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TAX PLANNING

2017

Published by:

KEIR EDUCATIONAL RESOURCES 4785 Emerald Way

Middletown, OH 45044

1-800-795-5347

1-800-859-5347 FAX

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© 2017 Keir Educational Resources 42.1 800-795-5347

TABLE OF CONTENTS

Title Page

Income Tax Planning (Topics 42-51) Topic 42: Fundamental Tax Law 42.1–42.21

Topic 43: Income Tax Fundamentals and Calculations 43.1–43.79

Topic 44: Characteristics and Income Taxation of Business Entities 44.1–44.44

Topic 45: Income Taxation of Trusts and Estates 45.1–45.13

Topic 46: Alternative Minimum Tax (AMT) 46.1–46.16

Topic 47: Tax Reduction/Management Techniques 47.1–47.16

Topic 48: Tax Consequences of Property Transactions 48.1–48.65

Topic 49: Passive Activity and At-Risk Rules 49.1–49.16

Topic 50: Tax Implications of Special Circumstances 50.1–50.25

Topic 51: Charitable/Philanthropic Contributions and Deductions 51.1–51.18

Appendix A

Ridgeway Case Appendix – 1

Keller Case Appendix – 7

Powers Case Appendix – 18

Adams Case Appendix – 29

Carlisle Case Appendix – 36

Tingey Case Appendix – 39

Beals Case Appendix – 42

Mocsin Case Appendix – 54

Loudon Case Appendix – 66

Young Case Appendix – 75

Jones Case Appendix – 85

Smith Case Appendix – 100

Perkins Case Appendix – 116

Walker Case Appendix – 128

Appendix B – Basis of property received as a gift Appendix – 149

Tax Forms Appendix – 150

Selected Facts and Figures Appendix – 153

72 Topic List Appendix – 180

Glossary Glossary – 1

Index Index – 1

Tax Planning – Topic 42

© 2017 Keir Educational Resources 42.2 www.keirsuccess.com

Fundamental Tax Law (Topic 42)

CFP Board Student-Centered Learning Objectives

(a) Compare and contrast the fundamental components of the income tax system including filing

forms, filing status, income, exemptions, exclusions, deductions, adjustments, credits and tax

rates. [See also Topics 43 and 44]

(b) Explain how a progressive income tax system works and contrast it with other tax systems.

(c) Compute marginal and average tax brackets and explain the appropriate use of each.

Fundamental Tax Law

A. Types of authority

1) Primary

2) Secondary

B. Research sources

C. Progressive tax system

D. Marginal and average tax brackets

E. Tax Doctrines F. Tax Accounting

1) Accounting periods 2) Accounting methods

a) Cash receipts and disbursements b) Accrual method c) Hybrid method d) Change in accounting method

G. Net operating losses

Income Tax Law

Fundamentals

An important part of any comprehensive financial plan is

consideration of the effect income taxes have on the outcome. Lack

of planning for taxes may result in a large portion of a client’s wealth

being forfeited to the federal and state governments. To be able to

properly plan for future tax consequences, financial planners must

be able to apply provisions of tax law to their clients’ specific

circumstances. Because tax law is very complex and constantly

changing, it is nearly impossible for a planner to memorize the

myriad applications. Thus, it is important to understand the sources

of tax law so that research can be done to locate answers.

Types of Authority When researching tax questions, a planner can find answers in either

primary or secondary sources. Primary sources are those which



come directly from the government and have the official sanction of

those who enact the tax law. Secondary sources provide

explanations of provisions found in primary sources. Secondary

sources are generally much easier to read; however, only primary

sources carry official authority in a court or before the IRS.

Primary Sources Primary sources of tax law can be divided into three groups

corresponding to the three branches of the federal government. The

legislative branch (Congress) passes the laws, the executive branch

(President and governmental agencies) enforces the laws, and the

judicial branch (federal courts) interprets the laws. It is no different

for tax law – Congress passes tax legislation, the Treasury

Department (IRS) enforces it, and the Tax Court and other judges

interpret the law. Tax researchers must be familiar with the sources

of information that come from each branch of government.

Internal Revenue Code

Is Compilation of Tax

Laws

The Internal Revenue Code (IRC) is the compilation of all the laws

passed by Congress with regard to the collection of federal taxes. It

is organized in sections by topic and is amended each time Congress

passes a public law with tax provisions.

