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.Identify relevant and critical facts 2.Determine the issues to be resolved 3.Search for authority 4.Analyze authority. 5.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.Ken and Kelly Jitter were legally separated in 1997 and no longer living together. 2.In 1998 their divorce is finalized. 3.There were two minor children of the marriage. 4.Mr. Jitter lives in the family home. Ms. Jitter rents an apartment. 5.The family home was purchased in 1985 when the parties married. 6.Mr. Jitter pays no alimony. 7.Both Mr. and Ms. Jitter work. 8.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. 9.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. 10.Ms. Jitter pays rent of $525/mo plus utilities. 11.The custody agreement granted joint legal custody but gave Ms. Jitter primary physical custody of the children. 12.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 – 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 (d)(3)(iii) and Notice
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.