L E A R N I N G O B J E C T I V E S
Tax Law
After completing Chapter 2, you should be able to:
L O . 1
Distinguish between the statutory, administrative, and judicial sources of the tax law and understand the purpose of each source.
L O . 2
Locate and work with the appropriate tax law sources.
L O . 3
Understand the tax research process.
L O . 4
Communicate the results of the tax research process in a client letter and a tax file memorandum.
L O . 5
Apply tax research techniques and planning procedures.
L O . 6
Have an awareness of electronic tax research.
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Tax Sources
U
nderstanding taxation requires a mastery of the sources of the rules of tax law. These sources include not only legislative provisions in the form of the Internal Revenue Code, but also congressional Committee Reports, Treasury Department Regulations, other Treasury Department pronouncements, and court decisions. Thus, the primary sources of tax information include pronouncements from all three branches of government: legislative, executive, and judicial.In addition to being able to locate and interpret the sources of the tax law, a tax professional must understand the relative weight of authority within these sources. The tax law is of little significance, however, until it is applied to a set of facts and circumstances. This chapter, therefore, both introduces the statutory, administrative, and judicial sources of tax law and explains how the law is applied to individual and business transactions. It also explains how to apply research techniques and use planning procedures effectively.
A large part of tax research focuses on determining the intent of Congress. Although Congress often claims simplicity as one of its goals, a cursory examination of the tax law indicates that it has not been very successful in achieving this objective. Commenting on his 48-page tax return, James Michener, the author, said “it is unimaginable in that I graduated from one of America’s better colleges, yet I am totally incapable of understanding tax returns.” David Brinkley, the television news commentator, observed that “settling a dispute is difficult when our tax regulations are all written in a foreign tongue whose language flows like damp sludge leaking from a sanitary landfill.”
Frequently, uncertainty in the tax law causes disputes between the Internal Revenue Service (IRS) and taxpayers. Due to these gray areas and the complexity of the tax law, a taxpayer may have more than one alternative for structuring a business transaction. In structuring business transactions and engaging in other tax planning activities, the tax adviser must be cognizant that the objective of tax planning is not necessarily to minimize the tax liability. Instead a taxpayer should maximize his or her after-tax return, which may include maximizing nontax as well as noneconomic benefits.
Tax Sources, 2–2
Statutory Sources of the Tax Law, 2–3 Administrative Sources of the Tax Law, 2–8 Judicial Sources of the Tax Law, 2–13
Working with the Tax Law—Tax Research, 2–22
Identifying the Problem, 2–23 Refining the Problem, 2–24
Locating the Appropriate Tax Law Sources, 2–24 Assessing the Validity of the Tax Law Sources, 2–26
Arriving at the Solution or at Alternative Solutions, 2–30
Communicating Tax Research, 2–30
Working with the Tax Law—Tax Planning, 2–31
Nontax Considerations, 2–31
Tax Avoidance and Tax Evasion, 2–33 Follow-up Procedures, 2–34
Tax Planning—A Practical Application, 2–35 Electronic Tax Research, 2–35
O U T L I N E
L O . 1
Distinguish between the statutory, administrative, and judicial sources of the tax law and understand the purpose of each source.
STATUTORY SOURCES OF THE TAX LAW
Origin of the Internal Revenue Code. Before 1939, the statutory provisions relating to Federal taxation were contained in the individual revenue acts enacted by Congress. Because dealing with many separate acts was inconvenient and confus-ing, in 1939 Congress codified all of the Federal tax laws. Known as the Internal Revenue Code of 1939, the codification arranged all Federal tax provisions in a logical sequence and placed them in a separate part of the Federal statutes. A further rearrangement took place in 1954 and resulted in the Internal Revenue Code of 1954, which continued in effect until 1986 when it was replaced by the Internal Revenue Code of 1986. Although Congress did not recodify the law in the Tax Reform Act (TRA) of 1986, the magnitude of the changes made by TRA of 1986 did provide some rationale for renaming the Federal tax law the Internal Revenue Code of 1986.
The following observations help clarify the codification procedure:
•Neither the 1939 nor the 1954 Code substantially changed the tax law existing on the date of its enactment. Much of the 1939 Code, for example, was incorporated into the 1954 Code; the major change was the reorganization and renumbering of the tax provisions.
•Although the 1986 Code resulted in substantial changes, only a minority of the statutory provisions were affected.1
•Statutory amendments to the tax law are integrated into the Code. For example, the Taxpayer Relief Act (TRA) of 1997, the Internal Revenue Service Restructuring and Reform Act of 1998, the Tax Relief Reconciliation Act of 2001, the Job Creation and Worker Assistance Act of 2002, the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003, the Working
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TAX IN
THE
NEWS
T
AXF
REEDOMD
AYIn income tax history, 1913 was an important year. In that year, the Sixteenth Amendment to the Constitution was ratified:
The Congress shall have power to tax and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
The first income tax legislation that definitely was constitutional was passed that same year. According to the Tax Foundation, Tax Freedom Day fell on April 11, 2004, the earliest in 37 years. Tax Freedom Day is the date on which a taxpayer through working has paid off his or her taxes for the year. Of course, if you lived in Connecticut with the heaviest total tax burden, Tax Freedom Day fell on April 28, 2004. Alaskans paid the least and finished paying off their tax burden on March 26, 2004.
SOURCE: Tax Foundation, “Tax Freedom Day Arrives on April 11th in 2004,” http://www.
taxfoundation.org/taxfreedomday.html.
1This point is important in assessing judicial decisions interpreting provisions of the Internal Revenue Code of 1939 and the Internal Revenue Code of 1954. If the same provision was included in the
Internal Revenue Code of 1986 and has not been subsequently amended, the decision has continuing validity.
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Families Tax Relief Act of 2004, and the American Jobs Creation Act of 2004 all became part of the Internal Revenue Code of 1986. In view of the fre-quency with which tax legislation has been enacted in recent years, it appears that the tax law will continue to be amended frequently.
The Legislative Process. Federal tax legislation generally originates in the House of Representatives, where it is first considered by the House Ways and Means Committee. Tax bills originate in the Senate when they are attached as riders to other legislative proposals.2If acceptable to the House Ways and Means Committee, the proposed bill is referred to the entire House of Representatives for approval or disapproval. Approved bills are sent to the Senate, where they are considered by the Senate Finance Committee.
The next step is referral from the Senate Finance Committee to the entire Senate. Assuming no disagreement between the House and Senate, passage by the Senate results in referral to the President for approval or veto. The passage of JGTRRA of 2003 required the vote of Vice President Dick Cheney to break a 50–50 tie in the Senate. If the bill is approved or if the President’s veto is overridden, the bill becomes law and part of the Internal Revenue Code of 1986.
House and Senate versions of major tax bills frequently differ. One reason bills are often changed in the Senate is that each individual senator has considerable latitude to make amendments when the Senate as a whole is voting on a bill referred to it by the Senate Finance Committee.3 In contrast, the entire House of Representatives either accepts or rejects what is proposed by the House Ways and Means Committee, and changes from the floor are rare. When the Senate version of the bill differs from that passed by the House, the Joint Conference Committee, which includes members of both the House Ways and Means Committee and the Senate Finance Committee, is called upon to resolve the differences. The delibera-tions of the Joint Conference Committee usually produce a compromise between the two versions, which is then voted on by both the House and the Senate. If both bodies accept the bill, it is referred to the President for approval or veto. Former Senator Daniel Patrick Moynihan observed that it is common in the last hours of Congress for the White House and lawmakers to agree on a “1,200-page monster, we vote for it; nobody knows what is in it.” Figure 2–1 summarizes the typical legislative process for tax bills.
