Transcript R14-Chp-04-1-Chapter-4-Tax

Chapter 4
Tax Research
©2010 CCH. All Rights Reserved.
4025 W. Peterson Ave.
Chicago, IL 60646-6085
1 800 248 3248
www.CCHGroup.com
Tax Research
• Why is it important for the tax practitioner to be able to
perform quality and efficient tax research?
• Answer: Practitioners do not know all things at all times.
The tax law is ever-changing and to be able to perform
proper research is to be able to accurately advise the
client of the tax consequences of his actions both before
and after they occur.
• Furthermore the ability to perform proper research is
essential to avoiding the consequences associated with
taking an unfounded position on a client’s tax return.
Types of Research
• Planning Research – forward thinking, not all facts are
known
– Research is used to advise the client of the best way to plan a
transaction to meet tax and other business goals.
• Compliance Research – takes place after the fact, all
facts are known.
– Research is used to obtain the best tax result within the existing
factual framework.
• Policy Research – undertaken to understand the why’s
of a tax law provision or change.
– Research to understand the reasons behind proposed tax
reforms, to influence legislation on behalf of a client or the
profession or for educational/scholarly writing.
Steps in Tax Research
1.
2.
3.
4.
5.
Identify relevant and critical facts
Determine the issues to be resolved
Search for authority
Analyze authority.
Develop Conclusions & Make
Recommendations.
6. Communicate the results.
Identifying the Facts
• Why is identifying crucial and relevant facts essential to
performing quality tax research?
– The answer to a tax question often turns on the application of the
tax rules to a unique set of facts or circumstances. One small
change in fact, can change the answer.
• Clients can be reluctant to provide facts, or may not see
them as relevant. Remind them you are the professional
and let you make the determination.
• Take time before meeting with the client to formulate
relevant questions to elicit important facts.
– Err on the side of too much information.
– Use the old standbys – who, what, when, where, how?
Relevant Facts
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Ken and Kelly Jitter were legally separated in 1997 and no longer living
together.
In 1998 their divorce is finalized.
There were two minor children of the marriage.
Mr. Jitter lives in the family home. Ms. Jitter rents an apartment.
The family home was purchased in 1985 when the parties married.
Mr. Jitter pays no alimony.
Both Mr. and Ms. Jitter work.
Each day during the school year, Ms. Jitter brings the children to the family
home and Mr. Jitter drives them to school. The bus drops the children at
the family home after school. Ms. Jitter picks them up on the way home for
work each day at approx. 6pm.
The order granting the divorce requires Mr. Jitter to pay monthly child
support of $580/mo. He also pays the mortgage on the family home of
$645/mo.
Ms. Jitter pays rent of $525/mo plus utilities.
The custody agreement granted joint legal custody but gave Ms. Jitter
primary physical custody of the children.
Mr. Jitter’s mother lives in the family home with him.
Relevant Facts (Cont’d)
Query: Which facts are relevant to a determination
of whether Mr. Jitter can claim his two children
as dependents on his 1998 individual income tax
return?
Answer: In general the custodial parent claims the
child as a dependent. However, (2), (3), (4), (8),
(9), (10), (11) may also be relevant if support is
an issue. This brings up other questions, such
as did Ms. Jitter waive her right to the exemption
as the primary custodial parent?
Determine Issues
• Where do the issues or questions that need answers come
from?
– Clients asking questions.
– Situations identified during compliance.
– Unrelated client remarks.
• General categories of tax questions that over-arch most
transactions.
–
–
–
–
–
Income questions – taxable, character, when recognized?
Deduction Questions – deductible, character, limits?
Basis Questions – what is basis of asset and holding period?
Transaction is tax-free?
Expenditures qualify for credit?
• Research cycle may require several iterations of collecting
facts, identifying issues, searching for authority and then
analyzing those authorities.
Search for Authority
• Searching for authorities, provides the answers to
the questions asked.
– Locate authority and verify that it is relevant and
current.
– Answers should be found in primary sources of the tax
law (official sources).
– Although, secondary sources (unofficial sources) are a
good place to start to gain an understanding of the
area being researched.
• Tax research services (CCH/RIA) provide an excellent way to
understand the law involved and to locate primary sources
through annotations or editorial content.
Analyze Authority
• Primary sources should be analyzed to
determine whether they are, in fact, relevant to
your client’s situation.
– Does it guide you to an answer to your client’s
question – factually similar?
– What happens when two authorities provide
conflicting rules? Which do you follow?
• Horizontal conflicts – decisions of courts at the same level
disagree.
– Courts at the same level are not bound by each other’s
decisions.
• Vertical conflicts - decisions of courts at different levels
disagree.
– Decision of Circuit Court of Appeals in which the taxpayer may
bring appeal controls.
Analyze Authority (Cont’d)
• The tax law is constantly in a state of flux and thus, once
an authority is located it must be verified as still current.
