Ebook Federal tax research (8th edition): Part 1

Federal Tax
Research
EIGHTH EDITION

William A. Raabe, Ph.D., CPA
The Ohio State University

Gerald E. Whittenburg, Ph.D., CPA
San Diego State University

Debra L. Sanders, Ph.D., CPA
Washington State University

Australia  Canada  Mexico  Singapore  Spain  United Kingdom  United States


Federal Tax Research, 8th edition
William A. Raabe, Gerald E. Whittenburg,
Debra L. Sanders
VP/Editorial Director: Jack W. Calhoun
Editor-in-Chief: Rob Dewey
Acquisitions Editor: Keith Chasse
Senior Developmental Editor: Craig Avery

© 2009, 2005 South-Western, a part of Cengage Learning
ALL RIGHTS RESERVED. No part of this work covered by the copyright herein
may be reproduced, transmitted, stored or used in any form or by any means
graphic, electronic, or mechanical, including but not limited to photocopying,
recording, scanning, digitizing, taping, Web distribution, information networks, or information storage and retrieval systems, except as permitted
under Section 107 or 108 of the 1976 United States Copyright Act, without the

prior written permission of the publisher.

Marketing Manager: Kristen Hurd
Content Project Manager: Jennifer A. Ziegler

For product information and technology assistance, contact us at

Manager of Technology, Editorial: John Rich

Cengage Learning Academic Resource Center, 1-800-423-0563

Website Project Manager: Brian Courter
Manufacturing Coordinator: Doug Wilke
Production Service: Newgen, India

For permission to use material from this text or product,
submit all requests online at www.cengage.com/permissions
Further permissions questions can be emailed to


Senior Art Director: Michelle Kunkler
Internal Designer: Juli Cook
Cover Designer: Rose Alcorn
Cover Image: © Isabelle Rozenbaum /
PhotoAlto Agency RF Collections

Library of Congress Control Number: 2007943841
ISBN-13: 978-0-324-65965-8
ISBN-10: 0-324-65965-2
South-Western Cengage Learning

5191 Natorp Boulevard
Mason, OH 45040
USA
Cengage Learning products are represented in Canada by
Nelson Education, Ltd.
For your course and learning solutions, visit academic.cengage.com
Purchase any of our products at your local college store or at our preferred
online store www.ichapters.com

Printed in the United States of America
1 2 3 4 5 6 7 11 10 09 08 07


DEDICATIONS
This book is dedicated to our academic mentors.
William A. Raabe
Norton Bedford
Gerald Brighton
Christine Purdie
Joseph Schultz
Eugene Willis
Gerald E. Whittenburg
William H. Hoffman
James W. Pratt
John J. Willingham
Allan R. Bailey
Debra L. Sanders
William Raabe
Philip M. J. Reckers
Theodore Saldin

Robert Wyndelts


This page intentionally left blank


ABOUT THE AUTHORS

William A. Raabe, Ph.D., CPA, teaches graduate tax courses at the Fisher
College of Business of The Ohio State University, and at the Capital University
(OH) Law School. He is a leader among business school tax faculty in incorporating developments in technology into curricula for the educational development
of tax professionals.
Dr. Raabe’s teaching and research interests focus on multijurisdictional
taxation and financial planning, and he is recognized as the leader among business
school academics in the fields of state and local income, sales, and property taxation.
Dr. Raabe is the author or editor of approximately twenty books, including SouthWestern Federal Taxation, Schedule M-3 Compliance, and the Multistate Corporate Tax
Guide. He has received university-wide recognition as the winner of the AMOCO
Foundation Award for Teaching Excellence, and the Wisconsin Institute of CPAs
named him the Educator of the Year.

Gerald E. Whittenburg, Ph.D., CPA, EA, is a professor in the School of
Accountancy at San Diego State University. A graduate of the University of
Houston, Dr. Whittenburg is interested individual and corporate taxation, pension
plans, and tax research methodology.
Dr. Whittenburg is also an author of the textbook Income Tax Fundamentals. In
addition, he has published articles in journals such as Advances in Taxation, Practical
Tax Strategies,Taxes—The Tax Magazine, Journal of Taxation of Investments, Journal
of Taxation of Employee Benefits, Journal of Taxation of Financial Institutions, Valuation
Strategies, Journal of Small Business Strategy, The Tax Adviser, and Journal of Accounting Education. He has received numerous awards for teaching, including the Trustee’s Outstanding Faculty Award for the entire California State University System.
Recently, Dr. Whittenburg was awarded a Fulbright Fellowship to the Ukraine. In

this picture, he is shown in front of St. Michael's Church in Kiev.

Debra L. Sanders, Ph.D., CPA, is a professor in the Washington State
Unmiversity School of Accounting, Information Systems and Business Law. She
has received numerous awards for outstanding teaching, research, and service including the Boeing Distinguished Faculty Research Award, the Shell Corporation
Outstanding Teacher Award, and the College of Business and Economics
Outstanding Service Award.
Dr. Sanders, a graduate of Arizona State University, publishes in both
academic and professional journals. Her work has appeared in the academic journals Behavioral Research in Accounting, National Tax Journal, The Journal of the
American Taxation Association, Advances in Taxation, and The International Journal of
Accounting. Professional journals that have published her articles include Taxation
for Accountants, Taxation for Lawyers, The Review of Taxation of Individuals, Taxes,
The Tax Adviser, and Journal of Financial Planning.


