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CH2 Sol - ANSWERS TO KEYSTONE PROBLEMS—CHAPTER 2(112161...

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Unformatted text preview: ANSWERS TO KEYSTONE PROBLEMS—CHAPTER 2 (112161.) The leading case on the issue of the deductibility of home office expenses by teachers is David J. Weissman, 85-1 USTC 11 9106, 751 F.2d 512 (CA-3 1984), rev’g 47 TCM 520, Dec. 40,645(M), T.C. Memo. 1983-724. A college professor was required to do scholarly research and writing in addition to teaching. He spent the majority of his employment-related time doing research and writing at home because a quiet and safe place to perform this work was not available at the college. The court held that he was entitled to deduct his home office expenses because his home, not his college office, was his principal place of business. The home office was necessary to carry out an essential aspect of his job (i.e., his research) and was maintained for the convenience of the employer. The 7th Circuit in Thomas C. Cadwallader v. Commissioner, 90-2 USTC 1150,597, aff’ g 57 TCM 1030, denied a deduction for a home office maintained for the taxpayer’s own convenience where a university provided him with adequate office space. The US. Supreme Court, in another office-in-home case, Nadar E. Soliman, 93-1 USTC 1150,014, held that the office- in-home must be the principal place where the activities are performed to be deductible. Since Weissman’s principal income-earning activity could be held to be teaching, the deductibility of his office-in-home after the Soliman decision would be questionable. (112333.) In an office examination the taxpayer or a representative should take only information or support for items which are requested of the taxpayer by the IRS; otherwise the tax auditor might open up other areas for investigation. Situations may vary, but some practitioners believe that it is better for the taxpayer, assuming he or she has a representative such as a CPA or a lawyer, not to be present because the representative can keep better control over the interview and also approach the matter in a less emotional atmosphere. IRS personnel should be treated courteously and should be promptly furnished information and substantiation relating to applicable tax return items. Although the cooperation of the taxpayer (or representative) is important, the taxpayer should respond only to questions asked by the agent. Disclosing unnecessary information could cause problems to the taxpayer. When there is a disagreement after an office examination, if practicable, the taxpayer is given an opportunity for an interview with the tax auditor’s immediate supervisor or for a conference with an Appeals officer. If these actions are not feasible, the taxpayer will be sent a 30-day letter from the District Office indicating the proposed adjustments and the courses of action. If the taxpayer agrees with the adjustment, the agreement form can be signed. If the taxpayer disagrees, he or she may request an Appeals Office conference within 30 days, or ignore the 30-day letter and wait for the 90-day letter which allows the taxpayer to file a petition in the Tax Court. There are a number of factors a taxpayer should consider in trying to decide whether to pursue the matter. Going to the Appeals Office is less expensive than litigation, and yet the taxpayer leaves open the opportunity to file a petition in the Tax Court or to sue for refund in a District Court or the Court of Federal Claims. In addition, a taxpayer is often able to gather more information about the IRS position in the event the taxpayer needs to carry the case further and there may be a chance that the taxpayer may convince the Appeals Officer that the IRS was incorrect at the agent level. The Appeals Officer may be at some disadvantage in that the officer has not personally prepared the case and is relying on the information presented by the revenue agent, which could be an advantage to the taxpayer. On the other hand, there may be some disadvantages to having an Appeals Conference. New issues might be raised in an Appeals conference, although the IRS’s policy is not to raise an issue unless the grounds for such action are “substantial” and the potential effect upon tax liability is “material.” The 10 factors mentioned in the “Choice of Tax Forum” should also be considered. It is important for taxpayers to be aware of the characteristics of the courts so that an appropriate choice can be made if the taxpayer decides to go to court. A taxpayer, having made a decision to go to the District Court, for example, cannot later decide to go to the Tax Court. The taxpayer must think very seriously before taking the case to court. Not only may the economic costs be high, but the psychological and emotional costs may also be high. The taxpayer has to consider whether the tax savings will be worth the legal fees, time, and psychological costs. In deciding to which court to take the case, the taxpayer should not look simply at the statistics