...Chapter C:1 Tax Research Learning Objectives After studying this chapter, the student should be able to: 1. Distinguish between closed fact and open fact tax situations. 2. Describe the steps in the tax research process. 3. Explain how the facts influence tax consequences. 4. Identify the sources of tax law and assess the authoritative value of each. 5. Consult tax services to research an issue. 6. Apply the basics of Internet-based tax research. 7. Use the citator to assess authorities. 8. Describe professional guidelines that CPAs in tax practice should follow. 9. Prepare work papers and communicate to clients. Areas of Greater Significance Since this will usually be a student’s first exposure to tax research, the importance of the facts to the tax results, federal tax services and the citator should be discussed. The widespread use of Internet-based databases for tax research makes this means of tax research much more important. An effort should be made to introduce Internet-based searches to the students if at all possible. The text discusses two types of professional guidelines for CPAs in tax practice. Areas of Lesser Significance In the interest of time, the following areas may be omitted: Sample work papers and client letter (Appendix A). Problem Areas for Students The following areas may prove especially difficult to students: ...
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...Tax Research Exercise 1 1) 147(c)(2)(C)(iii)Insolvent farmer.—For purposes of clause (i), farmland which was previously owned by the individual and was disposed of while such individual was insolvent shall be disregarded if section 108 applied to indebtedness with respect to such farmland. 2) Federal Tax Regulations, Regulation, §1.351-1., Internal Revenue Service, Transfer to corporation controlled by transferor Click to open document in a browser | Reg. § 1.351-1 does not reflect P.L. 96–589, P.L. 100-647 or P.L. 101-239. | | (a) (1) Section 351(a) provides, in general, for the nonrecognition of gain or loss upon the transfer by one or more persons of property to a corporation solely in exchange for stock or securities in such corporation if, immediately after the exchange, such person or persons are in control of the corporation to which the property was transferred. As used in section 351, the phrase "one or more persons" includes individuals, trusts, estates, partnerships, associations, companies, or corporations (see section 7701(a)(1)). To be in control of the transferee corporation, such person or persons must own immediately after the transfer stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 per cent of the total number of shares of all other classes of stock of such corporation (see section 368(c)). In determining control under this section, the fact that any corporate...
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...Should the Rattameyers include the rent, the Disneyland vacation, and the renovation/remodeling expenses in their income tax return? The expenses the Rattameyers family should not include in their return income tax are the cost of rent and renovation/remodeling. Under IRC Sec. 61(a)(5) gross income derived from any type of sources and one of them is received rent or accrued for the occupancy of real estate or the use of personal property. However, IRC Sec. 280 A(g) states, “If a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxpayer year, then the income derived from such use for the taxable year shall not be included in the gross income of such taxpayer under section 61,” (mentioned above). Although, the Letter Ruling 8104117 with references to the IRC Sec. 280 A(g) issued by Internal Revenue Service applies only to the taxpayers who request it, this could not be a used as a proper example because there is enough substantial authority that supports the exclusion of rent from the Rattameyers’ gross income. In addition, they rented the house to the show producers for less than 15 days and the improvements were made by them as tenants. There is also substantial authority to exclude cost of renovation/remodeling from the Rattameyer’ income tax return. IRC Sec. 109 that states, “Gross income does not include income derived by a lessor or real property on the termination...
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...Facts Charley Long, a truck driver, works for a seafood company in Mobile, Alabama. Charley helps to deliver fresh seafood to customers from Mobile with the company’s truck. Charley leaves Mobile every weekday at 4:00pm and arrives his last stop at 12:00 midnight. It’s up to Charley whether to drive straight back or spend a night along the road as Charley’s company doesn’t reimburse any his lodging and food expense. Charley sometimes sleeps in his cab in which is equipped with sleeping facilities, having one meal on his way. Occasionally, Charley stays in motels during which he will eat two meals. The IRS disallowed all his expenses generated in his trips, as IRS believes that his expenses are personal expenses. Issues 1, Are Charley’s travel expenses qualified as unreimbursed employee expense? 2, Can Charley deduct the expenses when he sleeps in the cab? 3, Can Charley deduct the expenses when he sleeps in the motel? Solutions to issues 1, Yes. Charley’s travel expenses are related to his employment with purpose of pursuing a trade or business activity. His employer does not reimburse Charley’s expenses. Charley’s travel expenses should be unreimbursed employee expenses. 2, No. According to U.S. vs. Correll, 389 U.S. 299 (1967), the Court ruled unfavorably for the taxpayer in the situation where a traveling salesman pulled his car over to the side of the road and slept for several hours during trips. Charley cannot deduct his expenses on the night that he spent...
