TEST BANK FOR FEDERAL TAX RESEARCH 11TH EDITION BY ROBY B SAWYERS, STEVEN GILL COMPREHENSI, Exams of International Business

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STEVEN GILL

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CHAPTER 1

AN INTRODUCTION TO TAX PRACTICE AND ETHICS

DISCUSSION QUESTIONS

1-1. In the United States, the tax system is an outgrowth of the following five disciplines: law, accounting, economics, political science, and sociology. The environment for the tax system is provided by the principles of economics, sociology, and political science, while the legal and accounting fields are responsible for the system's interpretation and application.

Each of these disciplines affects this country's tax system in a unique way. Economists address such issues as how proposed tax legislation will affect the rate of inflation or economic growth. Measurement of the social equity of a tax, and determining whether a tax system discriminates against certain taxpayers, are issues that are examined by sociologists and political scientists. Finally, attorneys are responsible for the inter- pretation of the taxation statutes, and accountants ensure that these same statutes are applied consistently.

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1-2. The other major categories of tax practice in addition to tax research are:

 tax compliance  tax planning  tax litigation

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1-3. Tax compliance consists of gathering pertinent information, evaluating and classifying that information, and filing any necessary tax returns. Compliance also includes other functions necessary to satisfy governmental requirements, such as representing a client during an IRS audit.

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1-4. Most of the tax compliance work is performed by commercial tax preparers, enrolled agents, attorneys, and CPAs. Noncomplex individual, partnership, and corporate tax returns often are completed by commercial tax preparers. The preparation of more complex returns usually is performed by enrolled agents, attorneys, and CPAs. The latter groups also provide tax planning services and represent their clients before the IRS.

An enrolled agent is one who is admitted to practice before the IRS by passing a special IRS-administered examination, or who has worked for the IRS for five years, and is issued a permit to represent clients before the IRS. CPAs and attorneys are not required to take this examination and are automatically admitted to practice before the IRS if they are in good standing with the appropriate professional licensing board.

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Page 5 and Circular 230

1-5. Tax planning is the process of arranging one's financial affairs to minimize any tax liability. Much of modern tax practice centers around this process, and the resulting outcome is tax avoidance. There is nothing illegal or immoral in the avoidance of taxa- tion, as long as the taxpayer remains within legal bounds. In contrast, tax evasion constitutes the illegal nonpayment of a tax and cannot be condoned. Activities of this sort clearly violate existing legal constraints and fall outside of the domain of the professional tax practitioner.

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1-6. In an open tax planning situation, the transaction is not yet complete, therefore, the tax practitioner maintains some degree of control over the potential tax liability, and the transaction may be modified to achieve a more favorable tax treatment. In a closed transaction however, all of the pertinent actions have been completed, and tax planning activities may be limited to the presentation of the situation to the government in the most legally advantageous manner possible.

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1-7. Tax litigation is the process of settling a dispute with the IRS in a court of law. Typically, a tax attorney handles tax litigation that progresses beyond the final IRS appeal.

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1-8. CPAs serve is a support capacity in tax litigation.

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1-9. Tax research consists of the resolution of unanswered taxation questions. The tax research process includes the following:

1. Identification of pertinent issues; 2. Specification of proper authorities; 3. Evaluation of the propriety of authorities; and, 4. Application of authorities to a specific situation.

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1-10. Circular 230 is issued by the Treasury Department and applies to all who practice before the IRS.

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1-18. The names of organizations that can be represented by regular full-time employees are found in Circular 230, §10.7(c). A regular full-time employee can represent the employer (individual employer). A regular full-time employee of a partnership may represent the partnership. Also, a regular full-time employee of a trust, receivership, guardianship, or estate may represent the trust, receivership, guardianship, or estate. Furthermore, a regular full-time employee of a governmental unit, agency, or authority may represent the governmental unit, agency, or authority in the course of his or her official duties.

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1-19. Yes. Circular 230, Subpart A, Sec. 10.7.

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1-20. True. A practitioner may be suspended or disbarred from practice before the IRS if he or she knowingly helps a suspended or disbarred person practice indirectly before the IRS.