on taxpayer winnings in the various courts. Statistics like that only have some value if winnings by taxpayers on similar issues are being examined. Internal Revenue Code Structure 1. Yes, the Internal Revenue Code of 1986 includes all existing tax laws, regardless of the date when such provisions were enacted. Internal Revenue Code Organization 2. The majority of the income tax law is found in the Internal Revenue Code, Subtitle A, Chapter 1. Treasury Regulations: Judicial Precedent 3. Yes, Regulations are issued by the US. Treasury Department, and are authorized by Congress. In contrast, Revenue Rulings are issued by the Internal Revenue Service, which is a branch of the Treasury Department. Regulations v. Revenue Rulings 4. Yes, in dealing with the IRS, Regulations have the authority of law. Revenue Rulings are similar to Regulations in that they represent administrative interpretations of the law; however, they do not have the force and effect of Regulations, but they may be used as precedents. Administrative Sources of Tax Law 5. Treasury Regulations, Revenue Rulings, Revenue Procedures, Technical Information Releases and Announcements, Private Letter Rulings, Determination Letters, and Technical Advice Memoranda. Revenue Ruling and Revenue Procedure Citation 6. When a Revenue Ruling or a Revenue Procedure is first issued, the available citation is the reference to the Internal Revenue Bulletin. However, once the Cumulative Bulletinfor the period has been issued, all rulings and procedures reprinted in that Cumulative Bulletin should be cited according to their permanent CB page references—not according to the temporary IRB reference. Judicial Circuits 7. There are presently ll numbered judicial circuits plus the Federal Circuit. The District of Columbia is a separate Circuit. Trial Court System 8. The three trial courts that have jurisdiction over tax cases are the US. Tax Court, the US. District Court, and the US. Court of Federal Claims. Tax Court: Regular and Memorandum Decisions 9. Regular decisions require an interpretation of the law; memorandum decisions generally concern only well- established principles of law and require only a determination of facts. Tax Court: IRS Acquiescences 10. No, an acquiescence to a court decision can be retroactively withdrawn at any time by the IRS. Common Tax Law Abbreviations 11. CCH ............................................................................................................. .. CCH, a Wolters Kluwer business RIA .................................................................................................................... .. Research Institute of America BTA ................................................................................................................................ .. Board of Tax Appeals USTC ........................................................................................ ..United States Tax Cases (published by CCH) AFTR ......................................................... .. American Federal Tax Reports (RIA original series of tax cases) AFTRZd .............. .. American Federal Tax Reports, 2nd series (current years of tax cases, published by RIA) S.Ct. ....................... .. Supreme Court Reporter (Supreme Court decisions published by West Publishing Co.) CA-3 ................................................................................................................... .. Court of Appeals, 3rd Circuit TCM .......................................................................................................................... .. Tax Court Memorandum Tax Law Publication Services 12. Research Institute of America (RIA) Tax Law Publication Services 13. Merten’s, Law of Federal Income Taxation Tax Research Methodology: Case #1 14. 2011 = 0; 2012 = $1,900. See Reg. §l.165-1(d)(2)(ii). Tax Research: Computer-Based Research Systems 15. Computer-based research systems in which the text of tax treaties may be found include the publishers CCH, West, Lexis/Nexis, and RIA (Research Institute of America). Tax Research: Court Case Historical Record 16. The historical record of a court case can be found in a Citator. IRS Organization 17. See Exhibit 8 in the text for the organization of the Internal Revenue Service. The Internal Revenue Service consists of a National Office and an extensive field organization composed of over 100,000 revenue agents, revenue officers, and support personnel. The IRS is divided into four operating divisions, each responsible for serving a group of similar taxpayers. Practice Before the IRS 18. Attorneys or certified public accountants who are not under suspension or disbarment may practice before the IRS, as may any person enrolled as an agent. Enrolled agents, however, must demonstrate special competence in tax matters by written examination administered by the IRS. In certain situations, other persons may represent taxpayers: (1) An individual may represent another individual who is his or her full-time employer, may represent a partnership of which he