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...reported to the Environmental Protection Agency that his employer was illegally dumping chemicals into a river. Upon further review of the matter, Murray’s statements were conducted to be true and a penalty was given to his employer. After getting news about the penalty, Murray’s employer dismissed him from the organization and made an effort to prevent Murray from being able to work for any other employer. He later sued the company, and was compensated an award for “damages to his personal and professional reputation and for his mental suffering.” Murray defines his awarded damages as a recovery of his human capital and not part of his adjusted gross income. Murray is now concerned whether the Internal Revenue Service has the power to tax the award. In addition to receiving his award, Murray’s award categorizes as a “whistleblower award” according to Code Sec. 7624 under IRS: 63,060.05, “Informants provide leads upon which the Criminal Investigation Division (CID) may base a criminal investigation. The most common informants are former spouses and fired employees.” (Fed. Cl. 2006). ISSUES: Whether Murray, who was fired by his employer due to retaliation of him reporting illegal chemical dumping, and later was compensated for damages to his personal and professional reputation and for his mental suffering, would need to pay taxes for his compensation? Can Murray avoid reporting his award as Adjusted Gross Income? What portion, if any, can he deduct from his Adjusted Gross...
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...January 21, 2013 Mr. Jones’s Settlement Considerations Memorandum This memorandum discusses tax information in relation to Mr. Jones’s potential settlement against Bilbo Feed. There are multiple items that should be considered from Mr. Jones’s case that may have important tax exclusion implications. Guidance on how parts of Mr. Jones’s settlement may be tax excluded can be found in the Tax Court rulings from Kenneth R. Harris v. Commissioner. Holdings of this case include some similarities to the loss that Jones incurred. Harris received a large settlement amount from a fire that destroyed his bee farm just as Jones lost a significant portion of his miniature giraffe business. The Tax Court concluded that Harris was not entitled to have his settlement excluded from his taxable income under Code Sec. 104(a)(2), however I believe that Jones may be able to avoid the same outcome if he brings some of the following points to his settlement meeting. The IRC § 104 (a)(2) states that any damages received on account of personal physical injuries or physical sickness can be excluded from gross income. This is the main discussion point that Mr. Jones should bring to his settlement agreement. Harris was not able to use this exclusion because he could not provide evidence that any part of his settlement was for physical injuries as he argued they were. Mr. Jones would likely be able to avoid this same fate if his doctor provides evidence that his extended hospitalization was due...
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...Paper Assignment William has made an estimation that if his client takes a more favorable position on the tax return then there is a forty eight percent chance that the client's position will be sustained upon audit or judicial proceeding. As a professional tax preparer William should have some sort of supporting documentation which would have led him to come up with the forty eight percent chance. According to the AICPA's Interpretation No. 1-1, "Reporting And Disclosure Standards" from October 20, 2011 the forty eight percent would fall into the Substantial Authority Standard. "he substantial authority standard is an objective standard and is satisfied if the weight of the authorities supporting the position is substantial in relation to the weight of authorities supporting a contrary treatment. In practice, the substantial authority standard generally is interpreted as requiring approximately a 40 percent likelihood that the position will be upheld on its merits if it is challenged." According to Internal Revenue Code Section 6694(a)(2) (A) "Except as otherwise provided in this paragraph, a position is described in this paragraph unless there is or was substantial authority for the position." Since William estimated a forty eight percent likelihood then he is well within the Substantial Authority category and will not receive a penalty for signing the return as a tax preparer. In this case the taxpayer does not have to make a disclosure since there is substantial authority...
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...Memo To: Hunter Hart From: Student Date: Re: 2010 Tax Research Question Facts: During 2010, Hunter Hart lived with Helen Hunt for the whole year in Ferndale, MI. Helen is a 19 year old, single, female U.S. citizen. Hunter supported Helen because her income for the whole year was $3,640 from waitressing jobs. Hunter also was not married for the whole year of 2010. In Michigan, it is a misdemeanor for unmarried individuals to cohabit. Issue: Can Hunter claim Helen as a dependent, qualifying relative and what should his filing status be? Authorities: IRC 152 (d) IRC 2 (b) (1) (A) Tessie A. Manuel v. Commissioner, TC Summary Opinion 2010-111 Conclusion: Hunter can claim Helen as a qualifying relative because she passes all the tests of being a qualifying relative (relationship test, gross income test, support test and qualifying child test). Also, Hunter must file as single because he is not married and does not meet the qualifications to file for Head of Household. Support & Analysis: According to IRC 152 (d), Helen is a qualifying relative to Hunter because she meets all four of the qualifications. The first qualification in IRC 152 (d) (1) (A), deals with the relationship test. Helen meets the relationship test because she “has the same principal place of abode as the taxpayer and is a member of the taxpayer's household.” The second qualification to be a qualifying relative, stated in IRC 152 (d) (1) (B), affirms that one’s “gross income for...
