexis Uni find documents that contain either or both words.

Page 266 and Chapters 6 and 7

Federal Tax Research, 12th Edition

8-7.

Page 1-139

Westlaw KeySearch uses the West Key Numbering System, which numbers key issues (topics) found in court cases into approximately 450 numbered topics. These topics are further subdivided with the result that there are more than 100,000 unique key numbers. The KeySearch option, available on the key number screen, formulates a query for the researcher based on underlying terms for the topic selected by the researcher and adds the key numbers associated with the topic. This type of search is beneficial when the researcher is unfamiliar with the area of tax law and is having difficulty pinpointing keywords to use as search terms.

Page 262

8-8.

LexisNexis Advance Tax offers primary sources and the analytical materials offered by Bender and Tax Analysts. It has also created its own tax services: Federal Code Reporter and Federal Topical. Page 264

8-9.

Once the broad keyword search is performed, the source can be refined using the sources on the left-hand side near the top. Then, sources within that source can be selected from the bottom left-hand side. For example, if IRC § 121 is the desired document, a keyword search for exclusion gain sale home could be used as keywords. The source selected should be statutes and then Internal Revenue Code can be selected.

Page 267

8-10.

The Nexis Uni Get a Document is similar to Find by Citation in other services.

Page 271

8-11. Nexis Uni is a customized version of LexisNexis offered to academic institutions and public libraries. The libraries and databases offered on academic vary with the subscription. Generally, primary tax documents and secondary news, law review, and journal articles are included.

Page 270 8-12.

The simplest way is to narrow by content and choose Tax Law. Then the keyword search of those sources can be performed.

Page 270

8-13.

Westlaw was built by attorneys for attorneys and citations are the centerpiece of the service. Shepard‘s is the oldest citation service. Both provide color-coded symbols to assist the researcher in identifying relevant citing cases. Additionally, both services produce a table of authorities allowing for a quick review of citing

Page 1140 cases.

SOLUTIONS MANUAL

Pages 262–263

EXERCISES The answers to the exercises are valid as of October 2019. It is likely that there will be changes in the legal services and the tax law after this manual is published. Further, it is likely that the services available to the students will not be identical to the services available to the authors of this manual. Consequently, the student responses may vary from those provided. 8-14.

Portfolio 501 Gross Income: Overview and Conceptual Aspects and 502 Gross Income: Tax Benefit, Claim or Right and Assignment of Income are the BNA U.S. Income Portfolios that cover gross income.

Student results will vary by date. The purpose of the exercise is to have students enter the Daily Tax Report and perform a search of news releases. The default setting for results is by date.

The paragraph on Statutory Employees in the Tax Practice Series on Compensation Planning is ¶5440.02.C. The paragraph on income tax withholding for fishing crews is ¶5440.02.C.3.

8-15.

The search yields 3,503 documents (October 2019).

IRS publication covering moving expenses is Publication 521 (2018): Moving Expenses.

Using Fast Answers: Federal Tax and searching for keywords home office deduction, Rev. Proc. 2013-13, 2013-6 IRB 478 covers the safe harbor method.

When a search on notice 2012-62 is run, 33 agency documents are found (as of October 2019). The Notice itself is related to Extension of Replacement Period for Livestock Sold on Account of Drought.

The drought information website is http://droughtmonitor.unl.edu/archive.html (note: the website has been updated since the IRS Notice to https://droughtmonitor.unl.edu/Maps/MapArchive.aspx).

There are 73 agency documents from the initial search of IRS Agency Documents. The only notice found (October 2019) is Notice 2019-12 related to making payments to charities in return for a state tax credit.

8-16.

The BNA U.S. Income Portfolio discussing the definition of New York Liberty Zone property is Tax Incentives for Economically Distressed Areas, Portfolio 597-2nd, § II F.

Worksheet 5 of Portfolio 597-2nd is an Interactive Disaster Relief Chart.

The portfolio discussing the timing of deductions under the all events test for an accrual-based taxpayer is ―Accounting Methods—General Principles,‖ Portfolio Number 570-4th, § V(C)(1).

The author is George L. White, Esq.

Federal Tax Research, 12th Edition

8-17.

Page 1-141

The primary advantage to an Advanced Search is the ability to choose the collection(s) to search. This allows the search results to be narrowed to the source of choice.

In Bloomberg Tax, spaces between words is ―and‖ connector, the asterisk (*) is a wildcard that replaces one character at a time, and an exclamation point (!) is a multicharacter wildcard. These can be found under the info button next to the keyword search box.

The number of Agency Document will vary depending on the time of the search. Notice 2019-12 covers a safe harbor under § 164 for individuals that make a charitable donation in lieu of paying state income taxes and the related federal deduction or credit.

8-18.

The issue in 30 TC 757 is the deduction for clothing required by an employer but adaptable for general use.

8-19.

30 TC 757 is cited in Tax Practice Series: Deductions ¶2150.02.C

The only case found (October 2019) pertains to the attempted recovery of extradition costs.

The portfolio discussing the stuffing allocation is ―Other Pass-through Entities,‖ Portfolio 7362nd, § VI.

Portfolio 554-5th contains a Worksheet 1 or 10, that demonstrate the attribution rules between family members for § 267.

8-20.

The purpose of the Reg. § 1.61-11 is the inclusion of pension income in gross income.

Tax-deductible theft loss under 26 U.S.C.A. § 165 98 ALR Fed. 299.

169 A.L.R. Fed. 1 covers deductions for worthless nonbusiness debt.

Yarborough v. Comm. 11 TCM 1112 covers the timing of a worthless debt deduction due to a check being returned unpaid.

The court case is cited by 169 A.L.R. Fed. 1 (obviously), Mertens 30:67 Identifiable event requirement and 15 Tex Prac Series 17.06 Timing of bad debt loss.

8-21

The Westlaw Key Number for Gross Income is 3447. This can be found under Tools/Key Number 371.

8-22.

Ninth Circuit Court of Appeals presided over Stewart v. US 106 F.2d 405.

The Key Cite Flag is red showing severe negative results.

The U.S. Supreme Court reversed Stewart.

Chapter 7, Article 2, N.M.S.A. § 7-2-2 defines base income. Can be found by searching for ―base income‖ in New Mexico regulations.

For Armstrong v. Commonwealth of the Northern Mariana Islands, the Supreme Court denied certiorari. The Case History tab provides this information once the case document is found.

Using Practice Areas, Tax, Secondary Sources, Tax Law Reviews, there are 9 different tax law

Page 1142

8-23.

SOLUTIONS MANUAL

reviews and journals available in Westlaw Campus Research. d.

Tax Compliance as a Wicked System (18 Fla. Tax Rev. 235) was written by J.T. Manhire.

For the 2008 Supreme Court case, Boulware, the citations are as follows: 128 S Ct 1168; 552 U.S. 421, 101 AFTR 2d 2008-1065, 2008-1USTC ¶50.206.

Under Practice Areas, the following secondary resources are available under securities: American Law Reports—Securities and Securities Law Reviews & Journals.

The contents for the items in part (b) are as follows: Securities Law Reviews & Journals—Fordham Journal of Corporate & Financial Law, the Journal of Business & Securities Law, Michigan Business and Entrepreneurial Review, and the PIABA Bar Journal. American Law Reports—This is the source, opening this item starts the browsing process.

34 Am. Jur. 2d Federal Taxation ¶16526. Impairment-related work expenses are not subject to the 2 percent floor.

8-24.

The citation for the discussion of adding flu vaccines to the list of taxable vaccines is 159 Cong. Rec. H3704-01, 2013 (WL 3013727). The motion was introduced by Representative Gerlach.

Student responses will vary based on personal search strategies. A suggested strategy might be to select Proposed and Enacted Legislation or Congressional Record under Legislative History and keyword search influenza vaccine tax. The results include the Public Law passing the measure (P.L. 113-15) that can be opened and the Legislative History Materials tab will provide the congressional records for the bill.

8-25.

By using the Statutes Affected tab while on the P.L. document, IRC § 4132 was affected.

The key numbers suggested for this topic is 220k.

Subchapter B of Title 26, Subtitle A, Chapter 1 of the Code of Federal Regulations is Computation of Taxable Income.

The IRC section that covers the inclusion of the rental value of parsonages is § 107.

The key number for Internal Revenue: Expenses—Medical expenses is 220k3366.

Hargrove (130 S Ct 3543) was certiorari granted by the Supreme Court in 2010 in light of the Skilling case. The judgment was vacated and remanded to the Seventh Court of Appeals for further consideration.

8-26.

The frequency and update schedule for the Federal Income Tax of Life Insurance Companies is annually, every June.

January 1960.

The publisher of the LexisNexis Tax Advisor—Federal Topical is Matthew Bender & Company, Inc.

Federal Tax Research, 12th Edition

Page 1-143

Student responses will vary by terms selected and preference for natural language or terms and connector term searches.

8-27.

In the Tax News tab, the sources listed are Law360 Tax Authority and MLex U.S. Tax

Watch.

8-28.

The last documents found under the letter E is The European Company across Europe.

The only source is the Massachusetts Department of Revenue Administrative Procedures, which does not contain the Federal Revenue Procedures.

Rev Proc 2019-13 deals with depreciation on luxury autos and bonus depreciation.

Nexus Uni does not generally find the IRC through the publication search.

This is a backdoor into the IRC. By selecting a specific code section, the entirety of the code can be selected for searching.

8-29.

Answers may vary. In October 2019, the search resulted in three documents: a 1995 article from the Florida Law Review, a 2017 article from the Loyola University Chicago Law Journal, and a 1999 article from the California Law Review.

8-30

There are now 21 articles (October 2019).

The writs of certiorari decided on October 7, 2013 were as follows (all were denied): Dinicola v. OR Dept. of Revenue from the Oregon Court of Appeals Conway v. IRS from the Second Circuit U.S. Court of Appeals Fein v. Comm. from the Second Circuit U.S. Court of Appeals Matheson v. Washington Dept. of Revenue from Court of Appeals Washington Schoppe v. Comm. from the 10th Circuit U.S. Court of Appeals

The connectors definitions are as follows: W/10 means one term within 10 words of the other term with the terms in any order; PRE/20 means the first term precedes the second term by not more than 20 words; NOT W/seg means the first term occurs but not within the same section as the second term; and ATLEAST5 means that the term should appear at least five times in the document.

8-31.

The Tax Law Library may include Cases, Statutes and Legislation, Law Reviews and Journals, Administrative Materials, and many others. To find these, after selecting Tax Law from the Nexus Uni dropdown, click on Select a specific content type.

As of October 2013, the most recent article on the zombie apocalypse is Prosecuting the Undead: Federal Criminal Law in a World of Zombies 61 UCLA L. Rev. Disc 44.

Page 1144

8-32.

SOLUTIONS MANUAL

Calvin H. Johnson.

Gitlitz v. Commissioner, 531 U.S. 206 (2001).

The Gitlitz theory is not likely the cause of the loss.

Federal Tax Research, 12th Edition

Page 1-145

CHAPTER 9 MULTIJURISDICTIONAL TAXES DISCUSSION QUESTIONS

9-1.

There are numerous reasons for the emphasis on state and local tax planning. State and local tax environment is becoming increasingly complex and challenging to navigate due to states‘ ever-increasing expansion of their taxation systems. Taxpayers are finding it increasingly difficult to stay abreast of and comply with the evolving requirements. For many businesses, this is an untapped planning opportunity in which practitioners can provide value-added services. While each of the various taxes paid to states may be small, the percentage of total state taxes paid by a business can be almost one-half of its tax bill. Coordinated state tax planning can substantially reduce this percentage, especially where the taxpayer operates in various state and local taxing jurisdictions and has some flexibility as to where its property and labor force are located. International taxation is experiencing the same increasing complexity and compliance and strategy are becoming more commonplace as more firms expand into global markets.

Page 294

9-2.

The necessity for greater revenues to meet the needs of constituents has caused states to raise the tax burdens of citizens. Tax increases for state and local governments is especially critical when the economy is in a down turn. During these times, the demands for social programs such as welfare and Medicaid build, while the tax bases for states are reduced due to the slow economy. In addition, state and local governments‘ financial burdens have escalated due to cutbacks in federal aid. These cuts come at a time when public services demanded by citizens are increasing. The combination of these effects has caused the state and local tax burdens to increase substantially over the last 50 years. Since most states constitutionally cannot operate at a deficit, the state and local tax obligations become more of a burden for the taxpaying businesses and individuals.

