Chapter 5Chapter 5

Tax Research

McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

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ObjectivesObjectives

Understand and apply the six steps of the tax research process

Identify primary sources of tax law Utilize secondary sources of tax law to locate

primary authorities

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The Tax Research ProcessThe Tax Research Process

Step 1: Understand the client’s transaction and get the facts

Step 2: Identify the tax issues, problems, or opportunities suggested by the facts and formulate specific research questions

Step 3: Locate relevant tax law authority Step 4: Analyze relevant authority and

answer the research questions Step 5: Repeat steps 1 through 4 as

many times as necessary Step 6: Document your research and

communicate your conclusions

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The Tax Research Process GraphicallyThe Tax Research Process Graphically

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Step 1: Get the FactsStep 1: Get the Facts

Researcher must understand client’s motivation, economic objectives, desired outcome, and identified risks

Get the “who, what, when, where, why, and how” of the transaction or proposed transaction

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Step 2: Identify the IssuesStep 2: Identify the Issues

Given the facts, researcher must identify the related tax issues and formulate specific research questions Issues may be quite broad

Example: Is a loss deductible? Research questions should be as precise as possible

Example: Can the loss be recognized? What is the character of the recognized loss? Given the character, to what extent can the loss be deducted in the year of sale?

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Step 3: Locate AuthorityStep 3: Locate Authority

Primary authorities Internal Revenue Code of 1986 Treasury Regulations IRS guidance

Revenue Rulings Revenue Procedures Items representing authority only for taxpayer to whom

issued Private letter rulings Technical advice memoranda

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Step 3 continuedStep 3 continued

Additional primary authorities Judicial decisions – Trial courts

U.S. Tax Court U.S. District Court U.S. Court of Federal Claims

Judicial decisions – Appellate courts 13 U.S. Circuit Courts of Appeals U.S. Supreme Court

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Step 3 continuedStep 3 continued

Secondary authorities Textbooks Professional journals Commercial tax services

Code-arranged services, such as RIA’s United States Tax Reporter, and CCH’s Standard Federal Tax Reporter

Topically arranged services, such as RIA’s Federal Tax Coordinator 2d, CCH’s Federal Tax Service, Law of Federal Income Tax (Mertens), and BNA’s Tax Management Portfolios

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Strategies for Locating Relevant AuthorityStrategies for Locating Relevant Authority

For simpler questions, it may be possible to go directly to the Code, via its topical index, and find the relevant Code section This strategy may not be sufficient, if more

than one Code section seems to apply, or the Code seems too general for the researcher’s specific questions

Secondary authorities are often valuablein leading to researcher to relevant primary authorities, and may be written in less technical language

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Using Commercial Tax Services to Locate Primary Using Commercial Tax Services to Locate Primary AuthoritiesAuthorities

Using the topical index Search a variety of terms related to research questions,

to find relevant references

Using the table of contents Scan for chapters of the service to

locate relevant areas of discussion

Keyword searching in an electronic service Combine words and phrases for a targeted search of all

or any portion of the database

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Using Commercial Tax Services to Locate Primary Using Commercial Tax Services to Locate Primary AuthoritiesAuthorities

Once a starting point has been located, examine related material referenced in the service Read related Code sections, Treasury regulations,

rulings and judicial decisions Use cross-references

(hyperlinks) within the service to explore further

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Using Commercial Tax Services to Locate Primary Using Commercial Tax Services to Locate Primary AuthoritiesAuthorities

When relying on judicial authorities or IRS rulings, use the Citator to check the validity of the opinion Indicates any appeal of a judicial decision Lists subsequent decisions

and rulings that have cited the decision, with a brief indication of the nature of the subsequent reference

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Step 4: Analyze AuthorityStep 4: Analyze Authority

Authorities requiring a factual judgment Compare the authority to the client’s fact pattern If facts are complete and accurate, authority can provide a

definitive answer to the research question Authorities requiring an evaluative judgment

Subjective judgment requiring that a conclusion be inferred from a set of facts – often a ‘facts and circumstances’ test

With evaluative judgments, different observers may draw different conclusions from the same set of facts

An unqualified answer is not possible in this situation, and the IRS may challenge the researcher’s conclusion

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Step 5: Repeat Steps Step 5: Repeat Steps 1 through 41 through 4

Authorities identified during the research process may indicate the need to gather additional facts, not previously considered

Additional facts may suggest additional research questions The researcher must repeat the process as many times as

needed to thoroughly address the tax consequences of the client’s transaction

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Step 6: Communicate Your ConclusionsStep 6: Communicate Your Conclusions

Document research conclusions, via a research memo that includes Statement of the facts Statement of research issue(s) Analysis of relevant authorities Explanation of conclusions Details of advice given to client

Communicate conclusions to the client, often via letter May be less technical than the

research memo, depending on the client’s tax knowledge

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ConclusionConclusion

Tax research is a critical skill for tax practitioners – even the most experienced professionals cannot know the answers to all tax questions!

Tax research can support tax planning, as well as be part of the tax compliance process

Tax research skills must be developed through experience

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