Chapter 5 Tax Research McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

5-2 Objectives  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

5-3 The 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

5-4 The Tax Research Process Graphically

5-5 Step 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

5-6 Step 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?

5-7 Step 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

5-8 Step 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

5-9 Step 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

5-10 Strategies 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 valuable in leading to researcher to relevant primary authorities, and may be written in less technical language

5-11 Using Commercial Tax Services to Locate Primary Authorities  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

5-12 Using Commercial Tax Services to Locate Primary Authorities  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

5-13 Using Commercial Tax Services to Locate Primary Authorities  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

5-14 Step 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

5-15 Step 5: Repeat Steps 1 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

5-16 Step 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

5-17 Conclusion  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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