Pages 294–295

9-3.

The constitutional validity of state tax laws commonly is challenged in courts today, whereas federal taxes are rarely questioned on their constitutionality anymore. State and local tax challenges address not only whether taxes fall within the purview of state constitutions but also whether the laws are federally constitutional.

Page 297

9-4.

The Supremacy Clause in the federal constitution confers superiority to federal laws over state laws. That is, federal laws are ―the supreme law of the land‖ and trumps state laws. If a state law or constitutional provision is in conflict with a federal law, it is considered to be invalid.

Pages 294–295

Page 1146

9-5.

SOLUTIONS MANUAL

The Due Process Clause and the Commerce Clause are both constitutional limitations places on a state ability to exert taxation. P.L. 86-272 is a public law that restricts the ability of a state to exert taxing authority over certain taxpayers.

Pages 298–300

9-6.

The Due Process Clause of the Constitution requires that no state shall enforce a law that deprives any person of the right to due process under law, which in tax terms relates to the relative fairness between the state taxing the business and the economic activity the business is conducting in the state.

Page 298

9-7.

The four criteria set forth in Complete Auto Transit Inc. for imposition of state taxation are the following: •

The tax is applied to an activity with a substantial nexus (connection) with the taxing state.

•

It is fairly apportioned.

•

It does not discriminate against interstate commerce.

•

The tax is fairly related to the services provided by the state.

Page 299

9-8.

P.L. 86-272 prevents a state from taxing the income of a business whose activity is the mere solicitation of orders for the sale of tangible goods. Thus, an Internet-based retailer can avail itself of the protection offered under P.L. 86-272 by limiting activity to only having an online presence and avoiding any other activity in the state.

Page 300

9-9.

State legislatures are responsible for enacting laws regarding the revenue sources, just like the federal legislatures. The state legislatures pass bills amending and augmenting their state‘s taxing code. While federal revenue bills must start in the House, this is not a requirement in all state legislatures. In fact, the jurisdictions of the state legislative houses vary from state to state, and there tends to be a significant overlap in their functions. Nebraska avoids this duplication by having only one legislative body. Once the tax bills are passed and signed by the governor (similar to having the president sign the act), they are incorporated into the state‘s statutory structure.

Page 301

Federal Tax Research, 12th Edition

9-10.

Page 1-147

Federal regulations and rulings may be pertinent to state tax issues when states piggyback income, estate, or other taxes on federal statutes. Consequently, guidance in interpreting the law will come from the federal pronouncements. The degree to which states follow federal law varies greatly.

Page 302

9-11.

Common modifications include the following: • Adding back interest on state and municipal obligations if not exempt for state purposes (net of expenses). • Subtracting interest on U.S. obligations, which is taxable for federal purposes but not state purposes (net of expenses). • Adding back state income taxes deducted in computing federal taxable income. • Subtracting refunds of state income taxes. • Subtracting federal income tax paid. (A limited deduction is allowed in a few states.) • Adding back federal depreciation, amortization, and depletion in excess of that allowed by the state or subtracting state depreciation, amortization, and depletion in excess of the federal amount. • Adjustments of gain or loss on asset dispositions because of depreciation differences. • Adjustments for differences between federal and state net operating losses (NOLs).

Page 303

9-12.

Allocation is the direct assignment of certain types of income (typically nonbusiness income) to a state. Apportionment is the assignment of business income to a state based on a prescribed formula typically based on economic measures.

Page 303

9-13.

The purposes of the MTC include the following: Facilitate the proper determination of state and local tax liability of multistate taxpayers, including the equitable apportionment of tax bases and settlement of apportionment disputes; promote uniformity or compatibility in significant components of tax systems; facilitate taxpayer convenience and compliance in the filing of tax returns and in other phases of tax administration and avoid duplicative taxation.

Page 304

9-14.

Checkpoint has a database consisting of all proposed and current enacted legislation in full text. An effective date calendar is provided that lists each state‘s enactment conventions. Also, a current legislative calendar for each state is available.

Page 1148 Page 305

SOLUTIONS MANUAL

9-15. The CompareIt feature allows the researcher to link to the same topic material for one state in another state and return. This makes comparing the tax treatment of an item in multiple states easy, and it eliminates the need to return to the list of documents when performing multiple state searches.

Page 305–306

9-16.

The Checkpoint search option, Multiple Sources, uses the keyword search methodology. The document categories in the Multiple Source option are not identical to those offered in the state and local initial practice area. One offered only in Multiple Sources is the Miscellaneous Multistate Materials database. While the Multiple Sources search option contains the multistate materials it lacks, the tax-type indicator of the initial search option. Thus, the type of tax must be included as one of the keywords, to narrow the results to the particular tax of interest.

Page 308

9-17.

The Checkpoint SALT practice area does not allow citation searches directly on its opening screen. A single state must be earmarked for the search before the citation search option is offered. Based on the state, the citation search options will vary. Once the state and type of primary document is specified, templates are furnished for entering the citation.

Page 309

9-18.

CCH AnswerConnect can select state tax law in two ways. The first is to use All States in the State Tax practice area. Once selected, a list of all states is presented and a particular state can be selected. The second method is to go through State Tax Topics and select the topic of interest. AnwerConnect then prompts the researcher to choose the state of interest for that topical area.

Pages 310–312

9-19.

The All States database is the primary source of state tax information. State Tax Topics and SmartCharts are also valuable multistate resources.

Pages 310–314

9-20.

Most states will have analysis on corporate, individuals, sales and use, excise, property, estate and gift, and pass-through taxation. The primary tax law for each state is also available.

Federal Tax Research, 12th Edition

Page 1-149

Pages 314–315

9-21.

Although Nexis Uni lacks the detailed editorial analysis of tax law packaged as a complete service or treatise commonly found in the other services, because Nexis Uni includes access to an extremely large number of newspapers and periodicals, it contains extensive secondary analysis in various articles and stories. Page 318

9-22.

Nexis Uni uses Shepard‘s Citator.

See Chapter 8

9-23.

The State Materials tab is the easiest way to access state tax law.

Page 321

9-24.

Two important state taxation journals are Journal of Multistate Taxation and Incentives (Warren Gorham & Lamont) and Journal of State Taxation (CCH).

Page 322

9-25.

The U.S. system of taxing domestic corporations with international operations is a hybrid territorial system. Under the new regime, earnings from a controlled foreign corporation (CFC) now fall into three broad categories:

1. Subpart F as generally defined under old law but taxed at the new 21 percent rate 2. A narrow category of exempt income, which is not subject to U.S. tax 3. A new category of income called Global Intangible Low-Taxed Income (GILTI) eligible for a new 50 percent deduction, reducing the tax rate—at least theoretically—to 10.5 percent, or half the tax rate applicable to subpart F income.

In order to provide some parity between the taxation of GILTI earned by a CFC and foreign income earned directly by a U.S. corporation, the new law includes a new regime called Foreign Derived Intangible Income (FDII), which reduces the tax rate on income from certain export sales, licenses, and services provided to persons outside the United States.

Pages 323–324

Page 1SOLUTIONS MANUAL 150 9-26. The source of income is dependent on performance location and/or property location. Income from

interest and dividends generally is sourced by the residency of the payer. Thus, dividends from a domestic corporation and interest from a state bond are sourced within the United States. For income from property, such as rents, royalties, or gains from property sales, it is the location of the property

that is relevant.

Sales of inventory often are sourced by the location of the transaction, not by the origin of the inventory. Thus, inventory purchased in a foreign country but sold within the United States produces domestic sourced income. Income for personal services usually is sourced according to where the services are performed, not the residency of the compensating entity or the citizenship of the personal service provider.

Page 326

9-27.

Deductions for expenses and losses directly related to a transaction or activity are called definitely related deductions and are relatively simple to allocate. For example, cost of goods sold is allocated to the sales income to which it relates.

Expenses that either are not attributable to any specific income source or are associated with more than one source are known as not definitely related deductions and must be apportioned. Typically, these expenses are grouped by class of gross income and then apportioned between foreign- and U.S.-sourced income.

Page 326

9-28.

Multinational firms will have a variety of different income-producing activities in many countries. Setting prices for transfers of goods and services between related companies within the firm can be difficult depending on whether a third-party market for those goods already exists.

Pages 324–325

9-29.

The standard for transfer pricing is an arm‘s length standard—in other words, pricing based on fair market value between unrelated parties.

Page 325

9-30.

The goals of the Organisation for Economic Cooperation and Development (OECD) are to assist developing countries, support economic growth, boost employment, raise living standards, maintain

Federal Tax Research, 12th Edition

Page 1-151

financial stability, and enhance world trade.

Page 325

9-31.

If the Internal Revenue Code and a tax treaty conflict, typically the most recently issued provision generally prevails.

Pages 326–327

9-32.

The two primary areas of tax research are (1) researching the U.S. tax treatment of a transaction with some connection to U.S. tax law or (2) researching how a foreign country might tax a particular transaction.

Page 328

9-33.

The four international sources in Checkpoint are (1) International Tax Systems and Tax Planning, (2) RIA International Portfolios, (3) Tax Treaty Explanations, and (4) WG&L Treatises on International Taxation.

Page 328

9-34.

The two paths to international tax data in AnswerConnect are either to go into the specific country or to go through a topic area first and then select the country.

Page 331

9-35.

The Working Papers section of the Bloomberg Foreign Income Portfolios contains interactive and IRS forms, sample elections, official documents, and legal forms (some filled-in as examples).

Page 334

9-36.

The Bloomberg Tax International Library actually has four main areas of content: (1) portfolios, (2) treaties, (3) transfer pricing, and (4) practice tools.

Page 333

Page 1152

SOLUTIONS MANUAL

EXERCISES The answers to the exercises are valid as of October 2019. It is likely that there will be changes in the legal services and the tax law after this manual is published. Further, it is likely that the services available to the students will not be identical to the services available to the authors of this manual. Consequently the student‘ responses may vary from those provided.

9-37.

The definitions of the three levels of Membership in MTC are as follows: Compact members are states (represented by the heads of the tax agencies administering corporate income and sales and use taxes) that have enacted the Multistate Tax Compact into their state law. These states govern the Commission and participate in a wide range of projects and programs. Sovereignty members are states that support the purposes of the Multistate Tax Compact through regular participation in, and financial support for, the general activities of the Commission. These states join in shaping and supporting the Commission‘s efforts to preserve state taxing authority and improve state tax policy and administration. Associate members are states that participate in Commission meetings and otherwise consult and cooperate with the Commission and its other member states or, as project members, participate in Commission programs or projects.

Student responses will vary by the date the Website (www.mtc.gov) was visited. The Multistate Tax Commission Review is found through the Resources topic in the top window on the home screen and then Publications heading in the left side bar.

The National Nexus Program was founded in December 1990. It was created by the Multistate Tax Commission in furtherance of the following purposes. i. Fostering increased state tax compliance by business that is engaged in multijurisdictional commerce. ii. Establishing national cooperation in the administration of state tax issues arising in the nexus area, including possible development of a uniform nexus standard, which satisfies requisite constitutional standards, the identification of businesses involved in multijurisdictional commerce, which are not now in compliance with applicable state tax laws, the establishment of a national information network with uniform confidentiality standards, and similar activities. iii. Facilitating taxpayer compliance through education as to a taxpayer‘s state tax reporting responsibility when it becomes involved in the systematic development of a market in a specific state and providing cooperative services to multistate taxpayers to reduce compliance burdens and to simplify the compliance process. iv. Promoting fair, even-handed and consistent state tax enforcement in the nexus area.

Taxpayers may request in writing that the Multistate Tax Commission conduct a joint audit on

Federal Tax Research, 12th Edition

Page 1-153

behalf of participating states. This request is submitted to the MTC Audit Director. The Audit Director forwards the request to the MTC Audit Committee at its next scheduled meeting.

9-38.

Student responses will vary by the date the Website (www.taxadmin.org/) was visited.

The citation for the 1984 Bacchus Imports, Ltd., et al., v. Herbert H. Dias, Director of Taxation of the State of Hawaii case is 468 US 263 or 104 S.Ct. 3049. The case was heard by the U.S. Supreme Court.

Bacchus alleges that there have been violations of the equal protection, import–export, and commerce clauses of the U.S. Constitution. c. Both plaintiff and defendant names do not have to be entered into the template in the federal cases on State Taxes option. Either name or both are permissible. Entering Bacchus or Dias will locate the case. d. Student responses will vary, because they will use different keywords.

9-39.

