tax research Barbara Karlin

TAX RESEARCH
By Barbara Karlin
Fourth Edition

INSTRUCTOR’S GUIDE

By Barbara H. Karlin
Golden Gate University

TABLE OF CONTENTS

KEY CONCEPTS AND PRACTICAL APPLICATIONS

CHAPTER 1 - OVERVIEW OF TAX RESEARCH 1

CHAPTER 2 – THE INTERNAL REVENUE CODE 8

CHAPTER 3 – TREASURY INTERPRETATIONS 24

CHAPTER 4 - JUDICIAL INTERPRETATIONS 56

CHAPTER 5 - USING REFERENCE SERVICES AND OTHER SECONDARY
SOURCES 97

CHAPTER 6 - CULMINATION OF THE TAX RESEARCH PROCESS 114

CHAPTER 7 - COMMUNICATING RESEARCH RESULTS 127

CHAPTER 8 - OVERVIEW OF TAX PROCEDURE 130

CHAPTER 9 - OVERVIEW OF STATE TAX RESEARCH 139

INTEGRATED CASE STUDIES
Case Study A 143
Case Study B 146
Case Study C 154
Case Study D 159
Case Study E 165
Case Study F 169
Case Study G 173
Case Study H 178
Case Study I 184
Case Study J 189
Case Study K 192
Case Study L 196

Case Study M 199
Case Study N 204
Case Study O 207
Case Study P 210

Test Problem Bank 215
Test Problem Answers 236

PREFACE

This guide is intended to help the instructor address the research questions that follow
each chapter. Much effort has been made to ensure that the answers are as complete and
accurate as possible. However, due to the dynamic nature of tax law, as time passes, Congress
amends the Code, the Treasury issues new Regulations and the courts continue producing cases.
Please use this guide as a starting point with that fact in mind.

Those seeking additional instructor tools such as PowerPoint slides and exams may wish
to go to the following Web address where such tools can be found:
http://www.prenhall.com/karlin.

1

KEY CONCEPTS
AND
PRACTICAL APPLICATIONS

CHAPTER 1 - OVERVIEW OF TAX RESEARCH

KEY CONCEPTS (1-21)

1. Definitions:

a. Tax planning occurs when a tax question arises before all the facts are
established. In this case, research results may play a significant role in planning a
future transaction. In a tax planning situation, it is important for the researcher to
determine precisely what the taxpayer wishes to accomplish. The researcher can
then examine the law and provide the taxpayer with useful information about
whether it is possible to attain these goals, and if possible, how they might be
achieved.

b. A fact is something that is real or actual. A fact is different from an opinion. (See
pages 7-9)

c. A conclusion is an opinion. A conclusion may result from reviewing facts or the
law. It is important to distinguish a conclusion from a fact. (See pages 7-9)

d. A fact is relevant when it affects the application of the tax laws. An irrelevant
fact is one that, even if altered, would have no impact on the application of the tax
laws. (See pages 7-9)

e. A primary source is the most authoritative form of tax resource. Usually,
researchers should base their conclusions only on primary sources. Only
authorized governmental bodies such as Congress (the Internal Revenue Code),
the Treasury Department and the judiciary generate primary sources. (See pages
11-13)

f. A secondary source may be very useful in the research process, but it is not
authoritative. Examples of secondary sources include reference services,
treatises, textbooks and journal articles.

g. IRC stands for the Internal Revenue Code. It is the central primary source in tax
research. Most of the tax laws are found in the Internal Revenue Code.

h. A reference service is a type of secondary source of information for the tax
researcher. A reference service, among other things, provides references to
potentially relevant primary authority.

2 Chapter 1

i. Employers often use time budgets to indicate the approximate amount of time the
researcher should expect to spend on a research project. Unfortunately, because
they are guesstimates, they are often not as accurate as one would like. However,
they may provide a helpful guide regarding how exhaustive the research effort
should be. If the researcher finds she will likely exceed the allotted time budget,
it is advisable to consult with the person who prepared the budget before
performing more research.

2. The purpose of tax research is to determine the tax implications of a certain set of facts,
or to answer a tax question.

3. The four basic steps in the tax research process are:

Step One - Gathering Relevant Facts
*determine the relevant tax question
*identify all the material facts
Step Two -Researching
*identify and read the pertinent resources
*define the question if necessary and/or obtain additional facts
Step Three - Analyzing
*synthesize the information gathered
*ponder what you have learned
*determine whether there is enough information and authority to render a
conclusion
*conclude
Step Four - Communicating
*determine the appropriate form of communication
*communicate your conclusions.

4. It is important to determine and remain focused on the research question throughout the
research process. Because there is so much information available to the researcher, it is
easy to go astray and waste time material irrelevant to the research question. When the
researcher determines the initial research question, he can review the material efficiently
with an eye towards information that may help answer the question. By staying focused,
the researcher can carefully eliminate that material not useful to the question. The
researcher must also recognize the potential to amend the initial research question as he
gains more information through the research process.

5. It is important to determine whether you have been asked to act in a planning role when
gathering facts and determining the research question for a variety of reasons. The
expectations placed upon the researcher in a planning role may substantially differ from
those expected of the researcher when asked to react to an established set of facts. In the
Key Concepts and Practical Applications

Overview of Tax Research 3

planning role, the researcher may be expected to provide creative suggestions as to how
the taxpayer might accomplish his objectives. In addition, when planning, the researcher
is in a potentially more vulnerable situation because the research results may directly
impact the taxpayer’s actions. (See page 17)

6. A fact is something real, whereas a conclusion is an opinion which may or may not be
based on the facts or the law. It is important to recognize the difference between the two
because the tax research must be based on the facts and the law only.

7. The research question often changes as the research process progresses. As the
researcher learns more about the relevant provisions in the Internal Revenue Code, it is
likely that he will need to refine the research question. This may continue to occur with
each step of the research process. (See pages 4-7)

8. The researcher may miss critical information and fail to identify a critical tax question if
she frames the research question too narrowly. While it is important to stay focused, it is
also necessary to recognize that the initial research question may need to be expanded to
cover additional issues identified through the research process.

9. A tax researcher’s role is varied. It may simply be to determine the appropriate way to
report a completed transaction on a tax return. Or, the researcher may be asked to justify
a taxpayer’s position taken in a previously filed tax return. Another potential role for the
research involves helping a taxpayer plan a future transaction. The researcher may be a
creative advisor and educator. Ultimately, the researcher must also communicate the
research results in the taxpayer.

Tax research of some sort is necessary whenever someone (client, employer or
researcher) identifies a tax question requiring an answer. As a taxpayer’s advisor,
sometimes the researcher is able to provide the taxpayer with a clear and definitive
answer about the tax question, e.g,, “Yes, the position taken on a previous return was
correct,” or, “You must report the salary income on your return.” However, in a planning
mode, such straightforward results are not often possible. In the planning mode, although
the taxpayer may expect the tax advisor to make the decision as to what the taxpayer
should do, it is important that the tax advisor only educate the taxpayer so that the
taxpayer can make the decision.

10. The researcher can gather relevant facts by questioning the taxpayer and reviewing
relevant documents. It is important to be aware of all the facts because the application of
the law may change if any of the relevant facts change. Sometimes is it difficult for the
researcher to gather all the relevant facts because the researcher may not know what are
the relevant questions to ask and the taxpayer may not know what are the relevant facts to
explain.

4 Chapter 1

11. The two sources of primary authority that provide interpretations of the Internal Revenue
Code are Treasury interpretations and judicial interpretations.

12. Reference services may help direct the researcher to relevant primary authority.

13. The researcher may base his research conclusion only on primary sources, not secondary
sources. In determining whether something is a primary source, it is helpful to consider
the originator of the source. If either Congress, the Treasury Department or the courts
authored the source, it is likely a primary source. Otherwise, the source is likely a
secondary source.

14. Each research step requires the use of critical thinking.

15. The researcher may communicate research results either internally or externally. Internal
communications include letters to the file or office memos. External communications
include letter to the taxpayer and letters to a taxing authority. Communication can take
either oral or written form.

16. Sometimes, there is only one correct answer to a tax research question. However, many
times, there is no one correct answer. Instead, there may be a variety of potentially
correct answers. This is because the tax law is complex and frequently subject to a
variety of interpretations.

17. The tax researcher takes on the role of tax advocate in a variety of situations, the key one
being when representing the taxpayer before a taxing authority during an audit.

