Test Bank for Federal Tax Research 12th Edition by Roby Sawyers, Steven Gill

Test Bank for Federal Tax Research 12th Edition by Roby Sawyers, Steven Gill

Test Bank for Federal Tax Research 12th Edition by Roby Sawyers, Steven Gill

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Answers are at the end of Each Chapter Chapter 1

Indicate whether the statement is true or false.

1. Tax planning has a higher likelihood of success when a tax practitioner is dealing with an open transaction instead of a closed transaction. a. True b. False 2. If a CPA becomes aware of an error in a tax return, he or she must immediately notify the IRS. a. True b. False 3. The Sarbanes-Oxley Act addresses issues of corporate governance as well as the independence of auditors. a. True b. False 4. An attorney, CPA, or enrolled agent may use advertising to obtain clients under Circular 230. a. True b. False 5. Circular 230 bans tax practitioners from giving written advice on a federal tax issue based on the likelihood of an audit. a. True b. False 6. Tax research is required only for tax planning, not preparing returns. a. True b. False 7. The three categories of modern tax practice include tax planning, tax compliance, and tax research. a. True b. False 8. Tax practice can be defined as the application of the tax laws to specific accounting situations. a. True b. False 9. State Boards of Accountancy are the organizations with responsibility to license public accountants in each state. a. True b. False 10. A member of the AICPA is not allowed to prepare tax returns that involve the use of the taxpayer’s estimates.

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a. True b. False 11. The ABA Model Code of Professional Responsibility has the force of law and covers all attorneys practicing in the United States. a. True b. False 12. Drafting wills is a part of a CPA’s professional duties. a. True b. False 13. To become an enrolled agent, a person must either pass a special IRS examination or must work for the IRS for at least five years. a. True b. False 14. Tax avoidance and tax evasion are both illegal. a. True b. False 15. Paid tax return preparers must register with the IRS and obtain a PTIN. a. True b. False 16. Tax practitioners (as defined by the IRS) are regulated by Circular 230. a. True b. False 17. Enrolled actuaries are allowed to practice before the IRS. a. True b. False 18. A member of the AICPA may never disclose confidential taxpayer information under the AICPA rules. a. True b. False 19. A CPA can rely without verification on information given to the CPA by a taxpayer unless the information appears to be incorrect. a. True b. False 20. An ethical dilemma occurs when someone is faced with a situation for which there are no clearly defined answers. a. True b. False Page 2

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Indicate the answer choice that best completes the statement or answers the question.

21. Under the AICPA Code of Professional Conduct, which of the following actions would constitute deceptive advertising? a. advertising too frequently b. implying that the CPA had the ability to influence an IRS official c. promising a favorable result without justification d. implying that the CPA had the ability to influence an IRS official and promising a favorable result without justification 22. Which of the following is CORRECT about a CPA’s responsibility with regard to tax return positions under Statements on Standards for Tax Services No. 1 (SSTS No. 1)? a. A CPA may not base his or her position on authority that is not approved by the IRS under Section 6662 (accuracy-related penalty). b. A CPA may sign a return which has a tax position that has a realistic possibility of being sustained on the merits. c. A CPA may not sign a return which has any tax position that is not fully disclosed. d. All of these are correct.

23. Tax evasion is: a. a fraudulent act involving illegal nonpayment of taxes b. one of the objectives of tax planning c. an act of deferring tax payments to future periods d. the same as tax avoidance as both of them result in nonpayment of taxes 24. Who can represent a taxpayer before the IRS Appeals Office under Circular 230? a. a CPA b. an officer of a corporation may represent the corporation c. an attorney d. all of these are correct e. both a CPA and an attorney 25. Which of the following statements is CORRECT regarding the unauthorized practice of law? a. Taxpayers may not represent themselves in Tax Court. b. A CPA cannot express a legal opinion on a non-tax matter. c. A CPA cannot draft wills or trust instruments. d. Both b and c are correct.