Student responses will vary depending on the state chosen.

Student responses will vary depending on the state chosen. Florida has the following types of taxes listed: cigarette, alcohol, and miscellaneous; corporate income; estate and gift; fuels and minerals; insurance companies; intangibles; property, public utility; sales and use; special local and stamp taxes. Washington has the following types of taxes: business and occupation; cigarette, alcohol, and miscellaneous; estate and gift, fuels and minerals; insurance companies; property; public utility; sales and use; special local, and stamp taxes.

Student responses will vary depending on the state chosen. Washington State‘s tax per pack is $3.025 per pack.

9-40.

The documents listed for any under Search State and Local Taxes and in the TOC for the same state are similar but not identical. The documents are not listed in the same order. The TOC listing has Index and Statute History, which are not provided in the Search option. The Search option document list has cases segregated into federal and state. It also provides Legislative Highlights, List of Approved Laws, and Attorney General Opinions, which the TOC does not provide.

The listing for ―H‖ under Stamp in the Index is ―Home rule estate transfer taxes.‖

$100 as per the Index under Limited Liability Companies, Collection of Fees (¶8551 of the Hawaii State Reporter).

The U.S. statute titles listed under federal laws on state taxation are as follows: Titles 4,5,10,12,15,26,28,31,38,46,48,49,50, and 50a.

Page 1154

9-41.

SOLUTIONS MANUAL

Student responses will vary depending on the date the service was visited. Click Tax News from the main page and then select the State tab at the top of the page. Jurisdictions are in the left-hand margin under the tax types.

Student responses will vary depending on the date the service was visited. Recent articles can be found under Tax news and the State tab, then select Corporate Income as the topic area.

Escheat is the vesting to the state the title of unclaimed property. The topic is Unclaimed Property.

Florida does not require a homestead property to include the value of changes to property if caused by calamity or misfortune unless they exceed a certain size.

9-42.

Hawaii allows estates a $1,144 deduction for a personal exemption (Revenue Statute § 235-54(b)).

California sources sales of other than tangible property under the market rule. Connecticut also uses the market rule. New Mexico uses the proportion of services rule until after 2019 and then the market rule. Kansas and Mississippi do not use market-based sourcing, while Missouri does starting in 2020. SmartCharts are generally much easier to use for comparing multiple states.

9-43.

The Alaska personal income tax was repealed by a 1980 law retroactively to January 1, 1979. Therefore, the last year to have an income tax was 1978.

Student responses will vary with the state selected. Pennsylvania appears to have the highest gasoline tax at 74.1¢ per gallon (2019).

9-44.

Student responses will vary depending on the date the service was visited.

According to the Lexis Tax Practice Insights found in Corporate Income & Franchise Taxes/Nexus, use of a third-party retailer to sell gift cards creates a presence in the state of Florida.

9-45.

9-46.

Florida Stat. § 212.0596 and Florida Stat. § 220.15

Chapter 12 covers sales and use tax nexus.

South Dakota v. Wayfair

As of October 2019, 43 states plus Washington, D.C.

Breaking down BEPS: Strategies, Reforms, and Planning Responses by Michael Sala in the Connecticut Law Review (47 Conn. L. Rev. 573).

Federal Tax Research, 12th Edition

Page 1-155

Recent Developments in Federal Income Taxation: The Year 2016, Martin J. McMahon, Jr. and Bruce A. McGovern. University of Florida Tax Review, 20, 131.

9-47.

National Starch and Chemical Corporation v. Commissioner T.C. Memo 1986-512. The U.S. Tax Court heard the case and it was decided on October 20, 1986.

There are three citing decisions and no headnotes.

Shepard‘s shows a positive treatment and a review of the subsequent appellate history shows that the case was affirmed at the Supreme Court level in the INDOPCO case.

9-48.

In Complete Auto Transit, Inc v. Brady, Complete Auto Transit is requesting a refund of sales taxes. Thus, the case involves sales and use taxes. Parallel citations for the case are 430 US 274, 97 S Ct 1076, and 51 L.Ed 2d 236. Justice Blackmun delivered the opinion.

The Supreme Court in South Dakota v. Wayfair reversed and vacated the Supreme Court of South Dakota case. The justice delivering the opinion was Kennedy. Roberts filed a dissent and was joined by Breyer, Sotomayor, and Kagan. c.

The Wisconsin Department of Revenue v. Wrigley covers tax years 1973–1978.

Parallel citations for the case are 505 US 214, 112 S Ct 2447, and 120 L Ed 2d 174. The respondent lawyer is E. Barrett Prettyman and petitioner lawyer is F. Thomas Creeron. Dissenting opinions was filed by Kennedy, which Rehnquist and Blackmun joined. d.

In Commonwealth Edition Co. v. Montana, the tax involved was a severance tax on coal mined within Montana. Parallel citations for the case are 503 US 609, 101 S Ct 2946, and 69 L Ed 2d 884. The two federal clauses addressed in the case were the Commerce Clause and the Supremacy Clause.

9-49.

The topics covered in the Tax Materials for Maine (and most other states)

include the following: Cases, Statutes & Court Rules, Regulations, Secondary Sources, Briefs, Proposed and Enacted Legislation, and Proposed and Adopted Regulations.

9-50.

The case was heard in 1849. Bowling was not held in particularly high esteem at that time.

The case was heard in 1866. The smell of dead bodies was the nuisance.

The case was decided on October 14, 2009 by the California Court of Appeal Second Appellate District, Division Two.

(1) Wealthy individuals are not a suspect class requiring strict scrutiny under equal protection clause; (2) tax on income in excess of $1 million annually was supported by a rational basis; and (3) provision requiring that state mental health funding remain at certain level did not unconstitutionally interfere with legislative functions.

Page 1156

9-51.

SOLUTIONS MANUAL

There was a previous superior court decision.

Ashmann-Gerst, J., and Chavez, J., concurred.

6.6 percent (2019).

Trailing nexus is nexus that exists even after a corporation ceases doing business within a jurisdiction‘s borders.

Drop shipments are discussed in § 7. Special Transactions. Drop shipments generally arise from transactions involving three parties: a customer, retailer, and a third-party supplier who is directed to deliver the goods directly to the customer. It is the triangular structure of these transactions that raises numerous sales and use tax issues.

9-52.

Student responses will vary depending on the date State Tax Today was reviewed.

Student responses will vary depending on the date Tax Management Weekly State Tax Reporter was reviewed.

Student responses will vary depending on the date State Tax Day was reviewed.

Student responses will vary depending on the date State Tax Update was reviewed. The State Tax Update newsletters are archived from 1995 to the present.

9-53.

The article discussing ad valorem property taxes on a baseball stadium is “Tax Assessment of AT&T Park: Cost-Sharing, Value-Splitting, and the Definition of Economic Obsolescence,” by Peter B. Kanter, published in September 2007.

Student responses will vary depending on the date of the assignment.

Blaise Sonnier and Roby Sawyers, Is It a Tax or a Fee? May 2019.

Student responses will vary depending on the date the Journal of Multistate Taxation and Incentives was reviewed.

9-54.

Student responses will vary depending on the date the Journal of State Taxation was reviewed.

The editor-in-chief of the latest issue as of the writing of this manual was John C. Healy. Student responses will vary depending on which university they attend.

The author of ―A Deal‘s a Deal‖ is Jeff Patterson. It appears in the Nov/Dec (vol 31, issue 1) 2012 issue.

9-55.

Tax Sites provides the following news and topics links. Ryan and Co.: Topics in State and Local Tax E-Commerce Taxation

Federal Tax Research, 12th Edition

Page 1-157

AICPA: State News and Information CCH: State Tax News Headlines Council of State Governments: State News Pew Center on the States: Stateline.org RIA State Taxes: This Week‘s News Tax Analysts

9-56.

Student responses will vary depending on the association Websites visited.

Student responses will vary depending on their state of residence.

Student responses will vary depending on their state of residence and tax selected.

Canada‘s treaty has PE for services and a combination of preparatory/auxiliary activities are permitted by Austria but not by Canada. Canada‘s treaty has ―services‖ PE.

9-57.

Switzerland has a double tax agreement (treaty) with both China and Ghana.

It is available in English.

In general, nonregistered persons are not eligible for refunds of VAT (Value Added Tax Navigator

European Union § 8.6). b.

Marco de Lignie and Anna Ratzenhofer of Loyens & Loeff NV.

Student responses will vary based date of search. However, Bert Mesdom has written at least six articles regarding VAT taxes for Bloomberg Tax International.

9-58.

9-59.

Portfolio 6300 is on PFICs.

Student responses will vary based on date of search.

15 percent.

Sociedad de Responsabilidad Limitada (Colombia Country Portfolio – Forms of Doing Business).

Article 57 of the French tax code (Code Général des Impôts) covers transfer pricing (Transfer Pricing Portfolio E-G).

In May 2014, Daily Tax Report issued a story that China will continue a VAT refund for animators through 2020. Search ―China VAT animator‖ in Daily Tax Report.

9-60.

9-61.

Ellen K. Harrison and Carlyn C. McCaffrey.

Transaction Taxes.

Student responses will vary based on date of search. William H. Byrnes typically has a large number of articles in international taxation (approximately 109).

Page 1158

SOLUTIONS MANUAL

Bangladesh, India, Maldives, Nepal, Pakistan, and Sri Lanka (this may be a restricted source depending on the subscription).

Three—There is a single treaty signed through SAARC (South Asian Association for Regional Cooperation) and a separate agreement with India and Bangladesh.

9-62.

Article 5.

Article 20 indicates that as long as the earnings are related to education or training, they are not taxable. The treaty was published April 4, 1979 but was effective March 1, 1980.

Student responses will vary depending on the date that the research was performed. One way to find this information is to browse sources by Area of Law, Taxation, International. A search for Ireland will likely result in more than 3,000 hits (the max), so better to date limit the search to last 7 days.

Student responses will vary depending on the date that the research was performed. One way to find the information is to browse sources by Area of Law, Taxation, International—select International Tax Notes Magazine and keyword search for europ! And vat.

9-63.

Student responses will vary depending on the university‘s subscription. At a minimum, the Journal of International Taxation and International Taxes Weekly Newsletter are likely to be listed. Others include International Tax Alert, This Week with Cym Lowell, and the Inbound Tax Report Newsletter.

The paragraph of the RIA Tax Treaty Editorial Explanations on U.S.-Estonia that discusses visiting students is ¶35,012.

Student responses will vary depending on the date that the research was performed. BEPS is base erosion and profit sharing.

9-64.

Jersey companies or foreign companies managed and controlled in Jersey pay tax at 0 percent, with the following exceptions: • Financial services companies, which are licensed and regulated by the Jersey Financial Services Commission, pay 10 percent tax; • Companies receiving Jersey income from land, property, and property development pay 20 percent tax; • Utility companies pay 20 percent tax.

The International Create-a-Charts available for students and trainees are Code § 872(b)(3) later in time than treaty, students and trainees—right to tax, and students and trainees—tax credit in country of residence.

Federal Tax Research, 12th Edition

Page 1-159

The author of the treatise titled U.S. Taxation of International Mergers, Acquisitions & Joint Ventures are D. Kevin Dolan, Patrick Jackman, Philip Tretiak, and Ronald Dabrowski.

9-65.

Student responses will vary depending on the date that the research was performed. One way to find the information is to browse International News (typically at the bottom of the news are on the main page) and then select UK as the jurisdiction. Use Ctrl-F to search for VAT.

Article 20 of the U.S.-Estonia Income Tax Treaty discusses the taxation of students, apprentice, and trainees.

9-66.

Ministry of Industry and Commerce (International Topics Bahrain Business Formation).

In the Income Tax Treaty between Bermuda and the United States, Article 2—Residence, states that a ―resident of Bermuda‖ means an individual who has the status of a legal resident of Bermuda and a company, partnership, trust, or association created under the laws of Bermuda.

According to the Transfer Pricing Summary (found under International/Topics/Azerbaijan/Transfer Pricing Azerbaijan) follows the OECD TP guidelines.

Article 20 of the 2017 OECD Model Tax Convention on Income and Capital is titled ―Students.‖

Page 1160

SOLUTIONS MANUAL

CHAPTER 10 COMMUNICATING RESEARCH RESULTS

DISCUSSION QUESTIONS

10-1.

The research memo is designed for the following functions: •

Organize the facts, issues, and conclusions of the project.

•

Facilitate a review of the research activities by the practitioner‘s supervisors or colleagues.