Whenever Congress considers a tax bill, it is first debated in the

House Ways and Means Committee and later in the Senate Finance

Committee. A record of these Committee meetings is kept and can

be useful in showing the intention of Congress in writing a tax bill.

REMEMBER: THE PRIMARY SOURCES OF TAX LAW

ARE: (1) THE INTERNAL REVENUE CODE

(2) TREASURY DEPARTMENT REGULATIONS AND

IRS REVENUE RULINGS

(3) COURT DECISIONS IN TAX CASES

Tax Code Is Public

Document

Because tax laws are public, the IRC and Committee reports are all

public documents that can be found on Congress’ Thomas website

(Library of Congress), as well as in other library sources online.

Some of these sources may not have the most up-to-date IRC and

may have limited indexing or search capabilities; however, they are

generally available at no cost.

Print versions of the Tax Code are also available from the

Government Printing Office (GPO) and various commercial

publishers. Committee reports by year are also available from the

GPO.

Treasury

Regulations Have

the Force of Law

The Treasury Department has been delegated the authority to

enforce tax laws passed by Congress. The Treasury Department

accomplishes this role in part by issuing Treasury Regulations,



Revenue Rulings, Revenue Procedures, Technical Advice

Memorandums, Private Letter Rulings, and various other

instructional publications.

Of these, Treasury Regulations have the highest authority. When

the Treasury Department (more specifically the Internal Revenue

Service or IRS) issues regulations to fill in the details of tax law,

they have the force of law. These regulations must be followed by

all taxpayers and by the IRS. In many cases, the Treasury issues

proposed regulations or temporary regulations, which may later be

changed based on input from tax and business professionals.

Regulations are numbered according to the section of the IRC to

which they relate. Regulations may be successfully challenged in

court if they violate the intent of Congress in the legislation or

exceed the scope of authority delegated by Congress.

Regulations are first issued as proposed regulations, which allows

for taxpayers and tax professionals to comment and ask for changes

before the final regulations are issued. Overwhelming concern from

the public may prompt changes in the final regulations.

Revenue Rulings May

Be Relied On but Are

Not Law

The IRS may publish additional guidance on the specific application

of various tax provisions in either Revenue Rulings or Technical

Advice Memorandums (TAM). Revenue Rulings and TAMs do not

have the force of Regulations, but they can be relied on to show how

the IRS will treat specific situations. They are also much narrower

in application than Regulations. Revenue Rulings are usually issued

as a result of numerous questions about a specific tax issue. A TAM

may be written when a controversy is appealed to the National

Office by either an IRS agent or a taxpayer. Both Revenue Rulings

and TAMs must be followed by the IRS in subsequent cases with

the same or similar facts. Courts, however, are not bound by revenue

rulings.

Private Letter Rulings

A Private Letter Ruling (PLR) may be requested on behalf of a taxpayer who presents a specific set of facts. These requests are generally presented to the IRS prior to the taxpayer entering into a significant transaction in order to ensure a desired tax result. A PLR is applicable only to the taxpayer who requested it and may not be used by another taxpayer in a dispute with the IRS. However, PLRs do show the IRS’ pattern of thinking and can give taxpayers some assurance of similar treatment.

Revenue Procedures Revenue Procedures are published to show the internal workings of the IRS and to guide taxpayers in dealing with the IRS. For example, a revenue procedure document is issued each year which



provides inflation adjustments for certain tax items such as the standard deduction. Much of the guidance described above is summarized in various publications by topic and may be picked up at a local IRS office or downloaded from the IRS website. The full text of the Regulations is found in the Code of Federal Regulations (Title 26), available online at the GPO website and other library sources. The print version can be ordered from the GPO. The other items are published in a weekly bulletin available online from the IRS website or by subscription. These weekly bulletins are bound together and published semiannually as the Cumulative Bulletins. The Cumulative Bulletins can also be ordered from the GPO. Indexing and cross-referencing of these sources are available from several commercial publishers, either in print, or online.