This page intentionally left blank


BRIEF CONTENTS

Part I

The Tax Research Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Chapter 1
Chapter 2

Introduction to Tax Practice and Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Tax Research Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Part II

Primary Sources of Federal Tax Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

Chapter 3
Chapter 4

Constitutional and Legislative Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Administrative Regulations and Rulings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

Chapter 5

Judicial Interpretations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149

Part III

Research Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189

Chapter 6

Tax Services and Periodicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191

Chapter 7

Legal Services and Internet Sites. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233

Chapter 8
Chapter 9

Citators and Other Finding Devices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273

State Tax Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307

Chapter 10

International Tax Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349

Part IV

Implementing the Research Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379

Chapter 11

Communicating Research Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381

Chapter 12
Chapter 13

Tax Planning. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411
Working with the IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 437

Chapter 14

Tax Practice and Administration: Sanctions, Agreements, and Disclosures. . . . 469

Appendix A

Time Value of Money Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 515

Appendix B
Appendix C

Standard Tax Citations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 518
IRS Circular 230. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 522

Glossary

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 551

Index

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 565

vii


This page intentionally left blank


CONTENTS

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xv

PART I
THE TAX RESEARCH ENVIRONMENT . . . . . . . .1
Chapter 1: Introduction to
Tax Practice and Ethics . . . . . . . . . . . . . . . . . . 3
Elements of Tax Practice . . . . . . . . . . . . . . . . . . . 5
Tax Compliance . . . . . . . . . . . . . . . . . . . . . . . . . 5
Tax Planning . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Tax Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Tax Research . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Rules and Ethics in Tax Practice . . . . . . . . . . . . . 7
Circular 230 (Complete Text in Appendix C) . . . . 7
AICPA Code of Professional Conduct . . . . . . . . . 14
Statements on Standards for Tax Services . . . . . . 19
Sarbanes-Oxley and Taxation . . . . . . . . . . . . . . 23
ABA Model Code of Professional Responsibility . . . 24
Nonregulatory Ethical Behavior Models . . . . . . 25
Ethical Dilemmas. . . . . . . . . . . . . . . . . . . . . . . 25
Ethical Reasoning. . . . . . . . . . . . . . . . . . . . . . . 25
Ethical Professional Behavior . . . . . . . . . . . . . . . 26
Morality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Social Responsibility . . . . . . . . . . . . . . . . . . . . . 28
Business Ethics . . . . . . . . . . . . . . . . . . . . . . . . . 28
Tax Planning Ethics. . . . . . . . . . . . . . . . . . . . . 28
Other Ethical Standards . . . . . . . . . . . . . . . . . . 29
Ethics Training and Education. . . . . . . . . . . . . . 31
Tax Research by Certified
Public Accountants . . . . . . . . . . . . . . . . . . . . . . 32
Historical Developments . . . . . . . . . . . . . . . . . . 32
CPAs and Other Nonattorneys . . . . . . . . . . . . . 33
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Tax Tutor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Key Words . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Discussion Questions. . . . . . . . . . . . . . . . . . . . . 35
Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Research Cases . . . . . . . . . . . . . . . . . . . . . . . . . 43

Chapter 2: Tax Research Methodology . . . . . 47
Outline of the Tax Research Process . . . . . . . . . 48

Step 1: Establish the Facts . . . . . . . . . . . . . . . . . 49
Step 2: Identify the Issues. . . . . . . . . . . . . . . . . . 50
Step 3: Locate Authority . . . . . . . . . . . . . . . . . . 53
Step 4: Evaluate Authority . . . . . . . . . . . . . . . . 56
Step 5: Develop Conclusions and
Recommendations . . . . . . . . . . . . . . . . . . . . . . . 56
Step 6: Communicate the Recommendation . . . . . 57
Overview of Computerized Tax Research . . . . . 58
Benefits of Using a Computerized Tax Service . . 60
Factors in Choosing a Computerized
Tax Service . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Using a Computer in Tax Research . . . . . . . . . . 61
Step 1: State the Issue as a Question . . . . . . . . . . 62
Step 2: Identify the Key Words . . . . . . . . . . . . . 62
Step 3: Construct a Computer Search Query . . . . 63
Step 4: Select a Database and Execute the Search . 63
Step 5: Interpret and Refine the Search . . . . . . . . 64
IRS Web Site Research . . . . . . . . . . . . . . . . . . . 65
Tax Research on the CPE Exam . . . . . . . . . . . . 65
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Tax Tutor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Key Words . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Discussion Questions. . . . . . . . . . . . . . . . . . . . . 71
Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Research Cases . . . . . . . . . . . . . . . . . . . . . . . . . 78

PART II
PRIMARY SOURCES OF FEDERAL
TAX LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . .83
Chapter 3: Constitutional and Legislative

Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Sources of Federal Tax Law . . . . . . . . . . . . . . . 86
History of U.S. Taxation . . . . . . . . . . . . . . . . . . 86
U.S. Constitution . . . . . . . . . . . . . . . . . . . . . . . 89
Tax Treaties . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
The Legislative Process . . . . . . . . . . . . . . . . . . . 93
ix


x

Contents

Where to Find Committee Reports . . . . . . . . . . . .96
Internal Revenue Code . . . . . . . . . . . . . . . . . . . .96
Organization of the Internal Revenue Code . . . . . .97
Where to Find the Internal Revenue Code . . . . . .102
Interpreting the Internal Revenue Code. . . . . . .104
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107
Tax Tutor . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107
Key Words . . . . . . . . . . . . . . . . . . . . . . . . . . . .107
Discussion Questions. . . . . . . . . . . . . . . . . . . . .107
Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .109
Research Cases . . . . . . . . . . . . . . . . . . . . . . . . .115
Chapter 4: Administrative Regulations
and Rulings. . . . . . . . . . . . . . . . . . . . . . . . . . 119
Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . .120
Temporary Regulations . . . . . . . . . . . . . . . . . . .121
Effective Date of Regulations . . . . . . . . . . . . . . .121
Citing a Regulation . . . . . . . . . . . . . . . . . . . . .122