•

Allow for a subsequent examination of the research issue by the original researcher or by his or her successor, with respect to the same or another client‘s identical or related fact situation. Pages 350–353

10-2.

The following writing tips were discussed in this chapter:

•

Be organized

•

Consider the reader

•

Be professional and courteous

•

Use correct grammar and punctuation

•

Be brief and to the point

•

Write in direct, active voice and use short sentences Page 350

10-3.

The primary parts of a tax research memo are as follows:

•

Summary of the facts

•

Summary of the issues

•

Conclusion

•

A list of authorities relied upon

•

Analysis and summary Pages 350–351

10-4

Key points that the tax researcher must consider with respect to evaluating court cases as part of a research project:

•

The hierarchy of the court, similarity of the fact situation, and the date of the court decision. In addition, relevant information may be discovered in dissenting and concurring opinions in a court case.

Federal Tax Research, 12th Edition

Page 1-161

Page 354 10-5.

Key points that the tax researcher must consider with respect to evaluating administrative sources of law as part of a research project:

•

The hierarchy of the administrative sources of law particularly with regard to revenue rulings and revenue procedures compared to regulations. Page 354

10-6.

No, tax advice may be communicated either orally or in writing. There is no required format for tax advice under SSTS No. 7 (applicable for AICPA members) or Circular 230 (applicable to those who practice before the IRS). Professional judgment should be used in determining the form of communication. Page 355

10-7.

Major elements of a client letter include a salutation, objective and scope of the research, general summary of the research project results, statement of the facts as presented by the client, summary of critical sources of law, the implications of the results, any assumptions and limitations, closing including references to any required follow-up messages, closing including references to any required follow-up meetings, and attachments, if any. The difference between a letter to a sophisticated client and to an unsophisticated client is the degree of sophistication that is possessed by the receiving party. The tone of the letter should still be professional.

Page 356

10-8.

Gathering pertinent facts that can be a challenging task for tax researchers because initial documentation of the facts is likely to be incomplete for the following reasons: taxpayers may only see the issue from their side so that facts and circumstances may be hidden or forgotten if they would cast doubt on the ability to determine or document the pro-taxpayer position, taxpayers are not rained in the entails of the technical law, and there may be no clearly controlling tax statute or precedent, which could render the facts incomplete.

Page 351

10-9.

Key points include the following:

•

The hierarchy of the court decisions and their relevance for the taxpayer given the taxpayer‘s jurisdiction.

•

The recency of the court decision and administrative rulings

•

The hierarchy of the administrative ruling. While regulations are seldom held to be invalid by a court, revenue rulings and revenue procedures are more likely to be successfully challenged.

Page 1162 Pages 353–355

10-10. •

SOLUTIONS MANUAL

The key takeaways regarding the use of visual aids in oral presentations are as follows: General preparation for the talk should include a thorough, frank examination of the following set of questions by the presenter.

•

Be prepared in the technical aspects of your discussion.

•

Direct your remarks to the highlights and general results of the research and leave time for a questions-andcomments period in which more detailed subjects can be addressed.

•

Use visual aids effectively.

•

For text in visual displays, use the ―six and six‖ rule, and keep the font style simple.

•

Before the presentation, find out how long your time is supposed to be and do not exceed the time limit.

•

Rehearse your presentation at least once.

•

Get physically close to the audience as you can, in all but the very largest presentation venues.

•

Eliminate nervous habits.

•

Vary the pitch of your voice.

•

Do not be afraid of silence.

•

Do not read directly from your outline.

•

Be enthusiastic and positive about your comments.

•

Rehearse the logistical aspects of the presentation.

•

Do not take the risk of boring or offending the audience with a joke.

•

Have a ―Plan B‖ ready to go.

•

Observe audience body language and use signals conveying interest, enthusiasm, boredom, or restlessness to your advantage.

Pages 362–363

10-11. Professional judgment should be used in determining the form of communication used. While there is no required format for tax advice under SSTS No. 7 or Circular 230, Paragraph 7 of SSTS No. 7 provides factors to be considered when deciding on the format. One such factor is ―the tax sophistication of the taxpayer.‖ In this case, the taxpayer does not appear to understand the relationship between depreciation expense claimed on previous years‘ tax returns and the gain computation at the time of the sale. Because it appears that the taxpayer does not understand the tax issues associated with the transaction, the advice should provide a sufficient explanation so that someone without tax sophistication can understand how the tax law applies to him or her.

The tax professional may consider providing the taxpayer with an oral explanation during their initial conversation and then following that up with a written e-mail or more formal letter.

Federal Tax Research, 12th Edition

Page 1-163

With respect to content, the member should exercise professional judgment and consider the following issues associated with the sale: •

Taxpayer‘s other income

•

Explanation of depreciation rules and adjusted basis of the property sold

•

State and local tax issues

•

Possible net investment income taxes, passive losses and carryovers, and other carryover items

•

Possible alternatives, if any (e.g., a tax-free exchange)

•

Other relevant issues depending on the taxpayer‘s tax situation and financial sophistication

(Adapted from AICPA SSTS No. 7, FAQ number 1).

Page 355 and Chapter 1

EXERCISES

10-12. Information on the tax gap can be found in a variety of sources, including the Tax Policy Center at http://www.taxpolicycenter.org/briefing-book/what-tax-gap.

10-13. A good source for information on the distribution of household income and federal taxes in the Congressional Budget Office: www.cbo.gov. 10-14. Information on the estate tax can be found in a variety of sources, including the IRS‘s Statistics of Income program: https://www.irs.gov/uac/soi-tax-stats-statistics-of-income.

10-15. Sources of data and answers will vary by state. Good general sources include The Tax Policy Center (https://www.taxpolicycenter.org/) and the Tax Foundation: (https://taxfoundation.org/sources-state-andlocal-tax-revenues/).

10-16. Information on the U.S. system of taxing income of individuals with foreign income can be found at the IRS Website www.irs.gov in Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. KPMG also has a good publication called U.S. Taxation of Americans Abroad, which can be accessed at https://tax.kpmg.us/content/dam/tax/en/pdfs/2019/2019-us-taxation-of-americans-abroad.pdf .

Students can find summaries of the international provisions of the Tax Cut and Jobs Act at https://www.irs.gov/pub/newsroom/Topic-II-Post-TCJA-HO.pdf or https://www.taxpolicycenter.org/taxvox/explaining-tcjas-international-reforms.

Page 1164

SOLUTIONS MANUAL

CHAPTER 11 TAX PLANNING DISCUSSION QUESTIONS

11-1.

Taxes represent an additional cost of doing business or of accumulating wealth. Taxpayers employ tax-planning techniques to accomplish an overall goal of wealth maximization, specifically, by reducing the net present value of the lifetime tax liability.

Page 368

11-2.

Tax planning is not the simple reduction of nominal tax liabilities. Example 11-1 illustrates how a higher nominal tax charge can produce a lower present value of the tax liability, because of the period of deferral and the return on investment during that time.

Page 368

11-3.

Proportional

Federal excise, Social Security Medicare, local property

Progressive

Federal income, estate, gift

Regressive

State sales, Social Security retirement

Pages 371–372

11-4.

Tax planning between a corporation and a shareholder/employee is illustrated by the following examples:

When a corporation pays dividends to an owner-employee, the owner-employee recognizes gross income, but the corporation receives no deduction. To the extent the owner-employee is paid a reasonable salary, he or she recognizes gross income and the corporation receives a deduction. To the extent that the owner-employee receives certain employee fringe benefits, he or she is not required to recognize taxable income, and the corporation is allowed an ordinary business expense deduction. Therefore, to take advantage of this inconsistency, the owner-employee should receive all allowable fringe benefits and be paid a reasonable salary, rather than be paid dividends.

Federal Tax Research, 12th Edition

Page 1-165

Employer-furnished meals and lodging are not included in the gross income of the receiving employee under § 119, if certain requirements are met. Moreover, the costs are deductible by the employer. Therefore, an employee-owner of a corporation might both deduct the costs and avoid income recognition.

Page 382, Example 11-30

11-5.

A taxpayer might convert ordinary income into capital gains by providing a special financing arrangement for the sale of capital assets to another party. For example, the taxpayer could structure the terms of the sale to include a $6,000 sales price to be paid in a number of installments at 5 percent interest, rather than a $5,000 sales price with a 10 percent interest rate. Consequently, the seller would recognize more capital gain and less interest income. However, the transaction would have to be structured in a manner that would not change the character of the income under the below market rate loan rules or the original issue discount rules.

A second method of shifting ordinary income into capital gains would be to purchase capital assets (that will be retained for more than one year) instead of earning interest in a saving account. The market value appreciation on the asset would be recognized as a capital gain, but only when it is realized upon the sale of the asset. If the capital asset is the taxpayer‘s residence or is used in his or her trade or business, and it is purchased with borrowed funds, the taxpayer will be allowed an interest deduction. Thus, the taxpayer‘s current taxable income would be reduced and, upon the sale of the asset, a capital gain would result.

Pages 380–381

11-6.

Tax traps may be classified as either statutory or judicial. An example of a statutory tax trap is § 482 of the code. Under this section, the IRS is given the power to reallocate both income and deductions among certain related taxpayers, so as better to reflect ―true taxable income.‖ Another statutory tax trap is the code provision that prohibits accrual-basis taxpayers from taking deductions for accruals to related taxpayers, unless paid to a minority shareholder, within two and one-half months after the close of the taxable year. Two pervasive judicial doctrines that often limit the taxpayer‘s ability to employ effective planning techniques are the concepts of business purpose and substance over form.

Page 1166

SOLUTIONS MANUAL

Pages 383–385

11-7.

Over the course of several years, individual clients will require all of the following types of planning consulting. The tax practitioner is in the best position to initiate and execute many of these varied and interesting engagements. He or she must make all of these services available to the existing client base and use such planning services to recruit and retain new clients. •

Tax planning

•

Investment planning

•

Estate planning

•

Education planning

•

Cash planning

•

Retirement planning

•

Risk planning

Page 374, Exhibit 11-4

11-8.

The most important tax services offered by the typical tax professional include the following: ▪

Tax Compliance

▪

Tax Research

▪

Tax Planning

▪

Tax Litigation

Page 373, Exhibit 11-3

11-9.

Marginal tax rates are of prime interest in a tax planning analysis because they concern the incremental change in the tax liability due to an additional dollar of gross income or deduction. The execution of a tax plan also affects the nominal and effective tax rates, but it is the marginal rate that indicates the direct and immediate effect on the taxpayer‘s levy for the planning period.

Pages 371,372

11-10.

Departing from the tax planning fundamentals, for example, by accelerating income recognition or by deferring the timing of a deductible expenditure, might be appropriate where a taxpayer is

Federal Tax Research, 12th Edition

Page 1-167

subject to the alternative minimum tax, large loss or credit carryforwards are available on the current-year return or when tax rates are expected to increase in the future.

Pages 378-379, Examples 11-17 through 11-21

11-11.

Higher-income taxpayers tend to engage in tax planning more for the simple reasons that they are likely to face higher tax rates and have greater opportunities to plan. Higher-income taxpayers have more to gain from tax planning because there is more tax to save. Pages 369 -370 and Example 11-3

11-12.

No, taxpayers employ tax planning techniques to accomplish the overall goal of wealth maximization. Because taxes deplete the wealth of the taxpayer, planning behavior is designed to reduce the net present value of the tax liability, which is not the same as a simple reduction of taxes in current, nominal dollar terms.

Page 368

EXERCISES 11-13.

AR and CC

CC and CT

RP and AR

AR and CC

Exhibit 11-5, Pages 376-383

11-14.

CC and RP

Exhibit 11-5, Pages 376-383

11-15.

Answers will vary by student.

Exhibit 11-5, Pages 376-383

Page 1168

SOLUTIONS MANUAL

PROBLEMS 11-16.

The two alternatives would be economic equivalents at an approximately 23.26 percent marginal tax rate.