Court Interpretation of

the Tax Code

Finally, interpretation of the Tax Code is the responsibility of the courts. The Tax Court, Court of Claims, District Court, Court of Appeals, and the U.S. Supreme Court all publish decisions on tax cases. Court opinions are generally quite specific and are valuable only when the fact pattern being researched closely parallels the one considered by the court. However, sometimes, especially in appeals court cases, judges give more general guidance or will lay out rules that may have application in a wide array of future cases. It is important when referring to court decisions to check on subsequent appeals of court decisions for reversal or further clarification. Most tax publishers provide a volume which facilitates identifying opinions from appeals courts that refer to lower court decisions. Also, in Tax Court and appeals court cases, the IRS may publish an acquiescence to an unfavorable decision, indicating its willingness to follow the decision in other cases. Otherwise, the IRS is not bound by lower court decisions and may continue to litigate similar cases to get a more favorable ruling.

Publishers Court cases involving tax law are published in bound volumes by year and are made available by the Research Institute of

America and the Commerce Clearing House. Recent decisions of the Tax Court and all intermediate appeals courts are also available online either through the court’s own website or through an online college law library or through Find law (an online law library). These listings are not limited to tax cases, and searches must be done carefully to find the information needed.

Secondary Sources Secondary sources for tax research include comprehensive multi-

volume publications by the Research Institute of America (RIA), the



Commerce Clearing House (CCH), and the Bureau of National

Affairs (BNA). These sources are generally organized by topic and

have extensive indexing. They include explanation of tax

provisions, with reference to the IRC, Committee reports,

Regulations, court cases, and other pertinent primary sources. These

explanations provide a guide to, but are not a substitute for,

reference to the actual primary sources. These publishers also

provide single volumes that provide a very condensed overview of

tax provisions in an easy-to-use format. All these sources are

available in print and online.

Other secondary sources include tax periodicals, such as the Tax

Adviser published by the American Institute of Certified Public

Accountants (AICPA), the Tax Lawyer published by the ABA, and

other journals published by the CCH and the RIA. These periodicals

usually give in-depth coverage of a topic, including application

examples. They also help readers keep up with new and changing

topics.

Research Sources Research of a complex tax question involves the following steps:

Gather and review all facts pertaining to the tax situation.

Identify the issue that must be decided.

Identify the primary sources of tax law that have relevance to

the issue, either with original research or by using secondary

sources as a guide.

Compare the situations described in the tax law sources to the

question at hand and identify the similarities and the differences.

Evaluate the sources found, giving more weight to those that

have the force of law and checking to make sure Regulations or

Rulings have not been superseded and that Court cases have not

been reversed on appeal.

Choose an appropriate course of action to recommend, based on

how closely the facts match those described in tax sources and

the authority of those sources – if no tax law authority closely

resembles the case at hand, then a planner can use similar cases

to extrapolate a possible interpretation.

Communicate the recommendation in a concise manner, with

brief reference to the pertinent tax authority – indicate any lack

of authority for the recommendation and disclose those risks

involved in proceeding, where clear guidance is not available.

Progressive Tax The U.S. income tax system is a progressive tax system, meaning

that taxpayers pay at lower levels first, then higher levels of tax as



taxable income increases. Each level of tax is called a tax bracket,

and payment of taxes occurs at marginally higher rates. For

example, the current income tax system has brackets at the 10%,

15%, 25%, 28%, 33%, 35%, and 39.6% rates. The average, or

effective tax rate, will increase as income increases and taxes are

paid at increasingly higher rates.

Other tax systems include proportional tax systems where the

average tax rate is the same no matter what the taxpayer’s income

is, regressive tax systems where the average tax rate decreases as

income increases, and a flat tax system where everyone pays the

same lump-sum or same percentage of income each year.



Marginal vs. Average

Tax Rates

The taxpayer’s marginal tax rate is the highest tax bracket in which

they fall. This is the rate that will apply to the next dollar of income

earned. When analyzing the after-tax return on investments, the

marginal rate is the appropriate rate to use.

The average tax rate is the average rate of tax paid, factoring in the

payments at various marginal brackets.

Example:

If Heather is a single taxpayer with gross income of $115,000 and

total deductions of $20,000, her taxable income is $95,000. Based

on the following rate schedule, her marginal tax bracket is 28%. Her

average tax rate, however, is calculated by taking the tax liability

divided by her total income (for this example, we will assume

Heather does not qualify for any tax credits that reduce her tax after

the tax is calculated). Heather’s tax liability will be $18,713.75 plus

28% of the excess taxable income over $91,900. Based on this

calculation, Heather’s tax is:

