2008 15 Intro - Chapter 15: Rulings and Cases Explanation...

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Unformatted text preview: Chapter 15: Rulings and Cases Explanation of Contents .......................................... 551 Judicial System for Tax Disputes ............................ 553 Agricultural Issues ................................................... 557 Amortization and Depreciation............................... 558 At Risk ....................................................................... 560 Bad Debt ................................................................... 561 Bankruptcy and Discharge of Indebtedness .......... 562 Business Expenses..................................................... 567 Capital Gains and Losses......................................... 569 Casualty Loss ............................................................ 572 Clergy ........................................................................ 573 Corporations ............................................................ 573 Credits ....................................................................... 575 Deductions................................................................. 576 Dependency Issues.................................................... 582 Divorce Issues ........................................................... 586 Employment Tax Issues ........................................... 588 Estate and Gift.......................................................... 595 Gross Income ............................................................ 598 Innocent Spouse........................................................ 606 IRS Procedures -- Miscellaneous ........................... 609 IRS Procedures -- Payments .................................. 614 IRS Procedures -- Penalties.................................... 615 Itemized Deductions................................................. 618 Like-Kind Exchanges............................................... 621 Not for Profit............................................................. 624 Partnerships.............................................................. 627 Passive Activities ...................................................... 628 Residences ................................................................. 629 Retirement................................................................. 629 S Corporation ........................................................... 633 Tax Fraud.................................................................. 634 Travel and Transportation Expense ....................... 638 EXPLANATION OF CONTENTS Please Note. This chapter is a collection of selected cases, Revenue Rulings, Revenue Procedures, Treasury Regulations, Announcements, and Letter Rulings issued during the past year, through approximately September 1, 2008. They appear in a condensed version, and are not to be relied on as a substitute for the full documents. A full citation appears for each item. This is not a comprehensive coverage of all tax law changes or explanations. It reports the rulings and cases that are likely to be of interest to most tax professionals. Following is a discussion of the significance (weight) given to the different sources: Substantial Authority If there is substantial authority for a position taken on a tax return, neither the taxpayer nor the tax preparer will be subject to the penalty for underreporting income even if the IRS successfully challenges the position taken on the return. By contrast, if there is not substantial authority for a position taken on a tax return, the underreporting penalties may be imposed unless the position has been adequately disclosed and there is a reasonable basis for the position. Evaluation of Authorities. There is substantial authority for the tax treatment of an item only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment. 15 2008 Chapter 15: Rulings and Cases 551 Copyrighted by the Board of Trustees of the University of Illinois. This information was correct when originally published. It has not been updated for any subsequent law changes. All authorities relevant to the tax treatment of an item, including the authorities contrary to the treatment, are taken into account in determining whether substantial authority exists. The weight of authorities is determined in light of the pertinent facts and circumstances. There may be substantial authority for more than one position with respect to the same item. Because the substantial authority standard is an objective one, the taxpayer's belief that there is substantial authority for the tax treatment of an item is not relevant in determining whether there is substantial authority for that treatment. Nature of Analysis. The weight accorded an authority depends on its relevance and persuasiveness, and the type of document providing the authority. For example, a case or Revenue Ruling having some facts in common with the tax treatment at issue is not particularly relevant if the authority is materially distinguishable on its facts, or is otherwise inapplicable to the tax treatment at issue. An authority that merely states a conclusion ordinarily is less persuasive than one that reaches its conclusion by cogently relating the applicable law to pertinent facts. The weight of an authority from which information has been deleted, such as a Private Letter Ruling, is diminished to the extent that the deleted information may have affected the authority's conclusions. The type of document also must be considered. For example, a Revenue Ruling is accorded greater weight than a Private Letter Ruling addressing the same issue. Private rulings, technical advice memorandums, general counsel memorandums, Revenue Procedures and/or actions on decisions issued prior to the Internal Revenue Code of 1986, generally must be accorded less weight than more recent ones. There may be substantial authority for the tax