X = excess of after-tax payoff over after-tax cost for Alternative 1 Y = excess of after-tax payoff over after-tax cost for case Alternative 2 X = $1,600 − [$2,000  (1 − MTR)] Y = [$1,785  (1 − MTR)] − [$1,700  (1 − MTR)] The problem‘s requirement is that X = Y. Thus, $1,600 − [$2,000  (1 − MTR)] = [$1,785  (1 − MTR) − [$1,700  (1 − MTR)]

Solve for MTR −$400 + $2,000 MTR = $85 − $85 MTR $2,085 MTR = $485 MTR = $485 ÷ $2,085 MTR = 23.26%

Verification

Alternative A

Alternative M

Before-tax cost

$2,000.00

$1,700.00

Tax reduction (23.26%)

− 465.20

− 395.42

After-tax cost

$1,534.80

$1,304.58

Expected pre-tax payoff

$1,600.00

$1,785.00

–

− 415.19

$1,600.00

$1,369.81

$ 65.20

$ 65.23

Tax (23.26%)

Expected after-tax payoff

Excess of after-tax payoff Over after-tax cost

Federal Tax Research, 12th Edition

Page 1-169

Pages 369–370, Examples 11-2 and 11-3

11-17.

Structuring the transaction to include 50 percent debt will provide two tax advantages for Ben and his 100 percent-owned corporation. First, the interest that is paid by the corporation on the debt is deductible, whereas dividends that are paid on equity capital are not. The second advantage is that the subsequent repayments of the debt allow the shareholder to withdraw cash from the corporation without recognizing taxable income.

Generally, securities received in a § 351 transaction are treated as boot, and accordingly, gain must be recognized to the extent of the lesser of gain realized or boot received. Since the transfer of cash in exchange for stock and securities will not result in a realized gain, no gain will be recognized on such a transfer. However, a transferor that transfers appreciated property to a corporation in exchange for stock and a debt obligation of the corporation generally must recognize a gain.

Page 384, Example 11-33

11-18.

If alternative one is chosen, the effects on the seller and buyer are as follows:

Seller

Buyer

Total capital gain ($51,726 − 10,000)

$41,726

Interest income ($60,000 − 51,726)

$ 8,274

Basis

$51,726

Interest deduction

$ 8,274

Under alternative 2, the effects on the seller and buyer are as follows:

Seller

Buyer

Total capital gain ($39,380 − 10,000)

$29,380

Interest income ($60,000 − 39,380)

$20,610

Basis

$39,380

Interest deduction

$20,610

Assuming that the original issue discount rules do not apply, the seller would prefer alternative 1. Under this alternative, the seller would recognize a larger amount of capital gain income, which

Page 1170

SOLUTIONS MANUAL

can be offset against capital losses and may subject to a lower tax rate, and would recognize less interest income, which is fully taxable.

The buyer would prefer alternative 2, because the contract terms would result in a greater amount of interest deduction and a lesser cost for the land. Assuming that the investment interest deduction limitations are satisfied, the interest is deductible against ordinary income when it is paid. In contrast, the cost of land is capitalized and can be deducted only against capital gain income when the land is sold.

Page 375, Example 11-6

11-19.

A gift of the income only from the bonds is not effective for tax purposes. To shift the gross income to Debra, George must give her the bonds themselves. Debra is old enough then to avoid the kiddie tax, and the income shift is tax effective if George‘s marginal income tax rate exceeds Debra‘s. If the value of the bonds exceeds the gift tax annual exclusion, gift tax consequences should also be considered.

Page 381, Examples 11-28 and 11-29

11-20.

a. If the taxpayer takes the bonus now (at the end of year 1), the after-tax amount received is $10,000  (1 − 0.31) = $6,900. The taxpayer can invest this amount to earn 10 percent before-tax (6.9 percent after-tax) for the year, which will accumulate to $6,900  (1.069) = $7,376.10 at the end of next year. If the taxpayer defers the bonus for one year, the after-tax amount received is $11,000  (1 − 0.31) = $7,590, and the taxpayer is better off deferring receipt of the bonus for one year.

b. If the taxpayer can earn a 10 percent after-tax return on his money (a 14.4928 percent before-tax return), he will be indifferent to choosing the bonus at the end of year 1 or the end of year 2. c. If the taxpayer‘s marginal tax rate increases to 35 percent in year 2, the $10,000 bonus in year 1 will accumulate to $6,900  (1.065) = $7,348.50. If the bonus is deferred until the end of year 2, the taxpayer will have $11,000  (1 − 0.35) = $7,150 and the taxpayer is better off taking the $10,000 bonus at the end of year 1. d. Assuming a 10 percent before-tax return, if the taxpayer‘s tax rate in year 2 is equal to 33.07

Federal Tax Research, 12th Edition

Page 1-171

percent, the two alternatives are equal. $10,000  (1 − 0.31)  (1 + 0.10  (1 − t2)) = $11,000  (1 − t2), $6,900  (1 + 0.10  (1 − t2)) = $11,000  (1 − t2), 1 + 0.10  (1 − t2) = 1.594203  (1 − t2), 1.10 − 0.10 t2 = 1.594203 − 1.594203t2, t2 = 0.494203/1.494203 = 0.330747 or 33.07%

Page 378, Example 11-17

11-21.

The 6 percent annual interest earned on the taxable bond is taxed annually. After paying tax at a rate of 25 percent on the interest income, the bond accumulates to $10,000  (1 + 0.06  (1 − 0.25))10 = $15,529.69. The gain on the land is taxed in 10 years. In 10 years, the land is worth $10,000  (1 + 0.04)10 or $14,802.44. After paying tax of $960.49 on the $4,802.44 gain, the taxpayer is left with an aftertax accumulation of $13,841.95.

Page 381, Example 11-27

11-22.

As with many tax problems, the answer depends on Greg‘s marginal tax rate. If Greg limits the rental to 14 days, none of the income will be taxable under the Code Sec. 280A de minimis rule (i.e., rentals of less than 15 days). His after-tax cash flow from this option will be $5,000. If he rents the property for 16 days, the rental income will be taxed. Even though he would have more gross income ($6,400 vs. $5,000), after-tax cash flow will be reduced. If Greg faces a marginal tax rate of 15 percent, he would be left with $5,440 after paying tax on his rental income. However, if his marginal tax is greater than 21.875 percent, he will be better off renting for the shorter period of time.

Page 378

11-23.

The NOL will be used up in three years. The marginal tax rate is equal to the 21 percent future tax rate discounted back to today using a discount rate of 6 percent. Using the present value table at the end of the book: 0.21  0.840 = 17.64%.

Page 373, Example 11-5

Page 1172

11-24.

SOLUTIONS MANUAL

Decision Rule: Choose the alternative that produces the lowest present value of the tax liability. Since the loss carryforward is in its last year, non-acceleration of the gain by one year is at the cost of the entire shelter of the carryover.

If $40,000 carryforward Accelerate gain Net gain $60,000 × 25% tax rate × 1.00 PV factor

$15,000

Do not accelerate $100,000 × 25% × 0.877

$21,925

If $10,000 carryforward Accelerate gain Net gain $90,000 × 25% tax rate × 1.00 present value factor

$22,500

Do not accelerate $100,000 × 25% × 0.877

$21,925

If $40,000 carryforward Accelerate gain Net gain $60,000 × 25% tax rate × 1.00 PV factor

$15,000

Do not accelerate $100,000 × 25% × 0.943

$23,575

If $10,000 carryforward Accelerate gain Net gain $90,000 × 25% tax rate × 1.00 present value factor

$22,500

Do not accelerate $100,000 × 25% × 0.943

Pages 378-379

$23,575

Federal Tax Research, 12th Edition

11-25.

Page 1-173

Value of credit $100,000 base × 10% rate × 1.00 present value factor

$10,000

Cost of using credit (reduced cost recovery deductions) Deductions lost Yr 1

($3,333 ÷ 2) deduction lost × 8% tax rate × 1.00 present value factor

$133

Yr 2

$3,333 × 8% ×.877

234

Yr 3

$3,333 × 8% × 0.769

205

Yr 4

($3,333 ÷ 2) × 8% × 0.675

Net value of credit

− 662

$9,338

Pages 378–379

11-26.

Paying a bonus of $100,000 today would cost the employer $75,000 after considering the tax savings of $25,000. Investing that $75,000 for three years at an after-tax rate of return of 6 percent would accumulate to $89,326.20, allowing the employer to pay a deferred salary of $119,101.60 in three years ($89,326.20/(1 − 0.25).

Paying a bonus of $100,000 today would leave the executive with $63,000 after paying a 37 percent tax. Investing this amount for three years would leave the executive with $76,100.83 ($63,000  (1.065)3. Note that the executive‘s tax rate goes down to 30 percent at the beginning of 2020. In order to end up with the same after-tax benefit, the executive would require a bonus in three years equal to $108,715.47. After paying tax at a rate of 30 percent, he would be left with the same $76,100.83.

The employer is indifferent to paying $100,000 today or $119,101.60 in three years. At the same time, the executive is indifferent to receiving $100,000 today or $108,715.47 in three years. Why does this happen? The expected reduction in the executive‘s tax rate makes it advantageous for the employee to defer the receipt of the bonus. Accordingly, the employer and employee should negotiate a deferred salary between the two numbers. Students should note that nontax factors, including the risk of uncertain tax rates and the risk of the employer going bankrupt, should also be considered in making this decision.

Page 1174

SOLUTIONS MANUAL

Page 378 and Example 11-17

CHAPTER 12 WORKING WITH THE IRS DISCUSSION QUESTIONS 12-1

In counseling clients, the tax professional must be aware of the organization and inner workings of the IRS. Strategic and tactical decisions as to how and when to appeal within the administrative system of the IRS, assessing the strengths and weaknesses of the client‘s case, and determining available remedies can be made only with a thorough understanding of the agency and its operating style.

Page 420

12-2.

The IRS National Office is responsible for developing broad nationwide policies and programs for the administration of the tax laws. In addition, it directs, guides, coordinates, and controls the activities of its field personnel. Major functions include agency administration, taxpayer service, modernization of operations, disposition of appeals, and control of taxpayer information.

Pages 390–391

12-3.

The commissioner is the IRS CEO and holds the responsibility for overall planning for the agency. The commissioner directs, coordinates, and controls the policies and programs of the IRS.

The chief counsel is the attorney for the IRS. Rulings and other written determinations are prepared by the office of the chief counsel. The chief counsel represents the IRS in Tax Court cases and often assists in preparing proposed legislation, treaties, regulations, and executive orders.

The National Taxpayer Advocate administers a taxpayer-intervention system designed to resolve tax administration problems that have not been remedied through the agency‘s normal channels. At least one local advocate is located in each state.

A local taxpayer advocate works with the national advocate to resolve tax administration problems that have not been remedied through the agency‘s normal channels. At least one local advocate is

Federal Tax Research, 12th Edition

Page 1-175

located in each state.

Pages 390–394

12-4.

The following and other items were included as guaranteed to taxpayers in the various incarnations of the Taxpayers Bill of Rights. •

Representation before the IRS

•

Recording an audit proceeding

•

IRS explanation of its position

•

Notice sent to both spouses on an audited joint return

•

Confidentiality between taxpayer and CPA

Page 419

12-5.

The math/clerical error program directs computer-corrected notices to be sent to the taxpayer when an obvious computational error is found. The program is part of electronic filing, where the IRS computer will not accept a return with such an error. The unallowable items program makes the same type of correction where an item seems to be in error on its face, such as claiming a deduction for federal income taxes. Neither of these notices constitutes an ―audit‖ for IRS statistical purposes.

Pages 394–395

12-6.

The answer varies by taxpayer status, income level, and other factors. For instance, an individual‘s chance of audit is less than 1 percent, but it increases significantly for high income taxpayers.

Page 398, Exhibit 12-2

12-7.

Tax returns are chosen for audit based upon statistical methods that attempt to identify those returns that possess the greatest revenue return for the IRS‘ investment of audit resources. The mathematical/clerical error and unallowable items programs also are used to select returns for review, and a number of returns are selected manually by an examiner for review.

Pages 396–398

12-8.

Early settlement with an IRS auditor might be appropriate in the following circumstances:

Page 1176

SOLUTIONS MANUAL

•

To limit the issues that can be brought up by the agency.

•

To limit the time during which the agency can keep a tax return open.

•

To accept a settlement offer that is perceived to be favorable to the taxpayer‘s case.

Pages 402–403

12-9.

Answers will vary by reader. Responses should incorporate some of the issues identified on page 400, including the following. •

Conduct yourself courteously and professionally.

•

Cooperate with the auditor and respond to all requests in a timely fashion.

•

Provide the auditor with adequate work accommodations.

•

Don‘t impede the audit process.

•

Don‘t volunteer comments or information not specifically requested by the auditor.

•

Control the auditor‘s access to taxpayer records and personnel.

Page 400 12-10.

