Tax thomsonreuters com qf tools

CHAPTER

LEARNING O B 』 ECτIVES: A_fteγ completiηg Chapteγ 2, you should be able to:

L0.1

L0.2

L0.3

ι0.4

Distinguish between the statutory, administrative, and judicial sources of the tax law and understand the purpose 。f each s。urce.

Locate and w。rk with the appropriate tax law sources.

Develop an awareness of tax research t。。Is.

Describe the tax research process.

CHAPTER OUTLINE

2-1 Tax Sources, 2-2

2-1 a Statutory Sources of the Tax Law, 2-2

2-1 b Administrative Sources of the Tax Law, 2-6

2-1 c Judicial Sources of the Tax Law, 2-1 O

2-1 d Other Sources of the Tax Law, 2-17

2-2 Working with the Tax Law-Tax Research Tools, 2-18

2-2a Commercial Tax Services, 2-18

2-2b Using Electronic (Online) Tax Services, 2-19

2-2c Noncommercial Electronic (Online) Tax Services, 2-19

2-3 Working with the Tax Law-Tax Research, 2-20

2-3a Identifying the Problem, 2-22

2-3b Refining the Problem, 2-22

2-3c Locating the Appropriate Tax Law Sources, 2-23

L0.5

L0.6

L0.7

Communicate the results of the tax research process in a client letter and a tax file memorandum.

Apply tax research techniques and planning procedures.

Be aware of taxation on the CPA examination.

2-3d Assessing the Validity of Tax Law Sources, 2-23

2-3e Arriving at the Solution or at Alternative Solutions, 2-25

2-3f Communicating Tax Research, 2-26

2-4 Working with the Tax Law-Tax Planning, 2-28

2-4a Nontax Considerations, 2-29

2-4b Components of Tax Planning, 2-29

2-4c Tax Avoidance and Tax Evasion, 2-30

2-4d Follow-Up Procedures, 2-30

2-4e Tax Planning, 2-31

2-5 Taxation 。n the CPA 在xaminati。n, 2-31

2-Sa Preparation Blueprints, 2-31

2-Sb Regulation Section, 2-31

州总刷TIERSTOCK.COM

Early in November 2019, Fred and Megan Martel scheduled a meeting with you to discuss a potential

tax problem. Fred and Megan pt1rchased a 40-acre parcel of property in 2014 for $195,000. On it, they

built their “dream home" in 2015. In March 2019, while walking on a remote part of their property, they

spotted something shiny on the ground. They started digging and eventually unearthed eight metal cans

containing more than 1,400 rare gold coins in $5, $10, and $20 denominations dated from 1846 to 1895.

The face value of the gold coins is about $28,000, and the coins are in mint condition. Their delay in

coming to you for tax advice was dt1e to a state law that required their discovery to be tl1rned over to the

state for disposition. The state, for a period of six months, was required to publicize the find and ask if

anyone could prove ownership. When no one came forward, the coins were returned to the Martels in

October 2019. As they are now the rightful owners of the coins, they want to know the tax implications (if any) of their discovery.

Read the chapteγ and formulate your γ·esponses.

2-2 PART 1 Introduction and Basic Tax Model

L0.1

Distinguish between the statutory, administrative, and judicial sources of the tax law and understand the purpose of each s。urce.

ederal tax law reflects the three branches of our Federal government. It is a mixture of laws passed by Congress, explanations provided by the Treasury Department and the Internal Revent1e Service (IRS), and court decisions. Anyone

w ho has attempted to work w ith this vast amount of information is familiar w ith its complexity. Th e tax research process allows us to understand, evaluate, and apply the tax law to questions that are raised by taxpayers and tax practitioners.

In addition to being able to locate and interpret tax law, a tax professional also must understand the relative we您ht of authori沙 that each source carries. The tax law is of little significance, however, t1ntil it is applied to a set of facts and circumstances. This chapter introdt1ces the statutory, administrative, and judicial sources of tax law and explains how the law is applied to individt1al and bt1siness transactions . It also explains how to apply research techniqt1es and use planning procedt1res effectively. A large part of tax research focuses on determining the intent of Congress.

Frequently, uncertainty in the tax law causes dispt1tes between the Internal Revent1e Service (IRS) and taxpayers. Due to these gray areas and the complexity of the tax law, a taxpayer may have more than one alternative for structuring a financial transaction. In structuring financial transactions and engaging in other tax planning activities, the tax adviser mt1st be cognizant that the objective of tax planning is not necessarily to mini- H咀ze the tax liability. Instead, a taxpayer should maximize his or her after-tax wealth, w hich may include maximizing nontax as well as noneconomic benefits.

2-1 TAX SOURCES

Understanding taxation requires a mastery of the sources of tax law. These sources include laws passed by Congress, w hich are contained in the Internal Revenue Code and congressional Committee Reports, Treasury Department Regulations, other Treasury Department and IRS pronouncements, and court decisions. Thus, the primary sources of tax law inclt1de information from all three branches of government: legislative (or statutory), executive, and judicial.1

2-1 a Statutory Sources of the Tax Law Statutory sources of law include the Constitution (Article I, Sections 7, 8, and 10), the Internal Revenue Code, and tax treaties (agreements between countries to mitigate the double taxation of taxpayers subject to the tax laws of those countries). The Constitt1tion grants Congress the power to impose and collect taxes and authorizes the creation of treaties w ith other cot1ntries. The power of Congress to implement and collect taxes is reflected in the Internal Revent1e Code, the official title of U.S. tax law, and the Code is the basis for arriving at solutions to all tax questions.