Assessing Regulations . . . . . . . . . . . . . . . . . . . .123
Locating Regulations. . . . . . . . . . . . . . . . . . . . .124
Revenue Rulings . . . . . . . . . . . . . . . . . . . . . . . .124
Revenue Ruling Citations . . . . . . . . . . . . . . . . .126
Locating Revenue Rulings . . . . . . . . . . . . . . . . .127
Revenue Procedures . . . . . . . . . . . . . . . . . . . . .127
Letter Rulings . . . . . . . . . . . . . . . . . . . . . . . . . .128
Private Letter Rulings . . . . . . . . . . . . . . . . . . .129
Technical Advice Memoranda . . . . . . . . . . . . . .130
Determination Letters. . . . . . . . . . . . . . . . . . . .131
Public Inspection of Written Determinations . . . .131
Written Determination Numbering System. . . . .132
Locating Written Determinations. . . . . . . . . . . .132
Other IRS Pronouncements . . . . . . . . . . . . . . . .132
Acquiescences and Nonacquiescences. . . . . . . . . . .132
Internal Revenue Bulletin . . . . . . . . . . . . . . . . .134
Chief Counsel Memoranda . . . . . . . . . . . . . . . .135
Announcements and Notices . . . . . . . . . . . . . . . .135
Miscellaneous Publications . . . . . . . . . . . . . . . . .137
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .138
Tax Tutor . . . . . . . . . . . . . . . . . . . . . . . . . . . . .139
Key Words . . . . . . . . . . . . . . . . . . . . . . . . . . . .139
Discussion Questions. . . . . . . . . . . . . . . . . . . . .139
Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .142
Research Cases . . . . . . . . . . . . . . . . . . . . . . . . .145

Chapter 5: Judicial Interpretations . . . . . . . . 149
Federal Court System . . . . . . . . . . . . . . . . . . . .150
Legal Conventions . . . . . . . . . . . . . . . . . . . . . .151
Tax Court. . . . . . . . . . . . . . . . . . . . . . . . . . . .153

District Courts. . . . . . . . . . . . . . . . . . . . . . . . .162
Court of Federal Claims . . . . . . . . . . . . . . . . . .163
Courts of Appeals . . . . . . . . . . . . . . . . . . . . . . .165
Supreme Court . . . . . . . . . . . . . . . . . . . . . . . .168
Case Briefs . . . . . . . . . . . . . . . . . . . . . . . . . . . .170
The Internet and Judicial Sources . . . . . . . . . . .171
Computer Tax Service Example. . . . . . . . . . . . .172
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .173
Tax Tutor . . . . . . . . . . . . . . . . . . . . . . . . . . . . .176
Key Words . . . . . . . . . . . . . . . . . . . . . . . . . . . .176
Discussion Questions. . . . . . . . . . . . . . . . . . . . .176
Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .179
Research Cases . . . . . . . . . . . . . . . . . . . . . . . . .182

PART III
RESEARCH TOOLS. . . . . . . . . . . . . . . . . . . . . 189
Chapter 6: Tax Services and Periodicals. . . . 191
Tax Services . . . . . . . . . . . . . . . . . . . . . . . . . . .192
Illustrative Research Example . . . . . . . . . . . . . .193
Approaching the Research Problem . . . . . . . . . . .193
Assessing Tax Information. . . . . . . . . . . . . . . . .194
RIA Checkpoint . . . . . . . . . . . . . . . . . . . . . . . .195
Keyword Search . . . . . . . . . . . . . . . . . . . . . . . .195
Contents Search . . . . . . . . . . . . . . . . . . . . . . . .202
Citation Search . . . . . . . . . . . . . . . . . . . . . . . .205
CCH Tax Research Network. . . . . . . . . . . . . . .207
Keyword Search . . . . . . . . . . . . . . . . . . . . . . . .209
Citation and Contents Searches . . . . . . . . . . . . .210
ATX/Kleinrock . . . . . . . . . . . . . . . . . . . . . . . . .212
Tax Periodicals . . . . . . . . . . . . . . . . . . . . . . . . .213

Citing Articles . . . . . . . . . . . . . . . . . . . . . . . .213
Types of Periodicals. . . . . . . . . . . . . . . . . . . . . .214
Locating Relevant Tax Articles . . . . . . . . . . . . .217
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .219
Tax Tutor . . . . . . . . . . . . . . . . . . . . . . . . . . . . .220
Key Words . . . . . . . . . . . . . . . . . . . . . . . . . . . .220
Discussion Questions. . . . . . . . . . . . . . . . . . . . .220
Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .222


Contents

xi

Research Cases . . . . . . . . . . . . . . . . . . . . . . . . 227
Extensive Case. . . . . . . . . . . . . . . . . . . . . . . . . 230

Discussion Questions. . . . . . . . . . . . . . . . . . . . 296
Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298
Research Cases . . . . . . . . . . . . . . . . . . . . . . . . 302

Chapter 7: Legal Services and Internet Sites
LexisNexis. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Center . . . . . . . . . . . . . . . . . . . . . . . . . .
LexisNexis Academic. . . . . . . . . . . . . . . . . . . .
Tax Analysts . . . . . . . . . . . . . . . . . . . . . . . . . .
Research Library . . . . . . . . . . . . . . . . . . . . . .
Newsletters . . . . . . . . . . . . . . . . . . . . . . . . . .
Westlaw . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data and Access . . . . . . . . . . . . . . . . . . . . . . .

