KEIR EDUCATIONAL RESOURCES

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1 TAX PLANNING 2017 Published by: KEIR EDUCATIONAL RESOURCES 4785 Emerald Way Middletown, OH FAX

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3 TABLE OF CONTENTS Title Page Income Tax Planning (Topics 42-51) Topic 42: Fundamental Tax Law Topic 43: Income Tax Fundamentals and Calculations Topic 44: Characteristics and Income Taxation of Business Entities Topic 45: Income Taxation of Trusts and Estates Topic 46: Alternative Minimum Tax (AMT) Topic 47: Tax Reduction/Management Techniques Topic 48: Tax Consequences of Property Transactions Topic 49: Passive Activity and At-Risk Rules Topic 50: Tax Implications of Special Circumstances Topic 51: Charitable/Philanthropic Contributions and Deductions Appendix A Ridgeway Case Appendix 1 Keller Case Appendix 7 Powers Case Appendix 18 Adams Case Appendix 29 Carlisle Case Appendix 36 Tingey Case Appendix 39 Beals Case Appendix 42 Mocsin Case Appendix 54 Loudon Case Appendix 66 Young Case Appendix 75 Jones Case Appendix 85 Smith Case Appendix 100 Perkins Case Appendix 116 Walker Case Appendix 128 Appendix B Basis of property received as a gift Appendix 149 Tax Forms Appendix 150 Selected Facts and Figures Appendix Topic List Appendix 180 Glossary Glossary 1 Index Index Keir Educational Resources

4 Fundamental Tax Law (Topic 42) CFP Board Student-Centered Learning Objectives (a) Compare and contrast the fundamental components of the income tax system including filing forms, filing status, income, exemptions, exclusions, deductions, adjustments, credits and tax rates. [See also Topics 43 and 44] (b) Explain how a progressive income tax system works and contrast it with other tax systems. (c) Compute marginal and average tax brackets and explain the appropriate use of each. Fundamental Tax Law A. Types of authority 1) Primary 2) Secondary B. Research sources C. Progressive tax system D. Marginal and average tax brackets E. Tax Doctrines F. Tax Accounting 1) Accounting periods 2) Accounting methods a) Cash receipts and disbursements b) Accrual method c) Hybrid method d) Change in accounting method G. Net operating losses Income Tax Law Fundamentals An important part of any comprehensive financial plan is consideration of the effect income taxes have on the outcome. Lack of planning for taxes may result in a large portion of a client s wealth being forfeited to the federal and state governments. To be able to properly plan for future tax consequences, financial planners must be able to apply provisions of tax law to their clients specific circumstances. Because tax law is very complex and constantly changing, it is nearly impossible for a planner to memorize the myriad applications. Thus, it is important to understand the sources of tax law so that research can be done to locate answers. Types of Authority When researching tax questions, a planner can find answers in either primary or secondary sources. Primary sources are those which 2017 Keir Educational Resources

5 Primary Sources Internal Revenue Code Is Compilation of Tax Laws come directly from the government and have the official sanction of those who enact the tax law. Secondary sources provide explanations of provisions found in primary sources. Secondary sources are generally much easier to read; however, only primary sources carry official authority in a court or before the IRS. Primary sources of tax law can be divided into three groups corresponding to the three branches of the federal government. The legislative branch (Congress) passes the laws, the executive branch (President and governmental agencies) enforces the laws, and the judicial branch (federal courts) interprets the laws. It is no different for tax law Congress passes tax legislation, the Treasury Department (IRS) enforces it, and the Tax Court and other judges interpret the law. Tax researchers must be familiar with the sources of information that come from each branch of government. The Internal Revenue Code (IRC) is the compilation of all the laws passed by Congress with regard to the collection of federal taxes. It is organized in sections by topic and is amended each time Congress passes a public law with tax provisions. Whenever Congress considers a tax bill, it is first debated in the House Ways and Means Committee and later in the Senate Finance Committee. A record of these Committee meetings is kept and can be useful in showing the intention of Congress in writing a tax bill. REMEMBER: THE PRIMARY SOURCES OF TAX LAW ARE: (1) THE INTERNAL REVENUE CODE (2) TREASURY DEPARTMENT REGULATIONS AND IRS REVENUE RULINGS (3) COURT DECISIONS IN TAX CASES Tax Code Is Public Document Treasury Regulations Have the Force of Law Because tax laws are public, the IRC and Committee reports are all public documents that can be found on Congress Thomas website (Library of Congress), as well as in other library sources online. Some of these sources may not have the most up-to-date IRC and may have limited indexing or search capabilities; however, they are generally available at no cost. Print versions of the Tax Code are also available from the Government Printing Office (GPO) and various commercial publishers. Committee reports by year are also available from the GPO. The Treasury Department has been delegated the authority to enforce tax laws passed by Congress. The Treasury Department accomplishes this role in part by issuing Treasury Regulations, 2017 Keir Educational Resources