Origin of the Internal Revenue Code

Before 1939, the statutory provisions relating to Federal taxation were contained in the individual revenue acts enacted by Congress. Because dealing w ith many separate acts w as inconvenient and confusing, Congress codified all of the Federal tax laws in 1939. Know n as the Internal Revent1e Code of 1939, the codification arranged all Federal tax provisions in a logical sequence and placed them in a separate part of the Federal stat- utes. A further rearrangement took place in 1954 and resulted in the Internal Revenue Code of 1954, w hich continued in effect until 1986, w hen it was replaced by the Internal Revenue Code of 1986. Although Congress did not recodify the law in the Tax Reform Act (TRA) of 1986, the magnitude of the changes made by TRA of 1986 did provide some rationale for renaming the Federal tax law the Internal Revenue Code of 1986.2

1Secondary sources also are used by tax practitioners. Tl1ese sot1rces are not part of the tax law and inclt1de items like tax articles from profes- sional tax jot1rnals, newsletters, and textbooks. Commentary contained in variot1s tax research services (such as Tl1omson Reuters Checkpo仰，t) also are secondary sot1rces.

21'11is point is important in assessing jt1dicial decisions interpreting provisions of the Internal Revent1e Code of 1939 and the Internal Revenue Code of 1954. If a provision from the 1939 or 1954 Code was included in tl1e Internal Revenue Code of 1986 and has not been st1bseqt1ently amended, the provi- sion and the related jt1dicial decisions have contint1ing validity.

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CHAPTER 2 Working w ith the Ta× Law

The Legislative Process

Exhibit 2.1 illustrates the legislative process for enacting changes to the Internal Revenue Code of 1986. Federal tax legislation generally originates in the House of Representatives, where it is first considered by the Hot1se Ways and Means Committee.3 Once approved by the House Ways and Means Committee, the proposed bill is referred to the entire House of Representatives for approval or disapproval. Approved bills are sent to the Senate, where they are considered by the Senate Finance Committee. 4

After approval by the Senate Finance Committee, the bill is sent to the entire Senate. Assuming no disagreement between the House and Senate, passage by the Senate results in referral to the President for approval or veto. If the bill is approved or if the

House Ways and Means

ζommittee

Consideration by the House of

Representatives

Senate Finance Committee

Consideration by the Senate

Approval or Veto

by the President

Incorporation into the Internal Revenue Code

(if approved by the President o r if the President’s veto is overridden)

」

Joint Conference Committee (if the House and Senate di忏er)

ζonsideration by the House and Senate

2-3

3Congress enacts tax legislation virtually every year, and each piece of legis- lation contains changes to the Internal Revenue Code of 1986.

Responsibility Act of 1982 originated in the Senate, and its constitutionality was upheld by tl1e courts.

4Although rare, a tax bill can originate in the Senate when it is attached as a rider to a different legislative proposal. The Tax Equity and Fiscal

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2-4 PART 1 Introduction and Basic Tax Model

President's veto is overridden, the bill becomes law and part of the Internal Revent1e Code of 1986.

House and Senate versions of major tax bills frequently differ. One reason bills are often changed in the Senate is that each senator has considerable latitt1de to make amendments w hen the Senate as a w hole is voting on a bill referred to it by the Senate Finance Committee. 5 In contrast, the entire House of Representatives either accepts or rejects what is proposed by the House Ways and Means Committee, and changes from the floor are rare. When the Senate version of the bill differs fro1n that passed by the House, the Joint Conference Committee, which includes members of both the House Ways and Means Committee and the Senate Finance Committee, resolves the differences. The deliberations of the Joint Conference Committee usually produce a compromise between the two versions, which then is voted on by both the Hot1se and the Senate. If both bodies accept the bill, it is referred to the President for approval or veto.

The role of the Joint Conference Committee indicates the importance of compromise in the legislative process. Exhibit 2.2 illustrates what happened with amendments to the child tax credit in the Tax Cuts and Jobs Act (TCJA) of 2017.

The House Ways and Means Committee, the Senate Finance Committee, and the Joint Conference Committee each produce a Committee Report. These Committee Reports explain the provisions of the proposed legislation and are a valuable source for ascer- taining the intent of Coηgress. What Congress had in mind when it considered and enacted tax legislation is, of course, the key to interpreting the legislation by taxpayers, the IRS, and the courts. Because it takes time to develop other primary authority (e.g. , from the Treasury Department, the IRS, and the courts), tax researchers rely heavily on Committee Reports to interpret and apply new tax laws.

H。use Versi。n Senate Version Replaces the child ta× credit with an expanded family tax credit, allowing a tax credit of $1,600

per child and $300 for the taxpayer, spouse, and other dependents. Credit is partially

refundable ($1,000 per child).

Increases the child ta× credit to $2,000 per child and allows a $500 tax credit for other dependents. Increases the age limit of a

qualified child by one year.ζredit is partia 川y refundable ($1,000 per child).

)During the passage of tl1e Tax Reforn1 Act of 1986, Senate leaders tried to make the bill ameηdment proof to avoid the norn1al amendment process.

J。int c。nference Committee Result Increases the child tax credit to

$2,000 per child and allows a $500 ta× credit for other dependents. No change in the age limit

of a qua I i白ed child. Credit is partially refundable ($1,400 per child).