The role of the Joint Conference Committee indicates the importance of mise in the legislative process. As an example of the practical effect of the compro-mise process, consider Figure 2–2, which shows what happened to a limitation on contributions by employees to their education Individual Retirement Accounts (now Coverdell Education Savings Accounts) in the Taxpayer Relief Act of 1997.
Referrals from the House Ways and Means Committee, the Senate Finance Committee, and the Joint Conference Committee are usually accompanied by Com-mittee Reports. These ComCom-mittee Reports often explain the provisions of the pro-posed legislation and are therefore a valuable source for ascertaining the intent of Congress. What Congress had in mind when it considered and enacted tax legislation is, of course, the key to interpreting such legislation by taxpayers, the IRS, and the courts. Since Regulations normally are not issued immediately after a statute is enacted, taxpayers often look to Committee Reports to determine congressional intent.
2The Tax Equity and Fiscal Responsibility Act of 1982 originated in the Senate, and its constitutionality was unsuccessfully challenged in the courts. The Senate version of the Deficit Reduction Act of 1984 was attached as an amendment to the Federal Boat Safety Act.
3During the passage of the Tax Reform Act of 1986, Senate leaders tried to make the bill amendment proof to avoid the normal amend-ment process.
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Joint Conference Committee (if the House and Senate differ)
Consideration by the House and Senate Consideration by the House of Representatives Senate Finance Committee Approval or Veto by the President
Incorporation into the Code (if approved by the President or if the President’s veto is overridden)
Consideration by the Senate
House Ways and Means
Committee
■ FIGURE 2–1
Legislative Process for Tax Bills
For child under age 18, allows annual $5,000 contribution.
For child under age 18, allows $500 annual contribution with
phase-outs for higher-bracket taxpayers.*
Allows annual contribution of $500 child tax credit plus $2,000 nondeductible contribution.
House Version
Joint Conference Committee Result
Senate Version
*Subsequent legislation increased the amount to $2,000.
■ FIGURE 2–2 Example of Compromise in the Joint Conference Committee
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Arrangement of the Code. The Internal Revenue Code of 1986 is found in Title 26 of the U.S. Code. In working with the Code, it helps to understand the format. Note, for example, the following partial table of contents:
Subtitle A. Income Taxes
Chapter 1. Normal Taxes and Surtaxes
Subchapter A. Determination of Tax Liability Part I. Tax on Individuals
Sections 1–5
Part II. Tax on Corporations Sections 11–12
In referring to a provision of the Code, the key is usually the Section number. In citing Section 2(a) (dealing with the status of a surviving spouse), for example, it is unnecessary to include Subtitle A, Chapter 1, Subchapter A, Part I. Merely mentioning Section 2(a) will suffice, since the Section numbers run consecutively and do not begin again with each new Subtitle, Chapter, Subchapter, or Part. Not all Code Section numbers are used, however. Notice that Part I ends with Section 5 and Part II starts with Section 11 (at present there are no Sections 6, 7, 8, 9, and 10).4 Tax practitioners commonly refer to some specific areas of income tax law by their Subchapters. Some of the more common Subchapter designations include Subchapter C (“Corporate Distributions and Adjustments”), Subchapter K (“Part-ners and Part(“Part-nerships”), and Subchapter S (“Tax Treatment of S Corporations and Their Shareholders”). In the last situation in particular, it is much more convenient to describe the subject of the applicable Code provisions (Sections 1361–1379) as S corporation status rather than as the “Tax Treatment of S Corporations and Their Shareholders.”
4When the 1954 Code was drafted, some Section numbers were intentionally omitted so that later changes could be incorporated into the Code without disrupting its organization. When Congress
does not leave enough space, subsequent Code Sections are given A, B, C, etc., designations. A good example is the treatment of §§ 280A through 280H.
TAX IN
THE
NEWS
T
HOSED
ISAPPEARINGD
EPENDENTSTax law changes can have unforeseen or peculiar impacts. In 1986, 77 million depend-ents were claimed on U.S. individual income tax returns, but a year later, in 1987, more than 7 million of those dependents had disappeared. More than 11,000 taxpayers who claimed seven or more dependents in 1986 claimed none in 1987. Had some disaster or plague occurred?
No, according to former IRS Commissioner Donald C. Alexander. A 1987 tax law change required taxpayers to provide a dependent’s Social Security number on their tax returns. Apparently, those 7 million disappearing dependents were fakes who never existed.
Two years later 2.6 million babysitters disappeared. Kidnapped maybe? No, a change in the tax law required taxpayers to provide the babysitter’s name, address, and Social Security number on the income tax return. Alexander says that tax laws must be enforced to be effective.
SOURCE: Adapted from “An Open Letter to the New Commissioner of the IRS from Donald C. Alexander,” Tax Notes (May 17, 1993): 975.
Definitions and special rules (relating to the income tax imposed on individuals). Definition of a surviving spouse.
For purposes of § 1 (the determination of the applicable rate schedule), a surviving spouse must meet certain conditions. § 2
(a) (1)
(A) One of the conditions necessary to qualify as a surviving spouse is that the tax-payer's spouse must have died during either of his or her two taxable years immediately preceding the present tax-able year.
5Some Code Sections do not require subparts. See, for example, §§ 211 and 241.
6Some Code Sections omit the subsection designation and use the paragraph designation as the first subpart. See, for example, §§ 212(1) and 1222(1).
7§ 12(d) of the Internal Revenue Code of 1939 is the predecessor to § 2 of the Internal Revenue Code of 1954 and the Internal Revenue
Code of 1986. Keep in mind that the 1954 Code superseded the 1939 Code and the 1986 Code has superseded the 1954 Code. Footnote 1 of this chapter explains why references to the 1939 or 1954 Code are included.
Abbreviation for “Section” Section number Subsection number Paragraph designation Subparagraph designation § 2 (a) (1) (A) 6
Broken down by content, § 2(a)(1)(A) becomes:
Throughout the text, references to the Code Sections are in the form given above. The symbols “§” and “§§” are used in place of “Section” and “Sections.” Unless otherwise stated, all Code references are to the Internal Revenue Code of 1986. The following table summarizes the format that will be used:
Complete Reference Text Reference
Section 2(a)(1)(A) of the Internal Revenue Code § 2(a)(1)(A) of 1986
Sections 1 and 2 of the Internal Revenue Code of §§ 1 and 2 1986
Section 2 of the Internal Revenue Code of 1954 § 2 of the Internal Revenue Code of 1954
Section 12(d) of the Internal Revenue Code of § 12(d) of the Internal Revenue
19397 Code of 1939
Effect of Treaties. The United States signs certain tax treaties (sometimes called tax conventions) with foreign countries to render mutual assistance in tax enforce-ment and to avoid double taxation. The Technical and Miscellaneous Revenue Act
Citing the Code. Code Sections often are broken down into subparts.5Section 2(a)(1)(A) serves as an example.
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of 1988 provided that neither a tax law nor a tax treaty takes general precedence. Thus, when there is a direct conflict, the most recent item will take precedence. A taxpayer must disclose on the tax return any position where a treaty overrides a tax law.8 There is a $1,000 penalty per failure to disclose for individuals and a $10,000 per failure penalty for corporations.9
ADMINISTRATIVE SOURCES OF THE TAX LAW
The administrative sources of the Federal tax law can be grouped as follows: Treasury Department Regulations, Revenue Rulings and Revenue Procedures, and various other administrative pronouncements (see Exhibit 2–1). All are issued by either the U.S. Treasury Department or the IRS.