– Use Citators, e.g. Shepard’s, CCH, RIA
• Evaluate relevant authority to determine if it constitutes
substantial authority for a position taken on taxpayer’s
return
– Code Sec. 6662 – To avoid understatement of tax penalty the
position taken on the return must be supported by substantial
authority or disclosed on the return.
– Substantial authority – The weight of authorities supporting
taxpayer’s position is substantially greater than the weight of
authorities opposing it.
• Sources of substantial authority – primary sources of tax law –
Code, Regulations, Rulings, Cases etc. See: Reg. Sec. 1.66624(d)(3)(iii) and Notice 90-20.
Develop Conclusions and Make
Recommendations
• An authority is reasonably applied to draw
conclusions in the client’s situation only if the
facts of the authority are significantly similar to
that of the taxpayer.
• If conflicting authority exists, the practitioner
must explain the available options, the pros and
cons, and risks of each option.
– The final decision rests with the client.
– Stand ready to distinguish authority that is factually
similar if it does not support the client’s chosen
option.
Communicate the Results
• Two forms – Research Memo and Client
Letter
• Format for each is similar including:
– A summary of relevant facts
– The assumptions used in performing research
– A discussion of relevant authority
– Conclusions and recommendations.
The Research Memo
• The Fact Section – summarizes the relevant and critical
facts.
• Issue Section – Presents the issue(s) to be answered in
the form of a question.
• Discussion and Analysis – explains the relevant law
(authority) and how it applies to client’s situation
– First, discuss the relevant Code provision
– Second, discuss applicable regulations, if any
– Finally discuss, Treasury/IRS pronouncements and case law
• State the rule of law established by the authority and explain factual
similarities and dissimilarities.
The Research Memo (Cont’d)
• Conclusion Section – the answer to the
question and recommendations for action.
– There may not be one best option
– Provide several alternatives and supporting
authority for each.
– State the need more information to make a
recommendation.
Client Letter
• Format varies with the tax adviser, but a typical
format:
• Paragraph 1 – Salutation and purpose for letter
• Paragraph 2 – Summary of the relevant facts upon which
researcher is relying in doing research, drawing conclusions,
and making recommendations.
• Paragraphs 3 and on – Explanation of relevant authorities
relied upon, possible alternative courses of action based
upon that law and a recommended course(s) of action
• Final Paragraph – “Thank you for letting us serve you now
and in the future, contact us with questions.”
Client Letter (Cont’d)
• Poor communication to a client breeds
misunderstanding, which brings bad choices and
potential liability.
• How does the practitioner avoid this problem in
drafting a letter to a client?
– Know your client – draft the letter to the client’s level
of sophistication.
• Unsophisticated clients require non-technical language and
general references to the law.
– Include limitations – both as to facts provided and law
as it exists at the time the research is performed.
Tax Services
• Print or via internet
• Code-based versus Topic-based services
– Code-based – The materials are organized and presented by
Internal Revenue Code Section in order.
• Included is an explanation of the Code Section, applicable
Regulations, Committee Report extracts, editorial explanations and
annotations (summaries of cases and rulings).
– Topic-based – The materials are organized along logical topic
lines, such as trusts or depreciation, with each topic containing
reference to any number of Code Sections which apply.
• The topic is covered in narrative form.
• Primary sources, including cases and rulings, are included in the
body of the text, and referenced by footnotes.
Current Tax Services
• CCH (CCH Internet Tax Research Network)
– Code based – Standard Federal Tax Reporter
– Topic-based – CCH Federal Tax Service
– Topic-based (internet) – Tax Research Consultant
• RIA (RIA Checkpoint Network)
– Code-based – United States Tax Reporter
– Topic-based – Federal Tax Coordinator 2nd
• BNA
– Topic based – BNA Tax Management Portfolios
(through LEXIS and Westlaw)
Types of Searches
• Searches can be performed through the tax services in
three ways:
– Keyword search – use unique words, not general tax terminology
to locate primary authorities.
– Menu-walk search – use when the researcher is having difficulty
determining keywords.
• Starting with the Table of Contents or First Menu, the researcher
works his way through to higher levels of specificity.
• When a certain point is reached and the researcher can walk no
more try combining menu-walk + keyword searches.
– Citation search – researcher has a cite to a case, find case and
use it to determine its relevance and back track to annotations or
editorial discussion, which leads to additional primary sources.
Citators
CCH, RIA & Shepard’s
• The general format of the Citator:
– The citation to a case or ruling will include
• Judicial/procedural history (how the case has been
handled through the court system)
• Lists of other cases/rulings that cite to the case of
interest
• Some include “headnotes” or “casenotes” which
identify the issues addressed in the cited case.
• Some indicate how the case was treated by the
subsequent authority – followed, distinguished etc.