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...Tax Research 1．A higher federal income tax rate will benefit the overall economy; however, it is closely related to people’s incentive to work and government spending. A higher income tax rate hurts people’s incentive to produce, since it lowers the after-tax return from work. The higher the tax rate, the more time people spend evading taxes and the less time they spend on more productive activity, and also, it depends on the current tax rate levels and how much the tax rate increases. Considering a low income tax society, say 5%, a 1% increase in the income tax rate will not significantly reduce the productivity compared with another society with 90% income tax. On the other hand, a lower federal income tax rate will be some kind of bad for the overall economy, which will decrease not only the income of the country, but also the life levels of the whole country citizens. There is no doubt that with less money, the government will care less about the foundational installations of the country, the health care of the citizens, even the public security. What is more, even though the less income tax rate will be incentive for some people who would not like to donate their money to the country to work harder to earn much more money, leading the high production of the country, the extra money is far more less to overweigh the decrease of the levels of the whole country. However, a lower income tax rate on wage income can increase the labor supply. Based on the labor demand function...
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...Tax Research Problem 6-59 Parent Corporation owns 85% of the common stock and 100% of the preferred stock of Subsidiary Corporation. The common stock and preferred stock have adjusted bases of $500,000 and $200,000, respectively, to Parent. Subsidiary adopts a plan of liquidation on July 3 of the current year, when its assets have a $1 million FMV. Liabilities on that date amount to $850,000. On November 9, Subsidiary pays off its creditors and distributes $150,000 to Parent with respect to its preferred stock. No cash remain to be aid to Parent with respect to the remaining $50,000 of its liquidation preference for the preferred stock, or with respect to any common stock. In each of Subsidiary’s tax years, less than %10 of its gross income has been passive income. What are the amount and character of Parent’s loss on the preferred and common stock? First, it should be determined whether the transaction meets nonrecognition requirements of Sec. 332. There are two cases that are on point in determining if Sec.332 applies to this liquidation, Spaulding Bakeries Inc., 27 T.C. 684 (1957) and H.K. Porter Co., Inc. 87 T.C. 689 (1986) In Spaulding Bakeries Inc., 27 T.C. 684 (1957), Spaulding Bakeries, the taxpayer purchased all the outstanding common and preferred stock of Hazleton Bakeries, Inc. between 1930 and 1946. In 1950, Hazleton Bakeries was liquidated and the taxpayer received the assets distributed in the liquidation. The distributed assets failed to cover the preferred...
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...should be included in taxable year-end gross income, and if it should be taxed, at what date should it be taxed? Another issue arises when Linton sells the car to an unrelated party on December 22, 2015. The market value of the car is $50,000 and he sold it for $35,000, creating a $15,000 capital loss. The issue in question is, is the capital loss on the sale of the car deductible? Under IRC §74(a) gross income includes amounts received as prizes and awards, except otherwise provided in this section. IRC §74(b) states that gross income does not include amounts received as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement. As quoted from Federal Tax Case Paul v. Hornung: “Under the provisions of section 74, gross income includes amounts received as prizes and awards unless section 117 (relating to scholarships and fellowship grants), or the exception set forth in subsection [pg. 436](b) is applicable. We feel confident that Congress had no intention of allowing professional football to constitute a type of activity for which proficiency could be recognized with an exempt award under section 74(b). Professional football cannot be viewed as an...