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1-21. A practitioner may not advise a client to take a position on a document, affidavit, or other paper submitted to the Internal Revenue Service unless the position is not frivolous. Circular 230 §10.34(b)

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1-22. Under Circular 230, an attorney, certified public accountant (CPA), or enrolled agent may use mass media (e.g., T.V. and the Internet) for advertising purposes. Such media may not contain false, fraudulent, unduly influencing, coercive, or unfair statements or claims. Attorneys, CPAs, and enrolled agents must also observe any applicable standards of ethical conduct adopted by the American Bar Association (ABA), the American Institute of Certified Public Accountants (AICPA), and the National Association of Enrolled Agents (NAEA). Additional standards and listing of items that may be included in mass media advertising are defined under Section 10.30 of Subpart B in Circular 230.

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1-23. Under Section 10.25 of Circular 230, partners of government employees cannot represent anyone for which the government employee-partner has (or has had) official responsibility. For instance, a CPA firm with an IRS agent could not represent any taxpayer that is (or was in the past) assigned to the IRS agent-partner.

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1-24. Under Section 10.21 of Circular 230, each attorney, CPA, enrolled agent, or enrolled actuary who knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other

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paper which the client is required by the revenue laws of the United States to execute, shall advise the client promptly of the fact of such noncompliance, error, or omission.

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1-25. According to Circular 230, the best practices rules are aspirational. Thus, a practitioner who fails to comply with best practices will not be subject to discipline by the IRS.

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1-26. Best practices include: a. Communicating clearly with the client regarding the terms of the engagement. For example, the advisor should determine the client’s expected purpose for and use of the advice and should have a clear understanding with the client regarding the form and scope of the advice or assistance to be rendered. b. Establishing the facts, determining which facts are relevant, evaluating the reasonableness of any assumptions or representations, relating the applicable law (including potentially applicable judicial doctrines) to the relevant facts, and arriving at a conclusion supported by the law and the facts. c. Advising the client regarding the importance of the conclusions reached, including, for example, whether a taxpayer may avoid accuracy-related penalties under the Internal Revenue Code if a taxpayer acts in reliance on the advice. d. Acting fairly and with integrity in practice before the IRS.

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1-27. A practitioner must not give written advice if the practitioner:

1. bases the written advice on unreasonable factual or legal assumptions (including assumptions as to future events), 2. unreasonably relies upon representations, statements, findings, or agreements of the taxpayer or any other person, 3. does not consider all relevant facts that the practitioner knows or should know, or 4. in evaluating a Federal tax issue, takes into account the possibility that a tax return will not be audited, that an issue will not be raised on audit, or that an issue will be resolved through settlement if raised.

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1-28 A preparer tax identification number (PTIN) is required of a compensated individual who prepares or assists with the preparation of all or substantially all of a tax return or claim for refund must have a preparer tax identification number (PTIN). Normally, the individual must be an attorney, CPA, EA, or tax return preparer must obtain a PTIN in order to file tax returns for clients

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1-29. Individuals who prepared tax returns for compensation must follow the rules under Circular 230 Subpart B-- Duties and Restrictions Relating to Practice Before the Internal Revenue Service and Subpart C-- Sanctions for Violation of the Regulations. Thus, they are generally held to the same standards of practice as persons who are

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4. The CPA must obtain sufficient relevant data to afford a reasonable basis for any conclusion or recommendation in connection with the performance of any professional services.

Competence encompasses not only technical subject matter but also knowledge of the profession’s standards and the ability to exercise sound judgment in applying the technical knowledge. At the same time, the code is clear that the member does not assume a responsibility for infallibility of knowledge or judgment

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1-34. a. No violation b. 1.520.001- Commissions and Referral Fees c. No violation d. 1.600.001- Advertising and Other Forms of Solicitation e. 1.800.001- Form of Organization and Name Rule f. 2.400.090 or 3.400.090- Acts Discreditable Rule

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1-35. 1.700.001 (Confidential Client Information Rule) does not apply in the following situations:

1. There is a conflict with the Compliance with Standards Rule [1.310.001] or the Accounting Principles Rule [1.320.001]
2. The CPA is served with an enforceable subpoena or summons or must comply with applicable laws and government regulations
3. There is a review of a CPA’s practice under AICPA or state society authorization
4. The CPA is responding to an inquiry of an investigative or disciplinary body of a recognized society, or the CPA is initiating a complaint with a disciplinary body

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1-36. The Statements on Standards for Tax Services , or SSTS, are a series of statements, issued by the AICPA, as to what constitutes appropriate standards for tax practice. The State- ments also delineate a member's responsibility to clients, the public, and the profession.