18,713.75 + [(95,000 – 91,900) x .28] = 19,581.75

SINGLE (UNMARRIED INDIVIDUALS) If Taxable Income Is The Tax Is Not over $9,325 10% of taxable income Over $9,325 but not over $37,950 $932.50 plus 15% of the excess over $9,325 Over $37,950 but not over $91,900 $5,226.25 plus 25% of the excess over $37,950 Over $91,900 but not over $191,650 $18,713.75 plus 28% of the excess over $91,900 Over $191,650 but not over $416,700 $46,643.75 plus 33% of the excess over $191,650 Over $416,700 but not over $418,400 $120,910.25 plus 35% of the excess over $416,700 Over $418,400 $121,505.25 plus 39.6% of the excess over $418,400

Heather’s average tax rate is then calculated by dividing the

$19,581.75 in tax by her total income of $115,000, giving her an

average tax rate of 17.03%.

The Doctrine of

Constructive Receipt

Tax Doctrines

There are some basic principles that are applied in income tax law,

the understanding of which can be fundamental to learning the

myriad rules associated with income taxation.

Under the Doctrine of Constructive Receipt, a cash-basis taxpayer

(cash-basis versus accrual-basis is discussed below) need not take

physical possession of income in order for it to be treated as



“received” for income tax purposes. Income is taxable in the year

in which it is credited to the taxpayer’s account, set apart for the

taxpayer, or otherwise made available to be drawn upon by the

taxpayer at any time during the tax year. For example, a taxpayer

may purchase shares of a mutual fund and elect to have dividends

paid by the mutual fund reinvested to purchase additional shares.

The dividends will be taxable in the year of distribution even though

the taxpayer did not actually receive the dividend in cash form. The

fact that the dividend payment was credited to the taxpayer’s

account and was available for withdrawal governs the year in which

it is taxed.

If, however, the taxpayer’s control of the receipt of income is

subject to substantial limitations or restrictions, income is not

constructively received, and not taxed at that time. For example,

and employer might allocate a stock bonus to an employee but

restrict availability until some point beyond the end of the current

tax year. Although the stock bonus has been credited to the

employee’s account, it is not available to be withdrawn.

The Economic Benefit

Doctrine

The Economic Benefit Doctrine generally applies to employee

compensation and requires that the cash-basis taxpayer be taxed in

the year in which he or she receives an absolute right to property

(cash or otherwise) of measurable value. In other words, when the

employee receives an economic benefit. Thus, for example,

constructive receipt might be avoided if there is not an immediate

right to withdraw compensation from an employer when that

compensation is placed in an irrevocable trust for the benefit of the

taxpayer. However, the economic benefit doctrine may cause

taxation in the current year if there is a non-forfeitable right to

receipt at some point in the future, and the value of that right is

currently measurable. The economic benefit doctrine will not cause

immediate taxation, however, if there is substantial risk of

forfeiture.

The Doctrine of

Assignment of Income

The Assignment of Income Doctrine is a judicial doctrine designed

to limit tax evasion. The doctrine requires that a full transfer of

ownership of property must take place in order to transfer taxation

on the income. For example, a parent who owns an apartment

building cannot assign the rental income to his or her child (who is,

presumably, in a lower tax bracket). In addition, the assignment of

income doctrine also limits the ability to shift taxes to a family

member who is in a lower tax bracket by requiring that income

generated by performing personal services must be taxed to the

person who performed the services. Therefore, a parent cannot

assign salary earnings to a child in order to reduce taxation.



Accounting Periods

Tax Accounting A tax year is the annual time period over which a taxpayer calculates tax liability. The vast majority of taxpayers use a calendar year to calculate their tax liability because it easily conforms to the receipt of W-2s and 1099s. The tax year is elected on the first tax return and can only be changed with the permission of the IRS. A fiscal year may be beneficial for certain types of seasonal businesses, and the IRS will generally allow a change if it is also the business’ annual accounting period and the books are kept according to the fiscal year. A business may also choose to report using a 52-53-week year that always ends on a certain day of the week. For example, a company could have a fiscal year that ends on the last Tuesday in September each year. Other than this exception, a fiscal year must end on the last day of the month.

Generally, partnerships (and other entities taxed as partnerships)

must conform to the tax year of the majority owners (probably the

calendar year) unless a business purpose is established for a fiscal

year. S corporations and personal-service corporations are generally

limited to a calendar year unless a business purpose for a fiscal year

can be established. C corporations may choose any tax year desired

upon formation. When different tax years are approved and result in

tax deferrals, required payments by the entities must be made that

will neutralize any tax benefits.

