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CHAPTER 2

WORKING WITH THE TAX LAW

LECTURE NOTES

TAX SOURCES

STATUTORY SOURCES OF THE TAX LAW

1. Relationship Between the Constitution and the Sixteenth Amendment.

a. Constitution. The source of the Federal taxing authority is the U.S. Constitution: “The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.” (Art. I, § 8, Cl. 1)

b. Sixteenth Amendment. The Sixteenth Amendment is the foundation of our Federal income tax: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

2. Origin of the Internal Revenue Code.

a. Prior to 1939 Federal tax law was comprised only of the various revenue acts passed by Congress. This unwieldy accumulation of laws was inconvenient and confusing for both enforcement and compliance.

b. The Internal Revenue Code of 1939.

(1). In 1939 Congress codified the tax laws. Codification consists of organizing the provisions of the tax laws in a logical sequence and placing them in a separate part of the Federal Statutes.

(2). The Internal Revenue Code is now Title 26 of the U.S. Code.

(3). This codification is known as the Internal Revenue Code of 1939.

c. The Internal Revenue Code of 1954.

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2-2 2013 Annual Edition/Instructor’s Guide with Lecture Notes

(1). Because of additional tax legislation since 1939, Congress reorganized and renumbered the Internal Revenue Code again in 1954.

(2). This recodification is known as the Internal Revenue Code of 1954.

d. The Internal Revenue Code of 1986.

(1). The Tax Reform Act of 1986 made substantial changes to the Internal Revenue Code.

(2). While the Code was not renumbered as it was in 1954, it is, nonetheless, referred to as the Internal Revenue Code of 1986 because of the sweeping changes made.

e. Now statutory amendments to the tax law are integrated into the Internal Revenue Code of 1986 (e.g. the Economic Stimulus Act of 2008, the American Recovery and Reinvestment Tax Act of 2009, the Patient Protection and Affordable Care Act of 2010, and the Health Care and Education Reconciliation Act of 2010.

THE LEGISLATIVE PROCESS

3. a. Origin of a tax bill. Tax legislation normally originates in the House Ways and Means Committee of the House of Representatives. A tax bill might originate in the Senate when it is attached to other legislative proposals.

(1) The Tax Equity and Fiscal Responsibility Act of 1982 originated in the Senate, and its constitutionality was unsuccessfully challenged in the courts.

(2) The Senate version of the Deficit Reduction Act of 1984 was attached as an amendment to the Federal Boat Safety Act.

b. If acceptable to the committee, the proposed legislation is referred to the entire House of Representatives.

c. Approved bills are then sent to the Senate Finance Committee.

d. Bills are then referred to the entire Senate.

e. Approved bills are referred to the President who may either approve the bill (in which case it becomes law) of veto the bill.

f. A vetoed bill may still be overridden.

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g. When the House and the Senate disagree on the provisions of a bill, it is referred to a joint committee in an attempt to resolve the differences.

h. Committee Reports.

(1) Referrals from the House Ways and Means Committee, the Senate Finance Committee, and the Conference Committee usually are accompanied by Committee Reports.

(2) These reports explain the provisions of the proposed legislation. They are important, therefore, in subsequently interpreting the tax law. They are said to reveal Congressional intent.

ARRANGEMENT OF THE CODE

4. The Internal Revenue Code is Title 26 of the U.S. Code.

a. It arranged by Subtitle, Chapter, Subchapter, Parts, and Sections.

b. However, the Internal Revenue Code (IRC) is primarily referenced by section number. For example, IRC section 61 defines gross income. The symbol “§” is generally used rather than the word “section,” e.g. IRC § 62(a) Gross Income Defined.

c. Citing the Code on page 2-6 illustrates how specific parts of the code section are referenced.