Searching Westlaw. . . . . . . . . . . . . . . . . . . . .
Business News . . . . . . . . . . . . . . . . . . . . . . . .
Mertens Service . . . . . . . . . . . . . . . . . . . . . . .
Bittker Lokken Service. . . . . . . . . . . . . . . . . .
BNA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolios. . . . . . . . . . . . . . . . . . . . . . . . . . . .
News Reports . . . . . . . . . . . . . . . . . . . . . . . . .
Internet Sites . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Tutor . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Key Words . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discussion Questions. . . . . . . . . . . . . . . . . . . .
Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research Cases . . . . . . . . . . . . . . . . . . . . . . . .
Advanced Cases . . . . . . . . . . . . . . . . . . . . . . . .
Extensive Cases . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 9: State Tax Services. . . . . . . . . . . . 307
Importance of State and Local Taxes . . . . . . . . 308
Historical Perspective . . . . . . . . . . . . . . . . . . . 312
Legal Perspective. . . . . . . . . . . . . . . . . . . . . . . 312
Supremacy. . . . . . . . . . . . . . . . . . . . . . . . . . . 313
Commerce . . . . . . . . . . . . . . . . . . . . . . . . . . . 313
Due Process . . . . . . . . . . . . . . . . . . . . . . . . . . 313
Uniformity and Equal Protection . . . . . . . . . . . 315
Privileges and Immunities . . . . . . . . . . . . . . . . 316
State Tax Structure . . . . . . . . . . . . . . . . . . . . . 316
Constitution. . . . . . . . . . . . . . . . . . . . . . . . . . 316
Legislative. . . . . . . . . . . . . . . . . . . . . . . . . . . 316
Administrative . . . . . . . . . . . . . . . . . . . . . . . 317

Judicial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319
Multistate . . . . . . . . . . . . . . . . . . . . . . . . . . . 320
Illustrative Research Examples . . . . . . . . . . . . . 321
RIA State and Local Service. . . . . . . . . . . . . . . 321
Special Features . . . . . . . . . . . . . . . . . . . . . . . 322
Keyword Search . . . . . . . . . . . . . . . . . . . . . . . 323
Citation Search . . . . . . . . . . . . . . . . . . . . . . . 325
Contents Search . . . . . . . . . . . . . . . . . . . . . . . 326
CCH NetWork State Service . . . . . . . . . . . . . 327
State Tax Tab . . . . . . . . . . . . . . . . . . . . . . . . 327
Citation Search . . . . . . . . . . . . . . . . . . . . . . . 330
LexisNexis Academic . . . . . . . . . . . . . . . . . . . . 331
Search . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331
Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331
Westlaw State Services. . . . . . . . . . . . . . . . . . . 332
Find and KeyCite . . . . . . . . . . . . . . . . . . . . . . 333
Directory. . . . . . . . . . . . . . . . . . . . . . . . . . . . 333
Tax Tab . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334
BNA State Services . . . . . . . . . . . . . . . . . . . . . 335
Other Resources . . . . . . . . . . . . . . . . . . . . . . . 337
Periodicals and Internet Sites. . . . . . . . . . . . . . 337
Journals . . . . . . . . . . . . . . . . . . . . . . . . . . . . 337
Newsletters . . . . . . . . . . . . . . . . . . . . . . . . . . 337
Internet Sites . . . . . . . . . . . . . . . . . . . . . . . . . 338
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338

233
234
234
238

242
242
244
246
246
247
251
252
253
254
254
256
256
259
260
260
260
262
266
269
270

Chapter 8: Citators and Other Finding
Devices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
Citators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274
What Is a Citator? . . . . . . . . . . . . . . . . . . . . . 274
Commercial Citators. . . . . . . . . . . . . . . . . . . . 276
Shepard’s . . . . . . . . . . . . . . . . . . . . . . . . . . . 277
Lexis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281
Westlaw Citator System . . . . . . . . . . . . . . . . . 282

RIA Citator 2nd . . . . . . . . . . . . . . . . . . . . . . 287
CCH Citator . . . . . . . . . . . . . . . . . . . . . . . . . 292
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296
Tax Tutor . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296
Key Words . . . . . . . . . . . . . . . . . . . . . . . . . . . 296


xii

Contents

Tax Tutor . . . . . . . . . . . . . . . . .
Key Words . . . . . . . . . . . . . . . .
Discussion Questions. . . . . . . . .
Exercises . . . . . . . . . . . . . . . . . .
Research Cases . . . . . . . . . . . . .

...........
...........
...........
...........
...........

339
339
339
341
345

Chapter 10: International Tax Services . . . . 349

Overview of International Taxation . . . . . . . . . 350
Full Inclusion Model . . . . . . . . . . . . . . . . . . . . 350
Territorial Model. . . . . . . . . . . . . . . . . . . . . . 351
Blended Model . . . . . . . . . . . . . . . . . . . . . . . . 351
Income Sourcing . . . . . . . . . . . . . . . . . . . . . . . 352
Source Determination. . . . . . . . . . . . . . . . . . . 352
Deduction Apportionment . . . . . . . . . . . . . . . . 352
Tax Treaties . . . . . . . . . . . . . . . . . . . . . . . . . . 354
Tax Havens . . . . . . . . . . . . . . . . . . . . . . . . . . . 355
BNA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356
BNA Foreign Income Library . . . . . . . . . . . . . 356
BNA International Service . . . . . . . . . . . . . . . 357
LexisNexis. . . . . . . . . . . . . . . . . . . . . . . . . . . . 360
Tax Center . . . . . . . . . . . . . . . . . . . . . . . . . . 361
Academic. . . . . . . . . . . . . . . . . . . . . . . . . . . . 363
RIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364
International Tax Products . . . . . . . . . . . . . . . 365
Westlaw . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368
CCH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369
Service Offering. . . . . . . . . . . . . . . . . . . . . . . 370
Internet Sites . . . . . . . . . . . . . . . . . . . . . . . . . . 371
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372
Tax Tutor . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372
Key Words . . . . . . . . . . . . . . . . . . . . . . . . . . . 372
Discussion Questions . . . . . . . . . . . . . . . . . . . 372
Exercise. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 374
Research Cases . . . . . . . . . . . . . . . . . . . . . . . . 376

PART IV
IMPLEMENTING THE RESEARCH TOOLS. . . . .379

Chapter 11: Communicating Research
Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381
Communicating and the Tax Professional . . . . 382
The Heart of Tax Research Communication:
The File Memo . . . . . . . . . . . . . . . . . . . . . . . . 384
Evaluating the Sources of Law . . . . . . . . . . . . . 388

Client Letters . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive Illustration of Client File. . . . .
Oral Presentations of Research Results . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Tutor . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Key Words . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Research Assignments. . . . . . . . . . . . . . . .
Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research Cases . . . . . . . . . . . . . . . . . . . . . . . .
Advanced Cases . . . . . . . . . . . . . . . . . . . . . . . .

