ACTY 6240 - Chapter 2 Homework PDF

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Chapter 2 Homework DQ 1-5, 8, 13-21; Ex. 59-68 1. What are the purpose(s) of tax research? 1. The purpose of tax research is to answer taxation questions relevant to the researcher’s needs. 2. What are the six basic steps in conducting tax research? Briefly discuss each step in the tax research process. 2. The six basic steps in conducting tax research are establish the facts, identify the issues, locate authority, evaluate authority, develop conclusion and recommendations, and communicate the recommendations. The first step is to establish the facts, which means an evaluation of the client’s factual situation. It is important for the researcher to fully understand all the fact that could affect the related tax outcome. Although this is the first step, it should involve several rounds of fact gathering, including those necessitated by additional tax questions that arise when searching for or evaluating the pertinent tax authority. The second step is to identify the issues, which can be the most difficult element of a tax research problem. Sometimes issues in a closed-fact tax research problem arise from a client with the IRS, so it is easily to ascertain the issue or issues. However for most research projects, the researcher must develop the list of issues divided into two major categories, fact issues and law issues. The third step is to locate legal authority that relates to the issues. This authority may come from many sources and can be classified as either primary or secondary authority. The fourth step is evaluate the usefulness of the located authority that deals with the client’s problems because not all tax authority carries the same precedential value. While evaluating the authority for the issue under research, new issues not previously considered by the researcher may become known meaning they may be required to gather additional facts, find additional pertinent authority, and evaluate the new issues. The fifth step (after several iterations of the first four steps) is to arrive at conclusions for the tax issues raised. This is important because of unresolved issues of law or incomplete descriptions of the facts and the client’s personal preferences must also be considered. The “ideal” solution for tax purposes may be entirely impractical because of other factors that are integral to the tax question. It is important for the tax practitioner to use professional judgment in making recommendations based on the conclusions drawn from the tax research process. If there are unresolved issues, the researcher might inform the client about alternative possible outcomes of each disputed transaction and give the best recommendation for each. The researcher might detail a recommendation of the “best” solution from a tax perspective as well as one or more alternative recommendations that may represent much more workable solutions. In every case, the researcher should discuss with the client the pros and cons of all reasonable recommendations and the risks associated with each course of action. The sixth and final step is to communicate the results and recommendations of the research. The results are usually summarized in a memorandum to the client file and in a letter to the client containing a

restatement of the pertinent facts as the researcher understands them, any assumptions the researcher made, the issues addressed, the applicable authority, and the practitioner’s recommendations. 3. What are the two chief tax research skills, as identified in this text? Explain the importance of each basic skill. 3. The two chief tax research skills, as identified in this text are mechanical techniques and a combination of reasoning and creativity. Mechanical techniques are important to identify and locate the tax authorities that relate to solving a problem. A combination of reasoning and creativity is more difficult to learn because the researcher must begin with native intelligence and imagination and add training and experience properly to apply the information found. Creativity is important to explore the relevant relationships among circumstances and problems at hand to find a satisfying (and defensible) solution because there in many cases no legal authority will exist that is directly on point for a problem. This means that the researcher must combine seemingly unrelated facts, ideas, and legal authority to arrive at a truly novel conclusion. 4. The tax researcher must find the facts as the first step in tax research. Give examples of the kind of information that a tax practitioner might want to obtain. 4. Examples of the kind of information that a tax practitioner might want to obtain are the client’s tax entity (e.g., individual, corporation, trust), the client’s family status and stability, the client’s marginal tax rates (past, present, and projected), the client’s place of legal domicile and citizenship, the client’s motivation for the transaction, the relationships among the client and other parties who are involved in the transaction, whether special rules apply to the taxpayer because of the type of business in which the taxpayer is engaged (e.g., farmer, fisherman, longterm contractor), and whether the transaction is proposed or completed. 5. What are some of the potential pitfalls in the first step of the tax research process? 5. Some of the potential pitfalls in the first step of the tax research process are the client will, wittingly or not, omit information that is vital to a solution. The client not think the information is important or they might want to hide fit for person reasons. It is important that the researcher persist until all the available is known and record all the details that the client discloses. Another potential pitfall is that the researcher must be aware of the non-tax considerations that are pertinent to the client’s situation.