EFFECT OF TREATIES

5. Tax Treaties. In addition to the Internal Revenue Code, the United States often signs bilateral tax treaties with other countries.

a. The provisions of these treaties are not integrated into the Internal Revenue Code. However, the IRS as well as some tax publishing services provide this information.

b. When the Internal Revenue Code and treaties conflict, the most recent provision takes precedent.

c. With certain exceptions, ataxpayer must disclose on the tax return any filing position for which a treaty overridesa tax law. There is a $1,000 per failure to disclose penalty for individuals and a$10,000 per failure to disclose penalty for C corporations



ADMINISTRATIVE SOURCES OF THE TAX LAW (see Exhibit 2.1 on page 2-7in the text)

6. Treasury Department Regulations. The Treasury Department under § 7805(a) has a duty to issue rules and regulations to explain and interpret the Code.

a. Treasury Decisions. Final Regulations are issued as Treasury Decisions (TD’s) in the Federal Register. Regulations carry considerable authority as the official interpretation of tax statutes. They are arranged in the same sequence as the Internal Revenue Code and have the force and effect of law.

b. Organization. Treasury Regulations are arranged in the same order as the Code.

(1) An additional number is added, however, as a prefix to indicate what type of tax the regulation is interpreting (e.g. 1 for income tax, 20, for estate tax, 31 for employment tax).

(2) The Code section being interpreted is provided next.

(3) The numbering convention after the coded section is in chronological order and has no relation the Code subsections. (See text page 2-8 for an illustration.)

c. Types of regulations issued.

(1) Legislative Regulations.

(2) Interpretative Regulations.

(3) Procedural Regulations.

(4) Temporary Regulations – may be cited as precedent and are found in the Federal Register, Internal Revenue Bulletin, and Cumulative Bulletin. They are issued as Proposed Regulations and automatically expire within three years after the date of issuance.

d. Validity of a Regulation. One way courts assess the validity of a Regulation is by the legislative re-enactment doctrine. Here a Regulation is considered to have received Congressional approval if the regulation was finalized many years earlier and during the interim period Congress has not amended the relevant statutory language.

7. Revenue Rulings and Revenue Procedures. These are official pronouncements of the National Office of the IRS.

a. Revenue Rulings are official pronouncements of the National Office of the IRS and provide guidance to both IRS personnel and taxpayers in handling routine tax



matters. They usually deal with more restricted problems than Regulations and do not carry the same legal force and effect.

b. Revenue Procedures are issued in the same manner as Revenue Rulings, but they deal with the internal management practices and procedures of the IRS and do not carry the same legal force and effect.

8. Letter Rulings and Determination Letters. Letter rulings and determination letters have in common the fact that they apply only to the person who requested the ruling or letter.

a. Letter ruling. A letter ruling is a statement issued by the National Office of the IRS in response to a taxpayer’s request, which applies the tax law to a proposed transaction. Revenue rulings often results from a specific taxpayer’s request for a letter ruling. Like letter rulings, determination letters are issued at the request of taxpayers and provide guidance on the application of the tax law. They differ from letter rulings in that the issuing source is an IRS executive rather than the National Office of the IRS, and involve completed transactions. Determination letters are not published.

b. Determination letter. A determination letter is a statement issued by the Area Director in response to a taxpayer, which applies the tax law to a completed transaction.

9. Technical Memoranda and Technical Advice Memoranda. These sources are not the same.a. Technical Memoranda (TMs) are memoranda from the IRS Commissioner to the

Assistant Secretary of the Treasury for Tax Policy. They are drafted by the Legislation and Regulation Division of the Office of Chief Counsel and relate to proposed Treasury Decisions or Regulations.

b. Technical Advice Memoranda (TAMs) are furnished by the National Office of the IRS upon request of an Area Director or an Appeals Officer of the IRS in response to any technical or procedural question (e.g., a completed transaction).

10. Other Administrative Pronouncements.

a. Announcements of Proposed Regulations as well as the related public hearings.

b. Treasury Decisions.

c. Executive orders.

d. Tax conventions (i.e., international treaties).

e. Legislation (including Committee Reports).



f. Certain court decisions may be reproduced.

g. Announcements of court decisions in which the IRS acquiesces or does not acquiesce.

h. Punitive action (e.g., disbarment, suspension) taken against persons (e.g., attorneys, CPAs) practicing before the IRS.