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CHAPTER 2 Working with the Ta× Law 2-5

Arrangement of the Internal Revenue Code

The Internal Revenue Code of 1986 is found in Title 26 of the U.S. Code. In working with the Internal Revenue Code, it helps to understand the format. Here is a partial table of contents :

SL1btitle A. Income Taxes Chapter 11. Normal Taxes and Surtaxes

Subchapter A. Determination of Tax Liability Part I. Tax on Individuals

Sections 1-5 Part II. Tax on Corporations

Sections 11-12

In referring to a provision of the Code, the 均y is usually the Section number. In citing a Section number, identi乌ring the related SL1btitle, Chapter, SL1bchapter, and Part is not necessary. Merely mentioning the Section is sufficient because the Section numbers run consecutively and do not begin again w ith each new Subtitle, Chapter, Subchapter, or Part. 6

Tax researchers often refer to speci白c areas of income tax law by their Subchapters. Some of the more common Subchapter designations include Subchapter C （℃orporate Distributions and Adjustments’立 Subchapter K (“Partners and Partnerships”), and Sub- chapter S (“Tax Treatment of S Corporations and Their Shareholders").

Citing the Code

Code Sections often are broken dow n into subparts.7 Section 2(a)(l )(A) serves as an example.

§ 2 (a) (1) (A)

一一一一一一一一一一一一一一一一一一一－ ..,.. Abbreviation for ”Section”

－－－一一－一一－－一－－－一－－一－ - ..,.. Section number

一一一一一一一一一一一一一一一一一一一－ ..,.. Subsection designation8

- - - - - - - - - - - - - - - - - - _..,.. Paragraph designation

一一一一一一一一一一一一一一一一一一一－ ..,.. Subparagraph designation

Broken down by content, § 2(a)(l)(A) becomes:

§2

(A)

De自nitions and special rules （「e l ating to the income ta× imposed on individuals). Definition of a surviving spouse. For purposes of§ 1 (the determination of the applicable rate schedule), a surviving spouse must meet certa in conditions.

One of the conditions necessary to qualify as a surviving spouse is that the ta×- pay凹’ s spouse must have died during either of his or her two ta×able years immediately preceding the present tax- able year.

(a) 、 、 ‘ ， J

1 (

Throughout the text, references to the Code Sections are in the form given above. The symbols "§'’ and “祭” are L1sed in place of “Section” and “Sections,” respectively. The follow ing table summarizes the format that we L1se:

6\Vhen the 1954 Code was d.rafted, some Section nt1mbers were intentionally omitted so that later changes could be incorporated into the Code withot1t disrupting its organization. When Congress does not leave enough space, st1bsequent Code Sections are given A, B, C, etc., designations. A good example is the treatment of§§ 280A tl1rot1gh 280H.

7Son1e Code Sections do not require st1bparts. See, for example, §§ 211 and 241.

8Some Code Sections omit the subsection designation and t1se the paragraph designation as the first st1bpart. See, for exan1ple, §§ 212(1) and 1222(1).

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2-6 PART 1 Introduction and Basic Tax Model

Source

Regulations

Temporary Regulations

Proposed Regulations

Revenue Rulings Revenue Procedures Treasury Decisions Actions on Decisions

General Counsel Memoranda Technical Advice Memoranda

Letter Rulings

Complete Reference

Section 2(a)(1 )(A) of the Internal Revenue Code of 1986 Sections 1 and 2 of the Internal Revenue Code of 1986 Section 2 of the Internal Revenue Code of 1954

Section 12(d) of the Internal Revenue Code of 19399

Text Reference

§ 2(a)(1 )(A) §§ 1 and 2 § 2 of the Internal Revenue

Code of 1954 § 12(d) of the Internal

Revenue Code of 1939

2-1 b Administrative Sources of the Tax Law The administrative sources of the Federa l tax law include Treasury Department Regula-

tions, Revenue Rulings and Revent1e Procedures, and various other administrative pro- nouncements (see Exhibit 2.3). All are issued by either the U.S. Treasury Department or the IRS.

Treasury Department Regulations

Regulations are issued by the U.S. Treasury Department under at1thority granted b y Congress.10 Interpretive by nature, they prov ide taxpayers w ith considerable guidance

o n the meaning and application of the Code. Regt1lations, w hich carry considerable at1thority as the official interpretation of tax law, may be issued in proposed, temporary, or final form.

Because Regulations interpret the Code, they are arranged in the same sequence as the Code. A number is added at the beginning , how ever, to indicate the type o f tax or administrative , procedural, or definitional matter to w hich they relate.11 For example,

Location

Federal Register

Federal Register Internσl Revenue Bulletin Cumulative Bulletin必

Federal Register Internal Revenue Bulletin Cumulative Bulletin必

Internal Revenue Bulletin Cumulative Bulletin必

Tax Analysts' Tax Notes; Thomson Reuters Checkpoint**; Commerce Clearing House lntelliConnect

Thomson Reuters and Commerce Clearing House tax services

Authority

Force and e忏ect of law.

May be cited as a precedent.

Preview of final Regulations.

Do not have the force and e忏ect of law.

May not be cited as a precedent.

Applicable only to taxpayer addressed. No precedential force.

势Through 2008, the contents of Internal Revenue Bulletins were consolidated semiannually into a Cumulative Bulletin. Beginning in 2009, the IRS decided to stop producing a Cumulative Bulletin because all Internal Revenue Bulletins are available electronically on the IRS website.

**Thomson Reuters Checkpoint includes a wide variety of tax resources. The most significant are materials produced by the Research Institute of America (RIA), including the Federal Tax Coordinator 2d.