390
393
396
401
401
401
401
402
405
407

Chapter 12: Tax Planning. . . . . . . . . . . . . . . 411

Economics of Tax Planning, Avoidance, and
Evasion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 412
Tax Rate Terminology . . . . . . . . . . . . . . . . . . 414
Tax Base. . . . . . . . . . . . . . . . . . . . . . . . . . . . 415
Tax Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . 415
Tax Planning in Perspective . . . . . . . . . . . . . . 417
Fundamentals of Tax Planning. . . . . . . . . . . . . 418
Avoiding Income Recognition . . . . . . . . . . . . . . 420
Postponing Income Recognition . . . . . . . . . . . . . 421
Changing Tax Jurisdictions. . . . . . . . . . . . . . . 422
Controlling Classification of Income . . . . . . . . . 423
Spreading Income among Related Taxpayers . . . 423
Departing from the Fundamentals . . . . . . . . . . 424
Exploiting Inconsistencies in the Statute . . . . . 425
Inconsistencies between Transactions . . . . . . . . . 425
Inconsistencies between Taxpayers . . . . . . . . . . . 425
Inconsistencies between Years . . . . . . . . . . . . . . 426
Avoiding Tax Traps. . . . . . . . . . . . . . . . . . . . . 427
Statutory Tax Traps. . . . . . . . . . . . . . . . . . . . 427
Judicial Tax Traps . . . . . . . . . . . . . . . . . . . . . 427
Tax Planning Illustrations . . . . . . . . . . . . . . . . 430
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431
Tax Tutor . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432
Key Words . . . . . . . . . . . . . . . . . . . . . . . . . . . 432
Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432
Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433
Extended Cases . . . . . . . . . . . . . . . . . . . . . . . . 434
Chapter 13: Working with the IRS. . . . . . . . 437
Organization of the IRS. . . . . . . . . . . . . . . . . . 438
IRS National Office . . . . . . . . . . . . . . . . . . . . 439

Contents

IRS Service Centers . . . . . . . . . . . . . . . . . . . .
Taxpayer Assistance Orders . . . . . . . . . . . . . . .
Local Taxpayer Advocates . . . . . . . . . . . . . . . .
Taxpayer Rights . . . . . . . . . . . . . . . . . . . . . . .
The Audit Process . . . . . . . . . . . . . . . . . . . . . .
Preliminary Review of Returns . . . . . . . . . . . .
Selection of Returns for Examination . . . . . . . .
Examinations. . . . . . . . . . . . . . . . . . . . . . . . . .
Correspondence Examinations . . . . . . . . . . . . .
Office Examinations . . . . . . . . . . . . . . . . . . . .
Field Examinations. . . . . . . . . . . . . . . . . . . . .
Dealing with an Auditor. . . . . . . . . . . . . . . . .
Conclusion of Examination . . . . . . . . . . . . . . .
Thirty-Day Letter . . . . . . . . . . . . . . . . . . . . .
File a Protest or Go Straight to Court? . . . . . . .
The Appeals Process . . . . . . . . . . . . . . . . . . . .
Appeals Conference . . . . . . . . . . . . . . . . . . . . .
Ninety-Day Letter . . . . . . . . . . . . . . . . . . . . .
Entering the Judicial System . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Tutor . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Key Words . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discussion Questions. . . . . . . . . . . . . . . . . . . .
Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research Cases . . . . . . . . . . . . . . . . . . . . . . . .

442
442
443
443
446
447
448
451
451
453
453
454
455
455
456
456
457
457
461
462
462
463
463
465
465
465

Chapter 14: Tax Practice and Administration:
Sanctions, Agreements, and Disclosures. . . . 469

Taxpayer Penalties. . . . . . . . . . . . . . . . . . . . . . 471
Civil Penalties . . . . . . . . . . . . . . . . . . . . . . . . 471
Criminal Penalties . . . . . . . . . . . . . . . . . . . . . 482
Penalties on Return Preparers . . . . . . . . . . . . . 484
Definition of Return Preparer . . . . . . . . . . . . . 485
Definition of Return Preparation . . . . . . . . . . . 485
Preparer Disclosure Penalties . . . . . . . . . . . . . 486
Preparer Conduct Penalties . . . . . . . . . . . . . . . 486
Injunctions . . . . . . . . . . . . . . . . . . . . . . . . . . . 492
Action to Enjoin TRPs . . . . . . . . . . . . . . . . . . 492
Action to Enjoin Promoters of Abusive
Tax Shelters . . . . . . . . . . . . . . . . . . . . . . . . . . . 492
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 492
Interest-Computation Conventions . . . . . . . . . . 492

Applicable Interest Rate. . . . . . . . . . . . . . . . . .
Statutes of Limitations. . . . . . . . . . . . . . . . . . .
Nature of Statutes of Limitations . . . . . . . . . . .
Assessment. . . . . . . . . . . . . . . . . . . . . . . . . . .
Collection . . . . . . . . . . . . . . . . . . . . . . . . . . .
Claim for Refund or Credit . . . . . . . . . . . . . . .
Suspension of Period of Assessment and Collection
Mitigation of Statute of Limitations . . . . . . . . .
Statutory Agreements . . . . . . . . . . . . . . . . . .
Closing Agreements . . . . . . . . . . . . . . . . . . . .
Offers in Compromise . . . . . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Tutor . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Key Words . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discussion Questions . . . . . . . . . . . . . . . . . . .

Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research Cases . . . . . . . . . . . . . . . . . . . . . . . .

xiii

496
496
496
497
498
499
500
501
501
501
502
504
504
505
505
507
508
510

APPENDIX A
Time Value of Money Tables . . . . . . . . . . . . . 515

APPENDIX B
Standard Tax Citations . . . . . . . . . . . . . . . . . 518

APPENDIX C
IRS Circular 230 . . . . . . . . . . . . . . . . . . . . . . . 522

GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . .551
INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .565


This page intentionally left blank


PREFACE

The Eighth Edition of Federal Tax Research reflects the increasing importance of
online research databases in tax research practices, and the changing nature of the
tax profession. Now more than ever, our text is the essential learning tool for tax
research, both online and using standard library materials. From its new complete
chapter on international tax research, to its host of new and valuable tax links and
illustrative research cases, Federal Tax Research 8/e remains justifiably the market
leader among tax research texts.
This popular book has been prepared as a comprehensive, stand-alone
reference tool for the user who wishes to become proficient in Federal tax
research. It is written for readers who are familiar with the fundamentals of the
Federal income and transfer tax law, at a level that typically is achieved on the
completion of two comprehensive introductory courses in taxation in either (1) the
accounting program in a business school or (2) second- or third-year courses in a
law school.
Nearly every accounting, tax, and tax law student can benefit from the
strategies found in this book. The text is most appropriate for:
• Upper-level accounting students in a business school (i.e., seniors in a four-year

program or those in the fifth year of a 150-hour program) who desire
additional information concerning the practice of taxation.
• Those who are enrolled in a nontax graduate program in business administration (e.g., an MBA or MS—management program) and would like
further practical training in the functions of taxation in today’’s business
environment.
• Second- or third-year law school students, especially those who desire a more
detailed and pragmatic introduction to a specialized tax practice.
• Those who are commencing a graduate degree program in taxation, in either a
business school or a law school, and require a varied and sophisticated
introduction to the procedures of tax research and to the routine functions and
implications of a tax practice.
• Practicing accountants and attorneys who need an introduction, updating, or
refresher relative to tax practice and research as an element of their career
paths.

STRUCTURE

AND

PEDAGOGY

Too often, existing textbooks ignore the detailed, pragmatic approach that students
require in developing effective and efficient tax research skills.
That is why we have included an unprecedented degree of hands-on tax research analysis throughout the text. This book does not simply discuss tax research
procedures or the sources of the Federal tax law; nor does it pro-vide a mere sample
of the pertinent tax reference material. Rather, the Eighth Edition reflects our
conviction that readers learn best by active learning and real-world experience with
the most important elements of the Federal tax law. We have applied this
conviction to the many important features of the Eighth Edition.
xv

xvi

Preface
• NEW: A full chapter on international tax research opportunities reflects the
importance of this type of tax work in today’s practice.
• NEW: Exercises, problems, and research cases are included throughout that
help students learn using actual online research tools and methods discussed in
the text.
• NEW: Increased emphasis on ethical constraints and tax penalties as
restrictions on taxpayer and tax advisor behavior.
• Spotlight on Taxation boxes in every chapter provide additional research tips,
tax information, news, background, and factors to consider in developing a tax
research solution.
• An introduction to tax practice continues to provide details on such valuable
topics as preparer penalties, statutes of limitation, interest conventions, and
return selection for IRS audits.
• The book’s continuing focus on tax planning fits perfectly with this growing
trend in tax practice.
• The text has been thoroughly updated with developments that affect those who
conduct tax research, including revisions to codes of ethics, IRS organizational
structure and enforcement functions, and other principles that control tax
practice.
• Hundreds of exercises and discussion questions allow the reader to learn by
exploring the reference materials in a well-developed tax library in their
research strategies.
• Assignments allow students to construct case briefs, file memos, client letters,
and other elements of a comprehensive client file—vital skills they will need in
practice.

• Hundreds of reproductions and illustrations have been excerpted from the
most important tax reference materials and expose students to the real world of
tax research.
• Summary charts, diagrams, and other study aids are integrated throughout the
text that summarize the elements of primary and secondary sources of Federal
tax law and encourage students to develop their own research routines and
techniques.

FOCUS

ON

ONLINE

AND

COMPUTERIZED RESEARCH

The use of online databases and computerized research has become indispensable
in tax practice, and the previous edition was at the forefront of coverage of these
innovative tools. For the Eighth Edition, however, we focus the majority of our
coverage on online and computerized research. Presenting and discussing these
new tools, strategies, and research tactics now eclipses our discussions of traditional
paper-based resources. We reviewed every internet research tool available, and the
text now includes the deepest analysis of the use of computer research tools
available for this purpose. Other important features include:
• Expansion of the review of tax ethics, including tax and non-tax sources of
guidance for the conduct of today’s tax practice.
• More material than ever on the role of tax research on the CPA exam.

Preface

• Tax Tutor online tutorials and interactive quizzes under the Student Resources
page at the book’s web site reinforce the tax research coverage in each chapter.
• The instructor’s portion of the web site for the text gage.
com/taxation/raabe includes suggested solutions for assigned material, a
generous test bank, multiple quizzes for each chapter, instructor PowerPoint
slides, and lecture notes. The web site also offers templates for commonly used
research documents, and sample syllabi so that the instructor can share in the
learning approaches used by the text’s many adopters.
As a result, we believe that the Eighth Edition is indispensable to learning and
performing real-world online and computerized tax research.