or she is a member or a full-time employee, or may represent a member of his or her immediate family. (2) Corporations, associations, or organized groups may be represented by bona fide officers or full-time employees. (3) Trusts, receiverships, guardianships, or estates may be represented by their trustees, receivers, guardians, administrators, or executors or by full-time employees. (4) An individual who prepares the taxpayer’s return may represent the taxpayer before officers and employees of the Examination Division of the IRS. Rulings, Determination Letters, and Technical Advice Memoranda 19. Private Letter Rulings. A private ruling is a “written statement issued to a taxpayer by the National Office of the IRS that interprets and applies the tax laws to that taxpayer’s specific set of facts.” It is issued in response to a specific request by a taxpayer. The private ruling is applicable only for the taxpayer requesting the ruling, although it may provide to taxpayers in similar situations some indication of the IRS’s viewpoint. Determination Letters. A determination letter is a “written statement issued by a District Director in response to a written inquiry by a taxpayer which applies the principles and precedents previously announced by the National Office to a specific set of facts.” Determination letters are issued by District Directors whereas rulings are issued by the National Office. Most determination letters are issued as to matters involving pension plans and exempt organizations. Technical Advice Memoranda. Technical advice is “advice or guidance furnished by the National Office upon request of a District or an Appeals Office in response to any technical or procedural question” that develops during the examination or appeals process. Both the taxpayer and the District or Appeals Office may request technical advice. The taxpayer may request advice where there appears to be inconsistency in the application of law or where the issue is unusual or complex. Requests for technical advice memoranda sometimes become the basis for a Revenue Ruling. IRS Examination of Returns: Selection Programs 20. DIF. The Discriminant Function system used by the IRS involves computer scoring using mathematical formulae to select tax returns with the highest probability of errors. T CMP. Taxpayer Compliance Measurement Program is a program for measuring taxpayer compliance through specialized audits of individual tax returns. IRS Examination of Returns: Selection Criteria 21. The following events might cause an IRS examination: (1) Total positive income is above specified amounts. (2) Another IRS office or a non-IRS party might provide information (e.g., a tip from a bitter former spouse). (3) A claim for a refund may result in a closer examination of the return. (4) A return of a related party (family member, partner) might be examined to determine the correctness of the taxpayer’s return. Correspondence Examinations: Taxpayer Errors Resolved by Mail 22. Mathematical errors can be broadly defined to mean (1) an error in addition, subtraction, multiplication, or division shown on any return; (2) an incorrect use of any IRS table if such incorrect use is apparent from other information on the return; (3) inconsistent entries on the return; (4) an omission of information required to be supplied on the return to substantiate a return item; or (5) a deduction or credit disallowed by law that is either a specified monetary amount or a percentage, ratio, or fraction—if the items entering into the application of such limit appear on the return. District Office Examinations 23. Examples of types of issues which lend themselves to interview examinations are income items that are not subject to withholding, deductions for travel and entertainment, items such as casualty and theft losses that involve the use of fair market value, education expenses, deductions for business related expenses, and determination of basis of property. Also, if the taxpayer’s income is low in relation to financial responsibilities as indicated on the return through the number of dependents, or interest expense, or if the taxpayer’s occupation is of the type that required only a limited formal education, an office interview might be deemed appropriate. Certain business activities or occupations may also lend themselves to office interview examinations. Field Examinations 24. In addition to being less costly than settling at higher levels, negotiations with the revenue agent are generally more informal than higher levels and less demanding as to technical aspects. Also, if questionable issues exist but were not raised at the agent level, it may be wise to settle at that level in order to avoid the possibility of persons at higher levels raising those questionable issues. Notices of Deficiency 25. 30-day letter. If the taxpayer and the agent do not agree, the taxpayer will be sent a 30-day letter which explains the appellate procedures and urges the taxpayer to reply within 30 days either by signing the waiver or by requesting a conference. 