9Section 12(d) of tl1e Internal Revent1e Code of 1939 is the predecessor to § 2 of the Internal Revent1e Code of 1954 and the Internal Revent1e Code of 1986. Keep in mind tl1at the 1954 Code superseded tl1e 1939 Code and the 1986 Code st1perseded the 1954 Cod.e. Footnote 2 explains why references to the 1939 or 1954 Code are inclt1ded.

10§ 7805. 11The prefix 20 d.esignates estate tax Regt1lations, 25 covers gift tax Regula-

tions, 31 relates to employment taxes, and 301 refers to procedt1re and. administration.

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CHAPTER 2 Working with the Ta× Law 2-7

the prefix 1 designates the Regulations under the income tax law . Tht1s, the Regulations under Code § 2 are cited as Reg. § 1. 2, w ith subparts added for further identification. The numbering patterns of these subparts often have no correlation w ith the Code subsection s.

Maybe someone in your extended family is driving a luxury car and comments that only fools pay all of their taxes. Or maybe a contractor demands payment in cash. Or perhaps someone at work is not reporting all of his or her income. If cheating on taxes bothers you, the IRS wants to hear from you (and may make it worthwhile). The IRS has two whistleblower programs. The small-awards program is

for situations involving less than $2 million of tax, and the award can be as high as 15°/o of collections, although it often is less. The large-awards program covers situations involving $2 million or more of tax. Here, the reward can go as high as 30%. The IRS’s tip line is 1-800-829-0433, and the appropriate form to report tax fraud is Form 3949-A (Information Referral). Would you turn in someone?

New Regulation s and changes to existing Regulations are usually issued in proposed form before they are finalized. The interval between the proposal of a Regulation and i臼 finalization permits taxp ayers and other interested parties to comr丑ent on the pro- priety of the proposal. [f旦P。sed Regulati。ns under Code § 2, for example, are cited as Prop.Reg. § 1.2. The Tax Court indicates that Proposed Regulations carry little weight.12 ·Final Regulations! have the force and effect of law.

Sometimes the Treasury Department issues tTemp。rary Regulati。ns l w here immediate gt1idance is impo rtant. These Regulations are issued w ithout the comment period required for Proposed Regulation s. Temporary Regulations, cited as Temp.Reg. §, have the same authoritative value as final Regt1lations and may be cited as precedents. How - ever, Temporary Regulations also must be issued as Proposed Regulations and automati- cally expire w ithin three years after the date of isst1ance.13

Proposed , Temporary, and final Regulations are pt1blished in the Federal Regist以 in the Internal Revenue Bulletin (I.R.B.), and by major tax services . Final Regt1lations are isst1ed as Treasury Decisions (TDs) .

Regulations also may be classified as legislative, inteψretive, or procedural. These classification s are discussed in text Section 2-3d (Assessing the Validity of Tax Law Sources) later in the chapter.

Revenue Rulings and Revenue Procedures

Revenue Ruling主 are official pronouncemen臼 of the National Office of the IRS .14 They typically provide one or more examples of how the IRS would apply a law toψ，ec扩icfact situations. Like Regulations, Revenue Rulings are designed to provide interpretation of the tax law. Although they do no t carry the same legal force and effect as Regt1lations, becat1se 出ey are focused on a spec的c fact pattern, they provide a more detailed analysis of the law.

Although letter rulings (discussed in the next section) are no t the same as Revent1e Rulings, a Revenue Ruling often results from a specific taxpayer’s request for a letter ruling. If the IRS believes that a letter ruling request has w idespread impact, the letter ruling w ill be converted into a Revent1e Ruling and isst1ed. Revenue Rt1lings also can be issued in response to technical advice to Distric t Offices of the IRS, cot1rt decisions, and st1ggestions from tax practitioner groups.

Revenue Pr。cedures . deal w ith the internal management practices and procedures of the IRS. For example, Rev.Proc. 2019-1 (2019-1 I.R.B. 1) provides general instructions

12F W Woolworth Co. , 54 T.C. 1233 (1970); Ha1γis M. Miller, 70 T.C. 448 (1978); andjames 0. Tomerlin 7子ust, 87 T.C. 876 (1986). 、 7805(e).

14§ 7805(a).

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2-8 PART 1 Introduction and Basic Tax Model

for taxpayers requesting letter rulings or determination letters from the IRS. A taxpayer's failure to follow a Revenue Procedure can result in unnecessary delay or, in a discretion- ary situation, can cause the IRS to decline to act.

Both Revent1e Rulings and Revenue Procedures serve an important function by providing guidance to IRS personnel and taxpayers in handling routine tax matters. Revenue Rulings and Revent1e Procedures generally apply retroactively and are binding on the IRS until revoked or modified by subsequent rulings or procedt1res, Regulations, legislation, or court decisions.

Revenue Rulings and Revenue Procedt1res are published weekly by the U.S. Govern- ment in the Iηternal Revenue Bulletin (I.R.B.).

The proper form for citing Revenue Rt1lings is as follows. Revent1e Procedures are cited in the same manner, except that “Rev.Proc.” is substitt1ted for “Rev.Rul. ”

Rev.Rul. 2018- 22, 2018-34 I.R.B. 308.

E写plaηatioηJ Revenue Rt1ling Number 22, appearing on page 308 of the 34th weekly issue of the Internal Revenue Bulletin for 2018.