USING

THE

TEXT

The text’s exercises, cases, and advanced cases offer enough variety in both
difficulty and subject matter that they may be assigned to individual readers, or to
student groups of two or three, for their optimal use. The instructor also should
consider giving each student in the course a different research case to complete,
thereby both discouraging joint work and reducing the strain on the pertinent
library resources.
Given both the nature of the tax research process and the limited tax library
resources that are available to most firms and universities, the instructor must take
care (1) to assign discussion materials for which the necessary resources are
available and (2) to work through the assignment himself or herself, to as-certain

that one’s target solution to the assignment reflects the very latest in the
development of the Federal tax law.
The instructor may want to defer the assigning of certain research cases until a
specific electronic research service is discussed, which will provide additional
illustrations. Alternatively, the reader could be encouraged to rework a previous
assignment once the computerized tax reference tools have been introduced.
We discussed the instructor’s resource page content above.

ACKNOWLEDGMENTS
We are grateful to the reviewers of the Seventh Edition who provided valuable
comments and insights, which guided us in the development of the Eighth Edition
Adrian Allen, Shaw University
Rose Bailey, Gardner-Webb University
David R. Connelly, Western Illinois University
Patti Davis, Keystone College
Andrew Lafond, Philadelphia University
Tom Largay, Thomas College
Ernest Larkins, Georgia State University
Margaret Reed, University of Cincinnati
Robert Ricketts, Texas Tech University
Lee A. Sartori, Walsh College

xvii


xviii

Preface
James Trebby, Marquette University
Thomas C. Pearson, University of Hawaii at Manoa

Donald Williamson, American University
We wish to thank all of the book’s student and faculty readers who have
provided their detailed feedback and suggestions. Without your responses our
efforts would have been greatly diminished in scope. Any errors, of course, are the
sole responsibility of the authors. We are also grateful to Thomas Pearson for his
comments on Chapter 10.
We welcome your comments and suggestions for further improvements to this
text. Please feel free to use the following addresses to convey these remarks.
William A. Raabe
Fisher College of Business AMIS
The Ohio State University
Columbus, OH 43210
614.292.4023

Gerald E. Whittenburg
School of Accountancy
San Diego State University
San Diego, CA 92182-0221

Debra L. Sanders
Department of Accounting and Business Law
Washington State University
Pullman, WA 99164-4729


William A. Raabe
Gerald E. Wbittenburg
Debra L. Sanders
February 2008

The Tax Research
Environment
Chapter 1

Introduction to Tax Practice
and Ethics

Chapter 2

Tax Research Methodology

PART

I


This page intentionally left blank


CHAPTER

Introduction to Tax Practice
and Ethics

1

Learning Objectives
Chapter Outline
Elements of Tax Practice

Tax Compliance
Tax Planning
Tax Litigation
Tax Research
Rules and Ethics in Tax Practice
Circular 230 (Complete Text in Appendix C)
Who May Practice [Circular 230 §10.3]
Limited Practice without Enrollment [Circular 230 §10.7]
Tax Return Preparers [Circular 230 §10.7]
Practice Before the IRS [Circular 230 Subpart B]
Due Diligence [Circular 230 §10.22]
Contingent and Unconscionable Fees [Circular 230 §10.27]
Solicitation and Advertising [Circular 230 §10.30]
Best Practices [Circular 230 §10.33]
Tax Return Positions [Circular 230 §10.34]
Covered Opinions [Circular 230 §10.35]
Other Written Advice [Circular 230 §10.37]
AICPA Code of Professional Conduct
Rule 101: Independence
Rule 102: Integrity and Objectivity
Rule 201: General Standards
Rule 202: Compliance with Standards
Rule 203: Accounting Principles
Rule 301: Confidential Client Information
Rule 302: Contingent Fees
Rule 501: Acts Discreditable
Rule 502: Advertising and Other Forms of Solicitation
Rule 503: Commissions and Referral Fees
Rule 505: Form of Organization and Name
Statements on Standards for Tax Services

SSTS No. 1: Tax Return Positions
SSTS No. 2: Answers to Questions on Returns
SSTS No. 3: Certain Procedural Aspects of Preparing Returns
SSTS No. 4: Use of Estimates
SSTS No. 5: Departure from a Position Previously Concluded
in an Administrative Proceeding or Court Decision
SSTS No. 6: Knowledge of Error: Return Preparation
SSTS No. 7: Knowledge of Error: Administrative Proceedings
SSTS No. 8: Form and Content of Advice to Taxpayers
Sarbanes-Oxley and Taxation

• Describe the elements of modern tax

practice in the United States.
• Distinguish between open and closed

transactions.
• Identify sources of legal and ethical

standards that guide those who engage in
tax practice.
• Examine in detail the major collections of

ethical standards that bear upon tax
practitioners today.
• Place tax issues in a broader context of

ethics and morality.
• Understand the limitations on tax

research by CPAs and other nonattorneys.