GLOBAL
TAX
ISSUES
T
AXT
REATIESThe United States has entered into treaties with most of the major countries of the world in order to eliminate possible double taxation. For example, nonresident alien students wishing to claim exemption from taxation are required to provide an information statement as set forth in several Revenue Procedures. The withholding agent must also certify the form.
Chinese students are required to prepare a four-part statement. Part 3 of the student’s statement is as follows:
I will receive compensation for personal services performed in the United States. This compensation qualifies for exemption from withholding of Federal income tax under the tax treaty between the United States and the People’s Republic of China in an amount not in excess of $5,000 for any taxable year.
E T H I C A L
C O N S I D E R AT I O N S
The President and the IRS
President Franklin Delano Roosevelt once said, “I am wholly unable to figure out the amount of tax.” In a letter to the then Commissioner of the IRS, Roosevelt said, “as this is a problem in higher mathematics, may I ask the Bureau [IRS] to let me know the amount of the balance due.”
When a friend of FDR was ordered to pay $420,000 in tax penalties, the President called the Commissioner within earshot of reporters and told him to cut the penalties to $3,000. One listener, David Brinkley, recalled years later: “Nobody seemed to think it was news or very interesting.” Evaluate the President’s actions.
8§ 7852(d).
9Reg. §§ 301.6114–1, 301.6712–1, and 301.7701(b)(7).
10§ 7805.
Treasury Department Regulations. Regulations are issued by the U.S. Trea-sury Department under authority granted by Congress.10 Interpretive by nature, they provide taxpayers with considerable guidance on the meaning and application of the Code. Regulations may be issued in proposed, temporary, or final form. Regula-tions carry considerable authority as the official interpretation of tax statutes. They are an important factor to consider in complying with the tax law.
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as the Code. A number is added at the beginning, however, to indicate the typeSince Regulations interpret the Code, they are arranged in the same sequence of tax or administrative, procedural, or definitional matter to which they relate. For example, the prefix 1 designates the Regulations under the income tax law. Thus, the Regulations under Code § 2 are cited as Reg. § 1.2 with subparts added for further identification. The numbering patterns of these subparts often have no correlation with the Code subsections. The prefix 20 designates estate tax Regula-tions; 25 covers gift tax RegulaRegula-tions; 31 relates to employment taxes; and 301 refers to procedure and administration. This list is not all-inclusive.New Regulations and changes to existing Regulations are usually issued in proposed form before they are finalized. The interval between the proposal of a Regulation and its finalization permits taxpayers and other interested parties to comment on the propriety of the proposal. Proposed Regulations under Code § 2, for example, are cited as Prop.Reg. § 1.2. The Tax Court indicates that Proposed Regulations carry little weight—no more than a position advanced in a written brief prepared by a litigating party before the Tax Court. Finalized Regulations have the force and effect of law.11
Sometimes the Treasury Department issues Temporary Regulations relating to matters where immediate guidance is important. These Regulations are issued without the comment period required for Proposed Regulations. Temporary Regu-lations have the same authoritative value as final ReguRegu-lations and may be cited as precedents. Temporary Regulations must also be issued as Proposed Regulations and automatically expire within three years after the date of issuance.12Temporary
Source Location Authority**
Regulations Federal Register * Force and effect of law. Temporary Regulations Federal Register * May be cited as a precedent.
Internal Revenue Bulletin Cumulative Bulletin
Proposed Regulations Federal Register * Preview of final Regulations. Internal Revenue Bulletin
Cumulative Bulletin
Revenue Rulings Internal Revenue Bulletin Do not have the force and effect of Revenue Procedures Cumulative Bulletin law.
Treasury Decisions Actions on Decisions
General Counsel Memoranda Tax Analysts’ Tax Notes; RIA’s May not be cited as a precedent. Technical Advice Memoranda Internal Memoranda of the IRS;
CCH's IRS Position Reporter
Letter Rulings Research Institute of America and Applicable only to taxpayer Commerce Clearing House addressed. No precedential loose-leaf services force.
*Finalized, Temporary, and Proposed Regulations are published in soft-cover form by several publishers. **Each of these sources may be substantial authority for purposes of the accuracy-related penalty in § 6662.
Notice 90–20, 1990–1 C.B. 328. ■ EXHIBIT 2–1
Administrative Sources
11F. W. Woolworth Co., 54 T.C. 1233 (1970); Harris M. Miller, 70 T.C. 448 (1978); and James O. Tomerlin Trust, 87 T.C. 876 (1986).
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Regulations and the simultaneously issued Proposed Regulations carry more weight than traditional Proposed Regulations. An example of a Temporary Regula-tion is Temp.Reg. § 1.274–5T(k), which excludes cars, trucks, and vans that are qualified nonpersonal use vehicles from the substantiation requirements for excep-tion treatment to the depreciaexcep-tion limits on luxury passenger automobiles.
Proposed, Temporary, and final Regulations are published in the Federal Regis-ter, in the Internal Revenue Bulletin (I.R.B.), and by major tax services. Final Regula-tions are issued as Treasury Decisions (TDs).
Regulations may also be classified as legislative, interpretive, or procedural. This classification scheme is discussed under Assessing the Validity of a Treasury Regu-lation later in the chapter.
Revenue Rulings and Revenue Procedures. Revenue Rulings are official pronouncements of the National Office of the IRS.13They typically provide one or more examples of how the IRS would apply a law to specific fact situations. Like Regulations, Revenue Rulings are designed to provide interpretation of the tax law. However, they do not carry the same legal force and effect as Regulations and usually deal with more restricted problems. Regulations are approved by the Secretary of the Treasury, whereas Revenue Rulings generally are not.
Although letter rulings (discussed below) are not the same as Revenue Rulings, a Revenue Ruling often results from a specific taxpayer’s request for a letter ruling. If the IRS believes that a taxpayer’s request for a letter ruling deserves official publication because of its widespread impact, the letter ruling will be converted into a Revenue Ruling and issued for the information and guidance of taxpayers, tax practitioners, and IRS personnel. Names, identifying descriptions, and money amounts are changed to conceal the identity of the requesting taxpayer. Revenue Rulings also arise from technical advice to District Offices of the IRS, court decisions, suggestions from tax practitioner groups, and various tax publications.
Revenue Proceduresare issued in the same manner as Revenue Rulings, but deal with the internal management practices and procedures of the IRS. Familiarity with these procedures can increase taxpayer compliance and help the IRS administer the tax laws more efficiently. A taxpayer’s failure to follow a Revenue Procedure can result in unnecessary delay or, in a discretionary situation, can cause the IRS to decline to act on behalf of the taxpayer.
Both Revenue Rulings and Revenue Procedures serve an important function by providing guidance to IRS personnel and taxpayers in handling routine tax matters. Revenue Rulings and Revenue Procedures generally apply retroactively and may be revoked or modified by subsequent rulings or procedures, Regulations, legislation, or court decisions.
Revenue Rulings and Revenue Procedures are published weekly by the U.S. Government in the Internal Revenue Bulletin (I.R.B.). Semiannually, the bulletins for a six-month period are gathered together and published in a bound volume called the Cumulative Bulletin (C.B.).14 The proper form for citing Revenue Rulings and Revenue Procedures depends on whether the item has been published in the
Cumu-13§ 7805(a).