Audit Selection Method

Criteria

Comments

DIF Formula

Scope of review

Broad

Probability of selection

Based on likely net return to government

Taxpayer rights

Protected as the formula is applied but potentially put under stress when the formula is updated

National Research Program

Scope of review

Broad

Probability of selection

Equal among taxpayers (random)

Taxpayer rights

Protected

Federal Tax Research, 12th Edition

Other Selection Methods

Page 1-177

Scope of review

Narrow

Probability of selection

Varies greatly among taxpayers in an unpredictable manner

Taxpayer rights

Potentially subject to abuse by examiners

Math/Clerical Error and

Scope of review

Broad

Unallowable Items programs

Probability of selection

Equal among taxpayers

Taxpayer rights

Protected

Under the Taxpayer Bill of Rights, taxpayers are guaranteed various rights to representation before the IRS, such as the right to know why the IRS is requesting information, exactly how the IRS will use the information it receives, and what might happen if the taxpayer does not submit the requested information.

Pages 396–397

12-11. Answers will vary. A list of suggested guidelines for dealing with an auditor are discussed on page 400.

Page 400 12-12. Answers will vary. The Information Document Matching Program (IDMP) matches information on a return with corresponding data received from third parties such as W-2s and 1009s.

Page 394

12-13. Answers will vary. The exact makeup of the formula is not publicly disclosed. The formula probably includes the following variables. •

Amount of income

•

Source of income

•

Number of dependents

•

Size of certain itemized deductions

•

Type of certain itemized deductions

•

Marital status of the taxpayer

Page 396

12-14. About 0.6 percent of all individual income tax returns are audited in a given tax year. However, certain types of both taxpayers and income – including, for instance, high-income individuals, estate tax returns and high-income business returns – are subject to higher probabilities of audit. If Carol raises enough red

Page 1178 flags with the IRS, she could be chosen for an audit of her returns.

SOLUTIONS MANUAL

Page 398 and Exhibit 12-2

12-15. Answers will vary. Recent data show that the IRS expects to earn significant returns on investment on a number of new enforcement initiatives, including reducing the tax gap attributable to international activities, improving compliance of small business and self-employed taxpayers, expansions of the document matching program, and addressing nonfiling/underpayment and collection coverage. However, political pressures keep the agency from getting ―too large,‖ real budget dollars appropriated to the IRS decline every year. Concerns about a ―Big Brother‖ society may be the ultimate constraint on the size of the agency and the visibility of its audit activities. But this downsizing of various sorts does not excuse unethical or illegal behavior on the part of the taxpayer and the tax advisor.

Page 394 and https://www.taxpolicycenter.org/taxvox/irs-audit-rate-plummeting-does-it-matter 12-16. Answers will vary. A good summary of the issue can be found at https://www.cbo.gov/budgetoptions/2018/54826 and https://www.taxpolicycenter.org/taxvox/administrations-irs-budget-contains-goodbad-and-uncertain.

12-17. Statutes of limitations fix the latest date upon which taxes can be assessed and collected, and all refund claims must be made. Such provisions implement Congress‘ belief that, at a certain point, the right to be free of stale claims must prevail over the government‘s right to pursue them.

Pages 408–415

12-18.

The code establishes a specific period of time, commonly referred to as a statute of limitations, within which all taxes must be assessed and collected, and all refund claims must be made. Although the statute of limitations appears to be a legal loophole that rewards delinquent taxpayers who avoid detection, Congress believes that, at some point, the right to be free of stale claims must prevail over the government‘s right to pursue them.

The statute is extended when: •

The taxpayer significantly understates gross income.

•

No return is filed, or the return is fraudulent.

•

Additional time is needed to process a return.

•

The dispute goes into litigation.

•

The IRS and the taxpayer otherwise agree to extend the date.

The statute of limitations is suspended and will not begin until missing information is supplied to the IRS. It is also suspended in the following instances:

Federal Tax Research, 12th Edition

•

The taxpayer‘s assets are in the custody of the court.

•

The taxpayer is outside the United States for six or more consecutive months.

•

The taxpayer‘s assets are wrongfully seized.

•

Page 1-179

A fiduciary or receiver is appointed in a bankruptcy case.

Pages 408–415 12-19. Articles that students may find helpful include the following: ―How to Prepare for a Business Tax Audit‖ from https://www.thebalance.com/how-to-prepare-for-abusiness-tax-audit-398971 (November 2016).

12-20. Articles that students may find helpful include the following: Burquest, Patti (2015), New Procedures Designed to Restore Confidence in Appeal‘s Independence, Improve Efficiency, The Tax Adviser. Retrieved from http://www.thetaxadviser.com/issues/2015/apr/tax-clinic-10.html. ―The Tax Appeals Conference- How to Prepare‖ (2013) from http://thetaxlawyer.com/taxappeal/information/tax-appeals-conference-how-to-prepare.

12-21. Students can find the most recent audit rates in the annual IRS Data book, found online at https://www.irs.gov/uac/soi-tax-stats-irs-data-book.

EXERCISES 12-22. All of these methods are used to select returns for audit.

Pages 398–399

12-23.

When IRS personnel question only one or two items on a selected return, especially on a return with only wage income, a correspondence examination typically is conducted. The IRS examiner will request that the taxpayer verify the questioned item of income, deduction, or credit by mailing copies of receipts, canceled checks, or other documentation to the district office or service center.

Page 398

12-24.

Although a revenue agent technically has no settlement authority, in practice the agent may exercise limited discretion in a number of areas. However, a revenue agent does not have authority or discretion in areas where the commissioner has indicated that he will not follow a court decision

Page 1180

SOLUTIONS MANUAL

or has issued adverse regulations or revenue rulings. Consequently, it is important to determine whether the issues raised by the agent are of a factual or legal nature.

The appeals division has the exclusive and final authority to settle cases that originate in a district that is located within its jurisdiction. The appeals officer has the authority to settle all factual and legal questions that are raised in the revenue agent‘s report. Moreover, only the appeals officer can settle a tax dispute based upon the hazards of litigation. A revenue agent‘s case is never closed until his or her report is reviewed and accepted by the district office review staff. Therefore, it is possible that an agreement that is worked out with the agent may not be accepted by the service.

Although it would appear that the revenue agent has no authority to settle an unresolved legal issue, in reality he or she can interpret the facts in a manner that is favorable or unfavorable to the taxpayer. This ability enables the revenue agent to resolve certain issues before his or her audit report is completed.

Pages 400–402

12-25.

Upon receipt of the 30-day letter, the taxpayer has 30 days from the date of the letter to request a conference with an appeals officer.

Page 402

12-26.

A statutory notice of deficiency (―30-day letter‖) gives the taxpayer 90 days (150 days if the letter is addressed to a taxpayer who is outside the United States) to file a petition with the Tax Court for a redetermination of the deficiency.

Pages 404–405

12-27. A correspondence audit is conducted largely by telephone or mail. The IRS generally sends a letter to the taxpayer questioning a single tax issue, such as a charitable deduction. The letter indicates what item on the return is being questioned and requests that the taxpayer mail some form of supporting documentation to the IRS. Substantiation by the taxpayer might be a receipt or a cancelled check or a written explanation of how the amount entered on the return was calculated.

An office audit generally is conducted on a nonbusiness return that requires some analysis and the exercise of judgment. The office examination is conducted by an interview with the taxpayer. Some of the typical issues covered at an office audit include income from tips; capital gains; and, deductions for charitable

Federal Tax Research, 12th Edition

Page 1-181

contributions, dependency exemptions, travel and entertainment expenses, medical expenses, and bad debts. Although the entire return technically is subject to audit, the IRS normally reviews only the items in question, unless an obvious issue arises during the examination.

The field examination is used for most business returns and the larger, more complex individual returns. A field audit normally is conducted on the premises of the taxpayer, but, in certain cases, it may be conducted at the office of the taxpayer‘s representative. A field audit involves a complete review of the entire financial workings of the taxpayer. The agent will study the history of the taxpayer and examine any pertinent business agreements or documents. In addition, the agent will examine the taxpayer‘s method of accounting, reconcile book income to taxable income, test gross receipts, and seek verification of the taxpayer‘s inventory. Compensation of officers, accumulation of earnings, and related party transactions are three other important issues that are examined during a field audit.

An NRP (or National Research Program) or research audit is the most exhaustive audit that a taxpayer may have to endure. Unlike the other examinations discussed earlier, the examiner does not have any discretion to accept the return without examination. An NRP return must be examined in detail, including an examination of all related returns. When an NRP audit is conducted, the return is subjected to a detailed and thorough audit in which every item entered on the return is examined regardless of its dollar amount. Much of the NRP work is done by IRS computers and personnel, and the taxpayer may not even know that he or she was chosen for this purpose. When face-to-face NRP dealings are required, the taxpayer often should hire a tax advisor to help with the process.

Taxpayers generally have not been successful in refusing to comply with these in-depth audits on the basis that the results are generated for research purposes. See US v First National Bank of Dallas, 81-1 USTC ¶9159 (CA-5).

Pages 396–400

12-28. The decision to litigate should not be made lightly. The costs thereof include the loss of privacy, a long information-gathering and decision-rendering period, and sizable attorney and accountant fees. Other direct costs include those to find and coach expert and other witnesses, travel to the site of the hearing, and the reproduction of appropriate documentation to support the taxpayer‘s position. ―Odds of winning‖ statistics do not take into account the strength of one‘s legal arguments, the abilities of one‘s witnesses and counsel under pressure, and the policy of the government only to litigate cases that it thinks it can win.

Page 1182

SOLUTIONS MANUAL

Pages 402–403

12-29. One‘s chances of being selected for an income tax audit increase when the claimed itemized deductions are deemed to be excessive for the income level. However, a taxpayer should not hesitate to claim all legitimate deductions.

Pages 396–398

12-30. Following the diagram in Exhibit 12-3, after the IRS agent concludes the audit, a RAR will be prepared and given to the taxpayer. If Amber disagrees with the auditor‘s findings and the differences cannot be resolved at this stage, the taxpayer will be issued a 30-day letter, giving the taxpayer 30 days to request an appeals conference. If Amber does not agree with the findings of the appeals conference or if Amber chooses to skip the appeals process, a statutory notice of deficiency (90-day letter) will be issued, giving Amber 90 days to file a petition with the U.S. Tax Court. If a petition with the Tax Court is not filed within 90 days, Amber must pay the tax and file a claim for refund, requiring the case to be heard in the appropriate U.S. District Court of the Court of Federal Claims.

Pages 400–408 and Exhibit 12-3 12-31. The 30-day letter is issued by the IRS when the taxpayer does not agree with the IRS agent‘s proposed adjustments following an audit and give the taxpayer 30 days to request a conference with an appeals officer. If the taxpayer does not respond within 30 days or if the taxpayer and IRS cannot agree on the proposed adjustments after an appeals conference, a 90-day letter is issued to the taxpayer giving the taxpayer 90 days to file a petition with the U.S. Tax Court.

Pages 402–407

12-32.

A closing agreement is a formal written agreement between the taxpayer and the IRS and is considered binding on both parties.

Pages 415–416

12-33.

Generally, a client should not be advised to challenge the IRS with a lawsuit unless the dispute involves a significant amount of tax and there is a good chance that the taxpayer will prevail. For example, a lawsuit may be recommended to resolve a dispute that involves an issue that

Federal Tax Research, 12th Edition

Page 1-183

previously was decided in another taxpayer‘s favor in a case that involved similar facts. Even though the IRS may have issued a nonacquiescence to the previous decision, the taxpayer presumably will prevail (assuming the issues and the facts involved are substantially the same), since a court ordinarily will follow its previous decisions. Moreover, if the case involves an issue that was decided in favor of another taxpayer by the appropriate appellate court, the Tax Court is bound to follow that decision under the Golsen rule.

Pages 402–403

An offer in compromise should be recommended when there is merit to the taxpayer‘s argument, but there is some doubt as to whether the taxpayer can prevail in a lawsuit, or when the amount of tax involved does not justify the cost of instituting a lawsuit. As a matter or practice, the IRS compromises a case only if there is doubt as to the liability or collectability of the assessed tax. Most offers in compromise are based on inability to pay (or doubt as to collectability). However, hardship alone is not a basis for compromise; a kind of insolvency is required by the service in order to compromise a tax. Therefore, an offer in compromise should be recommended to a taxpayer who does not have sufficient assets to satisfy his or her tax liability.

