Using the Citator
Question 1
0
(15 points)
155
MC
1
4
This week we will
explore ways to connect multiple court decisions, Revenue Rulings, etc. that address similar issues.
Connection is possible anytime one decision, pronouncement, etc. cites another. There are many ways to
make these connections, but the easiest is to use the Citator on the Tax Research Network.
Let's start with a case on attorney's fees and the Alternative Minimum Tax. Find and read Sinyard, TC Memo
1998-364. Note that we are going to discuss this case at length in class. Please print it and bring it to class
with you to class so that you can answer any questions that may arise.
Before attempting to trace the case through the legal system, let's review what it was about. The Sinyards
joined a class action lawsuit against Mr. Sinyard's employer for age discrimination. The case was settled and
the Sinyards received a settlement payment of $862,906, from which their lawyers' fees of $315,760 were
withheld. Of the remaining $547,146 actually received, $109,429 was attributable to personal damages (age
discrimination) and excluded from income under Code Sec. 104 (prior to its 1996 amendment). They
reported the remaining $437,717 as taxable income on their 1992 income tax return.
The primary issue in the case was whether the portion of the settlement going to attorney's fees was
properly excluded from the Sinyards' taxable income. They argued that they never received the money and
should not therefore have to include it their taxable income. They cited Cotnam, 59-1 USTC P9200 (CA-5,
1959), and Davis, TC Memo 1998-248, in defense of their position. Because the Sinyards (unlike the
Davises) did not live in the 5th Circuit, the Tax Court declined to follow Cotnam, ruling that the attorneys'
fees were included in gross income, but were deductible as a miscellaneous itemized deduction.
Why does this outcome not result in a wash? That is, why would the Sinyards incur the legal expenses
necessary to take this case to trial if the attorneys’ fees included in AGI could be deducted as a
miscellaneous itemized deduction on the same tax return?
a. Because miscellaneous itemized deductions are not allowed for purposes of the Alternative
Minimum Tax.
b. Because miscellaneous itemized deductions are only deductible to the extent they exceed 2% of
AGI.
c. Because itemized deductions only reduce taxable income to the extent that they exceed the
standard deduction.
d. Because inclusion of the attorneys' fees in the Sinyards' income increased their AGI and therefore
increased the amount by which their itemized deductions were phased out.
Question 2
1
(15 points)
157
MC
1
4
As it turns out, the
Sinyards appealed the decision of the Tax Court. To follow the progress of the case through the courts, click
the "Citator" link at the top of the screen. The menu on the left side of the screen changes. Click on the
bottom Sinyard case (the one we’re reading).
To which court did the Sinyards appeal, and did they win their appeal?
a. The Sinyards appealed the case all the way to the Supreme Court, which ruled against them (and
for the IRS).
b. They appealed to the 9th Circuit Court of Appeals, which agreed with them and overturned the Tax
Court's decision.
c. They appealed to the 9th Circuit Court of Appeals, which agreed with the Tax Court (and the IRS),
ruling against the Sinyards.
d. They did not appeal the Tax Court's decision.
Question 3
2
(15 points)
159
MC
1
4
MC
1
4
Now check the citatory
for the Appellate Court's decision in Sinyard? How many other cases have referred to the Appellate Court’s
decision?
a. 7
b. 9
c. 6
d. 10
Question 4
3
(15 points)
161
The Citator lists all the
other cases, rulings, etc. that have referred to this case. This particular case has only been cited by other
courts (i.e., no rulings, etc. have referred to this case). Most of the courts citing this case have either cited it
favorably or followed the 9th Circuit’s reasoning. In one case, however, the 9th Circuit referred to its previous
decision in Sinyard, but noted that it was addressing a situation involving different facts. Click on this case.
Before reading it, check the citator. Note that it involved the appeal of a Tax Court Memorandum decision.
Read the Tax Court case.
Taxpayer’s attorneys raised three issues in his Tax Court case. The first argument was that the alternative
minimum tax violated taxpayer’s constitutional protection against having his property taken by the
government without due process or just compensation. On what grounds did he argue that the alternative
minimum tax in this case violated his constitutional rights?
a. After subtracting his attorneys' fees, his state income tax, and the alternative minimum tax, he
was left with just over 22% of the settlement award. He argued that sacrificing over threequarters of his settlement payment was a violation of his constitutional rights.
b. We cannot tell. The Tax Court dismissed his argument on the constitutionality of the alternative
minimum tax as "moot or without merit."
c. The alternative minimum tax was intended to apply to high-income taxpayers who take advantage
of tax shelters to reduce their tax liabilities. Applying it in the circumstances described in this case
is inconsistent with Congressional intent, and therefore a violation of taxpayer’s constitutional
rights.
d. The alternative minimum tax is irrational and unnecessary.