6 Revenue Rulings, Revenue Procedures, Technical Advice Memorandums, Private Letter Rulings, and various other instructional publications. Of these, Treasury Regulations have the highest authority. When the Treasury Department (more specifically the Internal Revenue Service or IRS) issues regulations to fill in the details of tax law, they have the force of law. These regulations must be followed by all taxpayers and by the IRS. In many cases, the Treasury issues proposed regulations or temporary regulations, which may later be changed based on input from tax and business professionals. Regulations are numbered according to the section of the IRC to which they relate. Regulations may be successfully challenged in court if they violate the intent of Congress in the legislation or exceed the scope of authority delegated by Congress. Regulations are first issued as proposed regulations, which allows for taxpayers and tax professionals to comment and ask for changes before the final regulations are issued. Overwhelming concern from the public may prompt changes in the final regulations. Revenue Rulings May Be Relied On but Are Not Law Private Letter Rulings Revenue Procedures The IRS may publish additional guidance on the specific application of various tax provisions in either Revenue Rulings or Technical Advice Memorandums (TAM). Revenue Rulings and TAMs do not have the force of Regulations, but they can be relied on to show how the IRS will treat specific situations. They are also much narrower in application than Regulations. Revenue Rulings are usually issued as a result of numerous questions about a specific tax issue. A TAM may be written when a controversy is appealed to the National Office by either an IRS agent or a taxpayer. Both Revenue Rulings and TAMs must be followed by the IRS in subsequent cases with the same or similar facts. Courts, however, are not bound by revenue rulings. A Private Letter Ruling (PLR) may be requested on behalf of a taxpayer who presents a specific set of facts. These requests are generally presented to the IRS prior to the taxpayer entering into a significant transaction in order to ensure a desired tax result. A PLR is applicable only to the taxpayer who requested it and may not be used by another taxpayer in a dispute with the IRS. However, PLRs do show the IRS pattern of thinking and can give taxpayers some assurance of similar treatment. Revenue Procedures are published to show the internal workings of the IRS and to guide taxpayers in dealing with the IRS. For example, a revenue procedure document is issued each year which 2017 Keir Educational Resources

7 provides inflation adjustments for certain tax items such as the standard deduction. Much of the guidance described above is summarized in various publications by topic and may be picked up at a local IRS office or downloaded from the IRS website. The full text of the Regulations is found in the Code of Federal Regulations (Title 26), available online at the GPO website and other library sources. The print version can be ordered from the GPO. The other items are published in a weekly bulletin available online from the IRS website or by subscription. These weekly bulletins are bound together and published semiannually as the Cumulative Bulletins. The Cumulative Bulletins can also be ordered from the GPO. Indexing and cross-referencing of these sources are available from several commercial publishers, either in print, or online. Court Interpretation of the Tax Code Publishers Secondary Sources Finally, interpretation of the Tax Code is the responsibility of the courts. The Tax Court, Court of Claims, District Court, Court of Appeals, and the U.S. Supreme Court all publish decisions on tax cases. Court opinions are generally quite specific and are valuable only when the fact pattern being researched closely parallels the one considered by the court. However, sometimes, especially in appeals court cases, judges give more general guidance or will lay out rules that may have application in a wide array of future cases. It is important when referring to court decisions to check on subsequent appeals of court decisions for reversal or further clarification. Most tax publishers provide a volume which facilitates identifying opinions from appeals courts that refer to lower court decisions. Also, in Tax Court and appeals court cases, the IRS may publish an acquiescence to an unfavorable decision, indicating its willingness to follow the decision in other cases. Otherwise, the IRS is not bound by lower court decisions and may continue to litigate similar cases to get a more favorable ruling. Court cases involving tax law are published in bound volumes by year and are made available by the Research Institute of America and the Commerce Clearing House. Recent decisions of the Tax Court and all intermediate appeals courts are also available online either through the court s own website or through an online college law library or through Find law (an online law library). These listings are not limited to tax cases, and searches must be done carefully to find the information needed. Secondary sources for tax research include comprehensive multivolume publications by the Research Institute of America (RIA), the 2017 Keir Educational Resources