14Usually, only two volumes of the Cumulative Bulletin are published each year. However, when Congress has enacted major tax legisla-tion, other volumes may be published containing the congressional Committee Reports supporting the Revenue Act. See, for example, the two extra volumes for 1984 dealing with the Deficit Reduction
Act of 1984. The 1984–3 Cumulative Bulletin, Volume 1, contains the text of the law itself; 1984–3, Volume 2, contains the Committee Reports. There are a total of four volumes of the Cumulative Bulletin for 1984: 1984–1; 1984–2; 1984–3, Volume 1; 1984–3, Volume 2.
lative Bulletin or is only available in I.R.B. form. Consider, for example, the follow-ing transition:
Temporary Rev.Rul. 2004–18, I.R.B. No. 8, 509.
Citation Explanation: Revenue Ruling Number 18, appearing on page 509 of the 8th weekly issue of the Internal Revenue Bulletin for 2004. Permanent Rev.Rul. 2004–18, 2004–1 C.B. 509.
Citation Explanation: Revenue Ruling Number 18, appearing on page 509 of Volume 1 of the Cumulative Bulletin for 2004.
Note that the page reference of 509 is the same for both the I.R.B. (temporary) and C.B. (permanent) versions of the ruling. The IRS numbers the pages of the I.R.B.s consecutively for each six-month period so as to facilitate their conversion to C.B. form.
Revenue Procedures are cited in the same manner, except that “Rev.Proc.” is substituted for “Rev.Rul.” Some recent Revenue Procedures dealt with the follow-ing matters:
•Deduction limits on luxury automobile depreciation.
•Revised procedures for the issuance of letter rulings.
•Automatic consent procedure for a change in accounting method.
Letter Rulings. Letter rulings are issued for a fee upon a taxpayer’s request and describe how the IRS will treat a proposed transaction for tax purposes. They apply only to the taxpayer who asks for and obtains the ruling, but post-1984 letter rulings may be substantial authority for purposes of the accuracy-related penalty.15 Letter rulings can be useful to taxpayers who wish to be certain of how a transaction will be taxed before proceeding with it. Letter rulings also allow taxpayers to avoid unexpected tax costs. Although the procedure for requesting a ruling can be quite cumbersome, sometimes requesting a ruling is the most effective way to carry out tax planning. Nevertheless, the IRS limits the issuance of individual rulings to restricted, preannounced areas of taxation. The main reason the IRS will not rule in certain areas is that they involve fact-oriented situations. Thus, a ruling may not be obtained on many of the problems that are particularly troublesome for taxpayers.16The IRS issues over 2,000 letter rulings each year.
The law now requires the IRS to make individual rulings available for public inspection after identifying details are deleted.17Published digests of private letter rulings can be found in Private Letter Rulings (published by RIA), BNA Daily Tax Reports, and Tax Analysts & Advocates Tax Notes. IRS Letter Rulings Reports (pub-lished by Commerce Clearing House) contains both digests and full texts of all letter rulings. Letter Ruling Review (published by Tax Analysts) is a monthly publica-tion that selects and discusses the more important letter rulings issued each month. In addition, computerized databases of letter rulings are available through several private publishers.
Letter rulings are issued multidigit file numbers, which indicate the year and week of issuance as well as the number of the ruling during that week. Consider,
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15Notice 90–20, 1990–1 C.B. 328. In this regard, letter rulings differ from Revenue Rulings, which are applicable to all taxpayers. A letter ruling may later lead to the issuance of a Revenue Ruling if the holding affects many taxpayers. In its Agents’ Manual, the IRS indicates that letter rulings may be used as a guide with other research materials in formulating a District Office position on an issue. The IRS is required to charge a taxpayer a fee for letter rulings, determination letters, etc.
16Rev.Proc. 2005–3, I.R.B. No. 1, 118 contains a list of areas in which the IRS will not issue advance rulings. From time to time, subse-quent Revenue Procedures are issued that modify or amplify Rev.Proc. 2005–3.
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for example, Ltr.Rul. 200414039, which ruled that grants awarded under a tax-exempt theology school’s scholarship program do not represent compensation for services.
2004 14 039
Year 2004 14th week of 39th ruling issued during the 14th issuance week
Other Administrative Pronouncements. Treasury Decisions (TDs) are issued by the Treasury Department to promulgate new Regulations, amend or otherwise change existing Regulations, or announce the position of the Government on se-lected court decisions. Like Revenue Rulings and Revenue Procedures, TDs are published in the Internal Revenue Bulletin and subsequently transferred to the Cumu-lative Bulletin.
The IRS publishes other administrative communications in the Internal Revenue Bulletin such as Announcements, Notices, LRs (Proposed Regulations), and Prohib-ited Transaction Exemptions.
Like letter rulings, determination letters are issued at the request of taxpayers and provide guidance on the application of the tax law. They differ from letter rulings in that the issuing source is the Area Director rather than the National Office of the IRS. Also, determination letters usually involve completed (as opposed to proposed) transactions. Determination letters are not published and are made known only to the party making the request.
The following examples illustrate the distinction between letter rulings and determination letters:
The shareholders of Red Corporation and Green Corporation want assurance that the consoli-dation of the corporations into Blue Corporation will be a nontaxable reorganization. The proper approach is to request the National Office of the IRS to issue a letter ruling concerning
the income tax effect of the proposed transaction. ■
Chris operates a barber shop in which he employs eight barbers. To comply with the rules governing income tax and payroll tax withholdings, Chris wants to know whether the barbers working for him are employees or independent contractors. The proper procedure
is to request a determination letter on their status from the appropriate Area Director. ■
Several internal memoranda that constitute the working law of the IRS now must be released. These General Counsel Memoranda (GCMs), Technical Advice Memoranda (TAMs), and Field Service Advice (FSAs) are not officially published, and the IRS indicates that they may not be cited as precedents by taxpayers.18 However, these working documents do explain the IRS’s position on various issues. The National Office of the IRS releases Technical Advice Memoranda (TAMs) weekly. TAMs resemble letter rulings in that they give the IRS’s determination of an issue. However, they differ in several respects. Letter rulings deal with proposed transactions and are issued to taxpayers at their request. In contrast, TAMs deal with completed transactions. Furthermore, TAMs arise from questions raised by IRS personnel during audits and are issued by the National Office of the IRS to its field personnel. TAMs are often requested for questions relating to exempt
E X A M P L E 1
E X A M P L E 2
18These are unofficially published by the publishers listed in Exhibit 2–1. Such internal memoranda for post-1984 may be substantial authority for purposes of the accuracy-related penalty. Notice 90– 20, 1990–1 C.B. 328.
organizations and employee plans. TAMs are not officially published and may not be cited or used as precedent.19 They are assigned file numbers according to the same procedure used for letter rulings. For example, TAM 200417004 refers to the 4th TAM issued during the 17th week of 2004.
The Office of Chief Counsel prepares Field Service Advice (FSAs) to help IRS employees. They are issued in response to requests for advice, guidance, and analysis on difficult or significant tax issues. FSAs are not binding on either the taxpayer to whom they pertain or on the IRS. For example, FSA 200233016 states that § 269 may be used to disallow foreign tax credits and deductions that arise from a series of reorganizations if the underlying transaction’s principal purpose is to secure tax benefits.
Field Service Advices are being replaced by a new form of field guidance called Technical Expedited Advice Memoranda (TEAMs). The purpose of TEAMs is to expedite legal guidance to field agents as disputes are developing. FSAs are revert-ing to their original purpose of case-specific development of facts.
A TEAM guidance differs from a TAM in several ways, including a mandatory presubmission conference involving the taxpayer. In the event of a tentatively adverse conclusion for the taxpayer or the field, a conference of right is offered to the taxpayer and to the field; once the conference of right is held, no further conferences are offered.
