Chapter 7
Tax Research for
Compliance and
Tax Planning
Learning Objectives
Tax research goals
 Tax research challenges
 Tax research databases
 Primary tax authorities
 Code, Treasury Regs, and cases
 Tax research process
 Professional standards

Tax Research Goals



Not always to get the lowest tax liability
Maximize after-tax return or benefits
 Some desire to minimize disputes
Distinguish
 Tax Evasion – illegal acts
 Tax Avoidance –minimize taxes legally
 Abusive Tax Avoidance –
misapplying tax laws, some tax shelters
Tax Research - Defined



Two different types of tax research exist:
Applied tax research
 Checks existing law, examines the impact on
a given situation.
 This textbook uses applied tax research.
Academic tax research
 Often empirical, behavioral tax research
 Some policy oriented for society at large
 Occasionally theoretical
Tax Research Challenges

Determine the relevant facts.
 Facts
include events and
both the taxpayer’s and IRS’s positions.
 Many disputes have questions of fact.
 Relevancy decided by applicable law.
 “Relevant facts” are those that make a
difference in how the law is applied.
 “Colorable facts” are those that
only some people consider relevant.
Tax Research Challenges (contd.)
Find and examine relevant tax laws.
 Apply the law to the facts
to determine the tax consequences.
 Alternative correct paths may exist.
 Inform the client of differing options.

Tax Practice

Three types of tax practice for research:
 Tax Compliance
 Completes
tax returns
(facts have already occurred)
 Tax
Planning
 Open
fact engagements
 Carefully
executed tax avoidance.
 Planning requires knowledge and skills.
 Tax Litigation
 Lawyers
handle tax litigation.
Tax Research Databases


Many alternative sources of tax law exist
 Legal databases - LexisNexis and Westlaw.
 Specialized tax databases -RIA and CCH.
 Research Institute of America – RIA Checkpoint
 Commerce Clearing House - CCH IntelliConnect
previously CCH had Tax Research Network
Databases include both
 Primary tax authorities: Code, Regs, & cases
 Secondary authorities: tax services, treatises
IRS publications, private letter rulings, …
Primary Tax Authorities

Created by the 3 areas of government:
 Congress,
the executive branch, & the courts
Hierarchy of tax law exists:
 Statutory law

 Law
passed by Congress, signed by President
 US Constitution, tax treaties also part of top
level
Primary Tax Authorities

Administrative regulations
 Treasury
Department releases treasury
regulations
 Internal Revenue Service creates Revenue
Rulings

Court cases
 Judicial
case decisions are law in common law
countries, such as the United States
 Hierarchy exists
The Code - Introduction

Statutory law for federal taxation
commonly referred to as the Code or IRC
 Internal
Revenue Code of 1986, as Amended
 Found in Title 26 of the U.S. Code

Within the Code, refer to sections (§).
 Sections
are uniquely numbered
The Code - Introduction
(contd.)

To find a code section, search by keywords,
drill down in table of contents, or use the
index
in the Code or a Tax Service.
 If
the code section number is known,
the citation approach can access it quickly.
The Code - Sections

A section is divided into subsections,
paragraphs, subparagraphs, clauses.
 Cite
as specific as possible within the section,
such as subsection, paragraph, or
subparagraph.

Always read subsection (a) carefully.
 Scan
other subsections for relevancy.
 If another code section is referenced in a
relevant part, examine that other section.
Administrative Authorities
Citation to a regulation references
the Code provision explained.
 The Executive branch issues admin. auth.

 The
Treasury Department creates Treasury
regulations – interpret and clarify statutory law
 Internal Revenue Service is part of Treas.
Dep’t creates lesser authorities and enforces
the law.
Administrative Authorities
(contd.)

Three types of Treasury Regulations
 Proposed
Regs – trial balloons – not
authority
 Temporary Regs - no public hearings,
legally binding, but expire in 3 years
 Final Regulations – go through public
hearing process, follow the regulations or
penalties exist
Treasury Regulations - Final

Two types of final regulations
 Legislative Regulations
 Arise when Congress has delegated specific lawmaking authority to the Treasury Dep’t
 Interpretive Regulations
 Arise under the authority of Section 7805(a)
which expressly provides that the Treasury
Department Secretary ”shall prescribe all needful
rules and regulations for the enforcement of this
title.”
 Most
consider both types equal in weight of
authority, some favor legislative regulations
Revenue Ruling & Revenue
Procedures

Revenue Rulings and Revenue Procedures


Both issued by the IRS.
Revenue Rulings
Apply the law to a specific set of facts.
 Weaker than Treasury Regulations.
 Citation to a rev. rul. does not reference the Code
sec., but some publishers add that info.

Revenue Ruling & Revenue
Procedures (contd.)

Revenue Procedures

Provides procedural requirements that taxpayers
must follow, such as documents to include when
filing a tax return involving
a Sec. 351 tax-free incorporation.
Judicial Sources

Court decisions interpret the Code and
the Regulations
 Courts
have the final say regarding
what the Code words really mean.

Judicial Precedent
– Courts will follow prior case holdings
Judicial Sources (contd.)

Federal court hierarchy exists
 Supreme
Court is the highest court
 Courts of Appeals is the second highest
 Three alternative trial courts:
 Tax Court, District Court, & Court of Federal
Claims
U.S. Tax Court

Advantage to the taxpayer:
No prepayment needed for
the amount in dispute.
 Other
trial courts consider only refunds.
 Acquiescence (acq.) – IRS will follow
the court’s decision in similar cases.
U.S. Tax Court (contd.)

Tax Court has two types of decisions
 “Regular
decision” - Chief judge decides
if new legal principle announced
 “Memorandum decision” applies
prior principle to new facts
U.S. Court of Appeals

U.S. Court of Appeals
Court of Appeals considers only the application
of the law, not redetermination of facts.
 Both taxpayers and IRS can appeal Tax Court and
District Court decisions to the relevant regional
Court of Appeals
 13 court of appeals, 11 regional, DC and Federal
–citation must be specific
 District courts must follow precedent set by the
relevant circuit court.

U.S. Supreme Court
 Considers
few cases involving tax issues.
 All courts must follow the precedent from
the Supreme Court.
 U.S. Congress can overturn a decision by
passing new statutory law.
 The citator enables the researcher to check
the subsequent decisions referencing a case,
and the case history
Evaluating Tax Authorities




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The Code is the strongest authority
Treasury Regulations are the
next strongest authority
Supreme Court decision applies to all courts and
taxpayers.
Circuit court decisions are either precedent or
influential on other courts.
Published IRS Revenue Rulings and Revenue
Procedures are binding on IRS revenue agents,
but not the courts
Steps in Conducting Tax Research
1. Investigate the facts and identify issues
 2. Collect the appropriate authorities
 3. Analyze the research
 4. Develop the reasoning and conclusions
 5. Communicate the results

Standards for Tax

IRS Circular 230
Governs practice before the IRS and
provides enforceable standards of conduct
 Impacted tax practice in various ways


AICPA’s Statements on Standards for Tax
Services


Supplements the AICPA Code of
Professional Conduct
CPA tests students on tax research