The stated objectives of the Statements are as follows:

SSTS No. 1: Tax Return Positions. This statement sets forth the applicable standards for members when recommending tax return positions, or preparing or signing tax returns. This statement also addresses a member’s obligation to advise a taxpayer of relevant tax return disclosure responsibilities and potential penalties.

SSTS No. 2: Answers to Questions on Returns. This statement sets forth the applicable standards for members when signing the preparer’s declaration on a tax return if one or more questions on the return have not been answered.

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SSTS No. 3: Certain Procedural Aspects of Preparing Returns. This statement sets forth the applicable standards for members concerning the obligation to examine or verify certain supporting data or to consider information related to another taxpayer when preparing a taxpayer’s tax return.

SSTS No. 4: Use of Estimates. This statement sets forth the applicable standards for members when using the taxpayer’s estimates in the preparation of a tax return. A member may advise on estimates used in the preparation of a tax return, but the taxpayer has the responsibility to provide the estimated data. Appraisals or valuations are not considered estimates for purposes of this statement.

SSTS No. 5: Departure from a Position Previously Concluded in an Administrative Proceeding or Court Decision. This statement sets forth the applicable standards for members in recommending a tax return position that departs from the position determined in an administrative proceeding or in a court decision with respect to the taxpayer’s prior return.

SSTS No. 6: Knowledge of Error: Return Preparation and Administrative Proceedings. This statement sets forth the applicable standards for a member who becomes aware of (a) an error in a taxpayer’s previously filed tax return; ( b ) an error in a return that is the subject of an administrative proceeding, such as an examination by a taxing authority or an appeals conference; or ( c ) a taxpayer’s failure to file a required tax return.

SSTS No. 7: Form and Content of Advice to Taxpayers. This statement sets forth the applicable standards for members concerning certain aspects of providing advice to a taxpayer and considers the circumstances in which a member has a responsibility to communicate with a taxpayer when subsequent developments affect advice previously provided.

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1-37. Under SSTS No. 1, a member should determine and comply with the standards, if any, which are imposed by the applicable taxing authority with respect to recommending a tax return position, or preparing or signing a tax return. If the applicable taxing authority has no written standards with respect to recommending a tax return position or preparing or signing a tax return, or if its standards are lower than the standards set forth in SSTS No. 1, then SSTS No. 1 must be followed.

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1-38. SSTS No.1 provides that a member should have a good faith belief that a recommended position has a realistic possibility of being sustained if challenged. In addition, a member may recommend a tax return position if the member concludes that there is a reasonable basis for the position and advises the taxpayer to appropriately disclose that position. Thus, a member may prepare or sign a tax return that reflects a position if a member has a reasonable basis for the position and that position is appropriately disclosed.

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1-39. Reasonable grounds for omitting an answer on a return include cases in which:

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1-45. No, tax compliance work for an audit client is allowed. It must be approved by the audit committee of the issuer.

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1-46. Neither the ABA Code nor the Model Rules have the force of law. Each was designed to be adopted by the appropriate agencies that govern the practice of law in the various states. In many jurisdictions, the state Supreme Court is charged with policing the practice of law. In other states, the legislature assumes this responsibility.

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1-47. An ethical dilemma occurs when someone is faced with a situation in which there are no clearly defined answers such as by regulation or law.

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1-48. The major types of ethical reasoning are:

1. End-based Ethical Reasoning is where the ethical decision is the one that produced the most good for the largest number of people.
2. Rule-based Ethical Reasoning was based on German philosopher Immanuel Kant’s idea that individual actions should be such that we would accept similar behavior from everyone else.
3. Care-based Ethical Reasoning advises one to make decisions that would result in the treatment you yourself would like to receive.