ADDITIONAL LECTURE RESOURCE

Provider of the Tax Source

Internal Revenue Code Congress/PresidentRegulations U.S. Treasury DepartmentRevenue Ruling National Office of IRSLetter Ruling National Office of IRSNotices and Announcements National Office of IRSDetermination Letter Area Director of IRSTechnical Advice Memorandum National Office of IRSTreasury Decision U.S. Treasury DepartmentRevenue Procedure National Office of IRSGeneral Counsel Memorandum General Counsel’s Office of IRSAction on Decision Office of Chief Counsel of IRSField Service Advice Office of Chief Counsel of IRSTechnical Expedited Advice Memorandum National Office of IRS

JUDICIAL SOURCES OF THE TAX LAW

11. Precedential Value. American law, following English common law, is frequently “made” by judicial decisions. Under the doctrine of stare decisis, each decision has precedential value for future decisions with the same controlling set of facts.

12. Trial Courts (Courts of Original Jurisdiction). A taxpayer chooses the route to pursue a tax conflict from among four alternatives (as illustrated in Figure 2.3 on page 2-12 and Concept Summary 2.1 on page 2-14 in the text).

a. U.S. Court of Federal Claims (hears tax and other claims against the Federal government). This court formerly was called the U.S. Claims Court. There is only one U.S. Court of Federal Claims and meets most often in Washington, D.C. Decisions are appealed to the U.S. Court of Appeals (Federal Circuit).



b. U.S. Tax Court (hears only tax cases). Taxpayer does not pay the deficiency before trial. Decisions are appealed to the U.S. Court of Appeals (Regional Circuit).

c. Small Cases Division of the U.S. Tax Court (hears only tax cases). No appeal available.

d. U.S. District Courts (hears tax as well as nontax cases). A jury trial is available. Decisions are appealed to the U.S. Court of Appeals (Regional Circuit). See Figure 2.4 on page 2-14 in the text.

13. Small Cases Division. The broken line between the U.S. Tax Court and the Small Cases Division in Figure 2.3 of the text indicates that there is no appeal from the Small Cases Division.

a. $50,000 or less. This court hears cases involving amounts of $50,000 or less.

b. No written record. The proceedings are informal, and there was no written record of such cases before 2002. Some of the more recent cases can now be found on the U.S. Tax Court Internet Website (http://www.ustaxcourt.gov/).

c. Informal Proceedings.

(1) No necessity for the taxpayer to be represented by a lawyer or other tax adviser.

(2) Special trial judges, rather than Tax Court judges, preside over the proceedings.

(3) Decisions are not precedent for any other court and are not reviewable by any higher court.

14. Appellate Courts. The two appellate courts are the Circuit Courts of Appeals (11 geographical circuits, the circuit for the District of Columbia, and the Federal Circuit) and the Supreme Court (see Figure 2.4 in the text).

a. All courts must follow the decisions of the U.S. Supreme Court.

b. A particular Court of Appeals need not follow the decisions of another Court of Appeals.

c. District Courts, the Tax Court, and the Court of Federal Claims must abide by the precedents set by the Court of Appeals of jurisdiction.

d. Appeal to the Supreme Court



(1) Appeal to the Supreme Court is not automatic.

(2) A Writ of Certiorari is a request to appeal a case to the Supreme Court.

(3) If the Supreme Court agrees to hear a case it will grant the Writ. The Court rarely hears a tax case.




JURISDICTION OF THE COURTS OF APPEALS

First Fourth Eighth TenthMaine Maryland Arkansas ColoradoMassachusetts North Carolina Iowa KansasNew Hampshire South Carolina Minnesota New MexicoRhode Island Virginia Missouri OklahomaPuerto Rico West Virginia Nebraska Utah

North Dakota WyomingSouth Dakota

Second FifthConnecticut Canal Zone EleventhNew York Louisiana Ninth AlabamaVermont Mississippi Alaska Florida

Texas Arizona GeorgiaThird CaliforniaDelaware HawaiiNew Jersey Sixth Idaho FederalPennsylvania Kentucky Montana U.S. Court of Federal Virgin Island Michigan Nevada Claims

Ohio OregonTennessee Washington

District of Columbia GuamWashington, D.C. Seventh

IllinoisIndianaWisconsin

WORKING WITH THE TAX LAW - TAX RESEARCH

15. Definition of Research. Tax research is the method whereby one determines the best available solution to a situation that possesses tax consequences.

a. In other words, it is the process of finding a professional conclusion to a tax problem.

b. The problem might originate either from completed or proposed transactions.