18. The researcher is typically in a tax planning situation when the facts can still be altered.
Tax planning typically does not occur when the facts are established and the researcher is
asked to determine the appropriate reporting position. However, any possible change in
the future actions of the taxpayer may trigger the research to become involved in tax
planning. As a tax planner, the researcher must provide the taxpayer with guidance
regarding the taxpayer’s options. Particularly because of the increased vulnerability to the
tax researcher, it is important to recognize when tax planning is involved.

19. The standard required when signing a return or recommending a tax return position to a
taxpayer is that the position have a “realistic possibility of being sustained on its merits.”
To satisfy this standard, the researcher must be able to show that after performing a
reasonable and well-informed analysis, a knowledgeable person in tax law would
conclude there is at least a one in three chance that the position will be upheld.

20. The tax researcher should be aware of the practical considerations of the need to be
accurate and time efficient, while considering the various standards of authority and the


amount of tax involved. The researcher must also create a proper record of the research
performed.

21. Client files help refresh the researcher’s memory regarding the facts and research results
and reasoning. In addition, they help provide for continuity in the service provided to the
taxpayer. A client file should include all relevant tax documents (tax returns, supporting
documents, etc.), summaries of written and oral communications regarding client issues,
office memos, supporting documentation for each research project, and any carryover
schedules.

PRACTICAL APPLICATIONS (22-26)

22. a. If taxpayer purchased a ticket for the New Jersey lottery and won $1,000, an
initial question arises regarding whether the $1,000 will be considered income for
federal income tax purposes and also state tax purposes. Potentially helpful
additional information includes: when and if the taxpayer collected the cash, type
of taxpayer (individual or something else), and method of accounting the taxpayer
uses.

b. Taxpayer’s payment of $5,000 to his former wife triggers the initial tax question
as to whether the taxpayer is entitled to a deduction for the $5,000 payment for
either federal or state tax purposes. It would be helpful to know more about what
generated the payment (e.g., was it required under a divorce decree or was it
voluntary), and the specific terms controlling the payment.

c. Taxpayer’s payment of $1,000 to a lawyer for advice triggers the initial question
as to whether the payment might qualify as a tax deduction for either federal or
state tax purposes. Necessary additional information includes the nature of the
services performed by the lawyer for the taxpayer and the date of payment.

23. a. Although this set of facts seems at first to be rather complete, there is still a good
deal of relevant information missing: the date of the divorce; number of children;
children’s ages; divorce decree and specific wording requiring the $10,000
payment; if it is determined by the researcher that a portion of the $10,000 is
actually child support, another relevant piece of necessary information is Mr. K’s
history of payments - has he kept up with them or is he behind? [§71(c)(3)] In
addition, if the payments are made within the first three years of the divorce, there
may be a frontloading issue which requires a knowledge of the history of
payments made. [§71(f)]

b. Additional potential sources of information or documents include: prior tax
returns and any divorce documents available.

6 Chapter 1

c. Relevant facts include the amount of payments and the fact they are made
monthly.
Irrelevant facts include Mr. K’s occupation and age.

d. Unless the student is very familiar with the rules under §71, the student will not
yet be able to identify all the facts necessary to fully address the research
question. Not until the law is examined will the student be able to appreciate all
the relevant facts and know all the relevant questions to ask.

e. The students most likely will identify the initial question as “Is the $10,000
income to Mrs. K?” That’s the first step in identifying the question. But as the
student begins to discover more about the law, for example that there is a different
tax impact depending on whether the amounts are alimony or child support, the
question begins to be more refined. One of the first refinements would be to
determine what portion of the $10,000 is alimony and what part is “child
support.” There are several additional layers of refinements as the student digs
deeper into the Code Section.

f. The taxpayer’s desired result is to avoid being required to recognize as income the
$10,000. Clearly the researcher should be aware of this. However, since the facts
are already set, the desired result is not quite as important as in a planning setting.

g. The students should recognize that this is not a planning research problem. The
facts are already entirely set. It could turn into a planning situation if, as a result
of the information the researcher provides to Mrs. K, she decides she wants to
change the facts by, for instance, revisiting in court how the amounts are to be
structured.

h. The same laws apply and in the same manner if the dollar amount is reduced,
except perhaps for the frontloading rules in §71(f). However, the need to be quick
about the research is underscored because the researcher is looking at a maximum
taxable income amount of $1200. It doesn’t make practical sense to research the
question so thoroughly that the research bill is as high as the income.

24. a. The researcher’s role in this situation is to determine the tax treatment, then
educate the client and report the appropriate tax treatment of the free parking.
Planning may occur for future parking arrangements, but the central role at this
juncture is to accurately determine the tax impact of the current arrangement.

b. The researcher will need to ascertain all the relevant facts as they exist, research
the status of the current law on the subject, determine the appropriate tax


treatment in this situation, and communicate the results to the taxpayer.

c. Some of the questions include the dollar amount involved, the location of the
parking lot, the employment relationship of the taxpayer, the law firm’s policies
regarding the provision of this benefit to its employees, etc.

d. The initial research question is “What is the tax impact of free parking provided
by a law firm to its employee (if the facts bear this out) or partner (if these are the
facts)?”

e. The students will not understand at this junction the impact that this has on the tax
treatment. However, because the Code provisions in Section 132 treat parking
benefits differently depending upon whether someone is a partner or an employee,
this underlines the importance of finding out all potentially relevant facts in the
initial client interview. (IRC Section 132(f)(1)(C) and (5)(C) provide that parking
reimbursements or free parking up to $175 per month provided by an employer to
an employee will be excluded from taxable income.) Thus to accurately answer
the research question, the researcher will need to understand the employment
relationship of the taxpayer to the law firm. If the taxpayer, upon hearing that the
parking benefits represent taxable income, pretends that she did not inform the
researcher of the information, ethical issues now arise. Chapter 6 explores this in
more detail, but suffice it to say that in this situation, the researcher is obligated
under various regulatory rules and guidelines to honestly report the benefits as
income.

25. This question provides a good opportunity for the student to explore the subject of
managing their work through files. There is no one right answer here. However, some
possible files include a tax return file, a working paper file (that includes all the
supporting analysis), an important documents file (that includes company bylaws, etc.),
and perhaps a correspondence file. Page 22 of the text lists some of the documents that
the student might consider including in the files.

26. The initial role of the researcher is to determine the tax treatment of the specific sale.
However, the role may quickly change into more of a planning role as the researcher
addresses potential future tax strategies regarding future stock transactions. Facts
necessary to address the initial question regarding tax treatment of the sale include
purchase dates and prices of the shares sold as well as the sales price. Broker statements
will need to be gathered.

INTEGRATED CASE STUDIES - see solutions at page 140


8 Chapter 2

CHAPTER 2 – THE INTERNAL REVENUE CODE

KEY CONCEPTS (1-17)

1. Definitions

a. Legislative Committee Reports provide a record of the decisions made in each
legislative committee. They can be helpful in providing guidance regarding
legislative intent.

b. The Joint Committee on Taxation is a nonlegislative committee whose staff
help draft bills and committee reports. It also writes the “Blue Book.”

c. The “Blue Book” is an explanation of new law prepared by the Joint Committee
on Taxation. It is considered primary authority.

d. USC stands for “United States Code.” It embodies all the statutory law passed by
Congress.

e. Title 26 of the United States Code is also known as the Internal Revenue Code.

f. Flush language is language that appears to not clearly belong to the Code
provision directly preceding it. Its margins are to the far left.

g. Sunset provisions are typically found at the end of a Code Section and provide
for the section’s termination at a specific date. If Congress wishes to continue the
provision, it must do so through legislation.

h. Terms of art are words that have a special meaning when used in the IRC. Most
tax research involves determining the meaning of a “term of art” in the context of
a particular factual situation.

i. IRC Section 7701 is the definitional section of the IRC. It provides definitions
for a wide variety of terms used.

j. Limiting language is language that limits the application of a Code provision to a
particular portion of the Code. For example, the language “For purposes of this
Part,” is limiting language.

k. Transition provisions are provisions within the Code indicating the application
date and terms of a particular Code provision. This occurs whenever a new Code
provision is passed.

2. New tax bills must first begin in the House Ways and Means committee. The Senate
Finance is the second Congressional committee to examine a potential tax bill. The


The Internal Revenue Code 9

Conference Committee is a committee made up of members of the other two committees
and is called into action when the Senate bill differs from that produced by the House of
Representatives.

3. The legislative process generates committee reports from the three legislative
committees. These reports can be useful in helping the researcher determine the
Congressional intent behind a particular Code provision.

4. Students can keep informed about current tax legislative activities through review of
publications that discuss this topic (BNA daily journals, newspapers, etc.).