8. Identify and briefly describe the two major types of tax research issues.

8. The two major types of tax research issues are fact issues and law issues. Fact issues are concerned with information having an objective reality, such as the dates of transactions, the amounts involved in an exchange, reasonableness, intent, and purpose. Law issues are those that arise when facts are well established, but it is not clear which portion of the tax law applies to the issue because of an apparent conflict among code sections, because a genuine uncertainty may exist as to the meaning of a term used in the Internal Revenue Code, or because there are no provisions in the law that deal directly with the transactions at hand. 13. Classify each of the following items as a primary (P) or secondary (S) tax research authority: a. The Internal Revenue Code b. A Tax Court case c. A textbook on corporate taxation d. Treasury Regulations e. An IRS revenue ruling 13. a. P

b. P

c. S

d. P

e. P

14. Classify each of the following items as a primary (P) or secondary (S) tax research authority: a. A U.S. District Court Case b. An IRS revenue procedure c. Code § 213 d. The Daily Tax Report newsletter e. An article on recent tax rulings on inventory valuation in Practical Tax Strategies 14. a. P

b. P

c. P

d. S

e. S

15. Classify each of the following items as a primary (P) or secondary (S) tax research authority: a. An article in the Journal of Taxation b. Taxes on Parade (a newsletter) c. A U.S. Supreme Court decision on a tax matter d. The U.S./Australia Income Tax Treaty e. A discussion on earnings and profits in the Checkpoint Tax Coordinator 2d Tax Service 15. a. S

b. S

c. P

d. P

e. S

16. Briefly characterize and distinguish between annotated tax services and topical tax services.

16. Annotated tax services are organized in Internal Revenue Code section order, while the topical tax services are arranged by topic, as defined by the publisher’s editorial staff. This difference has become significant blurred with the use of computers because with hypertext linking any of the tax services can be used from a Code or topical orientation. 17. What is a court reporter? Name three organizations that produce court reporters. 17. A court reporter is where court decisions are published in sets of bound volumes. Three organizations that produce court reporters are the Government Printing Office (GPO), West Publishing Company, and Thomson Reuters. 18. Who publishes each of the following court reporters? a. United States Tax Cases b. Federal Reporter c. American Federal Tax Reports d. Tax Court of the U.S. Reports 18. a. Commerce Clearing House (CCH) c. Thomson Reuters

b. West Publishing Company d. Government Printing Office (GPO)

19. What kind of information can be found in a citator? 19. The kind of information that can be found in a citator are reference sources that enable the researcher to follow the judicial history of court cases. 20. Name the primary bound publication where IRS pronouncements (i.e., Revenue Rulings) can be found. 20. The primary bound publication where IRS pronouncements (i.e., Revenue Rulings) can be found is the Internal Revenue Bulletin. 21. Tax practitioners use the term “tax service” regularly. What is a tax service? 21. A tax service is a coordinated set of reference materials that organize the tax authority into a usable format, making the Internal Revenue Code much more accessible. They are useful because they often provide simplified explanations with footnote citations as well as examples illustrating the application of the law, which may led to the tax researcher to the primary source that is pertinent to the question at hand. 59. Jennifer owns 200 acres of land on which she grows flowers for sale to local nurseries. Her adjusted basis in the land is $30,000. She receives condemnation proceeds of $20,000 from the state for 10 acres of her land on which a new freeway will be built. The state also pays her $30,000 for the harmful effects that the increased auto