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1-49. Professional ethical behavior is the result of the interaction of personal morality, social responsibility, business ethics, and other general ethical standards. When something is judged to be morally right or wrong (or good or bad), the underlying standards on which such judgments are based are called moral standards. The tax practitioner must be aware of social responsibility in areas such as environmental protection, equal opportunity, and occupational safety. Business ethics examines the moral and ethical problems that arise in a business environment. There is disagreement about whether a company has ethical responsibilities. Other ethical standards may include public policy, religious beliefs, and cultural values.

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1-50 Ethical issues involved in this case could include morality and business ethics. The moral issue involves the consideration of the “right thing to do” with respect to the plane ticket. The business ethics issues involve maintaining the integrity of the firm.

1-51 Unless the firm clearly allows staff to take home supplies (which likely would result in additional income to the staff members), this is clearly not ethical behavior. If Donna

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does work at home and the firm has clear policies allowing supplies to be taken home and used for work purposes, the behavior would be reasonable.

1-52. CPAs are in little danger of entering into the unauthorized practice of law as long as they avoid providing general legal services. The issue that arises is not whether CPAs are rendering legal services, but how much legal service is provided. Because of the lack of guidelines on this issue, the federal agencies seem to have taken a lead in attempting to solve this problem.

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1-53. To avoid being charged with the unauthorized practice of law, the following activities should be avoided.

 Expressing a legal opinion on a nontax matter.  Drafting wills or trust instruments.  Drafting contracts.  Drafting incorporation papers.  Drafting partnership agreements.

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EXERCISES

1-54.

a. Subpart A, § 10.4(c)8 Eligibility for enrollment as an enrolled agent or enrolled retirement plan agent. Discussion of the criteria for enrollment before the IRS b. Subpart B, § 10.21 Knowledge of client’s omission.. Each attorney, CPA, enrolled agent, or enrolled actuary who knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper, shall advise the client promptly of the fact of such noncompliance, error, or omission. c. Subpart B, § 10.26 Notaries.. A practitioner may not perform any official act as a notary public with respect to any matter administered by the IRS for which employed as counsel, attorney, or agent. d. Subpart B, § 10.29 Conflicting interests.. No tax practitioner can represent conflicting interests before the IRS unless he or she has the express consent of the directly interested parties

Circular 230

a. Subpart C, § 10.51(a)(12) Contemptuous conduct in connection with practice before the Internal Revenue Service, including the use of abusive language, making false accusations or statements, knowing them to be false, or circulating or publishing malicious or libelous matter b. Subpart A, § 10.6(e). Conditions for renewal. In order to qualify for renewal of enrollment, an individual, to practice before the IRS, must certify that he or she has satisfied the continuing professional education requirements. c. Subpart A, § 10.3(f) Registered tax return preparers

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d. Responsibility for correcting errors? Subpart, § 10.

Circular 230

1-61. a. Best Practices are discussed in Subpart B, § 10.33. b. The return of client’s records is discussed in Subpart B, § 10.28. c. Tax Return Positions are discussed in Subpart B, § 10.34. d. Due Diligence is discussed in Subpart B, § 10.22.

Circular 230

1-62. a. SSTS No. 1. In preparing a tax return, a member should have a good-faith belief that a recommended position has a realistic possibility of being sustained if challenged; otherwise such a position should not be recommended by the member. b. SSTS No. 4. A member may prepare tax returns that involve the use of the taxpayer's estimates if it is impractical to obtain exact data and if the estimated amounts appear reasonable to the member. c. SSTS No. 6. The member must advise the taxpayer promptly, whether or not the member prepared or signed the return in question, when he or she learns of an error in a previously filed tax return, an error in a return that is the subject of an administrative proceeding, or a taxpayer’s failure to file a required return. However, the member is neither obligated to inform the IRS of the situation, nor may he or she do so without the taxpayer's permission, except as provided by law.