5. Committee Reports of new legislation are easiest to locate through the publications made
available by the primary tax publishers. Finding Committee Reports reflecting older
legislation is more challenging. The major tax reference services also provide excerpts of
the committee reports. For legislative history prior to the 1954 Code, Siedman’s
Legislative History of the Federal Income Tax Laws includes committee reports,
hearings, and debates for selected legislation from 1861 to 1954. To find legislative
history of enacted legislation after 1954, a service published by the Bureau of National
Affairs called Primary Sources may be helpful. The table of contents is arranged by
Code Section. Tax Analysts’ web-based Federal Tax Library also provides committee
reports for all tax acts since 1981. The major tax services (CCH and RIA) provide
selected portions of committee reports through their multi-volumed reference services.
These are available in paper and electronically

6. The Internal Revenue Code is divided into many divisions. The largest division is a
subtitle, followed by Chapters, Subchapters, Parts, Subparts, and finally Sections. Each
major topic has its own Subchapter. Understanding the organization of the Code helps
make research more efficient and increases the researcher’s confidence that he has found
all possible applicable Code Sections.

7. Three possible methods of citing the Internal Revenue Code include: IRC Section; The
Internal Revenue Code of 1986 as amended; Code §.

8. a. Information returns and records
b. Employment taxes; Federal Insurance Contributions; Deduction of tax from
wages
c. Financing of Presidential Election Campaigns; Presidential Election Campaign
d. Income taxes; Accounting Periods and Methods of Accounting, Methods of
Accounting, Taxable year for which deductions taken

9. Through the table of contents, index or by knowing the relevant Code Section.

10. The connecting word is or. This means that if any of the listed items are satisfied, the
expenditure is considered political lobbying and is not deductible. If the items were


10 Chapter 2

connected with an and, each of the items would need to be fulfilled in order to be
penalized under these provisions.

11. “Taxpayer Bill of Rights 2." This was enacted July 30, 1996. This information is located
in the back of the CCH softbound IRC volumes and in the front of the RIA softbound
volumes.

12. “Economic Growth and Tax Relief Reconciliation Act of 2001.” It became law on June
7, 2001. In the back of the CCH Code volumes.

13. Historical notes to a Code Section can be helpful in providing information about
historical changes to Code provisions. This information may help the researcher better
understand the language used in the current Code provision. The notes often also provide
important information about transition dates.

14. The Internal Revenue Code can be found in the following:
* Softbound paper version published by both RIA and CCH
challenges: must purchase new version regularly to ensure currentness
benefits: easy to access
* As part of the larger hardbound reference services published by RIA and CCH
challenges: fragmented throughout the reporter service; less portable.
benefits: updated throughout the year as revisions are made.
* On the Internet on publicly accessible addresses
challenges: usually outdated; often contains mistakes
benefits: free
* Electronically either on the Internet or CD-ROM through proprietary fee-based services
challenges: cost
benefits: easy to cut and paste; current

15. IRC Section 162 is part of Title 26; Subtitle A (Income Taxes); Chapter 1 (normal taxes);
Subchapter B (Computation of Taxable Income).

16. IRC Section 162 includes the following:
a. 16 Subsections:
(a) General
(b) Charitable Contributions and Gifts
(c) Illegal Bribes and Kickbacks
(d) Capital Contributions to Federal National Mortgage Association
(e) Denial of deduction for certain lobbying and political expenditures
(f) Fines and penalties
(g) Treble damage payments under the antitrust laws
(h) State legislators’ travel expenses away from home
(i) Repealed
(j) Certain foreign advertising expenses


(k) Stock redemption expenses
(l) Special rules for health insurance costs of self-employed individuals
(m) Certain excessive employee remuneration
(n) Special rule for certain group health plans
(o) Treatment of certain reimbursed expenses of rural mail carriers.
(p) Cross references
b. Paragraphs within subsection (d) include:
(1) General
(2) Carryforward of disallowed interest
(3) Investment interest
(4) Net investment income
(5) Property held for investment
(6) Phase-in of disallowance
c. Subparagraphs within IRC Section 162(d)(3) include:
(A) General
(B) Exceptions
(C) Personal property used in short sale

17. IRC Section 7805 provides that the Secretary of the Treasury Department shall prescribe
all rules and regulations necessary to enforce the Internal Revenue Code. It also
discusses the retroactivity of regulations and the duration of temporary regulations.


18. The correct way to cite the bolded sentence is “IRC Section 280G(b)(2)(C)(ii).”

19. The correct way to cite the bolded sentence is “the flush language of IRC Section
460(b).”

20. a. Corporation’s ability to deduct mining and exploration costs - Section 381(c)(10).
[CCH code index topic “mining and exploration costs.”]

b. Taxation of Social Security benefits of nonresident aliens - Section 871(a)(3).
CCH - “Nonresident aliens...then Social Security benefits, taxation of.”]

c. Definition of “Head of Household” - Section 2(b)(1). [CCH - “Head of
Household, defined.”]

d. Valuation of a gift - Section 2512. [CCH - “Gifts, valuation of” or “Valuation of
gifts.”]

e. Sick pay benefits of employees - Sections 104-106. [CCH – “Employees, sick
benefits” or “Sick pay.”]


12 Chapter 2
f. Deductibility of face lift - Section 213(d)(9). [CCH - “Cosmetic surgery, medical
expenses.”]

g. Bad debt reserves - Section 593. [CCH - “Reserves (bad debt)” or “Bad Debt
(reserves).”]

h. Statute of limitations for filing an amended return - Section 6501(c)(7). [CCH -
“Returns” - amended - statute of limitations.”]

i. Withholding requirements for tip income - Section 3402(k). [CCH - “Tips” -
(Withholding). Or “Withholding of income tax on wages” -(tips)]

j. Penalties for tax fraud - Section 6663. [CCH - “Penalties”- fraud.]

21. Subtitle B.

22. Subtitle 1 (Income Taxes); Chapter 1 (Normal Taxes and Surtaxes); Subchapter L
(Insurance Companies). Section 816 defines an insurance company.

23. a. Tax on prohibited transactions of pension plan fiduciaries (Sec. 4975)

b. Definition of the Generation Skipping Tax (Sec. 2611)

c. Definition of “Adjusted Basis” in determining gain from sale of asset (Sec. 1011-
1012)

d. Taxation of contributions made to a partnership (Sec. 721-724)

e. Limitations on assessment and collection (Sec. 6501)

24. a. Deduction of interest paid on loans used for education (Sec. 221)

b. Deduction of corporation’s start-up and organizational expenses (Sec. 248–not to
be confused by 195...although table of contents makes it confusing)

c. Deduction of “qualified tuition” (Section 222)

d. Definition of a life insurance contract (Section 7702)

e. Payment of estimated income tax (Sec. 6315)

25. a. IRC §280G - Golden Parachute Payments (nondeductibility)

b. IRC §3102 - Deduction of federal insurance taxes from wages


c. IRC §68 - Limitation on deductibility of certain types of itemized deductions

26. a. IRC §1223 – First sentence contains the words For purposes of this subtitle
(limiting language); Section 1223(1) contains numerous terms of art (e.g.,
exchange, property, sale); Section 1223(1)(A) contains pinballing to another
Code Section as well as the connecting word and; Section 1223(8) provides
transitional rules; Section 1223(11) has flush language that uses the measuring
words more than 1 year; Section 1223(16) provides cross references. It will be
helpful to note to the students that the numbering in this Code Section differs
from the norm in that the Subsections are numeric rather than alphabetic.

b. IRC §117 – The first sentence of Section 117(b) contains the limiting language
For purposes of this section; Section 117(a) contains several terms of art (e.g.,
qualified scholarship, individual, candidate for a degree, educational
organization); Section 117(a) pinballs the student to another Code Section;
Section 117(b) contains the connecting word and.

c. IRC §1239 – Section 1239(b) contains the limiting language For purposes of
subsection (a); Section 1239(a) contains several terms of art (e.g., sale, exchange,
property, related persons, etc.); Section 1239(b) uses the connecting word and;
Section 1239(b)(2) pinballs the student to another Code Section; Section
1239(c)(A) uses the measuring terms more than 50 percent.