Question 5
4
(15 points)
163
MC
1
4
Now read the appellate
court’s decision. With regard to the tax treatment of attorneys' fees, did the appellate court rule for or against
taxpayer, and on what grounds?
a. The court ruled for taxpayer, allowing him to exclude the attorneys' fees from his gross income on
grounds that Oregon law gives attorneys a property interest in their clients' lawsuits. This property
interest means that the attorneys are not paid from the client's settlement, but rather have a coownership interest in the judgment or settlement.
b. The court ruled against taxpayer on grounds that it was obligated to follow its own precedent
established just two years earlier in Sinyard.
c. The court ruled against taxpayer, on grounds that the Supreme Court refused to hear the appeal
from Sinyard and therefore must agree with the decision in that case. Accordingly, the 9th Circuit
was obligated to follow the precedent established by the Supreme Court.
d. The court ruled for taxpayer on the grounds that including the attorneys' fees in his gross income
would unfairly raise the tax burden on his settlement proceeds above 50%.
Question 6
5
(15 points)
165
MC
1
4
Continuing in the
Citator, note that the IRS appealed the appellate court’s decision in this case and the Supreme Court agreed
to hear the appeal. This was a particularly interesting case for at least two reasons. First, the Supreme Court
had declined to hear an appeal from the taxpayer in Sinyard on exactly the same issue just two years
earlier. It apparently changed its mind when presented with conflicting decisions from the same Circuit
Court of Appeals.
Second, by the time the Court heard this appeal, Congress had stepped in and changed the law. Rather than
repeal the AMT, which would significantly reduce federal tax revenues, the American Jobs Creation Act of
2004 added Sec. 62(a)(19) to the Internal Revenue Code, allowing taxpayers to deduct attorneys' fees in
these types of settlements from their gross incomes in calculating adjusted gross income (i.e., as an "above
the line" deduction).
Did the Supreme Court rule for or against taxpayer, and on what grounds?
a. The court ruled against taxpayer on the grounds that the federal income tax is based on federal
law. Treating taxpayers in one state, say Oregon, differently than those in another state, say
Texas, is inherently unconstitutional.
b. The court ruled against taxpayer, on grounds that his attorneys based their arguments on "novel
propositions of law" that were "not advanced in earlier stages of the litigation and not examined by
the Courts of Appeals." The court refused to consider these arguments, and therefore was left with
no choice but to deny taxpayer’s claim.
c. The court ruled against taxpayer on grounds that the attorney-client relationship is not a business
partnership or joint venture for tax purposes. The attorneys do not have an ownership interest in
the "income-generating asset" that results in the judgment or settlement.
d. The court ruled for taxpayer, allowing him to exclude the attorneys' fees from his gross income on
grounds that by adding Sec. 62(a)(19) to the IRC, Congress clarified its intent that contingent
attorneys' fees awarded when taxpayers win a suit for discrimination should not be included in the
taxpayers' taxable incomes.
Question 7
6
(10 points)
199
MC
1
4
Finally, read Guzak v.
U.S., 2007-1 USTC ¶ 50,307. This is one of a long line of recent cases in which taxpayers have challenged
the alternative minimum tax treatment of stock options. For Wednesday, you should print this case and
bring it to class, as we will be discussing it in some length. However, before then, read it carefully, especially
the discussion regarding the Joint Committee Report accompanying the Tax Relief and Health Care Act of
2006. Which of the following statements is not correct?
a. The taxpayer argued that the 2006 legislation invalidated the IRS' interpretation of the application
of the provisions of §56 and that therefore she should be allowed a refund of alternative minimum
taxes previously paid.
b. The taxpayer argued that the language in the Joint Committee Report does not definitively
interpret Congress' intent because it states that a loss "may not" be allowed in full instead of
stating that a loss "would not" be allowed in full, thus leaving open the possibility that a loss could
be allowed in full under certain circumstances.
c. The taxpayer argued that the Joint Committee Report, authored by the Staff of the Joint
Committee, is not an official part of the actual legislative history and therefore should not viewed
as evidence of Congressional intent with respect to the interpretation of §56 .
d. The IRS noted that Congress changed the law in 2006 to expressly allow taxpayers to utilize AMT
credits associated with ISO exercises to be used, regardless of whether the taxpayer's regular tax
exceeds her tentative minimum tax in future years. It argued that this change in the law
confirmed the IRS' interpretation of the application of §56 for years preceding the law change.