Revenue Rulings and other tax resources may be found at the IRS website: irs.gov.1)

Letter Rulings

Letter rulinas are isst1ed for a fee upon a taxpayer’s request and describe how the IRS will treat a proposed transaction for tax purposes. Issued by the National Office of the IRS, they apply only to the taxpayer who asks for and obtains the ruling.16 Letter rulings can be useful to taxpayers who want to be certain of how a transaction will be taxed before proceeding with it. Letter rulings also allow taxpayers to avoid unexpected tax costs and may be the most effective way to carry out tax planning. However, the IRS limits the issuance of individual rt1lings to restricted, preannounced areas of taxation.17 The IRS issues more than 2,500 letter rulings each year.

The IRS must make individual rulings available for public inspection after identifying details are deleted.18 Published digests of private letter rt1lings can be found in a variety of sources, including IRS Letter Rul的gs Rψorts (published by CCH), Bloomberg BNA’S Daily TaxR，ψorts, Tax Analysts' Tax Notes, and electronic (online) tax research services (such as Thomson Ret1ters Checkpoint).

Letter rulings are issued multi-digit file numbers that indicate the year and week of issuance as well as the number of the ruling during that week. For example, Ltr.Rul. 201822015 provides 2018 interest rates to compt1te the special use value of farm real estate.

2018 22 015

Year2018 22nd week o f 2018 15th ru ling issued du ring the 22nd week

Other Administrative Pronouncements

Treasuη Decisions (TDs) are issued by the Treasury Department to announce new Regulations, amend or change existing Regulations, or announce the position of the

I王Comn1ercial sources for Revent1e Rulings and Revent1e Procedt1res are available, usually reqt1iring a st1bscription fee. Older Revenue Rulings and Revent1e Procedt1res are often cited as being published in tl1e Cumulative Bulletin (C.B.) rather tl1an in 由e Internal Revenue Bitlletin (I .R.B.).

otl1er research materials in forn1ulating a District Office position on an isst1e. Tl1e IRS is required to cl1arge a taxpayer a fee for letter rt1lings, detern'lination letters, etc.

17Rev.Proc. 2019-3, 2019-1 I.R.B. 130 contains a list of areas in which the IRS will not isst1e advance n1lings. According to 由e IRS, the main reason they will not rule in certain areas is that speci白c fact-oriented situations are involved. Tht1s, a ruling n1ay not be obtained on many of tl1e problen1s that are partict1larly trot1blesome for taxpayers.

16Post-1984 letter n1lings may be substantial at1thority for purposes of the acct1racy-related penalty; see pp. 2-24 and 2-25; Notice 90- 20, 1990-1 C.B. 328. In tl'lis regard, letter rulings differ from Revenue Rulings, whicl1 are applicable to all taxpayers. A le忧er ruling may later lead to the isst1ance of a Revent1e Ruling if the holding affects many taxpayers. In its Agents’ Manual, the IRS indicates that letter rt11ings may be used as a gt1ide with

18§ 6110.

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CHAPTER 2 Working with the Ta× Law 2-9

Government on selected court decisions. Like Revenue Rulings and Revent1e Proce- dures, TDs are pt1blished in the Internal Revenue Bulletin.

The IRS also publishes other administrative communications in the Internal Revenue Bulletin, such as Announcements, Notices, IRs (News Releases), Internal Legal Memo- randa (ILMs), Chief Counsel Notices (CC), and Prohibited Transaction Exemptions.

Like letter rulings, [determination letters I are issued at the reqt1est of taxpayers and provide guidance on the application of the tax law. They differ from letter rulings in that the isst1ing source is an IRS Area Director (rather than the National Office of the IRS). Also, determination letters usually involve completed (as opposed to proposed) transactions. Determination letters are not published and are made known only to the party making the request.

The following examples illt1strate the distinction between letter rulings and deter- mination letters.

The shareholders of Red Corporation and Green Corporation want assurance that the consolida- tion of the corporations into Blue Corporation will be a nontaxable reorganization. The proper approach is to request that the National Office of the IRS issue a letter ruling concerning the income tax effect of the proposed transaction.

Chris operates a barbershop in which he employs eight barbers. 丁O comply with the rules governing income tax and payroll tax withholdings, Chris wants to know whether the barbers working for him are employees or independent contractors. The proper procedure is to request a determination letter on their status from the appropriate Area Director.

A variety of internal memoranda that constitute the working law of the IRS also are released. These General Counsel Memoranda ( GCMs), Technical Advice Memoranda (TAMs), Internal Legal Memoranda (ILM纱， and Field Service Advice Memoranda (FSAs) are not officially published, and the IRS indicates that they may not be cited as prece- dents by taxpayers.19 However, these working documents do explain the IRS's position on various isst1es.

The National Office of the IRS releases 「丽丽丽丽l Advi豆eMem。ra画画a (TAMs) 1 weekly. TAMs resemble letter rulings in that they give the IRS’s determination of an issue. How- ever, they differ in several respects. Letter rulings deal with proposed transactions and are issued to taxpayers at their request. In contrast, TAMs deal with completed (rather than proposed) transactions. TAMs are issued by the National Office of the IRS in response to questions raised by taxpayers or IRS field personnel dt1ring audits. TAMs are not officially pt1blished and may not be cited or used as precedent. 20 They are assigned file numbers according to the same procedt1re t1sed for letter rulings. For example, TAM 201808024 refers to the 24th TAM issued during the 8th week of 2018.

The Office of Chief Counsel prepares Field Service Advice Memoranda (FSAs) to help IRS employees. These are issued in response to requests for advice, guidance, and analysis on difficult or significant tax issues and are not binding on either the taxpayer to whom they pertain or the IRS. Some FSAs are being replaced by another form of field guidance called Technical Expedited Advice Memoranda (TEAMs). The purpose of TEAMs is to expedite legal gt1idance to field agents as disputes are developing. FSAs are reverting to their original purpose of case-speci自c development of facts. 21

19Tl1ese are made available by the publishers listed in Exhibit 2.3. These internal memoranda n1ay be st1bstantial at1thority for purposes of the acct1racy-related penalty for post-1984 transactions (see pp. 2-24 and 2-25; Notice 90-20, 1990-1 C.B. 328).