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1-63. a. Lowell Bar Association v. Loeb. The preparation of "simple" tax returns did not constitute the unauthorized practice of Massachusetts law because tax return preparation could not be identified as strictly within the legal discipline. b. Bercu. The court held that Bercu could have provided tax advice if it had been incidental to the tax return work he regularly performed for his clients. c. Sperry v. Florida. The U.S. Supreme Court held that a Federal statute that admitted nonattorneys to practice before Federal agencies (in this case, the Patent Office) took precedence over state regulation, thus CPAs and Enrolled Agents were not engaged in the unauthorized practice of law when they were giving tax advice.

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1-64. False. See Circular 230, §10.29.

1-65. True. See Circular 230, §10.7.

1-66. These fees would all be contingent fees if the IRS challenges a tax position. Under Circular 230 § 10.27 A Contingent fee is any fee that is based, in whole or in part, on whether or not a position taken on a tax return or other filing avoids challenge by the Internal Revenue Service or is sustained either by the Internal Revenue Service or in litigation. A contingent fee includes a fee that is based on a percentage of the refund

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reported on a return, that is based on a percentage of the taxes saved, or that otherwise depends on the specific result attained.

Circular 230

1-67. Circular 230, § 10.32 (Practice of law) states that, “Nothing in the regulations in this part may be construed as authorizing persons not members of the bar to practice law.”

Circular 230

1-68. d. Under Rule 1.100.001 of the AICPA Code of Conduct, CPAs cannot make self- laudatory statements not based on verifiable facts.

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1-69. c. See Circular 230, §10.

1-70. c. Under Rule 1.800.001 of the AICPA Code of Conduct , CPAs cannot practice public accounting under a firm name that is misleading. A sole practitioner is not a company. The only exception is when a sole practitioner survives the death or withdrawal of all other partners or shareholders, he or she can continue to practice under a firm name for up to two years after becoming a sole practitioner.

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1-71. b. SSTS No. 4 allows a member to use reasonable estimates in the preparation of a tax return.

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1-72. d. Under Rule 1.510.001of the AICPA Code of Conduct , CPAs are allowed to take contingent fees in tax matters if they are based on judicial proceedings or the findings of governmental agencies.

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1-73. c. Under Rule 1.700.001 of the AICPA Code of Conduct, CPAs cannot reveal confidential client information without the consent of the client unless it is to an investigative body, trial board, quality review body, or court of law.

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1-74. a. SSTS No. 4 requires members to disclose to the IRS the use of estimates when fire or computer failure has destroyed the relevant records.

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1-75. d. Under Subpart A, §10.7(c)(2)(i) of Circular 230, persons who are disbarred or suspended are not allowed to practice before the IRS.

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finance; humanities/social science; international environment; law; management; or statistics

CHAPTER 2

TAX RESEARCH METHODOLOGY

DISCUSSION QUESTIONS

2-1. The primary purpose of tax research is to aid in finding solutions to tax problems.

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2-2. The basic steps in conducting tax research include the following:

Establish the Facts. This step involves the gathering of facts, including tax and nontax considerations.

Identify the Issues. The tax researcher must identify both issues of fact and issues of law. In so doing, the researcher must rely on a combination of education, training, and experience.

Locate the Appropriate Authority. The researcher must locate authority relevant to the client's situation. Authority may include both primary and secondary authority.

Evaluate the Authority. This step in the tax research process requires the researcher to analyze the authority, including the current status of the authority and the precedential value of the authority.

Develop Conclusions and Recommendations. The researcher must arrive at his or her conclusions based on the first four steps of the tax research process.

Communicate the Recommendations. The final step in the research process is to communicate to the client the facts, assumptions, issues, sources of authority, and conclusions and recommendations.

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2-3. First, the researcher must understand the mechanical techniques that are used to identify and locate the tax authorities that relate to solving a problem. Second, the researcher must be creative and explore all of the relevant relationships among the facts and the problems at hand.

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2-4. Significant tax facts that a tax practitioner might want to obtain could include any of the following: The client’s tax entity(ies). The client's family status and stability. The client's past, present, and projected marginal tax rates. The client's legal domicile and citizenship. The client's motivation for the transaction. Relationships among the client and other parties involved in the transaction. Whether special tax rules apply.