4

Part 1 >>> The Tax Research Environment

Chapter Outline

(continued)

ABA Model Code of Professional Responsibility
Nonregulatory Ethical Behavior Models
Ethical Dilemmas
Ethical Reasoning
End-Based Ethical Reasoning
Rule-Based Ethical Reasoning
Care-Based Ethical Reasoning
Ethical Professional Behavior

A

Morality
Social Responsibility
Business Ethics
Tax Planning Ethics
Other Ethical Standards
Ethics Training and Education
Tax Research by Certified Public Accountants
Historical Developments

CPAs and Other Nonattorneys

the twenty-first century, tax practice and tax research are
continuing to evolve into an electronic and paperless reporting system. For
example, 2007 is the first year that over 50 percent of individual taxpayers e-filed
their tax returns. In keeping with this transition to an all-electronic tax system, tax
research is almost 100 percent computer based. The Uniform CPA Exam recognizes this transition and includes a set of “simulation” questions that require
that the candidate demonstrate accounting and tax research skills by completing
short computer research cases online. However, before the tax practitioner can
complete a tax research project, he or she must understand the tax research process
and all its elements, and how each element relates to solving a specific tax problem.
The primary purpose of this book is to inform the user on how effectively to obtain tax research results in a timely and efficient manner.
The practice of taxation is the process of applying the tax law, rules, regulations, and judicial rulings to specific transactions to determine the tax consequences to the taxpayer involved. There are many ways to practice tax. One can
practice tax directly through jobs such as a CPA, tax attorney, Enrolled Agent
(EA), or commercial income tax return preparer. In addition, tax can be practiced
indirectly by such individuals as controllers, accountants, CFOs, and others who do
tax work as part of their other duties. An understanding of taxation and the tax
practice environment is essential to the individual who wants to have a position in
the tax area.
Taxation is the process of collecting revenue from citizens to finance government activities. In a modern technological society such as that of the United States,
however, taxation comprises an interaction among several disciplines that is far
from simple. The tax system is derived from law, accounting, economics, political
science, and sociology (Exhibit 1-1). Principles of economics, sociology, and political science provide the environment, while law and accounting precepts are applied in a typical tax practice.
Tax policy questions concerning the effects that a specified tax law change will
have on economic growth, the effects of projected inflation on the implementation
of the tax law and vice versa, and the effects of the tax law on the United States’
balance of payments are addressed by economists. Political scientists, economists,
and sociologists, alternatively, examine issues such as who bears the ultimate burden of a tax, how a tax bill becomes law (including practical effects of the legislative
process), the social equity of a tax, and whether a tax is discriminatory. Attorneys
interpret (and often create) taxation statutes, and accountants apply the tax laws to

current or prospective economic transactions.
T THE START OF


Chapter 1 >>> Introduction to Tax Practice and Ethics

Exhibit 1-1: Elements of Taxation
Economics

Accounting

Law

TAXATION

Political Processes

ELEMENTS

OF

Societal Concerns

TAX PRACTICE

The tax laws of a democratic country such as the United States are created by a political process. In recent years, the result of this political process has been a law that
levies taxes on income, sales, estates, gifts, and other items that usually are reflected
by the accounting process. Thus, tax practice can be described as the application of
tax legislation to specific accounting situations. The elements of modern tax practice can be separated into three categories: compliance, planning, and litigation,
which are all supported by tax research. How these elements of tax practice fit together is illustrated in Exhibit 1-2.

Tax Compliance
In general, tax compliance consists of the gathering of pertinent information,
evaluation and classification of such information, and the filing of necessary tax returns. Tax compliance also includes other functions necessary to satisfy government requirements, such as representation at a client’s Internal Revenue Service
(IRS) audit. Commercial tax preparers, EAs, attorneys, and CPAs all perform tax
compliance to some extent. Noncomplex individual, partnership, and corporate tax
returns often are completed by commercial tax preparers. EAs, attorneys, and
CPAs usually are involved in the preparation of more complex tax returns; in addition, they provide tax-planning services and represent their clients before the IRS.
The elements of tax compliance and administration are examined in more detail in
later chapters.

Tax Planning
Tax planning is the process of arranging one’s financial affairs to optimize (i.e.,
usually to minimize current tax payments, but not always) tax liabilities. However,
whereas tax avoidance is the legitimate object of much of modern tax practice, tax
evasion constitutes the illegal nonpayment of a tax and cannot be condoned. Fraudulent acts of this sort are unrelated to the professional practice of tax planning.
Tax planning can be divided into two major categories: open transactions and
closed transactions. In an open transaction, the tax practitioner maintains some
degree of control over the attendant tax liability because the transaction is not yet
completed; for example, the title to an asset has not yet passed. If desired, some
modifications to an incomplete transaction can be made to receive more favorable

5


6

Part 1 >>> The Tax Research Environment

Exhibit 1-2: Elements of Tax Practice

Tax Practice

Tax Research

Tax Compliance

Tax Planning

Tax Litigation

tax treatment. In a closed transaction, however, all of the pertinent actions have
been completed; therefore, tax planning may be limited to the presentation of the
facts to the government in the most favorable, legally acceptable manner possible.

SPOTLIGHT ON TAXATION
Case Quotation
There is nothing inherently illegal or immoral in the avoidance
of taxation (i.e., Tax Planning) according to the tax system’s rules. The eminent judge Learned Hand best expressed this doctrine in the dissenting opinion of Commissioner v. Newman, 159 F.2d 848 (CA-2, 1947):
Over and over again, courts have said that there is nothing sinister in
so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor, and all do right, for nobody owes any
public duty to pay more than the law demands: taxes are enforced
extractions, not voluntary contributions.

Tax Litigation
A specialized area within the practice of law is the concentration on tax litigation.
Litigation is the process of settling a dispute with another party (here, usually the
IRS) in a court of law (here, a federal court). Typically, a tax attorney handles tax
litigation that progresses beyond the initial appeal of an IRS audit result. Accountants and other financial advisers can also serve in a support capacity. Later chapters of this book contain additional discussions of the various opportunities and
strategies available in tax litigation.

Tax Research
Tax research is undertaken to answer taxation questions. The tax research process
includes the (1) identification of pertinent issues, (2) determination of proper authorities, (3) evaluation of the appropriateness of these authorities, and (4) application of these authorities to specific facts. Tax research techniques are examined in
Chapters 2 through 10 of this text.