26. The Lowell Bar Association v. Loeb case addressed the issue of: a. unauthorized practice of law by nonattorneys engaged in tax practice b. legal research by taxpayers c. attorneys and CPAs working together in a practice d. all of these are correct 27. Which of the following statements best describes Circular 230?

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a. Circular 230 has been adopted by the AICPA as its set of rules of practice for CPAs. b. Circular 230 is a set of Treasury Department ethical and legal standards for those engaging in practice before the IRS. c. Circular 230 is a set of internal rules at the IRS designed to protect tax practitioners from unfair discipline by the IRS. d. Circular 230 is a set of ethical rules for taxpayers.

28. Regarding open transactions, which of the following statements is INCORRECT? a. The transaction is not yet completed. b. The practitioner can suggest changes to achieve a better tax result. c. A tax practitioner has some degree of control over the client’s tax liability. d. The practitioner can fix the problem by amending the client’s tax return.

29. Under Statements on Standards for Tax Services No. 3 (SSTS No. 3), a CPA preparing a tax return should perform all of the actions EXCEPT: a. independently confirm the accuracy of the taxpayer’s information b. obtain additional information if the taxpayer’s information appears to be incorrect or incomplete c. review the prior year’s return when feasible d. determine when conditions for a deduction have been met 30. The primary change made by the Sarbanes-Oxley Act which affects the practice of public accounting is: a. Public accounting firms may no longer provide any actuarial services. b. Accounting firms may no longer offer tax shelters. c. Auditors may never do tax compliance work for their clients. d. Public accounting firms may provide some nonaudit services to their audit clients if the services are approved in advance by an audit committee.

31. Tax litigation is a process of: a. participating in an administrative audit b. settling tax-related disputes in a court of law c. filing amended tax returns as prescribed by tax laws d. arranging a taxpayer’s affairs to minimize tax liabilities 32. According to Circular 230, the ―best practices‖ rules are: a. mandatory for all tax practitioners b. restricted only to attorneys and CPAs c. aspirational, to act as goals for tax practitioners d. enforced by disbarment from practice before the IRS 33. A contingent fee is: a. always allowed by Circular 230 b. a fee that is out of line with the value of the service provided c. a fee based on a percentage of a taxpayer’s refund on a tax return d. all of these are correct Page 4

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34. Under Section 10.3, Subpart A, of Circular 230, the following individuals may practice before the IRS EXCEPT: a. unenrolled agents b. enrolled agents c. enrolled actuaries d. enrolled retirement plan agents 35. In which of the following situations would a CPA be engaged in the unauthorized practice of law? a. The CPA drafts a contract for his small business client. b. The CPA files a client’s state tax return. c. The CPA answers estate tax questions for his client. d. The CPA represents his client before the IRS. 36. The Statements on Standards for Tax Services (SSTS) are issued by: a. the Internal Revenue Service b. the FASB c. the AICPA d. the American Bar Association e. the AICPA and the American Bar Association jointly 37. Due diligence, in essence, means a tax practitioner: a. must be efficient in performing his duties b. must give due respect to IRS officials c. should use reasonable effort to comply with the tax laws d. should charge reasonable fees for work performed for a client 38. The Statements on Standards for Tax Services are: a. part of the ABA Code of Professional Responsibility b. intended to replace Circular 230 c. intended to supplement the AICPA Code of Professional Conduct and Circular 230 d. none of these are correct 39. Circular 230 includes rules on all of the following topics EXCEPT: a. who is authorized to practice before the IRS b. standards for ―covered opinions‖ c. compliance with state ethical requirements d. a set of best practices to guide practitioners 40. The six principles of professional conduct under the AICPA Code include: a. responsibilities b. public interest c. integrity d. All of these are correct 41. Tax compliance is the process of: a. filing necessary tax returns Page 5