exhaust might have on her flowers. List as many tax research issues as you can to determine the tax consequences of these transactions. Do not attempt to answer any of the questions you raise. Simply identify the research issues. 59. Some of the tax research issues are: -Do the condemnation proceeds and/or harmful effects payment constitute gross income to Jennifer? -If the condemnation proceeds and/or harmful effects payment constitute gross income to Jennifer, is it treated as active, passive, or investment income? -If the condemnation proceeds and/or harmful effects payment constitutes gross income to Jennifer, when should the amount be included in Jennifer’s income? -Should Jennifer consider these payments in the adjusted basis in the land? 60. Joey parked his car on the top of a hill when he went to watch the X Games in San Diego. He did not properly set his brakes or curb the wheels when he parked the car. When he returned from the games, he found his car had rolled down the hill, smashed into Nick’s house, and injured Nick, who was watching TV in his den. Joey does not have car insurance. List as many tax research issues as you can to determine the tax consequences of this accident. Do not attempt to answer any of the questions you raise. Simply identify the research issues. 60. Some of the tax research issues are: -How money were the damages from smashing into Nick’s house and injuring Nick? -Can the payment of damages be used as a deduction? -Did Nick request the money from Joey or file a lawsuit? -If there was a lawsuit, has there been a judgement? -If there has been a judgement, were there punitive charges as well? -Can the payment of punitive charges be used as a deduction? -What penalties did he face for not having car insurance? -If there were penalties, can these be used as a deduction? 61. John and Marsha are married and filed a joint return for the past year. During that year, Marsha was employed as an assistant cashier at a local bank and, as such, was able to embezzle $75,000, none of which was reported on their joint return. Before the defalcation was discovered, Marsha disappeared and has not been seen or heard from since. List as many tax research issues as you can to determine the tax consequences of this crime. Do not attempt to answer any of the questions you raise. Simply identify the research issues. 61. Some of the tax research issues are: -How long ago did Marsha disappear? -Was an official report with the police filed? -Could John be considered abandoned by his spouse? -What filing status would John be considered?

-Could this be amended? -How was the embezzled money used? -When should the embezzled money been included in Marsha’s income? 62. In the current year, Dave receives stock worth $125,000 from his employer. The stock is restricted and cannot be sold by Dave for seven years. Dave estimates the stock will be worth $300,000 after the seven years. List as many tax research issues as you can to determine the tax consequences of this transaction. Do not attempt to answer any of the questions you raise. Simply identify the research issues. 62. Some of the tax research issues are: -Why did he receive the stock? -What other compensation did he receive in the current year? -Is the value of stock constitute gross income to Dave? -If the value of stock constitutes gross income to Dave, is it treated as active, passive, or investment income? -If the value of stock constitutes gross income to Dave, when should the amount be included in Dave’s income?

63. On December 1, 2014, Ericka receives $18,000 for three months’ rent (December 2014, January 2015, and February 2015) for an office building. List as many tax research issues as you can to determine the tax consequences of this transaction. Do not attempt to answer any of the questions you raise. Simply identify the research issues. 63. Some of the tax research issues are: -Why did they receive three months’ of rent at once? -Is there any relationship between Ericka and the renter? -Is the payment subject to any restrictions? -Should the payment of rent be divided between 2014 and 2015? -Was there a security fee or deposit included? -If so,which year should it be included in? 64. Formulate a search query to determine whether your client is required to include in gross income the proceeds from redemption of a tax-exempt bond, purchased in 1998 and called by the school district this year. Redemption proceeds were $190,000, and the 1998 purchase price on the secondary market was $176,000. Give an example of an online search query using only the following Checkpoint connectors: “and,” “or,” “/n,” and “not.” 64. An example of an online search query is gross income and redemption of a tax-exempt bond.

65. Formulate a search query to determine the provisions of the treaty between the United States and Germany relative to graduate fellowship income received by a business student during a summer internship with the German Department of Price Controls. Give an example of an online search query using only the following Checkpoint connectors: “and,” “or,” “/n,” and “not.” 65. An example of an online search query is United States and Germany treaty and graduate fellowship income. 66. Formulate a search query to determine whether your client is required to capitalize fringe benefits and general overhead that is attributable to employees who are building an addition to your client’s factory during a “slack time” at work. Give an example of an online search query using only the following Checkpoint con- nectors: “and,” “or,” “/n,” and “not.” 66. An example of an online search query is capitalize fringe benefits and general overhead and slack time. 67. Formulate a search query to determine whether your client can retroactively elect to change its accounting method. Give an example of an online search query using only the following Checkpoint connectors: “and,” “or,” “/n,” and “not.” 67. An example of an online search query is retroactively elect and accounting method 68. Formulate a search query to find all the cases in which the word “constructive” occurs within 10 words of the word “dividend.” Give an example of an online search query using only the following Checkpoint connectors: “and,” “or,” “/n,” and “not.” 68. An example of an online search query is constructive/10 dividend....