27. a. IRC §179 – Section 179(d)(1) uses the limiting language For purposes of this
section; Section 179(a) contains several terms of art (e.g., cost, Section 179
property, expense, etc.); Section 179(b)(3)(B)(i) contains the connecting word or;
Section 179(b)(4)(B) contains the measuring language 50 percent (not more than
or in excess of); Section 179(d)(1) pinballs the student to another Code Section.
This is also an opportunity to illustrate that Code Section 179 is an entirely
different section than Code Section 179A.

b. §280F – Section 280F(a)(1)(B)(iv) provides the limiting language For purposes of
this subtitle; Section 280F(a) contains several terms of art (e.g., taxable year,
passenger automobile, recovery period); Section 280F(a)(2) contains the
connecting word and as well as pinballing the student to another Code Section;
Section 280F(b)(3) contains the measuring language exceeds 50 percent.

c. §168 – Section 168(b) contains the limiting language For purposes of this section;
Section 168(a) contains several terms of art (e.g., depreciation, tangible property,
applicable depreciation method, etc.); Section 168(b)(2) contains the connecting
term or as well as a pinball to another Code Section; Section 168(d)(3) contains
the measuring term exceed; Section 168(f)(5) contains transitional rules. This is a
good Code Section to point out the lengthy historical amendments following the
Section.


14 Chapter 2

28. The IRC is replete with examples literally almost every Code Section contains at least
one example of limiting language. The purpose of this exercise is to underline the
significance of paying attention to limiting language. Because the language seems so
nonsubstantive, students tend to simply ignore the language as unimportant.

29. Same answer as #28.

30. Section 172(c) defined the term net operating loss.

31. Code Section 168(e)(2)(A)(i) defines this term as “any building or structure if 80 percent
or more of the gross rental income from such building or structure for the taxable year is
rental income from dwelling units.” The provisions that follow define some, but not all,
of the terms of art in this provision such as dwelling unit.

32. This is a challenging question for the student. They should ultimately land on the words
“substantial risk of forfeiture” as the key words in the taxpayer’s situation. If the stock is
subject to “substantial risk of forfeiture,” Sam has no income in the current year.
However if he has no “substantial risk of forfeiture,” he has current income. One of the
points in this exercise is for the student to appreciate that although there are numerous
other terms of art in this provision, the only one requiring special research in this
situation are the words “substantial risk of forfeiture.” It is the set of facts that
determines which words in the Code need further analysis. The facts in this situation
which cause these words to be critical is the potential loss of the stock should Sam be
convicted of a crime. The research question moves from “is the stock income” to “is the
stock subject to substantial risk of forfeiture?”

“Substantial risk of forfeiture” is defined somewhat in IRC Section 83(c)(1). This
definition is not really sufficient to enable the student to determine whether the stock is
subject to a substantial risk of forfeiture. When we get to Chapter 3, the students will
have the opportunity to read the regulations which are clear in explaining that the risk of
being convicted of a crime is not substantial enough to be considered a “substantial risk
of forfeiture.” Therefore, Sam does have income in the year he receives the stock.

33. Now the key term of art is “property.” Does property include cash? The Code does not
clarify the meaning of this term for purposes of this section. The regulations indicate that
cash is not considered “property” for purposes of Section 83, although it is considered
“property” when that word is used in other Code Sections. (For example Section 1041).
This illustrates to the student that the facts drive the determination of what portion of the
Code requires focus. In addition, this is an important illustration of the fact that the same
word may have two different and conflicting definitions depending on what Code Section
it is used in.

34. a. Trust income tax – Subchapter I
b. Partnership tax – Subchapter K



c. Corporate tax – Subchapter C
d. Calculation of individual taxable income – Subchapter B

35. This Code Section was generated by P.L. 105-34, Section 1454(a) (The Taxpayer Relief
Act of 1997). All of the Committee Reports offer the same authoritative value regarding
this provision because the House and Senate’s reports are the same. The Conference
Committee Report simply indicates that the conference agreement follows the House and
Senate Bill, with some technical modifications. Students can begin to locate this
information after consulting with the historical amendments that follow the Code Section
which identify the applicable Public Law and Section number. From there, the easiest
method of research is to locate one of the softbound volumes containing the history of the
act (given the relative recency of the act, students may be able to find this information in
their library). If this is not available, students can locate the reports using the electronic
online libraries; however, this is somewhat challenging and will likely lead to some
frustration. This is a good lesson in why it is useful to keep those softbound legislative
summaries.

36. Code Section 213 allows a deduction to Sam of $50 per night [flush language of Code
Section 213(d)(2)]. Sam appears to satisfy all the requirements for the deduction set forth
in Section 213(d)(2) since the amount paid for the lodging does not appear to be lavish or
extravagant, was incurred while away from home primarily for...medical care, and the
medical care was provided by a licensed physician in a hospital (we assume it was
licensed) and there was no significant element of personal pleasure...

37. Mary will have to recognize the full $3,000 as income. Code Section 74(c)(1) seems to
provide an exclusion for the award. However, that provision refers to Code Section
274(j) for the definition of an employee achievement award. Students who assume that
Mary’s award is an employee achievement award will miss this question. Code Section
274(j) provides a very narrow definition of the term to include only awards given for
length of service or safety achievement [Section 274(j)(3)(A)].

38. No, the trust is not entitled to the Section 179 deduction per Section 179(d)(4).

39. The provision was added to the Code Section in 1993 by P.L. 103-66, Sec. 1343(a). This
provision applies to property converted on or after 9/1/91. This question provides the
student with the opportunity to research using the Code’s historical amendments.

40. Students should find researching into the current pending legislation interesting. In
addition, this provides an opportunity for a substantive discussion (if desired) on some of
the pending tax bills.

41. Costs incurred in searching for a new residence ceased being deductible as moving
expenses beginning after December 31, 1993. This change was as result of P.L. 103-66.


16 Chapter 2

42. a. No, per Section 121(f) which provides for an election by the taxpayer not to have
the Code Section apply.

b. Yes, per Section 121(d)(5) which refers to Section 1033 for additional rules.

c. No, per Section 121(b)(3)(A) which states that the exclusion is not allowed if
there was any other sale for which the exclusion applied during the prior 2 years
ending on the date of the second sale.

43. No. The student must look at the historical amendments which indicate that the
provisions only apply to sales AFTER May 6, 1997

There was a $125,000 exclusion for TP’s over 55 years old.

The provision was enacted by P.L. 105-34, Sec. 312(a). This process will enable the
students to practice researching legislative history.

44. P.L. 107-16 amended Code Section 2001 to change the rate to 49% in 2003, going down
by 1% each year through 2009.

45. a. Relevant facts include: motive for travel, travel expenses, actual travel plans.

b. The research question is whether she will be able to take a deduction for her travel
costs.

c. Code Section 274(m)(2) specifically disallows this form of educational deduction.

46. This problem illustrates a number of challenges: pinballing, measuring words, and
attempting to understand the often-times convoluted way things are written. In addition, it
is critical in this problem that the student always keep in mind the research question,
otherwise she will end up reading all sorts of provisions that never actually apply!

Students may identify the initial research question as “Do the passive loss rules apply to
the C Corporation?” The question at this point has nothing to do with what the actual
passive loss rules are. This becomes relevant only if they determine the answer to their
initial research question is “yes.”

The student first gets to the critical Code Section (§469) using either their knowledge, the
index (“passive losses”) or the table of contents. The critical language in §469 begins in
§469(a)(1) with “If for any taxable year the taxpayer is described in paragraph (2).” The
rest of paragraph (1) becomes irrelevant for the moment. It is only relevant if the
students decides that Corporation C is a “taxpayer described in paragraph (2).” The word
if is key.



IRC §469(a)(2) lists three types of taxpayers. If Corporation C is any one of these types
of taxpayers, then the passive loss provisions apply and the student must go back to the
beginning. So now the hunt is to determine whether Corporation C fits into either of the
three categories. Note that the connector in the list is and.

The facts do not lead one to believe that Corporation C is an individual, estate or trust
[§469(a)(2)(A)]. The facts indicate that Corporation C is definitely not a personal service
corporation, thus [§469(a)(2)(C)] also does not apply. But Corporation C might fit into
[§469(a)(2)(B)] and be considered a closely held C corporation.

Now the research question becomes more refined for the moment: Is Corporation C a
closely held C corporation for purposes of applying §469? To answer this, the student
needs to look for the definition of the term closely held C corporation. By skimming
through §469, the student should land upon §469(j)(1) as the place which provides the
definition of this term. [Note that some students may get waylaid and read other
subsections which seem relevant since some do start discussing the passive loss rules for
closely held corporations. However, this is a useful learning process...if the student has
always at the forefront the research question, the student in the skimming process will
skip the information that discusses the passive loss rules for a closely held C corp.]

IRC §469(j)(1) informs the student that a closely held C corporation is any C corporation
described in Code Section 465(a)(1)(B). Now the student must go read that provision,
always remembering the reason why he/she is reading it. IRC §465(a)(1)(B) send the
reader to yet another code section for the definition: IRC §542(a)(2)!