Accounting Methods The accounting methods used to calculate taxable income (especially from business or rental activities) do not always follow the rules established by the accounting profession. When calculating a client’s tax liability, a planner needs to understand the differences between a client’s accounting practices and the accounting required by the IRC. Individuals may elect to be taxed as cash-basis taxpayers, accrual-basis taxpayers, or as a hybrid of the two bases. Most taxpayers do not know they have a choice and, by default, become cash-basis taxpayers (when they file their first tax return, using this basis). Cash-basis taxpayers record income when the cash is received and deduct expenses when payments are made. The IRS must approve any change in the basis of accounting.

Cash Receipts and

Disbursements

According to IRS regulations, a cash-basis taxpayer must include

in income any amounts that are “constructively received”



(Cash Method)

during the taxpayer’s tax year. For example, a check written by a customer and held at the customer’s office for pickup by the taxpayer must be included in the taxpayer’s income on the date it was available even if it was not actually picked up. This rule applies to any payment where the amount is available to the taxpayer without substantial limitation. When it is available, it is included in income. Payments received by a taxpayer’s agent and amounts set aside by a taxpayer’s employer in the current year, without significant restriction, are income in the current year. Even unearned income, such as advance payments of rent, is taxed when received.

KEY SUMMARY 42 – 1

Cash-Method Taxpayers – The Exceptions

In addition to cash collected or constructively received,

cash-basis taxpayers report as income:

The increment on Series E and EE bonds unless the

taxpayer has elected to defer recognition of income until

maturity (In the past, a taxpayer could exchange the E

or EE bonds for HH bonds and continue to defer interest

until the HH bonds matured.)

The original issue discount earned on bonds, including

zero-coupon bonds

Expenses are only deductible when paid. Receiving the bill for an expense is not enough; the bill has to be paid prior to the yearend to be deductible in the current year. An exception arises for expenses paid by credit card. These expenses are deductible in the period in which the credit card is charged, even if actual payment in cash is made later. The cash-basis method cannot be used if it does not clearly reflect income. Tax Regulations do not allow the cash basis to be used in businesses where inventory is a material income-producing factor. However, the IRS recently allowed an exception for businesses with gross receipts of under $1 million.

REMEMBER: TYPICALLY, THE CASH METHOD OF ACCOUNTING IS USED WHEN THE TAXPAYER MAKES ONLY CASH TRANSACTIONS AND HAS NO INVENTORY.



Accrual Method The accrual-basis method of tax accounting requires a taxpayer to

record income when the right to receive it exists (accounts

receivable), not when it is actually received.

Further, expenses are recorded when they are incurred (accounts

payable). This basis must be used by taxpayers who have inventories

(at least for purchases and sales), by C corporations with gross

receipts of over $5 million (except for qualified personal-service

corporations), by partnerships which have a partner that is a C

corporation with gross receipts over $5 million, and by certain trusts.

Even accrual-basis taxpayers cannot deduct estimated expenses,

such as bad debt allowances and warranty expenses; rather, they

must wait until the bad debt is actually written off or the warranty

costs are incurred. On the other hand, cash received prior to

providing the services or goods (unearned income) is generally

taxable. One exception allows accrual taxpayers to defer unearned

income for one year if the income will definitely be earned by the

end of the following year. For example, an accrual-basis taxpayer

received payment this year for music lessons to be provided evenly

during the last month of this year and the first two months of next

year. The taxpayer could elect to defer two-thirds of the income

until next year, rather than including all of it this year.

REMEMBER: TAXPAYERS MUST TYPICALLY ACCOUNT

FOR INVENTORIES UNDER THE ACCRUAL METHOD.

Hybrid Method

A combination of the cash and accrual bases for tax accounting can

be used as long as the method is consistent and clearly reflects

income. Sometimes, a combination is required by tax Regulations.

For instance, an amount owed by an accrual-basis taxpayer to a

related, cash-basis taxpayer cannot be deducted until it is paid.

Therefore, for payments to related cash-basis taxpayers, an

otherwise accrual-basis taxpayer is on a cash basis.

Taxpayers can use a different basis for each separate business (as

long as the basis is used consistently from the start of the business),

and they can use a different basis for personal and business items.

Therefore, a taxpayer who must use accrual accounting for his

or her inventory-based business can still be a cash-basis

taxpayer for itemized deductions and other personal items.