Pages 416–417

A closing agreement should be recommended where a corporate taxpayer wishes definitely to establish its tax liability to facilitate a transaction, such as a sale of its stock. In addition, a corporation that is liquidating and wishes to wind up its affairs should request a closing agreement. A closing agreement is ideal for these situations, because it is final and conclusive except upon a showing of fraud, malfeasance, or misrepresentation of material fact; thus, the matter will be permanently closed.

Pages 415–416

An appeals conference should be requested when a case cannot be resolved at the Examination Division level. For example, an appeals conference may be helpful in dealing with a revenue agent who ignores a taxpayer‘s arguments because he or she ―believes‖ that the taxpayer is a tax evader. An appeals conference also should be recommended where the taxpayer has a good argument, or where the facts are similar to another case that previously was decided in a taxpayer‘s favor since an appeals officer can consider the "hazards of litigation" and compromise the issue with the taxpayer.

Page 1184

SOLUTIONS MANUAL

Page 404

The tax advisor should recommend that the taxpayer concede an issue at the examination level when the taxpayer‘s position is clearly incorrect, or when the amount of the tax involved is insignificant. Moreover, settling with an agent on a small matter may be advisable where larger potential issues exist, but have not been detected during the office examination. By agreeing to an additional assessment at the examination level, a taxpayer may be able to avoid further IRS scrutiny of the taxable year that is under examination.

Pages 400–403

A taxpayer should concede an issue during a correspondence audit where his or her position clearly is incorrect or where the documents supporting his or her position are not available. For example, the taxpayer should agree to an adjustment in the amount of allowable entertainment expenses when he or she has lost the documentation that is necessary to support the deduction and the amount involved is insignificant.

Pages 400–403

12-34.

False. Although the general rule is that assessment must be made within three years from the later of the date that the return actually is filed or the unextended due date of the return, the three year period is extended when: •

there is a substantial understatement of gross income (greater than 25 percent);

•

the taxpayer files a false or fraudulent return with the intent to evade tax;

•

the taxpayer files an amended return that shows an additional amount due;

•

the IRS and the taxpayer agree to extend the statute of limitations period with respect to a return that is under audit; or,

•

the three-year period is suspended because the IRS mails a statutory notice of deficiency, the taxpayer files a petition in the Tax Court; the taxpayer submits an offer in compromise; or for a variety of other reasons.

False. A taxpayer who has filed a return must file a claim for credit or refund within three years of the date in which the return was filed or two years from the date on which the tax was paid, whichever is later. This period may be extended when: •

the IRS and the taxpayer agree to extend the period;

Federal Tax Research, 12th Edition

•

Page 1-185

the overpayment results from a business bad debt or from a discovery of a worthless security; or

•

the claimed overpayment results from the carryback of a net operating loss, capital loss, or certain credits.

Pages 408–414

12-35.

The statute of limitations never expires when no tax return has been filed.

A seven-year statute of limitations applies in the case of bad debts and worthless securities.

For a substantial (>25 percent) omission of gross income, a six-year statute of limitations comes into play.

When fraud is involved, the statute of limitations never expires.

The usual three-year statute applies. Unlike the case of a substantial omission of income, the six-year statute does not materialize.

Pages 408–414

12-36.

Generally, assessment of any internal revenue tax must be made within three years of the

later of the date that the return actually was filed or the unextended due date of the return. Although Ace filed her return before its unextended due date, the statute will run for three years after April 15, 2020, until April 15, 2023.

12-37.

Generally, a taxpayer who has filed a return must file a claim for credit or refund within

three years of the date on which the return was filed or two years of the date on which the tax was paid, whichever is later. However, a claim for refund or credit that is attributable to losses which are sustained from worthless securities or business bad debts may be filed within seven years from the date that the return was due, without regard to any extension for filing the return. Thus, Blanche has until April 15, 2027, to file her refund claim.

Page 1186

SOLUTIONS MANUAL

12-38.

A tax may be assessed at any time, when a taxpayer files a false or fraudulent return, with

the intent to evade tax liability. Once the fraudulent return is filed, the limitations period will remain open indefinitely. Because Carl purposely omitted the receipts from his tax return, the statute will remain open indefinitely.

12-39.

The period in which a tax may be assessed is extended to six years, if the taxpayer omits from his reported gross income an amount that is greater than 25 percent of reported gross income. Since David inadvertently omitted the receipts, he has not filed a fraudulent return so the statute will not remain open indefinitely. However, the six-year statute will apply because he omitted more than 25 percent of his reported gross income (25%  $25,000 = $6,250).

Page 408–412

12-40.

Michal did not file a fraudulent return, nor did she omit over 25 percent of the gross income reported on the return. Accordingly, the regular three-year statute of limitations applies and the IRS can pursue Michal until April 15, 2023.

Pages 408–412

12-41.

An understatement of gross income by reason of an overstatement of basis is an omission of gross income. Thus, the period in which a tax may be assessed is extended to six years, if the taxpayer omits from his reported gross income an amount that is greater than 25 percent of reported gross income. Since Jenna and Sam inadvertently determined the incorrect basis, they have not filed a fraudulent return so the statute will not remain open indefinitely. However, the six-year statute will apply because they omitted more than 25 percent of their reported gross income (25%  $250,000 = $62,500).

Pages 408–412

Federal Tax Research, 12th Edition

Page 1-187

CHAPTER 13 TAX PRACTICE AND ADMINISTRATION DISCUSSION QUESTIONS

13-1.

Interest compounds on the amount due to the government in Tax Court cases, unless the taxpayer pays the liability at a time prior to the commencement of the litigation. Accordingly, the taxpayer does not get an advantage by postponing payment of the contested tax liability by going to Tax Court.

Late payment penalties are avoided when withholding amounts are supplemented at any time during the year. Adjustments to estimated payment amounts, though, do not avoid underpayment penalties. The higher the prevailing interest rate, the more likely the taxpayer should adjust withholdings late in the tax year.

Pages 434-436 and 451-453

13-2.

The civil fraud penalty is 75 percent of the underpayment of tax that is attributable to fraud. The burden of proof in a fraud case is on the IRS. Fraud entails more than mere negligence by the taxpayer, often including a series of actions over time to evade a tax. Under the all-or-nothing rule, if the IRS establishes that any portion of an underpayment is attributable to fraud, the fraud penalty applies to the entire underpayment.

Underpayments of estimated tax are applied differently to corporate and noncorporate taxpayers. Key differences include the following: ▪

The ―last tax year‖ exception is available only to large corporations for the first quarter payment.

▪

The ―current tax year‖ exception is 100 percent of the current tax for corporate taxpayers, but 90 percent for others.

▪

The ―prior tax year‖ exception applies for corporate taxpayers only if the prior year‘s liability was a positive amount. This rule does not apply to other taxpayers.

A frivolous return is one that is blank, unreadable, or takes positions clearly contrary to the tax law. A $500 civil tax penalty is assessed of those filing a frivolous return.

Pages 433–437

13-3.

Criminal penalties are intended to punish the taxpayer for committing a serious, usually recurring act to understate the tax liability. They can entail misdemeanor or felony infractions. Ordinarily, criminal prosecutions are limited to flagrant offenses for which the IRS believes it certainly will obtain a conviction.

Page 1188

SOLUTIONS MANUAL

Criminal penalties are more severe than civil counterparts, and criminal penalties can include incarceration. Tax crimes typically include willful and repeated violations, involving some form of tax evasion or lack of information disclosure.

Defenses to charges of a tax crime include illness, reliance on another party to pay or compute a tax, or ignorance of the law.

Pages 438–440

13-4.

A tax preparer has completed a tax return and is compensated by another. Over one-half of all Forms 1040 employ a paid tax return preparer. One who does clerical work on a tax return, or who completes only an insubstantial portion of a return, is not a tax preparer.

Preparer penalties assure a high quality of professionalism in preparing tax returns. Penalties apply if the preparer did not sign the return or give a copy to the taxpayer. Preparer penalties apply if there is an unreasonable position on a tax return, or a disclosure of the unreasonable position is not made. Penalties also apply if the preparer assists in filing a false return, discloses confidential taxpayer information, or endorses a refund check that is not his/her own.

Pages 443–450

13-5.

An injunction is a judicial order that prohibits the named person from engaging in certain specified activities. The IRS may seek an injunction against a TRP who is guilty of certain misconduct to prohibit him or her from engaging in such misconduct or from practicing as a return preparer.

Page 451

13-6.

To discourage the development of abusive tax shelters, Congress has enacted a civil penalty that may be imposed on any person who organizes or assists in organizing, or directly or indirectly participates in the sale of any interest in, a tax shelter, and who makes or furnishes, or causes another person to make or furnish, either a statement regarding an expected tax benefit that the person knows, or has reason to know, is either false or fraudulent, or a gross valuation understatement. In addition, the types of activities that are subject to injunction include aiding and abetting of tax understatements. The service may obtain an injunction against a person who is guilty of promoting abusive tax shelters as well as a person who is engaging in nonpromotional misconduct with respect to tax shelters.

Federal Tax Research, 12th Edition

Page 1-189

Page 447

13-7.

Fraud is not defined either in the code or the regulations. However, the longstanding definition of fraud was promulgated in Mitchell v Comm, 118 F2d 308 (CA-5, 1941). ―Negligence, whether slight or great, is not equivalent to the fraud with intent to evade tax named in the statute. The fraud meant is actual intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing.‖

Negligence is not defined either in the code or the regulations. However, the court in Marcello v Comm, 380 F2d 509 (CA-5, 1967) defined negligence as ―lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances.‖ The Internal Revenue Manual defines negligence as ―the omission to do something which a reasonable person, guided by those considerations which ordinarily regulate the conduct of human beings, would do, or doing something which a prudent, reasonable person would not do.‖ For example, failing to report income or overstating deductions generally is considered to be attributable to negligence.

Reasonable cause is a means by which a taxpayer or preparer can be excused from an applicable penalty or other sanction. For example, if an individual failed to file an income tax return on a timely basis because he was told by a tax advisor that a return did not have to be filed, he likely would be excused from the failure to file penalty due to this reasonable cause.

Lack of reasonable cause exists when the taxpayer does not have a valid reason or justification for his or her conduct. For example, a taxpayer who does not pay an income tax when it is due because he or she did not have sufficient funds would not be able to avoid a failure to pay penalty, because he or she lacks reasonable cause for her actions.

A civil penalty conviction occurs when a taxpayer violates tax statutes without reasonable cause, as the result of negligence or intentional disregard, or through a willful disobedience or outright fraud. A civil penalty conviction would likely occur if a taxpayer failed to file a tax return.

A criminal penalty conviction occurs when a taxpayer is found guilty of a criminal penalty. Criminal tax penalties are imposed only after the usual criminal process, in which the taxpayer is entitled to the same constitutional guarantees that are given to nontax criminal defendants. A criminal penalty conviction would likely occur if a taxpayer was found guilty of willfully

Page 1190

SOLUTIONS MANUAL

attempting to evade or defeat a tax (i.e., tax evasion).

Pages 426–428, 433, 438–440

13-8.

False. The government is required to pay interest at the applicable federal rate to any taxpayer who has made an overpayment of tax. Interest on the overpayment begins to accrue from the later of 45 days after the unextended due date of the return or 45 days after the return actually is filed. However, if the refund is not made within this 45 day period, interest begins to accrue from the latter of the due date of the return or the date on which the return actually was filed.

False. Tax penalties may not be deducted as itemized deductions on an individual‘s income tax return, because the code characterizes them as additions to tax and federal income taxes are not deductible.

False. The failure to pay and failure to file penalties are separate and distinct.

Pages 426–429, 453

13-9.

In this case, it is unlikely that any of the named individuals could be charged with a preparer penalty, since the taxpayer‘s position was acknowledged to have some statutory and judicial merit. The regulations provide that a preparer who does not follow a rule or regulation because he or she believes, in good faith and with reasonable basis, that the administrative provision does not accurately reflect the ode has not acted negligently or with intentional disregard of the provision. Therefore, a good-faith dispute concerning the interpretation of a regulation or ruling will not subject the preparer to a penalty.

If the preparer merely was following the instructions of the taxpayer, he or she will not be relieved of liability for the penalty. If this were the case in this problem, the partner of the accounting firm and the staff member could be subject to a preparer penalty. Neither the taxpayer nor the secretary of the accounting firm could be charged, since they do not fit the definition of a tax return preparer. It is doubtful that the employee who supplied the information could be charged, because the facts of this problem do not indicate that he or she willfully aided or assisted in the preparation of a return or other document that was false as to any material matter.

Pages 443–450

13-10.