§542(a)(2) is a very difficult code section to read. After studying it, the students should
conclude their facts are such that Corporation C is NOT a closely held C corporation for
purposes of §469. (It should be pointed out that there may be different meanings for the
term closely held C corporation but that this definition applies to the term when used in
§469.) Once deciphered, the provision says that in order to meet the stock ownership
requirements (which the student has been told by the code is the test for whether an entity
is a closely held company for the passive lass rules), the following must exist: more than
50% of the stock is owned by 5 or fewer people (“not more than 5 individuals”).
Because in the facts each shareholder owns 10% of the company, 5 people only own
50%. The provision states that more than 50% must be owned by 5 or fewer people. So
in no event can Corporation C’s facts fulfill this requirement. Therefore, Corporation C
is NOT a closely held corporation for purposes of §469 and therefore the company does
not need to worry about the passive loss rules!


18 Chapter 2

47. Yes, per Code Section 7701(a)(26) which states that a trade or business includes the
performance of the functions of a public office.

48. The research question is: “Can the company deduct the costs of demolition. If not, can
the costs be depreciated in some way?” The student will find the pertinent Code Section
[IRC §280B] if the student looks for the word demolition in the index. It might be
noticed that CCH’s index is a bit misleading here because it refers only to demolition of
historic structures. Students can also discover the provision by going through the table of
contents and finding the disallowance in Part IX of Subchapter B. It is good to note here
that whenever researching to determine if something is deductible, the student should
first look to see if there is a provision allowing the deduction, but then should always
look to see if there is a specific provision that makes the item not deductible. In this case,
the table of contents doesn’t lead to a clear allowance for the deduction in the allowing
code sections (§161 et seq.), but a disallowance is clearly located in Part IX.

IRC §280B provides clear authority that demolition expenses are not deductible and must
be capitalized to the land. This Code Section is fairly easy to read and doesn’t appear to
leave any doubt about the correct answer. However, in the next chapter, students will be
able to remember the definiteness of this Code Section and be surprised by how outdated
the Regulations can be. The Regulations contradict this provision, but were written long
before this provision came into effect.

49. The research question is “Can the president exclude the value of the free parking or must
he consider the value as taxable income?” In this situation, the students will most likely
not find the index to the Code very helpful: neither parking or benefits or employee
benefits can be located in the index. Unless the students know to look up the term fringe
benefits, they will not be able to get far with the index. On the other hand, the table of
contents is very useful in this situation. Students will browse through Subchapter B,
skimming the specific inclusions portion and then the specific exclusions portion. They
should land on IRC §132 as a possible pertinent section.

If the student is accessing the Code using an electronic format, she might very well take
advantage of the ability of the computer to search through the Code to find where parking
is mentioned. Because this word is not used frequently in the IRC, in this case they will
be able to quickly arrive at not only the correct Code Section but the specific provision
within that Code Section that addresses the issue.

This problem helps illustrate the need to apply the logical skimming technique discussed
in the chapter. The student starts by reading carefully §132(a). From this, the student
should identify that it is paragraph 5 (qualified transportation fringe) that looks most
relevant. §132(a)(5) indicates that qualified transportation fringes are excluded from
gross income. Thus, the new research question is whether the free parking provided to
the president is considered a qualified transportation fringe. They should have skimmed
each of the subsection headings until they find the one on qualified transportation fringes


- §132(f).

§132(f)(1)(C) indicates that qualified parking provided by an employer to an employee is
a qualified transportation fringe. Because the president is receiving the parking as an
employee from the company (or employer), the next question is whether the parking
provided to the president is qualified parking. Reading on, the student sees the limitation
on any exclusion (should the parking be qualified) in §132(f)(2)(B). That provision states
that the exclusion shall not exceed $175 per month. [Students will notice several
apparently duplicate provisions regarding the dollar limitation. This provides the student
with an opportunity to see the importance of the effective date rules contained in these
provisions.] It is also important to note here that the IRC frequently has “inflation”
provisions hidden somewhere in the Code Section which provides for an adjustment of
dollar amounts on an annual basis. Students should be aware that whenever dollar
amounts are used in the IRC, they need to determine whether those amounts are to be
adjusted for inflation. In this case, further perusal of the Code Section reveals §132(f)(6)
which indicates the parking dollar limitation is to be adjusted annually for inflation. Next
obvious question of the students - how do you discover what the adjusted amount is? The
adjusted amount is never in the IRC. Rather, it is published yearly by the Treasury in
announcements which they will learn about in the next chapter.

So the student knows that perhaps the entire amount of the parking will be excluded - if
the parking is qualified parking. Skimming through §132(f), she should find the
definition for “qualified parking” in §132(f)(5)(C). Upon reading the definition, the
student will realize that more information is needed to accurately answer the research
question since the definition anticipates the parking is provided on or near the business
premises of the employer. Assuming this is the case, the value of the free parking is
excludable. [Note that some students may have a very hard time reading the definition of
qualified parking. It is defined as parking provided to an employee on or near the
business premises of the employer or ... What follows the or are requirements if the
employee commutes to work. Sometimes students fail to spot that or and believe that the
additional requirements (in a commuter highway vehicle or car pool) must be satisfied.

50. a. Using either the index or the table of contents, the student should find the
applicable IRC section with ease – IRC §163. This section is an excellent
example of the bandaging effect that has taken place over the years which results
in the poor organization of Code Sections within the section itself. It is also an
example of the need to read a Code Section to the end using the logical skimming
approach. IRC §163(a) provides a general rule which appears to allow fully the
deduction of all the interest. The language does not suggest any exceptions to the
general provision allowing deduction for interest paid. However, IRC §163(h)
provides much more detailed rules for this type of interest (in addition to
destroying the general rule stated in IRC §163(a) by instead indicating that no
personal interest is deductible unless). Therefore, the student must skim through
each of the subsections until they bump into §163(h).

20 Chapter 2

Once finding §163(h), the student should see that IRC §163(h)(2)(D) indicates
that “qualified residence interest” is still a deductible type of interest. Now the
research question becomes more refined and is “is the interest paid by taxpayer
‘qualified residence interest”?

IRC §163(h)(3) defines this term to include interest paid on “acquisition
indebtedness” with respect to any “qualified residence” of the taxpayer. Thus two
new questions are whether the interest the taxpayer paid was “acquisition
indebtedness” and whether the homes are “qualified residences.”

“Acquisition indebtedness” is defined in IRC §163(h)(3)(B) and after careful
reading appears to apply to the debt paid on both homes with the facts given. The
remaining question is whether both homes are “qualified residences.” Further
skimming reveals that IRC §163(h)(4)(1) defines a qualified residence to include
the “principal residence” within the meaning of IRC §121 AND one other
residence “which is used by the taxpayer as a residence (within the meaning of
section 280A(d)(1).” [Note that in the CCH codes, the cite actually reads
“§163(h)(5)[4]”. This is because CCH is reflecting the official number of the
Code paragraph (“5") which is erroneous. The accurate number is “4," which
CCH also reflects. RIA’s code simply reports the paragraph as it should be
without noting the formal erroneous numbering.]

Next the student must determine that the first home is indeed the taxpayer’s
principal residence by seeing how that term is defined in Section 121. Next, the
student must read IRC §280A(d)(1) to determine whether the second home also
qualifies. IRC §280A(d)(1) defines use as a residence to include any dwelling
unit used for personal purposes (we can assume from the facts that taxpayer’s use
is personal) for a period of time “which exceeds the greater of 14 days or 10% of
the days rented.” Taxpayer’s personal use is 30 days. He rents the house for 10
days. Thus, 14 days is greater than 10% of the rental days (10% of 10 = 1).
Because the taxpayer’s personal use (30 days) exceeds 14 days, the house is
considered a residence for purposes of IRC §280A(d). We are able to use this
definition for
purposes of IRC §163(h) even though there is limiting language because IRC
§163(h) directs us to use this definition.

Therefore, both houses are qualified residences, both debts are acquisition
indebtedness and neither debt exceeds the dollar limitations found in IRC
§163(h)(3); therefore, all the interest is deductible.

b. This question requires the student to apply the rule that you must always skim to
the end of the applicable section. At first glance, the student will think that the
new facts result in a failure of the second home to be considered a qualified


residence because it fails the test in IRC §280A(d)(1) since 14 days of personal
use does not exceed 14 days. However, more thorough reading of IRC §163(h)(5)
reveals an exception to this rule in IRC §163(h)(5)(A)(iii). This provision states
that “for purposes of clause (i)(II)” [limiting language that refers to the second
home definition we just discussed], a home will still be considered a residence
even if it fails the IRC §280A(d)(1) test if the taxpayer does not rent the house at
any time. Therefore, the home remains a qualified residence under these
circumstances and the interest on the debt is deductible.

c. Assume for this question that the current balance on the mortgage is $1,500,000. Also
assume there is no second home. Now the student should discover the provisions in
IRC §163(h)(3)(B)(ii) that impose a $1,000,000 limitation on the total amount of
acquisition indebtedness. This would appear to indicate that only a portion of the
interest on the first home is deductible. However, further reading uncovers an
exception to this dollar limitation when the initial debt was acquired prior to 1987
[IRC §163(h)(3)(D)]. Therefore, all the interest is deductible.