JUDICIAL SOURCES OF THE TAX LAW
The Judicial Process in General. After a taxpayer has exhausted some or all of the remedies available within the IRS (i.e., no satisfactory settlement has been reached at the agent or at the Appeals Division level), the dispute can be taken to the Federal courts. The dispute is first considered by a court of original jurisdic-tion (known as a trial court) with any appeal (either by the taxpayer or the IRS) taken to the appropriate appellate court. In most situations, the taxpayer has a choice of any of four trial courts: a Federal District Court, the U.S. Court of Federal Claims, the U.S. Tax Court, or the Small Cases Division of the U.S. Tax Court. The trial and appellate court system for Federal tax litigation is illustrated in Figure 2–3.
The broken line between the U.S. Tax Court and the Small Cases Division indicates that there is no appeal from the Small Cases Division. The jurisdiction of the Small Cases Division is limited to cases involving amounts of $50,000 or less. The proceedings of the Small Cases Division are informal (e.g., no necessity for the taxpayer to be represented by a lawyer or other tax adviser). Special trial judges rather than Tax Court judges preside over these proceedings. The decisions of the Small Cases Division are not precedents for any other court decision and are not reviewable by any higher court. Proceedings can be more timely and less expensive in the Small Cases Division. Some of these cases can now be found on the U.S. Tax Court Internet Web site.
American law, following English law, is frequently made by judicial decisions. Under the doctrine of stare decisis, each case (except in the Small Cases Division) has precedential value for future cases with the same controlling set of facts. Most Federal and state appellate court decisions and some decisions of trial courts are published. More than 4 million judicial opinions have been published in the United States; over 130,000 cases are published each year.20Published court decisions are organized by jurisdiction (Federal or state) and level of court (trial or appellate).
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19§ 6110(j)(3). Post-1984 TAMs may be substantial authority for pur-poses of avoiding the accuracy-related penalty. Notice 90–20, 1990–1 C.B. 328.
20Jacobstein, Mersky, and Dunn, Fundamentals of Legal Research, 6th ed. (Westbury, N.Y.: The Foundation Press, 1994), p. 11.
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A decision of a particular court is called its holding. Sometimes a decision includes dicta or incidental opinions beyond the current facts. Such passing remarks, illustrations, or analogies are not essential to the current holding. Although the holding has precedential value under stare decisis, dicta are not binding on a fu-ture court.
Trial Courts. The differences among the various trial courts (courts of original jurisdiction) can be summarized as follows:
•Number of courts. There is only one Court of Federal Claims and only one Tax Court, but there are many Federal District Courts. The taxpayer does not select the District Court that will hear the dispute but must sue in the one that has jurisdiction where the taxpayer resides.
•Number of judges. District Courts have various numbers of judges, but only one judge hears a case. The Court of Federal Claims has 16 judges, and the Tax Court has 19 regular judges. The entire Tax Court, however, reviews a case (the case is sent to court conference) only when more important or novel tax issues are involved. Most cases are heard and decided by one of the 19 judges.
•Location. The Court of Federal Claims meets most often in Washington, D.C., whereas a District Court meets at a prescribed seat for the particular district. Each state has at least one District Court, and many of the more populous states have more than one. Choosing the District Court usually minimizes the inconvenience and expense of traveling for the taxpayer and his or her counsel. Although the Tax Court is officially based in Washington, D.C., the various judges travel to different parts of the country and hear cases at predetermined locations and dates. This procedure eases the distance prob-lem for the taxpayer, but it can mean a delay before the case comes to trial and is decided.
•Jurisdiction of the Court of Federal Claims. The Court of Federal Claims has jurisdiction over any claim against the United States that is based upon the Constitution, any Act of Congress, or any regulation of an executive department. Thus, the Court of Federal Claims hears nontax litigation as
U.S. Court of Appeals (Regional Circuit) U.S. Supreme Court Small Cases Division Appellate Courts Trial Courts (Courts of Original Jurisdiction) U.S. Tax Court U.S. District Court U.S. Court of Federal Claims U.S. Court of Appeals (Federal Circuit) ■ FIGURE 2–3 Federal Judicial System
well as tax cases. This forum appears to be more favorable for issues having an equitable or pro-business orientation (as opposed to purely technical issues) and for those requiring extensive discovery.21
•Jurisdiction of the Tax Court and District Courts. The Tax Court hears only tax cases and is the most popular forum. The District Courts hear a wide variety of nontax cases, including drug crimes and other Federal violations, as well as tax cases. Some Tax Court justices have been appointed from IRS or Treasury Department positions. For these reasons, some people suggest that the Tax Court has more expertise in tax matters.
•Jury trial. The only court in which a taxpayer can obtain a jury trial is a District Court. But since juries can only decide questions of fact and not questions of law, even taxpayers who choose the District Court route often do not request a jury trial. In that event, the judge will decide all issues. Note that a District Court decision is controlling only in the district in which the court has jurisdiction.
•Payment of deficiency. For the Court of Federal Claims or a District Court to have jurisdiction, the taxpayer must pay the tax deficiency assessed by the IRS and sue for a refund. A taxpayer who wins (assuming no successful appeal by the Government) recovers the tax paid plus appropriate interest. For the Tax Court, however, jurisdiction is usually obtained without first paying the assessed tax deficiency. In the event the taxpayer loses in the Tax Court (and does not appeal or an appeal is unsuccessful), the deficiency must be paid with appropriate interest. With the elimination of the deduction for personal (consumer) interest, the Tax Court route of delaying payment of the deficiency can become expensive. For example, to earn 7 percent after tax in 2005, a taxpayer with a 35 percent marginal tax rate would have to earn 10.77 percent. By paying the tax, a taxpayer limits underpay-ment interest and penalties on the underpayunderpay-ment.
•Termination of running of interest. A taxpayer who selects the Tax Court may deposit a cash bond to stop the running of interest. The taxpayer must deposit both the amount of the tax and any accrued interest. If the taxpayer wins and the deposited amount is returned, the Government does not pay interest on the deposit.
•Appeals. Appeals from a District Court or a Tax Court decision are to the U.S. Court of Appeals for the circuit in which the taxpayer resides. Appeals
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TAX IN
THE
NEWS
C
HANGING THEF
ACE OFR
USSIAPeter the Great, the ruler of Russia from 1682 to 1725, imposed a tax on beards (except for clergy) because he felt that beards were “unnecessary, uncivilized, and ridiculous.” If an individual did not pay the tax, a tax official would scrape off the beard. Without warn-ing Peter himself would take a straight razor to the faces of bearded men appearwarn-ing before him. When Peter attended a ceremony or banquet, anyone arriving with a beard would depart without it.
SOURCE: Adapted from Erik Jensen, “Taxation of Beards,” Tax Notes (January 5, 2004): 153–157.
21T. D. Peyser, “The Case for Selecting the Claims Court to Litigate a Federal Tax Liability,” The Tax Executive (Winter 1988): 149.
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from the Court of Federal Claims go to the Court of Appeals for the Fed-eral Circuit. Few Tax Court cases are appealed, and when appeals are made, most are filed by the taxpayer rather than the IRS.
•Bankruptcy. When a taxpayer files a bankruptcy petition, the IRS, like other creditors, is prevented from taking action against the taxpayer. Sometimes a bankruptcy court may settle a tax claim.
For a summary of the Federal trial courts, see Concept Summary 2–1.