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...Tax Research and Bibliography University Instructor: Introduction This paper addresses three aspects of corporate tax research and its associated bibliographies to clarify the subject matter, thus providing credence to the work and its authors. Three subject have been explored; first examined was ‘equal opportunity and disabled workers’, next was the deductibility of tuition, and finally, the matters of ‘tax court and TEFRA’ were looked at and provided a nice grouping of responses over ten years. Research Results Subject 1: Equal opportunity and disabled workers, returned one result in ten years. Lytes v. DC water & sewer auth. No. 08-7002 936 (UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT 2005) A (Appellant) former employee sought judicial review of the United States District Court for the District of Columbia's entry of summary judgment in favor of appellee, his former employer, on his claim that the employer refused to accommodate his disability and then terminated his employment, in violation of the Americans with Disabilities Act of 1990 (ADA) and while the appeal was pending the ADA Amendments Act of 2008 became law. Only the district court's holding that the employee was not actually disabled was challenged and in applying the ADA prior to its amendment, the employee failed to discuss his functional capacity at the time of the alleged discrimination. In fact, the employee never discussed or provided any proof...
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...Research Memo Date: February 27, 2014 Preparer: Michele Reviewer: Brian Subject: Personal use of Delta Skymiles acquired from company purchased business trips Facts: Latrell recently used his Delta Skymiles to purchase a free roundtrip ticket to Milan, Italy (value $1,200). The frequent flyer miles used to purchase the ticket generated from Latrell’s business travel as a CPA. Latrell’s employer paid for his business trips, and he did not get taxed on the travel reimbursements. Issue: How much income, if any, does Latrell have to recognize because of the purchasing an airline ticket with Skymiles earned from business travel? Authorities: IRS Announcement 2002-18 Conclusion: According to the IRS Announcement 2002-18, Latrell does not need to recognize any of the frequent flyer miles ($1,200 value) used when he purchased his round trip ticket to Milan, Italy. The miles redeemed were for a free airline ticket and he did not convert the miles to cash; so there is no taxable income from the transaction. Analysis: The IRS Announcement 2002-18 states “these promotional benefits may generally be exchanged for upgraded seating, free travel, discounted travel, travel-related services, or other services or benefits. Inquiries centered on the taxability of frequent flyer miles or other promotional items that are received as the result of business travel and used for personal purposes. There are numerous technical and administrative issues relating to these benefits on...
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...February 5, 2013 TAX FILE MEMORANDUM To : Prof. C. Cruz From : Vidia Mamesah Subject: Research Problem 1 Murray Today, I spoke with Mr. Murray with respect to his letter regarding tax assistance. He wants to know that his recent award for damages to his personal and professional reputation is taxable. Mr. Murray reported to the Environmental Protection Agency that his employer was illegally dumping chemicals into a river. His charges were true, and Mr. Murray’s employer was fined. In retaliation, Mr. Murray’s employer fired him and made deliberate efforts to prevent Murray from obtaining other employment. Mr. Murray sued the employer, claiming that his reputation had been damaged. Mr. Murray won his lawsuit and received an award for damages to his personal and professional reputation and for his mental suffering. He argues that he was awarded damages as recovery of his human capital and a recovery of capital is not income. Therefore the Federal government does not have the power to tax the award. ISSUES: Is the recent award taxable? Income exclusions: damages on account of personal injury or sickness-physical vs. emotional injury. CONCLUSION: Section 104(a) (2) provides that excludes from gross income the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness. Emotional distress is not considered a physical...
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...To: Mr. Keith’s Estate Facts: 1. Mr. Keith and Mr. Lars were business partners for 30 years. 2. Each partner had a life insurance policy on the other partner so that the insurance proceeds could be used to purchase the deceased partner’s interest in partnership from his estate. a. Each partner was allowed veto power over any beneficiary that was chosen or changed on the life insurance policy that was on his own life. 3. Mr. Keith died recently and Mr. Lars received the $500,000 life insurance proceeds. a. Mr. Lars did use the proceeds to purchase Mr. Keith’s interest in their partnership from Mr. Keith’s estate. Issues and Analysis: Did Mr. Keith’s veto right over the beneficiary designation give him “incidents of ownership”? Reg. §20.2042-1 (c)(4) Proceeds of life insurance (being capable of changing the beneficial ownership in the policy gives Mr. Keith “incidents of ownership” based on this Reg. and IRC 2042) Would this require Mr. Keith’s estate to include the insurance proceeds of $500,000 in his gross estate? §2042 Proceeds of life insurance. (If Mr. Keith has incidents of ownership the proceeds will be included in his gross estate) Is there a problem with the life insurance proceeds being used to purchase the deceased individuals interest in the partnership from the deceased’s estate? §2042 Proceeds of life insurance (this would cause the life insurance proceeds to be included in gross estate if life insurance proceeds, even if owned by another...
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