8 Commerce Clearing House (CCH), and the Bureau of National Affairs (BNA). These sources are generally organized by topic and have extensive indexing. They include explanation of tax provisions, with reference to the IRC, Committee reports, Regulations, court cases, and other pertinent primary sources. These explanations provide a guide to, but are not a substitute for, reference to the actual primary sources. These publishers also provide single volumes that provide a very condensed overview of tax provisions in an easy-to-use format. All these sources are available in print and online. Other secondary sources include tax periodicals, such as the Tax Adviser published by the American Institute of Certified Public Accountants (AICPA), the Tax Lawyer published by the ABA, and other journals published by the CCH and the RIA. These periodicals usually give in-depth coverage of a topic, including application examples. They also help readers keep up with new and changing topics. Research Sources Research of a complex tax question involves the following steps: Gather and review all facts pertaining to the tax situation. Identify the issue that must be decided. Identify the primary sources of tax law that have relevance to the issue, either with original research or by using secondary sources as a guide. Compare the situations described in the tax law sources to the question at hand and identify the similarities and the differences. Evaluate the sources found, giving more weight to those that have the force of law and checking to make sure Regulations or Rulings have not been superseded and that Court cases have not been reversed on appeal. Choose an appropriate course of action to recommend, based on how closely the facts match those described in tax sources and the authority of those sources if no tax law authority closely resembles the case at hand, then a planner can use similar cases to extrapolate a possible interpretation. Communicate the recommendation in a concise manner, with brief reference to the pertinent tax authority indicate any lack of authority for the recommendation and disclose those risks involved in proceeding, where clear guidance is not available. Progressive Tax The U.S. income tax system is a progressive tax system, meaning that taxpayers pay at lower levels first, then higher levels of tax as 2017 Keir Educational Resources

9 taxable income increases. Each level of tax is called a tax bracket, and payment of taxes occurs at marginally higher rates. For example, the current income tax system has brackets at the 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% rates. The average, or effective tax rate, will increase as income increases and taxes are paid at increasingly higher rates. Other tax systems include proportional tax systems where the average tax rate is the same no matter what the taxpayer s income is, regressive tax systems where the average tax rate decreases as income increases, and a flat tax system where everyone pays the same lump-sum or same percentage of income each year Keir Educational Resources

10 Marginal vs. Average Tax Rates The taxpayer s marginal tax rate is the highest tax bracket in which they fall. This is the rate that will apply to the next dollar of income earned. When analyzing the after-tax return on investments, the marginal rate is the appropriate rate to use. The average tax rate is the average rate of tax paid, factoring in the payments at various marginal brackets. Example: If Heather is a single taxpayer with gross income of $115,000 and total deductions of $20,000, her taxable income is $95,000. Based on the following rate schedule, her marginal tax bracket is 28%. Her average tax rate, however, is calculated by taking the tax liability divided by her total income (for this example, we will assume Heather does not qualify for any tax credits that reduce her tax after the tax is calculated). Heather s tax liability will be $18, plus 28% of the excess taxable income over $91,900. Based on this calculation, Heather s tax is: 18, [(95,000 91,900) x.28] = 19, SINGLE (UNMARRIED INDIVIDUALS) If Taxable Income Is The Tax Is Not over $9,325 10% of taxable income Over $9,325 but not over $37,950 $ plus 15% of the excess over $9,325 Over $37,950 but not over $91,900 $5, plus 25% of the excess over $37,950 Over $91,900 but not over $191,650 $18, plus 28% of the excess over $91,900 Over $191,650 but not over $416,700 $46, plus 33% of the excess over $191,650 Over $416,700 but not over $418,400 $120, plus 35% of the excess over $416,700 Over $418,400 $121, plus 39.6% of the excess over $418,400 Heather s average tax rate is then calculated by dividing the $19, in tax by her total income of $115,000, giving her an average tax rate of 17.03%. Tax Doctrines There are some basic principles that are applied in income tax law, the understanding of which can be fundamental to learning the myriad rules associated with income taxation. The Doctrine of Constructive Receipt Under the Doctrine of Constructive Receipt, a cash-basis taxpayer (cash-basis versus accrual-basis is discussed below) need not take physical possession of income in order for it to be treated as 2017 Keir Educational Resources