Some transactions require specialized tax accounting methods, as

prescribed in the tax law.

Change in Accounting

Method

Once a business entity or individual has adopted an accounting

method or accounting period, a change in the method or period

requires IRS permission even if the original method was incorrect.

Corrections cannot be made just by filing an amended tax return.

Changes in method include going from cash-basis to accrual-basis

or from one inventory valuation method to another. Errors in the

calculation of income or tax liability do not count as changes in

method and may be corrected by filing an amended return within the

statute of limitations. Many changes receive an automatic consent

from the IRS, including changes to begin the use of the accrual

method or to discontinue the use of LIFO. These automatic changes

can only be made once every five years and are severely limited

once a taxpayer is subject to audit.

For changes in the tax year, a Form 1128 must be filed with the

taxpayer’s income tax return for the first year of the change, by the

due date of the return, including extensions. Form 3115 is required

to change the accounting method. This Form is due by the end of the

year in which the change is made unless the change is among those

receiving automatic consent. Forms requesting an automatic change

can be filed, along with the tax return for the year of the change, by

the due date, including extensions.

Net Operating Losses

Generally, taxpayers must pay tax on the income earned in the

specified tax year, without regard to other tax years. However, some

modification of this general rule is available in the case of net

operating losses. When a client has a net operating loss, this loss

can be carried back to offset past income to produce a refund of tax

paid, and/or it can be carried forward, to offset future income. The

general rule is that NOLs can be carried back 2 years and forward

20 years. The carryback provision is extended to 3 years for NOLs

arising from casualties that occur in a Presidentially-declared

disaster area or that are incurred by businesses with less than $5

million in gross receipts. Farmers can carry back NOLs for 5 years.

Corporations can carry losses back 2 years and forward 20 years.



Practice Question

The Pine Tree Corporation has had the following amounts of taxable

income:

Year Taxable Income

2012 $10,000

2013 $15,000

2014 $20,000

2015 $10,000

2016 $ 5,000

2017 $10,000

In 2018, the company sustained a $70,000 loss. What amount of

loss can the Pine Tree Corporation carry back to previous years?

A. $0

B. $5,000

C. $15,000

D. $60,000

Answer:

The carryback of losses is limited to two years. Pine Tree

Corporation can carry back only $15,000 of the losses.

The answer is C.

For an individual, the NOL must arise from business activities. To

calculate the NOL for any given year for an individual, personal

exemptions are ignored, as are nonbusiness deductions in excess of

nonbusiness income. Capital losses are only subtracted to the extent

of capital gains, and no NOL from any other year is used. If, after

these adjustments are made, an individual still has a loss, it is first

carried back two years prior to the NOL year and used to offset

income from that year, dollar-for-dollar. The excess is then applied

to the year previous to the NOL year in the same way, and any

excess is carried forward.

For corporations, the NOL rules apply in the same way. The only

adjustment to the taxable income used to calculate a corporate NOL

is that no NOL from any other year may be used.

Editor’s Note: Certain companies who received assistance under

the Troubled Asset Relief Program (TARP) are not allowed to elect

to carry back their NOL for five years. They are limited to the

traditional two-year carry back or 20-year carry forward.



EXHIBIT 42 – 1 Forms and Schedules

Form 1040 – Individuals report their income to the IRS by

filing this tax return annually. See Topic 43 Form 1041 – Estates and Trusts report income to the IRS by

filing this form annually. See Topic 45 Form 1040X – This form is used to amend a previously filed

Form 1040 return. Schedule A – This schedule is filed with the Form 1040 to

report a taxpayer’s itemized deductions. Schedule B – This schedule is filed with the Form 1040 to

report a taxpayer’s interest and dividend income. Schedule C – This schedule is used to report income from a

business operated by the taxpayer as a sole proprietor. A separate Schedule C must be prepared for each business the taxpayer operates.

Schedule D – This schedule is filed with the Form 1040 to report the taxpayer’s capital gains and losses.

Form W-2 – An employer prepares this statement of wages, salary, or tips paid to an employee and the taxes withheld. The employer provides the form to the employee and to the IRS.

Form 1099 – This form reports many different types of income, such as interest, dividends, and other income, where the payer has not withheld taxes for the payee.

Form K-1 – This form reports a taxpayer’s share of income or losses from a pass-through entity, such as a partnership, S corporation, trust, or LLC.