90-day letter. If the taxpayer does not respond to the 30-day letter, a statutory notice of deficiency (90-day letter) will be sent which gives the taxpayer 90 days to file a petition with the Tax Court. Appeals Procedure: Administrative Process 26. If an appeal is made within the IRS, an appropriate request must be made if required. A taxpayer may go to the Appeals Office at two different times: (1) if the protest is filed within the 30-day period as stated in the 30- day letter, or (2) if the 30-day period passes and the taxpayer files a petition in the Tax Court within 90 days after receipt of a statutory notice of deficiency (the “90-day letter”). The taxpayer may represent himself or herself at an Appeals conference or the taxpayer may be represented by an attorney, CPA, or person enrolled to practice before the IRS. The Appeals Officer, who actually handles the appeals, reports to the Regional Director of Appeals, who reports to the Regional Commissioner. Proceedings before the Appeals Office are informal and are held in the District Office. The Appeals Officer may request that the taxpayer submit additional information, which could involve additional conferences. Appeals Procedure: Federal Court System 27. There is a small tax cases procedure in the Tax Court if the amount of the deficiency or claimed overpayment is not greater than $50,000. In addition, there are three other trial courts or courts of original jurisdiction: the US. Tax Court, a federal District Court, and the US. Court of Federal Claims. Appeals from the Tax Court and the District Court go to the Circuit Court of Appeals and appeals from the Court of Federal Claims go to the US. Court of Appeals for the Federal Circuit. Appeals from all Courts of Appeals go to the US. Supreme Court. Tax Forum Selection 28. The factors to be considered include the following: (1) Jurisdiction. (2) Payment of tax. (3) Jury trial. (4) Rules of evidence. (5) Expertise of judges. (6) Publicity. (7) Legal precedent. (8) Factual precedent. (9) Statute of limitations. (10) Discovery. See also the choice of tax forum section at 1l2311 in the textbook. Delinquency Penalties; Types 29. The two delinquency penalties are the penalty for failure to file a return and the penalty for failure to pay the tax. Delinquency Penalties: Reasonable Causes for Avoidance 30. The following are some “reasonable causes” for purposes of avoiding the delinquency penalties: (1) A return was mailed in time but returned for insufficient postage. (2) A return was filed within the legal period but in the wrong district. (3) Death or serious illness of the taxpayer or of someone in the immediate family. (4) Unavoidable absence of the taxpayer. (5) Destruction of the taxpayer’s business or business records by fire or other casualty. (6) Erroneous information was given the taxpayer by an IRS official. (7) The Taxpayer made an effort to obtain assistance or information necessary to complete the return by a personal appearance at an IRS office but was unsuccessful because the taxpayer, through no fault of his own, was unable to see an IRS representative. (8) The taxpayer is unable to obtain the records necessary to determine the amount of tax due for reasons beyond the taxpayer’s control. (9) The taxpayer contacts a competent tax adviser, furnishes the necessary information, and then is incorrectly advised that the filing of a return is not required. Negligence Penalty 3 1 . A 20 percent penalty, part of the accuracy-related penalty, is imposed for underpayment of tax due to negligence or intentional disregard of rules or regulations. Understatement of Tax Liability Penalty 32. (1) A taxpayer and (2) any person who aids in the preparation or presentation of any tax document in connection with matters arising under the internal revenue laws who knows that the document will result in the understatement of tax liability of another person. Valuation Overstatement Penalty 33. Any taxpayer having an underpayment of tax attributable to a valuation overstatement is subject to a penalty. The amount of the penalty is 20 percent and is part of the accuracy-related penalty. Underpayment of Tax Penalty 34. An individual taxpayer can avoid the penalty for underpayment if the payments of estimated tax are at least as large as any one of the following: (1) 90 percent of the tax shown on the return or 100 percent of the tax shown on the return of the individual for the preceding taxable year (assuming it showed a tax liability and covered a taxable year of 12 months); or (2) An amount equal to 90 percent of the tax for the taxable year computed by annualizing the taxable income received for the months in the taxable year ending before the month in which the installment is required to be paid. Delinquency Penalties: Computation of Penalty 35. Jim’s total penalties (disregarding interest) are $400, consisting of a failure to pay penalty of $40 (1/2 X 1% X $8,000) and a failure to file penalty of $360 or $400 (5% X $8,000...
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