2飞 6110(k)(3) . Post-1984 TAMs may be st1bstantial at1阳仰 for pt1rposes of avoiding the acct1racy-related penalty. Notice 90-20, 1990-1 C.B. 328.

21A TE灿tI guid.ance differs from a T灿tI in several ways, including a mand.a- to叩 prest1bmission conference involving 由e taxpayer. In the event of a tentatively adverse conclt1sion for the taxpayer or the field agent, a confer- ence of right is offered to 由e taxpayer and to the field agent; once the conference of right is held, no further conferences are offered.

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2-10 PART 1 Introduction and Basic Tax Model

2-1 c Judicial Sources of the Tax Law Five Federal courts have jurisdiction over tax dispt1tes between the IRS and taxpayers: the U.S. Tax Court, the U.S. District Court, the U.S. Court of Federal Claims, the U.S. Court of Appeals, and the U.S. Supreme Court.

The Judicial Process in General Once a taxpayer has exhausted the remedies available w ithin the IRS (i.e., no satisfac- tory settlement has been reached at the agent or at the Appeals Division level), the dispute can be taken to the Federal courts. The trial and appellate court system for Federal tax litigation is illustrated in Exhibit 2.4.

A trial court, also know n as a I c。urt of ori也到urisdictioril, initially hears the case. Appeals (either by the taxpayer or the IRS) are heard by the appropriate appellate court. A taxpayer has a choice of three trial courts: a 皂生District Cou百l 由e U.S. Court . of Federal Claims I, or the [U.S. Tax c。urt1 .

The U.S. Tax Court contains a f Small Cases Division! that only hears cases involving amounts of $50,000 or less. The ruling of the judge is final (no appeal is available), and these rulings are not precedent for any other cases (i.e., they are not primary authority and are not citable as substantial authority). Proceedings of the Small Cases Division are informal, and because there is no requirement that a taxpayer be represented by an attorney, they can be less costly for a taxpayer. The typical small case lasts one to two hours, and the taxpayer only needs to tell the judge his or her stoηr and present any supporting evidence. Special trial judges, rather than Tax Court judges, often preside over these hearings. Some of these cases can be found on the U.S. Tax Court w ebsite.

American law, follow ing English law, is frequently created by judicial decisions . Under the doctrine of sta仰 dee必is ("let the decision stand"), each case has precedential value for futt1re cases w ith the same set of facts. Judges are not required to follow judicial precedent beyond their own jurisdiction. For example, the decisions of an appellate court are binding only on the trial cot1rts w ithin i岱 jurisdiction and not on other trial courts. Different appel- late cour臼 may reach different opinions about the same issue. Further, the doctrine of prec- edential authority requ让es a court to follow prior cases only w hen the issues and material facts of the cu盯ent case are essentially the same as those involved in the prior decisions.

U.S. Ta× Court

U.S. Court of Appeals

(Regional Circuit)

Small Cases Div i s ion祷

U.S. Supreme Court

U.S. District Court

祷No appeal from this division of the U.S. Tax Court.

U.S. Court of Appeals

(Federal Circuit)

U二 Court

of Federal Claims

Appellate Courts

Trial Courts (Courts of Original

Jurisdiction)

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CHAPTER 2 Working with the Ta× Law 2-11

Most Fed.eral and state appellate court decisions and some decisions of trial courts are published. Pt1blished court decisions are organized by jurisdiction (Federal or state) and level of court (trial or appellate).22

Several other terms are important to understand. The plaintiff is the party reqt1esting a hearing, and the d吃fendant is the party being challenged. Sometimes a court uses the terms petitioner and re句pondent (rather than plaintiff and d与fendant). At the trial cot1rt level, a taxpayer is normally the plaintiff ( or petitioner), and the Government is the def en- dant (or respondent). If the taxpayer wins and the Government appeals, the Government becomes the petitioner (or appellant), and the taxpayer becomes the respondent.

Trial Courts

Here are some differences between the various trial courts (courts of original jt1risdiction):

• Number of courts. There is only one Court of Federal Claims and only one Tax Court, bt1t there are many U.S. District Courts. District Courts hear cases based on where the taxpayer lives (so a taxpayer in Atlanta would have her case heard by the Atlanta U.S. District Cour川

• Number of judges. District Courts have a number of judges, but only one judge hears a case. The Cot1rt of Federal Claims has 16 judges, and the Tax Cot1rt has 19 regt1lar judges. Typically, Tax Court cases are heard and decided by only one of the 19 regular judges. However, if the case is viewed as important or novel tax issues are raised the entire Tax Court mioht hear the case. If a case is reviewed

。

by the full Tax Court, such an en bane decision has compelling authority.

• Location. The Cot1rt of Federal Claims meets most often in Washington, D.C. Each state has at least one District Court, and many of the more populous states have more than one. Although the Tax Court is officially based in Washington, D.C., the variot1s judges travel to different parts of the country and hear cases at prede- termined locations and dates.

• jurisdiction of the Tax Court and District Gou仰 The Tax Court hears only tax cases and is the most popular forum for tax cases since its judges have more tax expertise; many had careers in the IRS or Treasury Department before being appointed to the Tax Court. The District Courts hear a wide variety of nontax cases as well as tax cases. As a result, District Court judges are viewed as generalists (rather than specialists) in tax law.