51. At the initial stage, students probably will not be able to closely articulate the research
question unless they understand what the vacation home deduction rules provide. So the
initial question for most will be “do the vacation rules apply when a cousin uses a home
for personal use?” As students learn more about the vacation home deduction rules, the
question will be refined further.

If the students were asked to do the previous question, most of them should be able to
recognize the code section that is applicable since they just spent some time in it --
§280A. Otherwise, students can arrive at the section by using the index or looking at the
table of contents.

The initial question is not what are the vacation home deduction rules, but do they apply
in the given factual situation? Thus, the student should not be struggling to determine
what the rules are at this point. The general rule states however the general rule and
provides important information to the researcher. §280A(a) says that “...no
deduction...shall be allowed with respect to the use of a dwelling unit which is used by
the taxpayer during the taxable year as a residence.” The student should eventually
determine that §280A(d)(1) is relevant because it discusses what a “residence” is and
states that it all depends on the number of days the taxpayer “personally used” the home.
Now the student’s research question can be narrowed to “is the personal use of a cousin
considered to be personal use by the taxpayer?”

§280A(d)(2) defines “personal use” to include the use of persons other than the taxpayer
in three different situations. §280A(d)(2)(A) states that the personal use of “any member
of the family (as defined in section 267(c)(4)) of the taxpayer” is considered to be
personal use of the taxpayer. Study of §267(c)(4) indicates that a cousin is not a
“member of the family.”

22 Chapter 2

However, this is not the end of the research. It turns out that the personal use of the
cousin will be attributed to the taxpayer under §280A(d)(2)(C) because this provision
includes the use of “any individual...unless ... the dwelling unit is rented for a rental
which...is fair rental.” Because the cousin uses the house for free, such use is considered
the personal use of the taxpayer.

52. With the changed facts, the critical provision is §280A(d)(2)(A) which attributes the
nephew’s personal use even though he is paying fair rental value is he is considered “a
family member” of Sue. Studying §267(c)(4), the student should conclude that the
nephew is not a “family member” of Sue’s.

53. a. John has $20,000 of debt relief which represents potential gross income. Code
Section 108(a)(1)(B) provides for the exclusion from income of debt relief if the
debtor was “insolvent” immediately prior to the relief of debt. The exclusion
cannot exceed the amount of the insolvency. Code Section 108(d)(3) defines
insolvency as the amount a person’s liabilities exceed the fair market value of
their assets immediately prior to the discharge. John is insolvent by $15,000
(300,000-[235,000+50,000]. John will be able to exclude $15,000 of the $20,000
debt relief income. He must recognize $5,000 as income.

b. Because John excluded $15,000 of the debt relief due to insolvency, Code Section
108(b) suggests that he has to reduce his basis by that amount. However, Code
Section 1017(b)(2) provides additional limitations on the amount the basis needs
to be reduced if after the discharge, liabilities still exceed the basis of the assets.
Applying Code Section 1017(b)(2) results in the requirement that John will not
have to reduce his basis at all because the basis in his assets after discharge does
not exceed the liabilities after discharge [basis of assets after discharge = $70,000
(150,000-30,000 cash paid) minus liabilities after discharge = $250,000 (300,000-
50,000 discharged debt]. Note that students sometimes need to be reminded that
John does not want to have the basis in his assets reduced! So the Code Section
1017(b)(2)’s limitation may provide him with a desired benefit. Also note that
students tend not to go to Code Section 1017(b)(2) and instead stop at Code
Section 108(b)(2)(E). This provides a good lesson in the need to follow the
“pinballing.”

c. Students should see that Code Section 108(b)(5) allows John the ability to avoid
reducing the NOL under the regular Section 108(b) ordering rules, and instead
reduce his basis. Here it is critical to point out to the student that by making the
Section 108(b)(5) election, the benefits of Code Section 1017(b)(2) are waived
[see the last sentence in Section 1017(b)(2)].

54. The applicable Code Section in this situation is IRC §127 which provides for the
exclusion of up to $5,250 in educational benefits resulting from a qualified educational


assistance program. A few important items to note to the students when examining this
Code Section include the sunset provisions now in the historical notes and the frequency
of amendments in Subsection (c). It will be useful to have the students examine these
historical amendments and discuss them briefly.

55. This question involves the tax treatment of income resulting from the relief of debt.
Either through the table of contents or through the index, students should locate IRC
§108. After a good deal of careful skimming, students should discover that IRC
§108(e)(2) applies in this situation and allows Susan to exclude the $6,000 in relieved
rent, since these payments would have resulted in a tax deduction had she made them.

INTEGRATED CASE STUDIES - see solutions beginning on page 140


24 Chapter 3

CHAPTER 3 B TREASURY INTERPRETATIONS

KEY CONCEPTS (1-22)

1. Definitions

a. Proposed Regulations represent the form Regulations first take before they are
made final. (See page 122)

b. Temporary Regulations are a special form of Regulation issued when the
Treasury determines that is it necessary to provide binding authority while the
regulations are also in the proposed form. (See pages 122-123)

c. Final Regulations are the most authoritative form of Treasury interpretation.
(See pages 118-123)

d. The preamble to regulations provide useful introductory and contextual
information about the specific regulation. Although their formal authority is
unclear, preambles are widely viewed as useful sources of information. (See page
121)

e. 26 CFR stands for Title 26 of the Code of Federal Regulations. This represents
the regulations that interpret the Internal Revenue Code.

f. The Internal Revenue Bulletin is a weekly publication of the Internal Revenue
Service that contains, among other things, newly issued regulations. (See page
126)

g. The Cumulative Bulletin is a semiannual service containing most of the
documents issued in the IRB. (See page 126)

h. Revenue Rulings are Treasury interpretations that offer guidance regarding the
appropriate application of the IRC to a specific set of facts. (See pages 131-139)

i. Revenue Procedures are Treasury pronouncements offering procedural guidance
regarding certain tax matters. (See page 141)

j. A citator is a tool published by a variety of tax publishers. The citator enables
the researcher to identify court decisions, Revenue Rulings and Revenue
Procedures that have cited a particular case decision or ruling or procedure. (See
pages 136-140)

k. Private Letter Rulings are Treasury interpretations issued by the National office
in response to a taxpayer request for a ruling regarding the tax treatment of a

Treasury Interpretations 25

prospective transaction. (See page 143)

l. Technical Advice Memoranda are Treasury interpretations issued by the
National office of the Treasury as a result of internal confusion regarding the
appropriate tax treatment of a transaction that has already occurred. (See pages
143)

m. Field Service Advice Memoranda are similar to letter rulings. However, the
Office of Chief Counsel issues FSAs in response to requests from IRS personnel
such as revenue agents and field attorneys. The IRS states that FSAs are intended
only to assist in resolving matters. They do not represent the IRS=s final position
on matters.

n. Determination Letters are interpretations similar to Letter Rulings except they
are issued by an IRS District Director rather than the National office. (See page
146)

o. General Counsel Memoranda are issued by the Chief Counsel=s office in the
IRS as internal guidance for the preparation of rulings. (See page 147)

p. IRS Announcements are issued by the National Office of the IRS to provide
quick interpretive guidance, prior to the issuance of a Revenue Ruling. (See page
148)

q. IRS News Releases provide general information to the public regarding recently
published regulations and IRS forms and instructions. The news releases
generally do not provide significant substantive information and are not usually
considered authoritative.

r. IRS Publications are publications of the IRS directed at the general public
explaining in lay terms the application of particular Code provisions. (See page
149)

s. Actions on Decisions are internal IRS communications in response to a court
decision. (See pages 149-150)

t. Acquiescences and nonacquiescences are internal communications by the IRS
indicating its acceptance or nonacceptance of a Tax Court decision. An
acquiescence indicates that the IRS will not continue to pursue its position taken
in the litigation leading to the decision. An acquiescence does not necessarily
indicate approval of the court=s rationale. A nonacquiescence indicates that it is
the IRS=s intention to continue applying its previous position regardless of the
court decision. Acquiescences and nonacquiescences are published in the Internal


26 Chapter 3

Revenue Bulletin and the Cumulative Bulletin, usually in the form of a revenue
ruling. In addition, each citator provides information as to whether the IRS issued
an acquiescence.