Appellate Courts. The losing party can appeal a trial court decision to a Circuit Court of Appeals.The 11 geographic circuits, the circuit for the District of Columbia, and the Federal Circuit22appear in Figure 2–4. The appropriate circuit for an appeal depends on where the litigation originated. For example, an appeal from New York goes to the Second Circuit.
If the Government loses at the trial court level (District Court, Tax Court, or Court of Federal Claims), it need not (frequently does not) appeal. The fact that an appeal is not made, however, does not indicate that the IRS agrees with the result and will not litigate similar issues in the future. The IRS may decide not to appeal for a number of reasons. First, if the current litigation load is heavy, the IRS may decide that available personnel should be assigned to other, more im-portant cases. Second, the IRS may determine that this case is not a good one to appeal. Perhaps the taxpayer is in a sympathetic position or the facts are particularly strong in his or her favor. In that event, the IRS may wait to test the legal issues involved with a taxpayer who has a much weaker case. Third, if the appeal is from a District Court or the Tax Court, the Court of Appeals of jurisdiction could have some bearing on whether the IRS chooses to go forward with an appeal. Based on past experience and precedent, the IRS may conclude that the chance for success
Federal Judicial System: Trial Courts
U.S. Court of Federal Issue U.S. Tax Court U.S. District Court Claims
Number of judges per 19* Varies 16
court
Payment of deficiency No Yes Yes
before trial
Jury trial available No Yes No
Types of disputes Tax cases only Most criminal and civil Claims against the United
issues States
Jurisdiction Nationwide Location of taxpayer Nationwide
IRS acquiescence policy Yes Yes Yes
Appeal route U.S. Court of Appeals U.S. Court of Appeals U.S. Court of Appeals for the Federal Circuit *There are also 14 special trial judges and 9 senior judges.
C
ONCEPTS
UMMARY2–1
22The Court of Appeals for the Federal Circuit was created, effective October 1, 1982, by P.L. 97–164 (4/2/82) to hear decisions appealed from the Claims Court (now the Court of Federal Claims).
on a particular issue might be more promising in another Court of Appeals. If so, the IRS will wait for a similar case to arise in a different jurisdiction.
The Federal Circuit at the appellate level provides the taxpayer with an alterna-tive forum to the Court of Appeals for his or her home circuit. Appeals from both the Tax Court and the District Court go to a taxpayer’s home circuit. When a particular circuit has issued an adverse decision, the taxpayer may prefer the Court of Federal Claims route, since any appeal will be to the Federal Circuit.
District Courts, the Tax Court, and the Court of Federal Claims must abide by the precedents set by the Court of Appeals of jurisdiction. A particular Court of Appeals need not follow the decisions of another Court of Appeals. All courts, however, must follow the decisions of the U.S. Supreme Court.
This pattern of appellate precedents raises an issue for the Tax Court. Because the Tax Court is a national court, it decides cases from all parts of the country. For many years, the Tax Court followed a policy of deciding cases based on what it thought the result should be, even though its decision might be appealed to a Court of Appeals that had previously decided a similar case differently. A number of years ago this policy was changed in the Golsen23decision. Now the Tax Court will decide a case as it feels the law should be applied only if the Court of Appeals of appropriate jurisdiction has not yet passed on the issue or has previously decided a similar case in accord with the Tax Court’s decision. If the Court of Appeals of appropriate jurisdiction has previously held otherwise, the Tax Court will conform under the Golsen rule even though it disagrees with the holding.
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FLORIDA MIDDLE NEW MEXICO DELAWARE MARYLAND TEXAS WESTERN OKLAHOMA WESTERN KANSAS NEBRASKA SOUTH DAKOTA NORTH DAKOTA MONTANA WYOMING COLORADO UTAH IDAHO ARIZONA NEVADA WASHINGTON EASTERN OREGON KENTUCKY WESTERN MAINE PENNSYLVANIA MIDDLE MICHIGAN WESTERN MASSACHUSETTS RHODE ISLAND CONN VIRGINIA WESTERN W. VIRGINIA SOUTHERN OHIO NORTHERN INDIANA NORTHERN NORTH CAROLINA EASTERN TENNESSEE MIDDLE SOUTH CAROLINA ALABAMA NORTHERN MISSISSIPPI NORTHERN ARKANSAS EASTERN LOUISIANA WESTERN MISSOURI WESTERN IOWA NORTHERN MINNESOTA WISCONSIN WESTERN DISTRICT OF COLUMBIA NEW JERSEY GEORGIA SOUTHERN 7 1 11 2 3 FEDERAL CIRCUIT 8 D.C. CIRCUIT 6 10
NEW YORK EASTERN
CALIFORNIA EASTERN ILLINOIS CENTRAL 4 9 HAWAII NORTHERN MARIANA ISLANDS GUAM 9 ALASKA 9 Washington, D.C. Washington, D.C. 1 PUERTO RICO VIRGIN ISLANDS 3 CALIFORNIA CENTRAL CALIFORNIA SOUTHERN C AL IF OR N IA N O RT HE RN WASHINGTON WESTERN TEXAS NORTHERN TEXAS SOUTHERN TEXAS EASTERN LOUISIANA EASTERN LOUISIANA MIDDLE OKLAHOMA EASTERN OKLAHOMA NORTHERN MISSISSIPPI SOUTHERNSOUTHERNALABAMA
ALABAMA MIDDLE GEORGIA NORTHERN GEORGIA MIDDLE FLORIDA SOUTHERN FLORIDA NORTHERN NORTH CAROLINA MIDDLE NORTH CAROLINA EASTERN TENNESSEE EASTERN TENNESSEE WESTERN KENTUCKY EASTERN W. VIRGINIA NORTHERN VIRGINIA EASTERN OHIO SOUTHERN INDIANA SOUTHERN MICHIGAN EASTERN WISCONSIN EASTERN IOWA SOUTHERN MISSOURI EASTERN ILLINOIS SOUTHERN ILLINOIS NORTHERN ARKANSAS WESTERN PENNSYLVANIA WESTERN EASTERNPENN
NEW YORK NORTHERN NEW YORK SOUTH 5 NEW YORK WESTERN LEGEND Circuit Boundaries State Boundaries District Boundaries
ADMINISTRATIVE OFFICE OF THE UNITED STATES SUPREME COURT APRIL 1988
MICHIGAN WESTERN
NEW HAMPSHIRE VERMONT
■ FIGURE 2–4
The Federal Courts of Appeals
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Emily lives in Texas and sues in the Tax Court on Issue A. The Fifth Circuit Court of Appeals is the appellate court of appropriate jurisdiction. It has already decided, in a case involving similar facts but a different taxpayer, that Issue A should be resolved against the Government. Although the Tax Court feels that the Fifth Circuit Court of Appeals is wrong, under its Golsen policy it will render judgment for Emily. Shortly thereafter, Rashad, a resident of New York, in a comparable case, sues in the Tax Court on Issue A. Assume that the Second Circuit Court of Appeals, the appellate court of appropriate jurisdiction, has never expressed itself on Issue A. Presuming the Tax Court has not reconsidered its position on Issue A, it will decide against Rashad. Thus, it is entirely possible for two taxpayers suing in the same court to end up with opposite results merely because they live in different parts of
the country. ■
Appeal to the U.S. Supreme Court is by Writ of Certiorari. If the Court agrees to hear the case, it will grant the Writ (Cert. granted). Most often, it will deny jurisdiction (Cert. denied). For whatever reason or reasons, the Supreme Court rarely hears tax cases. The Court usually grants certiorari to resolve a conflict among the Courts of Appeals (e.g., two or more appellate courts have assumed opposing positions on a particular issue) or where the tax issue is extremely important. The granting of a Writ of Certiorari indicates that at least four members of the Supreme Court believe that the issue is of sufficient importance to be heard by the full Court. The role of appellate courts is limited to a review of the record of trial compiled by the trial courts. Thus, the appellate process usually involves a determination of whether the trial court applied the proper law in arriving at its decision. Rarely will an appellate court disturb a lower court’s fact-finding determination.