11 received for income tax purposes. Income is taxable in the year in which it is credited to the taxpayer s account, set apart for the taxpayer, or otherwise made available to be drawn upon by the taxpayer at any time during the tax year. For example, a taxpayer may purchase shares of a mutual fund and elect to have dividends paid by the mutual fund reinvested to purchase additional shares. The dividends will be taxable in the year of distribution even though the taxpayer did not actually receive the dividend in cash form. The fact that the dividend payment was credited to the taxpayer s account and was available for withdrawal governs the year in which it is taxed. If, however, the taxpayer s control of the receipt of income is subject to substantial limitations or restrictions, income is not constructively received, and not taxed at that time. For example, and employer might allocate a stock bonus to an employee but restrict availability until some point beyond the end of the current tax year. Although the stock bonus has been credited to the employee s account, it is not available to be withdrawn. The Economic Benefit Doctrine The Doctrine of Assignment of Income The Economic Benefit Doctrine generally applies to employee compensation and requires that the cash-basis taxpayer be taxed in the year in which he or she receives an absolute right to property (cash or otherwise) of measurable value. In other words, when the employee receives an economic benefit. Thus, for example, constructive receipt might be avoided if there is not an immediate right to withdraw compensation from an employer when that compensation is placed in an irrevocable trust for the benefit of the taxpayer. However, the economic benefit doctrine may cause taxation in the current year if there is a non-forfeitable right to receipt at some point in the future, and the value of that right is currently measurable. The economic benefit doctrine will not cause immediate taxation, however, if there is substantial risk of forfeiture. The Assignment of Income Doctrine is a judicial doctrine designed to limit tax evasion. The doctrine requires that a full transfer of ownership of property must take place in order to transfer taxation on the income. For example, a parent who owns an apartment building cannot assign the rental income to his or her child (who is, presumably, in a lower tax bracket). In addition, the assignment of income doctrine also limits the ability to shift taxes to a family member who is in a lower tax bracket by requiring that income generated by performing personal services must be taxed to the person who performed the services. Therefore, a parent cannot assign salary earnings to a child in order to reduce taxation Keir Educational Resources

12 Tax Accounting Accounting Periods A tax year is the annual time period over which a taxpayer calculates tax liability. The vast majority of taxpayers use a calendar year to calculate their tax liability because it easily conforms to the receipt of W-2s and 1099s. The tax year is elected on the first tax return and can only be changed with the permission of the IRS. A fiscal year may be beneficial for certain types of seasonal businesses, and the IRS will generally allow a change if it is also the business annual accounting period and the books are kept according to the fiscal year. A business may also choose to report using a week year that always ends on a certain day of the week. For example, a company could have a fiscal year that ends on the last Tuesday in September each year. Other than this exception, a fiscal year must end on the last day of the month. Generally, partnerships (and other entities taxed as partnerships) must conform to the tax year of the majority owners (probably the calendar year) unless a business purpose is established for a fiscal year. S corporations and personal-service corporations are generally limited to a calendar year unless a business purpose for a fiscal year can be established. C corporations may choose any tax year desired upon formation. When different tax years are approved and result in tax deferrals, required payments by the entities must be made that will neutralize any tax benefits. Accounting Methods The accounting methods used to calculate taxable income (especially from business or rental activities) do not always follow the rules established by the accounting profession. When calculating a client s tax liability, a planner needs to understand the differences between a client s accounting practices and the accounting required by the IRC. Individuals may elect to be taxed as cash-basis taxpayers, accrualbasis taxpayers, or as a hybrid of the two bases. Most taxpayers do not know they have a choice and, by default, become cash-basis taxpayers (when they file their first tax return, using this basis). Cash-basis taxpayers record income when the cash is received and deduct expenses when payments are made. The IRS must approve any change in the basis of accounting. Cash Receipts and Disbursements According to IRS regulations, a cash-basis taxpayer must include in income any amounts that are constructively received 2017 Keir Educational Resources