16. Tax Research Procedures. Tax research involves the following procedures:

a. Identifying and refining the problem.

b. Locating the appropriate tax law sources.

c. Assessing the validity of the tax law sources.

d. Arriving at the solution or at alternative solutions with due consideration given to nontax factors.



e. Effectively communicating the solution to the taxpayer or the taxpayer’s representative. See Figure 2.6 and Figure 2.7 on pages 2-27 and 2-28 in the text.

(1) A clear statement of the issue.

(2) In more complex situations, a short review of the fact pattern that raises the issue.

(3) A review of the pertinent tax law sources (e.g., Code, Regulations, Revenue Rulings, judicial authority).

(4) Any assumptions made in arriving at the solution.

(5). The solution recommended and the logic or reasoning supporting it.

(6) The references consulted in the research process.

f. Following up on the solution (where appropriate) in the light of new developments.

17. Identifying the Problem. This step consists of gathering all the information about the tax consequences of an existing or a proposed transaction.

18. Refining the Problem. This step generally involves analyzing alternative proposals and the possible tax implications of each option.

LOCATING THE APPROPRIATE TAX LAW SOURCES

19. Locating the appropriate tax law sources. The next step is to research the tax law to fine authoritative sources of the tax law that describe or explain the appropriate tax treatment of various alternative proposals. The major publishers of tax research services are:

a. Standard Federal Tax Reporter, Commerce Clearing House.

b. United States Tax Reporter, Research Institute of America.

c. Federal Tax Coordinator 2d, Research Institute of America.

d. Tax Management Portfolios, Bureau of National Affairs.

20. Working with Tax Services. Instruction in using the various tax services is beyond the scope of this text. However, there are two important observations. First, always check for the most current developments. Second, always read the pertinent Code sections and regulations relevant to the question at hand.



21. Tax Commentary. Various tax publications often discuss topics relevant to the issue being researched. These article will often cite primary sources, thereby reducing the research effort.

ASSESSING TAX LAW SOURCES

22. Interpreting the Internal Revenue Code.

a. The Internal Revenue Code is the tax law, as passed by Congress.

b. Because it is law, it is written using rather precise legal terminology that is, sometimes, difficult to interpret. Further, several Code sections are often interrelated, further compounding interpretation.

c. Nonetheless, because it is the governing law, it should be the starting point for most tax research.

23. Assessing the Significance of a Treasury Regulation.

a. Treasury Regulations are the official interpretation of the Code. As such examining agents (Internal Revenue Agents) must give the Regulations the same weight as the Code when interpreting tax law.

b. Taxpayers disagreeing with the interpretation of a Treasury Regulation have the burden of proof to show that the Regulation is not consistent with the Code and Committee Reports.

c. Occasionally Congress will direct the Secretary of the Treasury to prescribe regulations to administer Code provisions. These so called Legislative Regulations have the force of law.

24. Assessing the Significance of Other Administrative Sources of the Tax Law.

a. Revenue Rulings. Revenue Rulings reflect the IRS interpretation of the tax law in specific situations. They do not, however, have the force of law and can be overturned in court.

b. Actions on Decisions. When the IRS disagrees with a court decision, it may decide, for a variety of reasons, not to appeal the decision. In such situations, it will often announce its non acquiescence. Thus, taxpayers being audited for similar issues will need to litigate in order to prevail.

25. Assessing the Significance of Judicial Sources of the Tax Law. While court cases have precedential value, the weight of that value depends on several variables:

The level of the court



The legal residence of the taxpayer The type of decision The weight of the decision Subsequent events

26. Assessing the Significance of Other Sources.

a. Primary Sources. The Constitution, the Internal Revenue Code, Treasury Regulations, judicial decisions, Committee Reports, tax treaties, and IRS pronouncements are the primary sources of the tax law.

b. Secondary Sources. Legal periodicals, treatises, legal opinions, General Counsel Memoranda, and written determinations are secondary sources.

c. Substantial Authority. Generally, primary sources are considered authoritative while secondary sources are not.

(1) The exception is that, for purposes of the accuracy related penalty, some secondary sources are considered substantial authority.