APPLICATION QUESTIONS

1. Which of the following sources should be

consulted to determine the intent of Congress

in enacting a tax statute?

A. Committee reports

B. Treasury Regulations

C. Private Letter Rulings

D. Revenue Rulings

2. Which of the following sources of

authority in tax matters is not issued by the

IRS?

A. Committee reports

B. Technical Advice Memoranda

C. Revenue Procedures

D. Private Letter Rulings

3. Which of the following sources of tax law

is binding on the Internal Revenue Service

for dealing with future tax disputes?

A. Circuit Court of Appeals decisions

B. Tax Court decisions

C. Private Letter Rulings

D. Revenue Procedures

4. Which of the following statements

concerning tax research are correct?

(1) If the IRS acquiesces to an

unfavorable Tax Court decision, it

will continue to litigate that issue in

other cases.

(2) Secondary sources may provide clear

explanations, but they are not

authoritative in controversies with the

IRS.

(3) Because Private Letter Rulings are

now published, they are considered

binding on the IRS.

(4) Rulings favorable to the taxpayer in

Tax Court may be reversed on appeal.

A. (1) and (4) only

B. (2) and (3) only

C. (2) and (4) only

D. (1), (2), and (4) only

5. Primary sources of tax law include:

(1) Treasury Regulations

(2) Revenue Rulings

(3) Tax Court decisions

(4) CCH reports

A. (1) only

B. (1), (2), and (3) only

C. (3) only

D. (1), (2), (3), and (4)

Tax Planning – Application Questions – Topic 42


For practice answering case questions related to Topic 42, please answer the following questions

in the cases included in Appendix A at the back of this textbook.

Case Questions

Ridgeway 1 and 10

Keller

Powers

Adams

Carlisle

Tingey

Beals

Mocsin

Loudon

Young

Jones 1 and 2

Smith 1 and 2

Perkins

Steve and Michelle Walker 1, 2, 3, 4, 5, and 6

Tax Planning – Application Questions – Topic 42

© 2017 Keir Educational Resources 18 www.keirsuccess.com

ANSWERS AND EXPLANATIONS

1. A is the answer. The intent of Congress is determined from its Committee reports, which

record the statements of members of Congress about the tax law. Treasury Regulations, Private

Letter Rulings, and Revenue Rulings are prepared by the IRS and do not show Congressional

intent.

2. A is the answer. Committee reports appear from Congressional committees as they consider

tax law changes. These reports are frequently valuable in establishing the intent of lawmakers with

regard to certain tax provisions. The other items are issued by the IRS. Revenue Procedures are

guidance on how taxpayers should treat a common transaction to ensure uniform treatment. TAMs

and PLRs are issued in response to specific requests from or disputes with individual taxpayers

regarding specific fact patterns. TAMs have a more general application than PLRs, but both are

valuable in showing the IRS’ thinking with regard to certain transactions.

3. D is the answer. No court’s decision is binding on the IRS in subsequent tax disputes, except

for the Supreme Court. However, the IRS can acquiesce to a lower court decision, which means

it agrees to follow the decision with other taxpayers. A PLR is issued in response to a specific set

of facts and is binding only on the requesting taxpayer in the described set of facts. A Revenue

Procedure is general guidance and is binding on the IRS for matters described in the Procedure.

4. C is the answer. Secondary sources are written by commercial publishers and are organized

in a way that makes them easy to use to find answers to tax questions. However, they make

reference to primary sources, which include the Internal Revenue Code and Regulations, which

actually are authoritative and can be used to prove a point to the IRS. Tax researchers should

always be careful when finding a court case that appears to support their position. Unless it is a

Supreme Court case, the Citator volume in most commercial tax publications will indicate later

decisions that cite the original case and can be used to identify changes upon appeal. IRS

acquiescence in a court case means that the IRS will not challenge the position if taken by other

taxpayers. The IRS is bound to follow only Supreme Court rulings. Private Letter Rulings are

now published with identifying information removed, but they can still be used as authority only

in the case for which they were issued. They are helpful in determining the general thinking of

the IRS on issues.

5. B is the answer. Primary sources of tax law come from one of the three branches of the

government and include the Internal Revenue Code, Treasury Regulations, Revenue Rulings,

Private Letter Rulings, court decisions, and Congressional Committee reports. CCH reports and

other explanations are secondary sources.

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