13 (Cash Method) during the taxpayer s tax year. For example, a check written by a customer and held at the customer s office for pickup by the taxpayer must be included in the taxpayer s income on the date it was available even if it was not actually picked up. This rule applies to any payment where the amount is available to the taxpayer without substantial limitation. When it is available, it is included in income. Payments received by a taxpayer s agent and amounts set aside by a taxpayer s employer in the current year, without significant restriction, are income in the current year. Even unearned income, such as advance payments of rent, is taxed when received. KEY SUMMARY 42 1 Cash-Method Taxpayers The Exceptions In addition to cash collected or constructively received, cash-basis taxpayers report as income: The increment on Series E and EE bonds unless the taxpayer has elected to defer recognition of income until maturity (In the past, a taxpayer could exchange the E or EE bonds for HH bonds and continue to defer interest until the HH bonds matured.) The original issue discount earned on bonds, including zero-coupon bonds Expenses are only deductible when paid. Receiving the bill for an expense is not enough; the bill has to be paid prior to the yearend to be deductible in the current year. An exception arises for expenses paid by credit card. These expenses are deductible in the period in which the credit card is charged, even if actual payment in cash is made later. The cash-basis method cannot be used if it does not clearly reflect income. Tax Regulations do not allow the cash basis to be used in businesses where inventory is a material income-producing factor. However, the IRS recently allowed an exception for businesses with gross receipts of under $1 million. REMEMBER: TYPICALLY, THE CASH METHOD OF ACCOUNTING IS USED WHEN THE TAXPAYER MAKES ONLY CASH TRANSACTIONS AND HAS NO INVENTORY Keir Educational Resources

14 Accrual Method The accrual-basis method of tax accounting requires a taxpayer to record income when the right to receive it exists (accounts receivable), not when it is actually received. Further, expenses are recorded when they are incurred (accounts payable). This basis must be used by taxpayers who have inventories (at least for purchases and sales), by C corporations with gross receipts of over $5 million (except for qualified personal-service corporations), by partnerships which have a partner that is a C corporation with gross receipts over $5 million, and by certain trusts. Even accrual-basis taxpayers cannot deduct estimated expenses, such as bad debt allowances and warranty expenses; rather, they must wait until the bad debt is actually written off or the warranty costs are incurred. On the other hand, cash received prior to providing the services or goods (unearned income) is generally taxable. One exception allows accrual taxpayers to defer unearned income for one year if the income will definitely be earned by the end of the following year. For example, an accrual-basis taxpayer received payment this year for music lessons to be provided evenly during the last month of this year and the first two months of next year. The taxpayer could elect to defer two-thirds of the income until next year, rather than including all of it this year. REMEMBER: TAXPAYERS MUST TYPICALLY ACCOUNT FOR INVENTORIES UNDER THE ACCRUAL METHOD. Hybrid Method A combination of the cash and accrual bases for tax accounting can be used as long as the method is consistent and clearly reflects income. Sometimes, a combination is required by tax Regulations. For instance, an amount owed by an accrual-basis taxpayer to a related, cash-basis taxpayer cannot be deducted until it is paid. Therefore, for payments to related cash-basis taxpayers, an otherwise accrual-basis taxpayer is on a cash basis. Taxpayers can use a different basis for each separate business (as long as the basis is used consistently from the start of the business), and they can use a different basis for personal and business items. Therefore, a taxpayer who must use accrual accounting for his or her inventory-based business can still be a cash-basis taxpayer for itemized deductions and other personal items Keir Educational Resources