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Whether the transaction is proposed or completed.

Pages 47-

2-5. The researcher should be aware of the following pitfalls:

1. The researcher may attempt to research a problem before fully understanding the facts and circumstances relevant to the client's situation.
2. Often the researcher may have a tendency to ignore new questions that arise as the research task progresses.
3. The client may fail to provide all of the information that is vital to an accurate solution.
4. The tax researcher may approach a tax problem without considering other constraints on the solution to the problem, such as economic factors or personal preferences of the client.

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2-6. a. T (lower tax liability).

b. NT (economic constraints).

c. NT (personal preference).

d. NT (personal preference).

e. NT (personal preference).

2-7. a. NT (personal preference). Might also be classified as T, since the taxpayer's motivation for a potential transaction is known.

b. NT (personal preference)

c. NT (family preference)

d. T (lower tax liability)

e. T (lower tax liability)

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2-8. Research issues can be divided into two major categories, namely, fact issues and law issues. Fact issues are concerned with problems such as the dates of the transactions, the amounts involved in an exchange, reasonableness, intent, and purpose. Law issues arise when the facts are well established, but it is not clear which portion of the tax law applies.

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c. P d. P e. S

Pages 51-

2-16. A citator is a reference source that enables the researcher to follow the judicial history of court cases.

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2-17. A tax service is a coordinated set of reference materials that organizes the tax authority into a useable format, making the Internal Revenue Code more accessible.

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2-18. a. TAXES - General tax practitioners

b. Journal of Taxation - Sophisticated tax practitioners

c. Practical Tax Strategies – General tax practitioners

d. The Tax Adviser - Members of the AICPA and other tax practitioners

e. The ATA Journal of Legal Tax Research – Tax academics and practitioners.

Page 55

2-19. All tax authority does not carry the same precedential value. In the process of evaluating the tax authority for the issue under consideration, it is possible that new issues, not previously considered, may become known. In this case, the researcher may be required to gather additional facts, find more pertinent authority, and evaluate the new issues.

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2-20. If a clear solution to a tax research problem has not been obtained, the practitioner must use professional judgment as to the proper conveyance of the research results to the client. In addition, the client might be informed of the alternative possible outcomes of the disputed transaction and give the best acceptable recommendation.

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2-21. Include the following items in both the memorandum to the client file and the client letter:

1. A restatement of the pertinent facts from the researcher's perspective.
2. A summary of any assumptions that the researcher made in the course of his or her research.
3. A summary of the issues addressed in the research process.
4. The applicable authority used to arrive at the researcher's conclusions and recommendations.

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5. The researcher's conclusions and recommendations.

Generally, the memorandum to the client file will contain significantly more details than the letter to the client.

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2-22. Yes. In many research situations, a fact generates an issue that in turn may lead to an answer or the need for more facts. Similarly, once an answer is found to an issue, it may also cause a new issue to appear or the need to gather more information. The same situation occurs in evaluating authority. Frequently, there will be ambiguity between items of authority that will require the researcher to use his or her critical thinking skills. This may result in new issues becoming known. The researcher would then be required to gather additional facts, find additional pertinent authority, and evaluate the new issues.

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2-23. Substantial Authority under Reg. §1.6662-4(d)(3)(iii) includes:

a. The Internal Revenue Code and other statutory provisions,

b. Proposed, Temporary, and Final Regulations,

c. Revenue Rulings and Procedures,

d. Tax Treaties and regulations there under,

e. Court Cases,

f. Congressional Committee Reports,

g. The Blue Book,

h. Private Letter Rulings issued after 10/31/76,

i. Technical Advice Memoranda issued after 10/31/76,

j. General Counsel Memoranda issued after 3/31/81, and

k. IRS Information and Press Releases.

It is important to be familiar with the above sources because any position documented based on these authorities will prevent accuracy-related penalties associated with the item or return under review.

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2-24. Online tax research systems provide a fast, cheap method for tax practitioners to access tax information that he or she could not afford to buy before the use of computers. Today’s online systems allow the