Both the Code and the Supreme Court indicate that Federal appellate courts are bound by findings of facts unless they are clearly erroneous.24 This aspect of the appellate process is illustrated by a decision of the Court of Appeals for the District of Columbia involving whether a taxpayer was engaged in an activity for profit under § 183.25 This appeals court specifically held that the “Tax Court’s findings of facts are binding on Federal courts of appeals unless clearly erroneous.” The court applauded the Tax Court for the thoroughness of its factual inquiry but could “not place the stamp of approval upon its eventual legal outcome.” In re-versing and remanding the decision to the Tax Court, the appellate court said that “the language of § 183, its legislative history and the applicable Treasury regulation combine to demonstrate that the court’s [Tax Court’s] standard is erroneous as a matter of law.” The appeals court held that this taxpayer’s claims of deductibility were to be evaluated by proper legal standards.
An appeal can have any of a number of possible outcomes. The appellate court may approve (affirm) or disapprove (reverse) the lower court’s finding, or it may send the case back for further consideration (remand). When many issues are involved, a mixed result is not unusual. Thus, the lower court may be affirmed (aff’d) on Issue A and reversed (rev’d) on Issue B, while Issue C is remanded (rem’d) for additional fact finding.
When more than one judge is involved in the decision-making process, disagree-ments are not uncommon. In addition to the majority view, one or more judges may concur (agree with the result reached but not with some or all of the reasoning) or dissent (disagree with the result). In any one case, of course, the majority view controls. But concurring and dissenting views can have an influence on other courts or, at some subsequent date when the composition of the court has changed, even on the same court.
E X A M P L E 3
24§§ 7482(a) and (c). Comm. v. Duberstein, 60–2 USTC ¶9515, 5 AFTR2d 1626, 80 S.Ct. 1190 (USSC, 1960). See Rule 52(a) of the Federal Rules of Civil Procedure.
25Dreicer v. Comm., 81–2 USTC ¶9683, 48 AFTR2d 5884, 665 F.2d 1292 (CA–DC, 1981).
Knowledge of several terms is important in understanding court decisions. The term plaintiff refers to the party requesting action in a court, and the defendant is the party against whom the suit is brought. Sometimes a court uses the terms petitioner and respondent. In general, “petitioner” is a synonym for “plaintiff,” and “respondent” is a synonym for “defendant.” At the trial court level, a taxpayer is normally the plaintiff (or petitioner), and the Government is the defendant (or respondent). If the taxpayer wins and the Government appeals as the new petitioner (or appellant), the taxpayer becomes the new respondent.
Judicial Citations—General. Having briefly described the judicial process, it is appropriate to consider the more practical problem of the relationship of case law to tax research. As previously noted, court decisions are an important source of tax law. The ability to cite and locate a case is, therefore, a must in working with the tax law. Judicial citations usually follow a standard pattern: case name, volume number, reporter series, page or paragraph number, court (where necessary), and the year of the decision.
Judicial Citations—The U.S. Tax Court. A good starting point is with the Tax Court. The Tax Court issues two types of decisions: Regular and Memorandum. The Chief Judge decides whether the opinion is issued as a Regular or Memorandum decision. The distinction between the two involves both substance and form. In terms of substance, Memorandum decisions deal with situations necessitating only the application of already established principles of law. Regular decisions involve novel issues not previously resolved by the court. In actual practice, however, this distinction is not always preserved. Not infrequently, Memorandum decisions will be encountered that appear to warrant Regular status and vice versa. At any rate, do not conclude that Memorandum decisions possess no value as precedents. Both represent the position of the Tax Court and, as such, can be relied on.
The Regular and Memorandum decisions issued by the Tax Court also differ in form. Memorandum decisions are officially published in mimeograph form only. Regular decisions are published by the U.S. Government in a series entitled Tax Court of the United States Reports (T.C.). Each volume of these Reports covers a six-month period (January 1 through June 30 and July 1 through December 31) and is given a succeeding volume number. But, as is true of the Cumulative Bulletin, there is usually a time lag between the date a decision is rendered and the date it appears in bound form. A temporary citation may be necessary to help the re-searcher locate a recent Regular decision. Consider, for example, the temporary and permanent citations for Estate of Leona Engelman, a decision filed on July 24, 2003:
Temporary Estate of Leona Engelman, 121 T.C. _____, No. 4 (2003). Citation Explanation: Page number left blank because not yet known. Permanent Estate of Leona Engelman, 121 T.C. 54 (2003).
Citation Explanation: Page number now available.
Both citations tell us that the case will ultimately appear in Volume 121 of the Tax Court of the United States Reports. But until this volume is bound and made available to the general public, the page number must be left blank. Instead, the temporary citation identifies the case as being the 4th Regular decision issued by the Tax Court since Volume 120 ended. With this information, the decision can easily be located in either of the special Tax Court services published by Commerce Clearing House (now owned by the Dutch company Wolters Kluwer) or Research Institute of America (formerly by Prentice-Hall). Once Volume 121 is released, the permanent citation can be substituted and the number of the case dropped. Starting in 1999, both Regular decisions and Memorandum decisions are published on the U.S. Tax Court Web site (http://www.ustaxcourt.gov).
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Before 1943, the Tax Court was called the Board of Tax Appeals, and its decisions were published as the United States Board of Tax Appeals Reports (B.T.A.). These 47 volumes cover the period from 1924 to 1942. For example, the citation Karl Pauli, 11 B.T.A. 784 (1928). refers to the 11th volume of the Board of Tax Appeals Reports, page 784, issued in 1928.
If the IRS loses in a decision, it may indicate whether it agrees or disagrees with the results reached by the court by publishing an acquiescence (“A” or “Acq.”) or nonacquiescence (“NA” or “Nonacq.”), respectively. Until 1991, acquiescences and nonacquiescences were published only for certain Regular decisions of the Tax Court, but the IRS has expanded its acquiescence program to include other civil tax cases where guidance is helpful. The acquiescence or nonacquiescence is pub-lished in the Internal Revenue Bulletin and the Cumulative Bulletin as an Action on Decision. The IRS can retroactively revoke an acquiescence.
Most often the IRS issues nonacquiescences to adverse decisions that are not appealed. In this manner, the Government indicates that it disagrees with the result reached, despite its decision not to seek review of the matter in an appellate court. A nonacquiescence provides a warning to taxpayers that a similar case cannot be settled administratively. A taxpayer will incur fees and expenses appealing within the IRS even though the IRS may be unwilling to litigate a fact pattern similar to a nonacquiescence decision.26
Although Memorandum decisions were not published by the U.S. Government until recently (they are now published on the U.S. Tax Court Web site), they were—and continue to be—published by Commerce Clearing House (CCH) and Research Institute of America (RIA [formerly by Prentice-Hall]). Consider, for exam-ple, the three different ways that Jack D. Carr can be cited:
Jack D. Carr, T.C.Memo. 1985–19
The 19th Memorandum decision issued by the Tax Court in 1985. Jack D. Carr, 49 TCM 507
Page 507 of Vol. 49 of the CCH Tax Court Memorandum Decisions. Jack D. Carr, RIA T.C.Mem.Dec. ¶85,019
Paragraph 85,019 of the RIA T.C. Memorandum Decisions.