15 Change in Accounting Method Some transactions require specialized tax accounting methods, as prescribed in the tax law. Once a business entity or individual has adopted an accounting method or accounting period, a change in the method or period requires IRS permission even if the original method was incorrect. Corrections cannot be made just by filing an amended tax return. Changes in method include going from cash-basis to accrual-basis or from one inventory valuation method to another. Errors in the calculation of income or tax liability do not count as changes in method and may be corrected by filing an amended return within the statute of limitations. Many changes receive an automatic consent from the IRS, including changes to begin the use of the accrual method or to discontinue the use of LIFO. These automatic changes can only be made once every five years and are severely limited once a taxpayer is subject to audit. For changes in the tax year, a Form 1128 must be filed with the taxpayer s income tax return for the first year of the change, by the due date of the return, including extensions. Form 3115 is required to change the accounting method. This Form is due by the end of the year in which the change is made unless the change is among those receiving automatic consent. Forms requesting an automatic change can be filed, along with the tax return for the year of the change, by the due date, including extensions. Net Operating Losses Generally, taxpayers must pay tax on the income earned in the specified tax year, without regard to other tax years. However, some modification of this general rule is available in the case of net operating losses. When a client has a net operating loss, this loss can be carried back to offset past income to produce a refund of tax paid, and/or it can be carried forward, to offset future income. The general rule is that NOLs can be carried back 2 years and forward 20 years. The carryback provision is extended to 3 years for NOLs arising from casualties that occur in a Presidentially-declared disaster area or that are incurred by businesses with less than $5 million in gross receipts. Farmers can carry back NOLs for 5 years. Corporations can carry losses back 2 years and forward 20 years Keir Educational Resources

16 Practice Question The Pine Tree Corporation has had the following amounts of taxable income: Year Taxable Income 2012 $10, $15, $20, $10, $ 5, $10,000 In 2018, the company sustained a $70,000 loss. What amount of loss can the Pine Tree Corporation carry back to previous years? A. $0 B. $5,000 C. $15,000 D. $60,000 Answer: The carryback of losses is limited to two years. Pine Tree Corporation can carry back only $15,000 of the losses. The answer is C. For an individual, the NOL must arise from business activities. To calculate the NOL for any given year for an individual, personal exemptions are ignored, as are nonbusiness deductions in excess of nonbusiness income. Capital losses are only subtracted to the extent of capital gains, and no NOL from any other year is used. If, after these adjustments are made, an individual still has a loss, it is first carried back two years prior to the NOL year and used to offset income from that year, dollar-for-dollar. The excess is then applied to the year previous to the NOL year in the same way, and any excess is carried forward. For corporations, the NOL rules apply in the same way. The only adjustment to the taxable income used to calculate a corporate NOL is that no NOL from any other year may be used. Editor s Note: Certain companies who received assistance under the Troubled Asset Relief Program (TARP) are not allowed to elect to carry back their NOL for five years. They are limited to the traditional two-year carry back or 20-year carry forward Keir Educational Resources

17 EXHIBIT 42 1 Forms and Schedules Form 1040 Individuals report their income to the IRS by filing this tax return annually. See Topic 43 Form 1041 Estates and Trusts report income to the IRS by filing this form annually. See Topic 45 Form 1040X This form is used to amend a previously filed Form 1040 return. Schedule A This schedule is filed with the Form 1040 to report a taxpayer s itemized deductions. Schedule B This schedule is filed with the Form 1040 to report a taxpayer s interest and dividend income. Schedule C This schedule is used to report income from a business operated by the taxpayer as a sole proprietor. A separate Schedule C must be prepared for each business the taxpayer operates. Schedule D This schedule is filed with the Form 1040 to report the taxpayer s capital gains and losses. Form W-2 An employer prepares this statement of wages, salary, or tips paid to an employee and the taxes withheld. The employer provides the form to the employee and to the IRS. Form 1099 This form reports many different types of income, such as interest, dividends, and other income, where the payer has not withheld taxes for the payee. Form K-1 This form reports a taxpayer s share of income or losses from a pass-through entity, such as a partnership, S corporation, trust, or LLC Keir Educational Resources