treatment of an item despite the absence of certain types of authority. Thus, a taxpayer may have substantial authority for a position that is supported only by a well-reasoned construction of the applicable statutory provision. The following are considered authority for purposes of determining whether there is substantial authority for the tax treatment of an item: Applicable provisions of the Internal Revenue Code (IRC) and other statutory provisions Temporary and final regulations construing such statutes Note. Proposed regulations present a tentative IRS position which may be changed when temporary and/or final regulations are issued. Revenue Rulings Revenue Procedures Tax treaties and regulations thereunder, and Treasury Department and other official explanations of such treaties Federal court cases interpreting such statutes Congressional intent as reflected in committee reports Joint explanatory statements of managers included in congressional conference committee reports, and floor statements made prior to enactment by one of a bill's managers General explanations of tax legislation prepared by the Joint Committee on Taxation (the Blue Book) Letter Rulings and technical advice memoranda issued after October 31, 1976 Actions on decisions and general counsel memoranda issued after March 12, 1981 IRS information or press releases, and notices, announcements, and other administrative pronouncements published by the Service in the Internal Revenue Bulletin 552 2008 Chapter 15: Rulings and Cases Copyrighted by the Board of Trustees of the University of Illinois. This information was correct when originally published. It has not been updated for any subsequent law changes. Internal Revenue Code. The provisions of the IRC are binding in all courts except when the provisions violate the United States Constitution. Treasury Regulations (Income Tax Regulations). The regulations are the Treasury Department's official interpretation and explanation of the Internal Revenue Code (IRC). Regulations have the force and effect of law unless they are in conflict with the statute they explain. Revenue Rulings. The IRS is bound by the position taken in Revenue Rulings. Revenue Rulings that interpret Treasury Regulations are entitled to substantial deference. Letter Rulings and Technical Advice Memoranda (TAM). These are IRS rulings directed at a particular taxpayer. Private Letter Rulings are issued for a fee. The IRS is only bound to the ruling for the particular taxpayer that requested the ruling. TAM's are issued in response to a request for a legal opinion. Chief Counsel Advice (CCA). These are IRS rulings issued to the IRS field operations by the Office of Chief Counsel. They may be directed to a particular taxpayer or to a particular issue. Included in this categoty are various legal memoranda (e.g., Internal Legal Memoranda (ILM) and Litigation Guideline Memoranda (LGM)). General Council Memorandum (GCM). These detail the legal reasoning behind the issuance of a Revenue Ruling. Service Center Advice (SCA). These SCA'a are issued by the IRS in response to a question coming from an IRS Service Center. There are two types of SCAs: routine and significant. A Routine SCA is answered by district counsel and is not coordinated with the National Office. A Routine SCA is not issued to the public. A Significant SCA (SSCA), on the other hand, is only issued with the approval of the National Office. An SSCA is not legal advice and only addresses the interpretation or application of the internal revenue laws. SSCA's are made public, but any information identifying the taxpayer is deleted. Tax Court Summary Opinions. Cases decided under the Small Case Procedures cannot be appealed by either the taxpayer or the IRS. Without the appeals process, incorrect legal interpretations by the Tax Court cannot be challenged. Therefore, the Tax Court's decision is only binding on that particular case. However, reviewing the cases can still be useful since they explain the IRS's arguments, the taxpayer's arguments, and the Tax Court's reasoning. JUDICIAL SYSTEM FOR TAX DISPUTES The taxpayer in a dispute with the IRS has two choices after he or she receives the statutory notice or notice of final determination ("90 day letter"): File a petition in the Tax Court without paying the tax. Pay the tax and file a claim of refund. If the IRS rejects the claim of refund, the taxpayer can file a suit in the Federal District Court or the Claims Court. The U.S. Tax Court is a federal court of record established by Congress under Article I of the Constitution in 1942. It replaced the Board of Tax Appeals. Congress created the Tax Court to provide a judicial forum in which affected persons could dispute tax deficiencies determined by the Commissioner of Internal Revenue prior to the payment of the disputed amounts. The Tax Court is located at 400 Second Street, N.W., Washington, D.C. 20217. Although the court is physically located in Washington, the judges travel nationwide to conduct trial in various designated cities. The Tax Court is composed of 19 judges acting as "circuit riders." This is the only forum in which a taxpayer can contest a tax liability without first paying the tax. However, jury trials are not available in this forum. More than 90% of all disputes concerning taxes are litigated in the Tax Court. The jurisdiction of the Tax Court was greatly expanded by the Revenue Reconciliation Act of 1998 (RRA 98). The jurisdiction of the Tax Court includes the authority to hear tax disputes concerning notices of deficiency, notices of transferee liability, certain types of declaratory judgment, readjustment and adjustment of partnership items, review of 15 2008 Chapter 15: Rulings and Cases 553 Copyrighted by the Board of Trustees of the University of Illinois. This information was correct when originally published. It has not been updated for any subsequent law changes. ...
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