• Jurisdictioη of the Court of Federal Claims. The Court of Federal Claims has jt1ris- diction over any claim against the United States. As a rest1lt, the Cot1rt of Federal Claims hears nontax litigation as well as tax cases. Court of Federal Claims judges are tax law generalists. This court is viewed as a stronger option when equity is an isst1e (as opposed to purely technical issues) or when the case requires exten- sive discovery of evidence. In addition, it has a pro-business orientation. 23

• juη； trial. A jury trial is only available in a District Cot1rt. However, becat1se juries can decide only qt1estions of fact (and not questions of law), taxpayers who choose a District Court often do not request a jury trial. In that event, the judge decides all issues in a bench trial. A District Court decision carries precedential value only in its district.

• Payment of d，可βciency. Before the Court of Federal Claims or a District Cot1rt will hear a case, the taxpayer must pay any taxes assessed by the IRS and sue for a refund. This is not the case with the Tax Court. Her飞 a taxpayer may request a hearing withot1t making any payments to the IRS. As a result, whether to pay the

22 A decisio n o f a particular court is calle d its holding . Son1etimes a deci-

sion inclt1des dicta, o r incide nta l opinions beyond tl1e ct1rrent facts . St1ch passing ren1arks , illt1strations, or analogies are not essentia l to tl1e ct1rre nt l1o lding. Although the holding has precedential valt1e under sta1它 deci.'.;;is, dicta are no t binding o n a fl.1tt1re cot1rt.

23T. D. Peyser, “The Case fo r Selecting the Cla ims Cot1rt to Litiga te a Fede ral

Tax Liabili吼” Tax 丘x:ecutive (Winter 1988): 149.

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2-12 PART 1 Introduction and Basic Tax Model

tax in advance (and limit further interest and penalties) or wait to pay the tax (and risk additional interest and penalties) becomes part of the decision-making process of selecting a venue.

• Appeals. Appeals from a District Cot1rt or a Tax Cot1rt decision are to the U.S. Court of Appeals for the circuit w here the taxpayer lives. Appeals from the Court of Federal Claims go to the Court of Appeals for the Federal Circuit.

• Bankriψtcy. When a taxpayer files a bankruptcy petition , the IRS, like other credi- tors, is prevented from taking action against the taxpayer. Sometimes a bankruptcy court may settle a tax claim.

• Gn句； areas. Because there are “gray areas” in the tax laws, courts may disagree as to the proper tax treatment of an item. With these differences in judicial authority, a tax- payer may have some flexibility to choose the most favorable fon1m to hear the case.

See Concept Summary 2.1 for a summary of various attribt1tes of the Federal trial courts.

L ‘ k '. .. i,;;{I,) Concept Summary 2.1 Federal Judicial System: Trial Courts

Issue

Number of judges per court

Payment of deficiency before trial

Jury trial available

Types of disputes

Jurisdiction

IRS acquiescence policy

Appeal route

U.S. Tax c。urt

19铃

No

No

Tax cases only

Nationwide

Yes

U.S. Court of Appeals

U.S. District c。urt

Varies

Yes

Yes

Most criminal and civil issues

Location of taxpayer

Yes

U.S. Court of Appeals

U.S. Court of Federal Claims

16

Yes

No

Claims against the United States

Nationwide

Yes

U.S. Court of Appeals for the Federal Circuit

祷Currently, there are only 15 regular judges. They are assisted by 10 senior judges (whose terms have ended but return to hear cases as needed) and 5 special trial judges (who are appointed by the Senior Judge of the U.S. Tax Court rather than by the President) (November 2018).

Appellate Courts A trial court decision can be appealed to the appropriate [ Circuit c。urt of Apl?eals!. The 11 geographic circuits, the circuit for the District of Columbia, and the Federal Circuit24 appear in Exhibit 2.5. Generally, a three-judge panel hears a Court of Appeals case, but occasionally 由e卢II court decides more controversial cases.

If the Government loses at the trial cot1rt level (District Cot1rt, Tax Court, or Court of Federal Claims), it may decide not to appeal. However, the fact that the IRS does not appeal does not mean that the IRS agrees w ith the result (and it may litigate similar issues in the future).

η1e IRS may decide not to appeal for a number of reasons. First, the IRS may decide that available personnel should be assigned to other more important cases. Second， 由e IRS may decide that the taxpayer has a sympathetic position or the facts are particularly strong in his or her favor. In that event, the IRS may wait to test the legal issues w ith a different taxpayer (who might have a weaker case). Third, the Court of Appeals jurisdiction might matter. Based on past experience and precedent, the IRS may decide that the chance for success on a partict1lar issue might be more promising in a different Cot1rt of Appeals.

The Federal Circuit provides 由e taxpayer with an alternative forum. When a particular Circuit Cot1rt of Appeals has isst1ed an adverse decision in a similar case， 出e taxpayer may prefer the Court of Federal Claims route because any appeal is to 出e Federal Circuit.

24Tl1e Cot1rt of Appeals for the Fed.era! Circuit was created, effective October 1, 1982, by P.L. 97-64 (4/2/82) to hear decisions appealed from the Claims Cot1rt (now the Court of Federal Claims).

