TAX PLANNING
2016
Published by:
KEIR EDUCATIONAL RESOURCES
4785 Emerald Way
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1-800-795-5347
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TABLE OF CONTENTS
Title
Page
Income Tax Planning (Topics 42-51)
Topic 42:
Fundamental Tax Law
Topic 43:
Income Tax Fundamentals and Calculations
Topic 44:
Characteristics and Income Taxation of Business Entities
Topic 45:
Income Taxation of Trusts and Estates
Topic 46:
Alternative Minimum Tax (AMT)
Topic 47:
Tax Reduction/Management Techniques
Topic 48:
Tax Consequences of Property Transactions
Topic 49:
Passive Activity and At-Risk Rules
Topic 50:
Tax Implications of Special Circumstances
Topic 51:
Charitable/Philanthropic Contributions and Deductions
42.1–42.20
43.1–43.80
44.1–44.44
45.1–45.13
46.1–46.16
47.1–47.16
48.1–48.62
49.1–49.16
50.1–50.24
51.1–51.18
Appendix A
Ridgeway Case
Keller Case
Powers Case
Adams Case
Carlisle Case
Tingey Case
Beals Case
Mocsin Case
Loudon Case
Young Case
Jones Case
Smith Case
Perkins Case
Walker Case
Appendix – 1
Appendix – 7
Appendix – 18
Appendix – 29
Appendix – 36
Appendix – 39
Appendix – 42
Appendix – 54
Appendix – 66
Appendix – 75
Appendix – 85
Appendix – 100
Appendix – 116
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 – 181
Glossary
Glossary – 1
Index
Index – 1
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Tax Planning – Topic 42
TAX PLANNING
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 Accounting
1)
Accounting periods
2)
Accounting methods
a)
Cash receipts and disbursements
b)
Accrual method
c)
Hybrid method
d)
Change in accounting method
F.
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.
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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.
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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,
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however, are not bound by revenue rulings.
Private Letter Rulings
Revenue Procedures
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 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.
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Otherwise, the IRS is not bound by lower court decisions and may
continue to litigate similar cases to get a more favorable ruling.
Publishers
Secondary Sources
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 for tax research include comprehensive multivolume 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
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Tax Planning – Topic 42


Progressive Tax
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.
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
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$18,558.75 plus 28% of the excess taxable income over $91,150.
Based on this calculation, Heather’s tax is:
18,558.75 + [(95,000 – 91,150) x .28] = 19,636.75
SINGLE (UNMARRIED INDIVIDUALS)
If Taxable Income Is
The Tax Is
Not over $9,275
Over $9,275 but not over $37,650
Over $37,650 but not over $91,150
Over $91,150 but not over $190,150
Over $190,150 but not over $413,350
Over $413,350 but not over $415,050
Over $415,050
10% of taxable income
$927.50 plus 15% of the excess over $9,275
$5,183.75 plus 25% of the excess over $37,650
$18,558.75 plus 28% of the excess over $91,150
$46,278.75 plus 33% of the excess over $190,150
$119,934.75 plus 35% of the excess over $413,350
$120,529.75 plus 39.6% of the excess over $415,050
Heather’s average tax rate is then calculated by dividing the
$19,671.25 in tax by her total income of $115,000, giving her an
average tax rate of 17.08%.
Tax Accounting
Accounting Periods
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.
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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, accrualbasis 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
(Cash Method)
According to IRS regulations, a cash-basis taxpayer must
include in income any amounts that are “constructively
received” 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
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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.

Accrual Method
REMEMBER: TYPICALLY, THE CASH METHOD OF
ACCOUNTING IS USED WHEN THE TAXPAYER MAKES ONLY
CASH TRANSACTIONS AND HAS NO INVENTORY.
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
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Tax Planning – Topic 42
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
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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
2011
2012
2013
2014
2015
2016
Taxable Income
$10,000
$15,000
$20,000
$10,000
$ 5,000
$10,000
In 2017, the company sustained a $70,000 loss. What amount of
loss can the Pine Tree Corporation carry back to previous years?
A.
B.
C.
D.
$0
$5,000
$15,000
$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.
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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
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.
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Tax Planning – Application Questions – Topic 42
Application Questions
1. Which of the following sources should be consulted to determine the intent of Congress in
enacting a tax statute?
A.
B.
C.
D.
Committee reports
Treasury Regulations
Private Letter Rulings
Revenue Rulings
2. Which of the following sources of authority in tax matters is not issued by the IRS?
A.
B.
C.
D.
Committee reports
Technical Advice Memoranda
Revenue Procedures
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.
B.
C.
D.
Circuit Court of Appeals decisions
Tax Court decisions
Private Letter Rulings
Revenue Procedures
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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.
B.
C.
D.
(1) and (4) only
(2) and (3) only
(2) and (4) only
(1), (2), and (4) only
5. Primary sources of tax law include:
(1)
(2)
(3)
(4)
Treasury Regulations
Revenue Rulings
Tax Court decisions
CCH reports
A.
B.
C.
D.
(1) only
(1), (2), and (3) only
(3) only
(1), (2), (3), and (4)
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Tax Planning – Answers and Explanations – 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
Ridgeway
Keller
Powers
Adams
Carlisle
Tingey
Beals
Mocsin
Loudon
Young
Jones
Smith
Perkins
Steve and Michelle Walker
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Questions
1 and 10
1 and 2
1 and 2
1, 2, 3, 4, 5, and 6
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Tax Planning – Application Questions – Topic 42
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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