2. The researcher must pay attention to Treasury interpretations because it is the IRS that
taxpayers must first deal with. If the researcher finds an authoritative treasury
interpretation directly on point and supportive of the taxpayer=s position, taxpayer
doesn=t have much to worry about. However, if there is an authoritative treasury
interpretation negative to the taxpayer=s position, a helpful court case is comforting but
requires the taxpayer to litigate should he get audited.

3. The researcher should first always try to find the answer to the research question in the
IRC. But when the IRC does not sufficiently answer the research question, the Treasury
Regulations are the next source to examine. Unfortunately, the researcher cannot expect
the Regulations to always provide the research answer. Sometimes there is no Regulation
interpreting the IRC section; other times the Regulation provision is obsolete; and yet
other times, the regulation just doesn=t address the issue at hand.

4. Regulations frequently conflict with the provisions of the Code. When a Code Section is
amended, the Regulation interpreting the section is not concurrently amended. In fact,
the Code Section may be amended several times with no corresponding change made to
the regulations.

5. To ensure the reliability of a Regulation, the researcher must make sure that there have
been no changes made to the Code Section not reflected in the Regulation. There are a
number of ways of accomplishing this. In the print reference materials, the publishers
post warnings immediately prior to any obsolete regulation. This is also true in the
electronic context and with RIA=s softbound regulation volumes. If the researcher uses
CCH=s softbound regulation volumes, the table at the front of the regulations provides
this information.

6. Treasury Regulations can be found in the multi-volumed services published by RIA and
CCH, in the same publishers= softbound Regulations, on the public Internet and in most
of the fee-based Internet tax services.

7. Treasury Regulations and Revenue Rulings are different in both their level of authority
and their intent. Regulations provide very authoritative generic guidelines regarding the
application of a Code Section. Revenue Rulings provide guidelines with respect to a
specific set of facts, rather than a generic discussion. As a result, Revenue Rulings are
generally less authoritative since they are fact specific.

8. A Revenue Ruling provides the greatest amount of authority when the facts in the
Revenue Ruling are materially the same as those involved in the situation being


researched.

9. The central components of a Revenue Ruling include: An anonymous explanation of the
facts, a discussion of the relevant authority (including Code, Regulations, Revenue
Rulings and case law), a conclusion regarding how the law applies to the facts, and a
statement about any impact on previously issued rulings.

10. Rev. Rul. 97-54, 1997-1 CB 25:
Rev. Rul. = Revenue Ruling; 97-54, = the year (97) and number of the ruling;
1997-1 = the first volume in the Cumulative Bulletin for 1997; C.B. = Cumulative
Bulletin; 25 = Page number in that volume.

Rev. Rul. 99-20, 1999-5 I.R.B. 10:
Rev. Rul. = Revenue Ruling; 99-20, = the year (99) and number of the ruling;
1999-5 = the fifth issue of the Internal Revenue Bulletin for 1999; IRB. = Internal
Revenue Bulletin; 10 = Page number in that issue.

11. To ensure the reliability of a Revenue Ruling, the researcher must citate the ruling.

12. The citator does not inform the researcher of all documents that are related to the research
issue because that is not its intent. It is intended only to identify those documents that
have cited the document upon which the researcher wishes to rely.

13. The difference between a Letter Ruling and a Revenue Ruling is both one of level of
authority and intent. A Letter Ruling is intended only to speak to the particular
transaction the requester of the ruling discusses. Likewise, a Letter Ruling is primarily
authoritative only with regard to that transaction. A Revenue Ruling has broader
application, speaking to all situations with facts similar to those in the Revenue Ruling.

14. The IRS Bulletin Index-Digest System can be used for this purpose since it identifies
Rulings by Code Section.

15. PLR = Private Letter Ruling;
2000 = Represents the year of the ruling
45 = Represents the week within the year
300 = Represents the ruling number within that week

16. Most research issues are answered through research in the reference services and reading
the relevant cases and revenue rulings they refer you to. But if there still remains a
question even after reading all pertinent cases and Revenue Rulings, Private Letter
Rulings provide another possible source for an answer.

Reference services do not provide thorough referencing to relevant Letter Rulings.
Therefore, to find relevant Letter Rulings, the researcher must separately research into

28 Chapter 3

Letter Rulings. Electronic databases provide the best vehicle for this type of research.
The researcher must use the search mechanism available on the electronic database they
are using.

17. Searching for a Code Section cite or a Regulation cite results in the most comprehensive
list of relevant Letter Rulings. This is because every Letter Ruling refers to the relevant
Code Section and also to the relevant Regulation. So a search for these items results in a
list of all the Letter Rulings dealing with the pertinent Code Section. Searching for key
words may enable the researcher to find a pertinent Letter Ruling. However, using key
words creates a danger of inadvertently eliminating a potentially useful document by
using a word or combination of words in a slightly different way than the ruling.
Because electronic searching is literal, the search lists only the rulings actually using the
exact words in the search. Therefore, key word searches should be used with that danger
in mind.

18. When the IRS acquiesces to a court decision, it puts the researcher at ease that the IRS
will no longer challenge positions taken contrary to the court decision. However, when
the IRS issues a nonacquiescence, it places the researcher on alert that even though the
court decision may be helpful to the taxpayer, the Service does not intend to abide by the
ruling in future transactions.

19. The Code represents statutory law written by Congress, whereas Regulations are simply
interpretations of the Code issued by the Treasury Department.

20. A Revenue Ruling provides interpretative guidance with respect to the application of the
Code to a specific set of fact. Revenue Procedures are not factual specific and instead
offer procedure guidance.

21. The Service issues an internal reaction through an Action on Decision indicating how the
Service believes it will respond to a court decision. It may then issue either an
acquiescence (indicating concurrence with the decision) or a nonacquiescence (indicating
it will continue to disagree with the court=s decision).

22. Through the method of citating a case.


23. Treas. Reg. Section 1.132-5(a)(1)(v)(B).

24. a. Treas. Reg. Section 1.162-1 provides quite a bit of information regarding what
types of expenses might constitute business expenses. However, it provides no
information helping to interpret the terms ordinary and necessary.

b. Treas. Reg. Section 1.183-2 provides a great deal of information regarding the


term activity not engaged in for profit. It provides a list of factors to be considered
in making this determination.

c. There are no Final or Temporary Regulations interpreting Section 280A. Some
students may discover that there are Proposed Regulations interpreting this
section.

25. Rev. Rul. 96-150, 1996-2 C.B. 225

26. Rev. Proc. 99-5, 1999-5 IRB 10 (or IRB1995-5, 10)

27. a. Rev. Rul. 95-20, 1991-1 C.B. 163

b. Rev. Rul. 91-14, 1991-1 C.B. 18

c. Rev. Rul. 72-604, 1972-2 C.B. 35

d. Rev. Rul. 57-441, 1957-2 C.B. 45 (it is not appropriate to cite to the IRB
once the document has been placed in the Cumulative Bulletin)

e. Rev. Proc.2003-19, 2003-5 IRB 371 (or IRB 2003-5,371)

f. Rev. Proc. 96-1, 1996-1 C.B. 385

28. a. Rev. Rul. 71-301, 1971-2 CB 256 B This was made obsolete by Rev. Rul.
95-21, 1995-1 C.B. 131 and also was cited in Babin vs. Commission, 94-1
USTC &50,224.

b. Rev. Rul. 62-199, 1962-2 CB 38 B Still an authoritative Revenue Ruling.

c. Rev. Rul. 87-41, 1987-1 CB 296 - Still an authoritative Revenue Ruling.

d. Rev. Rul. 54-14, 1994-1 CB 129 - obsoleted by Rev. Rul. 89-119, 1989-2
CB 275.

29. a. Rev. Proc. 96-1, 1996-1 CB 385 B Superceded by Rev. Proc. 97-1 which
in turn was superceded by Rev. Proc. 98-1 and again by Rev. Proc. 99-1,
and every year since. The first Revenue Procedure issued each year is on
the same subject and supercedes the one issued in the prior year. This is
the one thing the researcher can always rely on!

b. Rev. Proc. 79-63, 1978-2 CB 578 B Superceded by Rev. Proc. 92-85
which was then further modified by several subsequent Revenue


30 Chapter 3

Procedures before being made obsolete by Treasury Decision 8680.

c. Rev. Proc. 87-41, 1987-2 CB 515 B Superceded by Rev. Proc. 88-49
which was superceded by Rev. Proc. 89-44 which was superceded by 90-
43, again obsoleted by Rev. Proc. 91-33 which was obsoleted by Rev.
Proc. 92-46 which was superceded by Rev. Proc. 93-31 which was
superceded by Rev. Proc. 94-43 which is currently authoritative.

d. Rev. Proc. 98-5, 1998-1 IRB 155 B Superceded by Rev. Proc. 99-5 and the
fifth revenue procedure each year. Therefore, as of this writing, Rev.
Proc. 2008-5 is the authoritative procedure.