18 APPLICATION QUESTIONS 1. Which of the following sources should be consulted to determine the intent of Congress in enacting a tax statute? A. Committee reports B. Treasury Regulations C. Private Letter Rulings D. Revenue Rulings 2. Which of the following sources of authority in tax matters is not issued by the IRS? A. Committee reports B. Technical Advice Memoranda C. Revenue Procedures D. Private Letter Rulings 3. Which of the following sources of tax law is binding on the Internal Revenue Service for dealing with future tax disputes? A. Circuit Court of Appeals decisions B. Tax Court decisions C. Private Letter Rulings D. Revenue Procedures 4. Which of the following statements concerning tax research are correct? (1) If the IRS acquiesces to an unfavorable Tax Court decision, it will continue to litigate that issue in other cases. (2) Secondary sources may provide clear explanations, but they are not authoritative in controversies with the IRS. (3) Because Private Letter Rulings are now published, they are considered binding on the IRS. (4) Rulings favorable to the taxpayer in Tax Court may be reversed on appeal. A. (1) and (4) only B. (2) and (3) only C. (2) and (4) only D. (1), (2), and (4) only 5. Primary sources of tax law include: (1) Treasury Regulations (2) Revenue Rulings (3) Tax Court decisions (4) CCH reports A. (1) only B. (1), (2), and (3) only C. (3) only D. (1), (2), (3), and (4) 2017 Keir Educational Resources

19 Tax Planning Application Questions Topic 42 For practice answering case questions related to Topic 42, please answer the following questions in the cases included in Appendix A at the back of this textbook. Case Questions Ridgeway 1 and 10 Keller Powers Adams Carlisle Tingey Beals Mocsin Loudon Young Jones 1 and 2 Smith 1 and 2 Perkins Steve and Michelle Walker 1, 2, 3, 4, 5, and Keir Educational Resources

20 Tax Planning Application Questions Topic 42 ANSWERS AND EXPLANATIONS 1. A is the answer. The intent of Congress is determined from its Committee reports, which record the statements of members of Congress about the tax law. Treasury Regulations, Private Letter Rulings, and Revenue Rulings are prepared by the IRS and do not show Congressional intent. 2. A is the answer. Committee reports appear from Congressional committees as they consider tax law changes. These reports are frequently valuable in establishing the intent of lawmakers with regard to certain tax provisions. The other items are issued by the IRS. Revenue Procedures are guidance on how taxpayers should treat a common transaction to ensure uniform treatment. TAMs and PLRs are issued in response to specific requests from or disputes with individual taxpayers regarding specific fact patterns. TAMs have a more general application than PLRs, but both are valuable in showing the IRS thinking with regard to certain transactions. 3. D is the answer. No court s decision is binding on the IRS in subsequent tax disputes, except for the Supreme Court. However, the IRS can acquiesce to a lower court decision, which means it agrees to follow the decision with other taxpayers. A PLR is issued in response to a specific set of facts and is binding only on the requesting taxpayer in the described set of facts. A Revenue Procedure is general guidance and is binding on the IRS for matters described in the Procedure. 4. C is the answer. Secondary sources are written by commercial publishers and are organized in a way that makes them easy to use to find answers to tax questions. However, they make reference to primary sources, which include the Internal Revenue Code and Regulations, which actually are authoritative and can be used to prove a point to the IRS. Tax researchers should always be careful when finding a court case that appears to support their position. Unless it is a Supreme Court case, the Citator volume in most commercial tax publications will indicate later decisions that cite the original case and can be used to identify changes upon appeal. IRS acquiescence in a court case means that the IRS will not challenge the position if taken by other taxpayers. The IRS is bound to follow only Supreme Court rulings. Private Letter Rulings are now published with identifying information removed, but they can still be used as authority only in the case for which they were issued. They are helpful in determining the general thinking of the IRS on issues. 5. B is the answer. Primary sources of tax law come from one of the three branches of the government and include the Internal Revenue Code, Treasury Regulations, Revenue Rulings, Private Letter Rulings, court decisions, and Congressional Committee reports. CCH reports and other explanations are secondary sources Keir Educational Resources 18