§ 7216(a) provides that any tax return preparer who discloses or uses any tax return information

Federal Tax Research, 12th Edition

Page 1-191

other than for the specific purpose of preparing, assisting in preparing, or obtaining or providing services in connection with the preparation of, any tax return of the taxpayer by or for whom the information was made available to a tax return preparer, shall be guilty of a misdemeanor, and, upon conviction, shall be fined not more than $1,000, or imprisoned not more than one year, or both, together with the costs of prosecution. However, according to Reg § 301.7216-2(k), the provisions of § 7216(a) do not apply to the disclosure or use by any tax return preparer of any tax return information in the preparation or audit of, or in connection with the preparation or audit of, any tax return or declaration of estimated tax required of the taxpayer under the law of any state or political subdivision or possession of the United States. Therefore, the tax advisor could not be charged with this penalty. From the facts given, it appears that no other preparer penalties would apply.

The advisor might be charged with the criminal preparer penalty of disclosing information for other than return preparation purposes.

The tax advisor could not be charged with the criminal preparer penalty of disclosing information for other than return preparation purposes under § 7216(a), because Reg. § 301.7216-2(n) provides that the provisions of § 7216 do not apply to the disclosure of any tax return information to the proper federal, state, or local official in order, to the extent necessary, to inform the official of activities that may constitute, or may have constituted, a violation of any criminal law. Therefore, disclosure of the tax return information to the FBI appears to be allowable.

The tax advisor is not subject to any return preparer penalties merely for suggesting to the client various means by which to acquire excludible income provided these means involve legal activities. The tax advisor does not violate any disclosure requirements or rules governing improper conduct when he or she gives the client this information.

The tax advisor could be charged with a criminal violation of the tax statutes. This criminal penalty would be levied under § 7201 for attempting to evade or defeat tax. The advisor apparently could not be charged with some of the more obvious preparer penalties, such as willful understatement of liability because the problem does not state that this tax advisor assisted in the preparation of a return (therefore, we cannot determine if the advisor is a tax return preparer within the definition of § 7701(a)(36)). Moreover, the problem does not indicate whether the client followed the suggestions. The tax advisor could be charged with a civil penalty under 6701, because the scope of this statute is not limited to income tax preparers.

Page 1192

SOLUTIONS MANUAL

Therefore, if the tax advisor aids or assists, procures or advises with respect to, the preparation or presentation of any portion of a return, affidavit, or other document in connection with any matter arising under the internal revenue laws, he or she would be subject to the civil penalty provided in § 6701 for aiding and abetting understatement. In addition, an individual who aids or encourages another in attempting to evade the other‘s tax also is subject to prosecution and punishment under 18 USC § 2, which is referred to as the aider and abettor statute. The tax advisor presumably could be charged under this statute.

The tax advisor would be subject to the civil tax preparer penalties since those penalties apply to preparers of all types of tax returns. Moreover, the tax advisor could be charged with a penalty for aiding and abetting understatement of tax liability, which is a civil penalty under § 6701. Unlike the other civil preparer penalties, this penalty is not restricted to tax return preparers as defined in § 7701(a)(36). In addition, the tax advisor presumably could be charged with a criminal penalty. A person who willfully aids or assists in the preparation of a return or other document that is false as to any material matter is guilty of a violation of § 7206(2). The tax advisor also may be charged under the aid-and-abet statute: 18 US § 2 (see discussion in part e).

The answer to this question is the same as that for part f.

The answer to this question is the same as that for part e.

Pages 443–450

13-11.

A tax advisor cannot be charged with any type of penalties for simply suggesting that a client invest in a tax shelter. However, the advisor could be subject to a penalty for organizing an abusive tax shelter if the advisor either makes or furnishes a false statement as to the allowability of the tax benefits sought from the shelter or makes a gross valuation overstatement regarding the shelter.

The tax advisor could be subject to a civil penalty for promoting an abusive tax shelter if he or she makes a statement as to the allowability of any deduction or credit, the excludability of any income, or the securing of any other tax benefit by reason of holding an interest in the entity or participating in the plan or arrangement which the person knows or has reason to know is false or fraudulent as to any material matter or makes a gross valuation overstatement as to any material matter. For a statement concerning the tax benefits to be the basis for the penalty, the person must either make or furnish a false statement as to the allowability of the tax benefits sought from the

Federal Tax Research, 12th Edition

Page 1-193

shelter or make a gross valuation overstatement regarding the shelter. This question does not state whether the prospectus is incorrect as to any material matter. If it is not, the tax advisor could not be charged with this penalty.

To be subject to the penalty for promoting abusive tax shelters, the person must either help organize the tax shelter or participate in its sale. It is likely that selecting a specific accounting technique constitutes helping to organize. Consequently, the tax advisor presumably could be charged with a civil penalty for promoting an abusive tax shelter if the prospectus was incorrect as a result of adopting the suggested accounting method.

If any part of an understatement of liability with respect to an income tax return is due to a position for which there was not a realistic possibility of being sustained on its merits, a tax return preparer who knew or should have known of such a position is subject to a penalty of the greater of $1,000 or one-half of the preparer‘s fees for the engagement. Accordingly, if the return contained an undisclosed position that was not more likely than not to be sustained on its merits, and this unreasonable position would have been discovered by the tax return preparer had he or she conducted the usual review of the return, the IRS could levy this penalty on the preparer.

The penalty for understatements due to unreasonable positions would not apply, since the mathematical error was not the result of an unreasonable position being taken on the return.

Pages 443–450

13-12. Maggie may be subject to a $500 civil false-information penalty. If the required degree of willfulness (and an underpayment) is present, an additional criminal penalty could be made up of a fine of up to $1,000, or imprisonment for not more than one year, or both.

Pages 436–437

13-13. Married taxpayers often choose to file a joint income tax return because of benefits that the filing status provides. However, when joint returns are filed, both taxpayers are jointly and individually responsible for the tax as well as any interest and penalties due on the joint return—even if they later divorce and even if the income is only attributable to one of the taxpayers.

Pages 441–443

Page 1194

SOLUTIONS MANUAL

13-14. Relief from joint and several liability can be requested by a spouse under the provisions of IRC § 6015. Under § 6015, there are three ways that a requesting spouse can obtain relief: 1. Request ―innocent spouse‖ relief under the provisions of § 6015(b); 2. Request an allocation of liability between the spouses under § 6015(c) or § 6015(d); and 3. Request equitable relief under § 6015(f).

Pages 441–443

13-15. To obtain relief from joint and several liability on a joint return under § 6015(b), the requesting spouse must show that the following: 1. A joint return has been made for a taxable year; 2. There is an understatement of tax attributable to erroneous items of one individual filing the joint return; 3. The other individual filing the joint return establishes that in signing the return, he or she did not know, and had no reason to know, that there was such understatement; 4. Taking into account all the facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for such taxable year attributable to such understatement; and 5. The innocent spouse seeks the benefits of this subsection not later than the date which is two years after the date the secretary has begun collection activities with respect to the individual making the election.

Pages 441–443

13-16. If relief is unavailable under § 6015(b) or (c), a taxpayer may be eligible for relief under § 6015(f) if it would be otherwise inequitable to hold the taxpayer liable for the underpayment or deficiency considering the facts and circumstances. Unlike § 6015(b) and § 6015(c), which only provide relief from a proposed or assessed deficiency (i.e., an understatement of tax as previously defined), § 6015(f) also provides relief from under payments of tax. The innocent spouse can be relieved of all the year‘s liability or a pro rata percentage. In granting this relief, the IRS has wide latitude when looking at the facts and circumstances.

Pages 441–443

13-17.

The regulations define an erroneous item as ―any item resulting in an understatement or deficiency in tax to the extent that such item is omitted from, or improperly reported in an individual income tax return.‖

Page 441

Federal Tax Research, 12th Edition

Page 1-195

13-18. No, because to obtain relief from joint and several liabilities on a joint return under § 6015(b), the requesting spouse must show that the other individual filing the joint return establishes that in signing the return, he or she did not know, and had no reason to know, that there was such understatement.

Page 441

EXERCISES

13-19. Interest will be charged from April 15, 2021, until November 1, 2021. The failure to pay penalty applies for seven months and the failure to file penalty applies for one month. Remember, the penalties apply for each month (or fraction thereof) that the return is not filed or the tax is not paid.

Pages 427–430 13-20. The failure to pay penalty is equal to $100 per month ($20,000  0.005) for seven months or $700. The failure to file penalty is equal to $1,000 per month ($20,000  0.05) for one month. The $1,000 failure to file penalty is reduced by the concomitant failure to pay penalty of $100 for a total failure to pay penalty of $900. Since the return was filed within 60 days of the due date, the minimum penalty does not need to be considered.

Pages 427–430

13-21. The unextended due date of the return would be April 15, 2021. The failure to pay penalty is equal to $25 per month ($5,000  0.005) for seven months or $175. The failure to file penalty is equal to $250 per month ($5,000  0.05) for a maximum of seven months. The $1,750 failure to file penalty is reduced by the concomitant failure to pay penalty of $175 ($25 per month for seven months) for a total failure to pay penalty of $1,575. Although the return was not filed within 60 days, the minimum penalty is less than the calculated penalty in this case.

Pages 427–430

Page 1196

13-22.

SOLUTIONS MANUAL

None, as the additional tax ($1,700) is less than $5,000.

Additional tax $23,800 × 20% penalty rate = $4,760.

$85,000 additional tax × 40% penalty rate for gross overvaluation = $34,000.

$170,000 additional tax × 40% penalty rate for gross overvaluation = $68,000.

Pages 430–431

13-23.

None, as the additional tax ($2,800) is less than $5,000.

Additional tax ($24,500) × 20% penalty rate = $4,900.

$60,000 additional tax × 40% penalty rate for gross undervaluation = $24,000.

$160,000 additional tax × 40% penalty rate for gross undervaluation = $64,000.

Pages 430–431

13-24.

$0. Reported valuation is not at least 150 percent of correct value.

$0. Additional tax ($4,200) is less than $10,000.

$0. Reported valuation is not at least 150 percent of corrected value

$35,000 additional tax × 20% penalty rate = $7,000 penalty assessed

$157,500 additional tax × 40% penalty rate = $63,000 penalty assessed (reported value is overstated by at least 200 percent).

Pages 430–431

13-25.

$0. Additional tax ($2,500) is less than $5,000

Federal Tax Research, 12th Edition

Page 1-197

$0. Valuation claimed is not less than 65 percent of correct value

$50,000 additional tax × 20% penalty rate = $10,000 penalty assessed

$175,000 additional tax × 40% penalty rate = $70,000 penalty assessed (reported value is 40 percent or less than correct value)

Pages 430–431

13-26. $1,500 = 20% × $7,500.

Pages 430–431

13-27.

Penalty due to civil fraud

$112,500 (75% × $150,000)

Penalty due to negligence

10,000

Total penalty due

(20% × $50,000)

$122,500

Pages 430–431

13-28. Current-year method

Prior-year method

$13,500 is due each quarter ($60,000 tax ÷ 4 payments × 90% required)

$11,000 is due each quarter [($40,000 ÷ 4) × 110% required], the balance with the return

Pages 434–436

13-29.

Exception 1 is not available, as the prior year return did not show a positive tax liability. Each quarterly payment must equal $47,250 ($189,000 × 100% ÷ 4).

Lesser of Exception 1 amount ($42,000 ÷ 4 = $10,500) or Exception 2 amount $47,250.

Kold is a large corporation and can use Exception 1 only on the first installment, with a full catchup thereafter.

Page 1198

SOLUTIONS MANUAL

April 15 .................................................................................................................... $10,500 June 15 ....................................................................... $84,000 = [($47,250 × 2) − $10,500] September 15 ........................................................................................................... $47,250 December 15 ............................................................................................................ $47,250

Pages 434–436

13-30.

An underpayment penalty will not apply as long as White Corporation pays in at least 100% of its 2020 tax liability of $147,000 or $36,750 per quarter.

White Corporation cannot use the prior year exception since there was no tax liability in the previous year. In order to avoid an underpayment penalty, White must pay in 100% of the current year tax or $42,000 per quarter.

Pages 434–436

13-31.

$0. The refund claim is timely filed, but the refund is limited in amount to the taxes paid by the taxpayer during the three years preceding the date of the claim.

$16,000 should be recovered. The three-year payment period includes any filing extensions obtained by the taxpayer.

Pages 434–436

13-32. d. All of the above are examples of erroneous items.

Pages 441–442