30. a. Rev. Rul. 2003-12, IRB 2003-3, 283

Facts: This revenue ruling addresses the tax treatment of payments made by
states, charitable organizations or employers to victims of disasters. Situation 1
deals with taxpayers receiving grants from a state to pay for medical expenses and
temporary housing. Situation 2 addresses the situation where a charitable
organization makes the same type of payments. The third situation deals with an
employer making the payments.

Issue: Are payments received by an individual to assist in medical expenses and
temporary housing in a disaster situation includible in income?

Holding: The service held that in all three situations the amounts are excludible.
When the state and employer makes the payments, the Service held that Section
139 offers the exclusion. When a charitable organization makes the payments, the
court held that Section 102 is the exclusion section.

b. Rev. Rul. 95-58, 1995-2 CB 191

Facts:
1. The decedent created a trust for the benefit of others and designated an
independent corporate fiduciary as trustee. The trustee possesses broad
discretionary powers of distribution. The decedent reserved the right to remove
and replace the corporate trustee with another independent corporate trustee.
2. The decedent created a trust and appointed family members as the trustee with
discretionary powers of distribution. The decedent reserved the right to remove
and replace the trustee with successor trustees who were not related or
subordinate to the decedent. Three years later, the trust was amended to eliminate
both the decedent=s power to remove and replace the trustees and the decedent=s
eligibility to receive discretionary distributions.

Issue:


IRC Section 2038(a)(1), in general, provides that the value of the gross estate
includes the value of all property to the extent of any interest in the property that
was transferred by the decedent (for less than adequate consideration) if the
decedent held a power, exercisable alone or in conjunction with any person, to
change the enjoyment of the property through the exercise of a power to alter,
amend or revoke. The issue here is whether a grantor's reservation of an
unqualified power to remove a trustee and appoint a new trustee, other than the
grantor, is tantamount to a reservation by the grantor of the trustee's discretionary
powers of distribution.

Holding:
Even if the decedent possessed the power to remove the trustee and appoint an
individual or successor trustee that was not related or subordinate to the decedent,
the decedent would not have retained a trustee's discretionary control over trust
income.

c. Rev. Rul. Rev Rul 2006-57, 2006-47 IRB 911

Issue
Whether employer-provided transportation benefits provided through smartcards,
debit or credit cards, or other electronic media are excluded from gross income
under IRC §§132(a)(5) and 132(f).

Facts
The ruling discusses four situations. In summary, situation 1 involves the
employer providing to its employees transportation benefits in an amount not
exceeding $105 each month through smartcards. The smartcards are plastic cards
containing a memory chip that stores certain information including the serial
number of the card and the value of the fare media stored on the card. The amount
stored as fare media on the smartcard is not authorized to be used to purchase
anything other than the fare. The employer makes monthly payments to the transit
company selling the cards on behalf of its employees who participate in the
transportation benefit program. The employer does not require its employees to
substantiate their use of the smartcards.
Situation 2- In summary, the facts are very similar to situation 1 except that the
employer pays a debit-card provider for cards for its employees that can only be
used at transportation merchant terminals. All other facts are the for the most part
the same.
Situation 3 is for the most part the same as situation 1 and 2, except that the cards
have the potential for being used for a greater variety of charges. In addition, the

32 Chapter 3

employee is required to substantiate that the expenses were used for
transportation. (Many details are provided for this situation – so a researcher
dealing with a similar situation would certainly need to review more carefully the
text of the ruling.)
Situation 4 - The facts are the same as in Situation 3, except that the employees
are not required to substantiate that the charges were used for transportation
expenses even though on the card the instructions are that the charge must be
limited to this. In fact, an employee could end up charging for something that is
not transportation, and the employer would be paying for it, believing that it is
transportation charges.

Law (the full-text of this portion of the revenue ruling follows below)
Section 61(a)(1) of the Code provides that, except as otherwise provided in
subtitle A, gross income includes compensation for services, including fees,
commissions, fringe benefits, and similar items.
Section 132(a)(5) provides that any fringe benefit that is a qualified transportation
fringe is excluded from gross income. Section 132(f)(1) provides that the term
“qualified transportation fringe” means (1) transportation in a commuter highway
vehicle between home and work, (2) any transit pass, and (3) qualified parking.
The amount of the fringe benefit which may be excluded from gross income and
wages for 2006 is limited to $105 per month for the aggregate of transportation in
a commuter highway vehicle and transit passes, and $205 per month for qualified
parking. See § 132(f)(2); Rev. Proc. 2005-70, 2005-47 I.R.B. 979, § 3.12.
Section 132(f)(5)(A) provides that a transit pass is any pass, token, farecard,
voucher or similar item entitling a person to transportation (or transportation at a
reduced price) if such transportation is on mass transit facilities or is provided by
any person in the business of transporting persons for compensation or hire in a
commuter highway vehicle. See § 132(f)(5)(B) for the definition of a commuter
highway vehicle.
Section 132(f)(3) provides that a qualified transportation fringe includes a cash
reimbursement by an employer to an employee for transit benefits. However, a
qualified transportation fringe includes a cash reimbursement by an employer to
an employee for a transit pass only if a voucher or similar item that may be
exchanged only for a transit pass is not readily available for direct distribution by
the employer to the employee.
Section 1.132-9(b) Q/A-16(b)(1) of the Income Tax Regulations provides that if a
voucher or similar item is readily available, the requirement that a voucher or
similar item be distributed in-kind by the employer is satisfied if the voucher is
distributed by the employer or by another person on behalf of the employer (for


example, if a transit operator credits amounts to the employee's fare card as a
result of payments made to the operator by the employer).
Section 1.132-9(b) Q/A-16(b)(2) provides that a transit system voucher is an
instrument that may be purchased by employers from a voucher provider that is
accepted by one or more mass transit operators in an area as fare media or in
exchange for faremedia. Under § 1.132-9(b) Q/A-16(b)(3), a voucher provider is
any person in the trade or business of selling transit system vouchers to
employers, or any transit system or transit system operator that sells vouchers to
employers for the purpose of direct distribution to employees.
Section 1.132-9(b) Q/A-16(b)(4) provides that a voucher or similar item is readily
available for direct distribution by an employer to employees if and only if the
employer can obtain it from a voucher provider that does not impose fare media
charges greater than 1 percent of the average annual value of the voucher for a
transit system, and does not impose other restrictions causing the voucher not to
be considered readily available. See § 1.132-9(b) Q/A-16(b)(5) and (b)(6).
Section 1.132-9(b) Q/A-16(a) provides that the term qualified transportation
fringe includes cash reimbursement for transportation in a commuter highway
vehicle, transit passes (if permitted), and qualified parking, provided the
reimbursement is made under a bona fide reimbursement arrangement. A payment
made before the date an expense has been incurred or paid is not a
reimbursement. In addition, a bona fide reimbursement arrangement does not
include an arrangement that is dependent solely on the employee certifying in
advance that the employee will incur expenses at some future date. Under §
1.132-9(b) Q/A-16(c), whether a reimbursement is made under a bona fide
reimbursement arrangement depends upon the facts and circumstances. The
employer must implement reasonable procedures to ensure that the amount equal
to the reimbursement was incurred for transportation in a commuter highway
vehicle, transit passes, or qualified parking. Section 1.132-9(b) Q/A-16(d)
provides that reasonable reimbursement procedures include the collection of
receipts from employees or obtaining employee certifications in appropriate
circumstances. The regulations provide that obtaining an employee's certification
is a reasonable reimbursement procedure if receipts are not provided by the seller
in the ordinary course of business, and if the employer has no reason to doubt the
employee's certification.
Section 1.132-9(b) Q/A-18 provides that there are no employee substantiation
requirements if an employer distributes a transit pass (including a voucher or
similar item) in-kind to the employer's employees.
Federal Insurance Contributions Act (FICA) taxes, Federal Unemployment Tax
Act (FUTA) taxes, and Federal income tax withholding are imposed on “wages.”
See §§ 3101, 3111, 3121(a), 3301, 3306(b), 3402, and 3401(a). Section 3121(a)

tax research Barbara Karlin

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