(2) Note, most IRS publications intended to provide helpful individual and business tax guidance (e.g., pub. 17), are not considered authoritative sources.

COMMUNICATING TAX RESEARCH

27. Emphasize the six bullet points in the text about the importance of communicating the results of tax research.

COMPUTERS AND TAX RESEARCH

28. Online Commercial Services. There are several online tax research services (see Exhibit 2.2 on page 2-28 in the text). These services generally provide both primary and secondary sources of the tax law and allow researchers to search, link, store, and export the results of tax research.

29. Additional Online Sources. Exhibit 2.3 on page 2-29 in the text lists several web sites that provide tax information.

a. The IRS provides all of its forms and publications free on line.

b. The courts, (including the tax court) also provide free access to opinions.

c. The Internal Revenue Code and the Treasury Regulations are available free from several sources including the IRS web site.



d. Additionally, there are a variety of web sites and blogs that provide free tax related information and analysis. (Note that quality of these sources may be difficult to ascertain.

TAX RESEARCH ON THE CPA EXAM

30. The Uniform CPA Exam. Tax questions on the CPA exam are included in the three-hour regulation section. In addition to multiple choice questions, there are simulations that provide some authoritative literature that the candidate must research in completing the case study.

31. The AICPA maintains a web site to assist with the Uniform CPA Exam; www.cpa-exam.org. The site includes tutorials and sample tests including simulations.




Primary and Secondary Tax Sources

Primary Secondary

16th Amendment to Constitution XTax Treaty XInternal Revenue Code Section XU.S. Supreme Court Decision XU.S. Circuit Court of Appeals Decision XTax Court Memorandum Decision XTax Court Regular Decision XU.S. District Court Decision XU.S. Court of Federal Claims Decision XSmall Cases Division of U.S. Tax Court XFinal Regulation XTemporary Regulation X *Proposed Regulation XRevenue Ruling XRevenue Procedure XSenate Finance Committee Report XBluebook XLetter Ruling XTechnical Advice Memorandum XActions on Decisions XDetermination Letter XHarvard Law Review article XField Service Advice XGeneral Counsel Memorandum X

* For three years.



Figure 2--2

LOCATION OF JUDICIAL SOURCES

USTC AFTR F.Supp. F.3d Cls.Ct. S.Ct.Series Series Series Series Series Seriesa

U.S. DistrictCourts(tax cases) Yes Yes Yes No No No

U.S. TaxCourtb No c Noc No No No No

U.S. Courtof FederalClaimsd

(tax cases) Yes Yes No e Yese Yese No

U.S. Courts ofAppeal(tax cases) Yes Yes No Yes No No

U.S. Supreme Ct.(tax cases) Yes Yes No No No Yes

U.S. DistrictCourts f

(all cases) No No Yes No No No

U.S. Courts ofAppeal(all cases) No No No Yes No No

U.S. Supreme Court(all cases) No No No No No Yes



Notes:

a Answers also apply to the United States Supreme Court Reports (abbreviated U.S.) and to the United States Reports, Lawyers Edition (abbreviated L.Ed.).

b Regular (not Memorandum) decisions are published by the U.S. Government Printing Office in Tax Court of the United States Reports.

c Both CCH and RIA (formerly P-H) have separate services for reporting the decisions (both Regular and Memorandum) of the U.S. Tax Court.

d All decisions (both tax and non-tax) of the U.S. Court of Federal Claims are published by the U.S. Government Printing Office in the Claims Court Reporter Series. From 1960 to October 1, 1982, Court of Claims decisions were published in the Court ofClaims Reporter Series.

e From 1932 to 1960, the Court of Claims decisions were published in the F.Supp. Series. Beginning October 1982, the Claims Court decisions are published in the Claims Court Reporter. Beginning October 30, 1992, the Claims Court underwent a further name change. The new designation, U.S. Court of Federal Claims, begins with Volume 27 of the formerCl.Ct. (West citation) now abbreviated as Fed.Cl.

f “All cases” has reference to non-tax as well as tax decisions. Thus, it would include such varied issues as interstate transportation of stolen goods, civil rights violations, and anti-trust suits.


NOTES


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