Note that the third citation contains the same information as the first. Thus, ¶85,019 indicates the following information about the case: year 1985, 19th T.C. Memo. decision.27Although the RIA citation does not specifically include a volume number, the paragraph citation indicates that the decision can be found in the 1985 volume of the RIA Memorandum decision service.
Starting in 2001, U.S. Tax Court Summary Opinions are published on the U.S. Tax Court Web site, with the warning that they may not be treated as precedent for any other case. For example, Edward Charles Jones, filed on May 27, 2003, is cited as follows:
Edward Charles Jones, T.C. Summary Opinion, 2003–61.
Judicial Citations—The U.S. District Court, Court of Federal Claims, and Courts of Appeals. District Court, Court of Federal Claims, Court of Appeals, and Supreme Court decisions dealing with Federal tax matters are reported in both the CCH U.S. Tax Cases (USTC) and the RIA American Federal Tax Reports (AFTR) series. Federal District Court decisions, dealing with both tax and nontax issues, also are published by West Publishing Company in its Federal Supplement Series
26G. W. Carter, “Nonacquiescence: Winning by Losing,” Tax Notes (September 19, 1988): 1301–1307.
27In this text, the RIA citation for Memorandum decisions of the U.S. Tax Court is omitted. Thus, Jack D. Carr would be cited as 49 TCM 507, T.C.Memo. 1985–19.
28In this text, the case would be cited in the following form: Simons-Eastern Co. v. U.S., 73–1 USTC ¶9279, 31 AFTR2d 73–640, 354 F.Supp. 1003 (D.Ct. Ga., 1972). Prentice-Hall Information Services is now owned by Research Institute of America. Although recent volumes contain the RIA imprint, many of the older volumes con-tinue to have the P-H imprint.
29Before October 29, 1992, the Court of Federal Claims was called the Claims Court. Before October 1, 1982, the Court of Federal Claims was called the Court of Claims.
Finkbohner, Jr. v. U.S., (CA–11, 1986)
(Fed.Cl., 1994) 86–1 USTC 9393 (CCH citation)
57 AFTR2d 86–1400 (RIA citation) 788 F.2d 723 (West citation) Apollo Computer, Inc. v. U.S.,
95–1 USTC 50,015 (CCH citation) 74 AFTR2d 94–7172 (RIA citation) 32 Fed.Cl. 334 (West citation)
Note that Finkbohner, Jr. is a decision rendered by the Eleventh Circuit Court of Appeals in 1986 (CA–11, 1986), while Apollo Computer, Inc. was issued by the Court of Federal Claims in 1994 (Fed.Cl., 1994).
Judicial Citations—The U.S. Supreme Court. Like all other Federal tax deci-sions (except those rendered by the Tax Court), Supreme Court decideci-sions are published by Commerce Clearing House in the USTCs and by RIA (formerly by Prentice-Hall) in the AFTRs. The U.S. Government Printing Office also publishes these decisions in the United States Supreme Court Reports (U.S.) as does West (F.Supp.). Volume 999, published in 1998, is the last volume of the Federal Supplement Series. It is followed by the Federal Supplement Second Series (F.Supp.2d). The follow-ing examples illustrate three different ways of citfollow-ing a District Court case:
Simons-Eastern Co. v. U.S., 73–1 USTC ¶9279 (D.Ct. Ga., 1972).
Explanation: Reported in the first volume of the U.S. Tax Cases (USTC) published by Commerce Clearing House for calendar year 1973 (73–1) and located at paragraph 9279 (¶9279).
Simons-Eastern Co. v. U.S., 31 AFTR2d 73–640 (D.Ct. Ga., 1972).
Explanation: Reported in the 31st volume of the second series of the American Federal Tax Reports (AFTR2d) published by RIA and beginning on page 640. The “73” preceding the page number indicates the year the case was published but is a designation used only in recent decisions.
Simons-Eastern Co. v. U.S., 354 F.Supp. 1003 (D.Ct. Ga., 1972).
Explanation: Reported in the 354th volume of the Federal Supplement Series (F.Supp.) published by West Publishing Company and beginning on page 1003.
In all of the preceding citations, note that the name of the case is the same (Simons-Eastern Co. being the taxpayer), as is the reference to the Federal District Court of Georgia (D.Ct. Ga.) and the year the decision was rendered (1972).28
Decisions of the Court of Federal Claims29 and the Courts of Appeals are published in the USTCs, AFTRs, and a West Publishing Company reporter called the Federal Second Series (F.2d). Volume 999, published in 1993, is the last volume of the Federal Second Series. It is followed by the Federal Third Series (F.3d). Beginning with October 1982, the Court of Federal Claims decisions are published in another West Publishing Company reporter entitled the Claims Court Reporter (abbreviated Cl.Ct.). Beginning with Volume 27 on October 30, 1992, the name of the reporter changed to the Federal Claims Reporter (abbreviated as Fed.Cl.). The following exam-ples illustrate the different forms:
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Publishing Company in its Supreme Court Reporter (S.Ct.) and the Lawyer’s Co-operative Publishing Company in its United States Reports, Lawyer’s Edition (L.Ed.). The following illustrates the different ways the same decision can be cited:
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Understand the tax research process.
U.S. v. The Donruss Co.,
69–1 USTC ¶9167 (CCH citation) 23 AFTR2d 69–418 (RIA citation) 89 S.Ct. 501 (West citation)
393 U.S. 297 (U.S. Government Printing Office citation) 21 L.Ed.2d 495 (Lawyer's Co-operative Publishing Co. citation)
(USSC, 1969)
The parenthetical reference (USSC, 1969) identifies the decision as having been rendered by the U.S. Supreme Court in 1969. In this text, the citations of Supreme Court decisions will be limited to the CCH (USTC), RIA (AFTR), and West (S.Ct.) versions. For a summary, see Concept Summary 2–2.
Working with the Tax Law—Tax Research
Tax research is the method by which a tax practitioner, student, or professor determines the best available solution to a situation that possesses tax consequences. In other words, it is the process of finding a competent and professional conclusion to a tax problem. The problem may originate from completed or proposed transac-tions. In the case of a completed transaction, the objective of the research is to
Judicial Sources
Court Location Authority
U.S. Supreme Court S.Ct. Series (West) Highest authority U.S. Series (U.S. Gov’t.)
L.Ed. (Lawyer’s Co-op.) AFTR (RIA)
USTC (CCH)
U.S. Courts of Appeal Federal 3d (West) Next highest appellate court AFTR (RIA)
USTC (CCH)
Tax Court (Regular decisions) U.S. Govt. Printing Office Highest trial court* RIA/CCH separate services
Tax Court (Memorandum decisions) RIA T.C.Memo. (RIA) Less authority than Regular T.C.
TCM (CCH) decision
U.S. Court of Federal Claims** Federal Claims Reporter (West) Similar authority as Tax Court AFTR (RIA)
USTC (CCH)
U.S. District Courts F.Supp.2d Series (West) Lowest trial court AFTR (RIA)
USTC (CCH)
Small Cases Division of Tax Court U.S. Tax Court Web site*** No precedent value
*Theoretically, the Tax Court, Court of Federal Claims, and District Courts are on the same level of authority. But some people believe that since the Tax Court hears and decides tax cases from all parts of the country (i.e., it is a national court), its decisions may be more authoritative than a Court of Federal Claims or District Court decision.
**Before October 29, 1992, the U.S. Claims Court. ***Starting in 2001.