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CH A P TER 2 Working with the Ta× Law 2-13

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ADMINISTRATIVE OFFICE OF THE UNITED STATES SUPREME COURT

APRIL 1988

The Appellate Process

The role of the appellate court is usually limited to a review of w hether the trial court applied the proper law in arriving at its decision. Rarely does an appellate court ques- tion a lower cot1rt’s fact-finding determination. Both the Code and the St1preme Court indicate that Federal appellate cot1rts are bound by findings of facts t1nless they are clearly erroneous.25

An appeal can have a number of possible outcomes. The appellate court may approve (affirm) or disapprove (reverse) the lower cot1rt’s finding , or it may send the case back to the trial court for further consideration (remand). When many issues are involved, a mixed rest1lt is not unusual. Thus, the lower court may be affirmed (aff协 on Issue A and reversed (rev份 on Issue B and Issue C is remanded (rem份 for additional fact finding.

When more than one jt1dge is involved in the decision-making process, disagree- men臼 are common. In addition to the majority view, one or more judges may conct1r (agree w ith the result reached but no t w ith some or all of the reasoning) or dissent (disagree w ith the rest1lt). In any decision, of cot1rse, the majority controls. But conct1r- ring and dissenting views can have an influence on future cases or other courts.

Appellate Precedents and the Tax Court District Courts, the Tax Court, and the Court of Federal Claims must abide by the 匾！！C司画可 set by a Cot1rt of Appeals jurisdiction. A particular Court of Appeals need not follow the decisions of another Cot1rt of Appeals. All courts, however, mt1st follow the decisions of the ［~旦J!reme c。urt ..

This pattern of appellate precedents raises an issue for the Tax Court. Because the Tax Court is a national cot1rt, it decides cases from all parts of the cot1ntry. Under a

25§§ 7482(a) and (c). Conim. v. Duberstein, 60- 2 USTC 咱9515, 5 AFTR 2d 1626, 80 S.Ct. 1190 (USSC, 1960). See Rl1le 52(a) of the Federal Rules of Civil Procedl1re.

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2-14 PART 1 Introduction and Basic Tax Model

L0.2

ι。cateand w。rkwith the appropriate tax law s。urces.

26 Jack E. Go/sen, 54 T.C. 742 (1970).

policy known as the Golsen rule, the Tax Court decides a case as it believes the law should be applied only if the Court of Appeals of appropriate ju risdiction has n ot yet ru le d o n the issue or has p reviously affirmed the Tax Court’s rationale. If the Court of Appeals has ruled on a case sim ilar to the o ne being heard by the Tax Court, th e Tax Court w ill conform to th e Appeals Court decisio n u nder the Golsen rule even though it d isagrees w ith the decisio n . 26

Emily lives in Texas and sues in the Tax ζourt on Issue A. The Fi仕h Circuit Court of Appeals is the appropriate appellate court. The Fifth Circuit has already decided, in a case involving similar facts but a different taxpayer, that Issue A should be resolved in favor of the taxpayer. Although the Tax Court believes that the Fifth Circuit Court of Appeals is wrong, under its Go/sen policy, the trial court will rule in favor of Emily.

Shortly thereafter, Rashad, a resident of New York, in a comparable case, sues in the Tax Court on Issue A. Assume that the Second Circuit ζourt of Appeals, the appellate court that would hear a Tax Court appeal, has never expressed itself on Issue A. As a result, the Tax Court will decide against Rashad.

Thus, it is possible for two taxpayers, both having their cases heard by the Tax Court, to end up with opposite results merely because they live in different parts of the country.

Appeal to the U.S. Supreme Court Appeal to the U.S. Supreme Court is by !Writ of "Certioraril . If the Cot1rt agrees to hear the case, it w ill grant the Writ ( Cert. grante动． Since the Supreme Court rarely hears tax cases, m ost often, it denies jurisdiction ( Cert. denie均. The Court usually gran臼 certiorari to resolve a conflict among the Cou rts of Appeals (e.g., two o r more appellate courts have asst1med opposing positio n s o n a particular issue) o r where the tax issue is extremely importan t. The gran ting of a Writ of Certio rari ind icates that at least four of the n ine members of the Supreme Court believe that the isst1e is of s11fficient importance to be heard by the full Court.

Judicial Citations

Court decisio n s are an important source of tax law, and the ability to cite and locate a case is a critical sk过l when working w ith the tax law. Judicial citation s usually fo llow a stan dard pattern: case n ame, volt1me nu mber, reporter series, page or paragraph num ber, court ( w h ere necessary), and year of the decisio n (see Concept Su mmary 2. 2).

Judicial Citations-The U.S. Tax Court The U.S. Tax Court issues two types of decisio ns: Regular and Memoran dum, based o n the Chief Judge’s determination . They d iffer in both st1bstance and form. In terms of substan ce, Memorandum decisions d eal with cases that involve only th e application of establish ed p rinciples of law. Regular decisions involve n ovel issues n ot previot1sly resolved by the Tax Court. In actual p rac- tice, however, both Regular and Memorandum represent the position of the Tax Court and, as such , can be re lied o n . 27

The Regular and Memoran dum decisio ns issued by the Tax Col1rt also d iffe r in form. Regula r decisions a re p u blished by the U.S. Government in a series entitled 阳Courtof the United States R，ψorts (T.C.). Each volt1me of these Rψorts covers a six-mon th period (Jan t1ary 1 through Ju ne 30 and J u ly 1 through December 31) and is given a succeed ing volum e number. Usually there is a time lag between the date a decision is ren dered and the date it is publishe d . A temporary citation may be necessary to help the researcher locate a recent Regl1lar d ecision . Con sider, fo r example, the temporary and permanen t citation s for Mehrdad R，ψzadeh, a decisio n filed on January 2, 2018.