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b. gathering the financial information necessary to report taxable income c. representing a taxpayer at an IRS audit d. all of these are correct 42. An EA must renew his or her enrollment card on a: a. 5-year cycle b. 3-year cycle c. 2-year cycle d. Renewal is not required once an EA gets a card 43. In a closed transaction, the scope of tax planning is: a. more limited as compared to an open transaction b. limited by the IRS rules of practice c. limited to presenting the taxpayer’s facts to the government in the most favorable, legal manner d. more limited as compared to an open transaction and limited to presenting the taxpayer’s facts to the government in the most favorable, legal manner 44. Statements on Standards for Tax Services (SSTS) contain advisory guidelines for: a. members of the AICPA b. enrolled agents c. attorneys d. IRS authorities e. all of these are correct 45. Which of the following statements best explains the need for tax practitioners to understand nonregulatory ethical models of behavior? a. Competing ethical solutions must be resolved by the courts. b. There is more to ethical behavior than just following the rules of professional organizations. c. Practitioners must always choose the action with the greatest benefit for their client. d. Ethical choices are clearly spelled out by IRS regulations.

46. Taxation and tax practice are comprised of the interaction of several disciplines. What are those disciplines?

Briefly discuss their impact on the tax system.

47. What standard must tax practitioners meet under Section 6694 (preparer penalties) of the Internal Revenue Code with respect to undisclosed positions taken on tax returns?

48. Does the IRS regulate unenrolled tax preparers? Explain your answer.

49. Who may represent a taxpayer before the IRS in cases which go beyond the examination of the return?

50. Explain the concept of ―limited practice without enrollment‖ under Circular 230 and list several of the special situations in which the IRS allows this type of representation.

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51. Explain the AICPA guidelines under SSTS No. 3 for relying without verification on taxpayer or third-party information when preparing a tax return.

52. What should an AICPA member do upon learning about an error in a prior year’s tax return?

53. Explain the standards for professional services that involve tax return positions under SSTS No.1. What is the level of authority for disclosed or undisclosed positions and what types of authority can be relied upon?

54. Explain which types of services a CPA can and cannot provide to avoid engaging in the unauthorized practice of law.

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Answer Key 1. True 2. False 3. True 4. True 5. True 6. False 7. False 8. True 9. True 10. False 11. False 12. False 13. True 14. False 15. True 16. True 17. True 18. False 19. True 20. True 21. d 22. b 23. a 24. d 25. d Page 8

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26. a 27. b 28. d 29. a 30. d 31. b 32. c 33. c 34. a 35. a 36. c 37. c 38. c 39. c 40. d 41. d 42. b 43. d 44. a 45. b 46. Tax practice involves a blend of accounting and law. The tax law itself is a product of economics, political science, and sociology. Each of these disciplines influences taxation in a different way. Economics provides input about how the tax law will affect the economy. Political science is the process by which laws are made, and sociology provides the framework to determine the equity and societal goals of the tax law.

47. Tax return positions which are not disclosed on the tax return must meet the standard of ―substantial authority‖ to avoid the penalties under Code Section 6694, relating to understatement of taxpayer's liability by tax return preparer.

48. Yes, unenrolled preparers are now regulated by the IRS under proposed amendments to Circular 230 and recent IRS regulations. Tax return preparers who prepare returns for compensation and sign the return are authorized to conduct Page 9

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―limited practice‖ before the IRS. The tax return preparer may only make an appearance before the Examination Division

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of the IRS. All paid preparers must register for a Preparer Tax Identification Number (PTIN) and include that number on all returns submitted to the IRS. In addition, tax return preparers are subject to competency testing and are required to take continuing professional education courses. They also are subject to the Circular 230 ethical standards.

49. Under Circular 230, the following individuals may represent taxpayers before the IRS beyond the examination stage: • Attorneys • CPAs • Enrolled agents • Enrolled actuaries The above individuals must be in good standing and have a current license. Also, certain authorized individuals may represent taxpayers in special situations under the ―limited practice without enrollment rules‖ of Section 10.7.

50. Under Section 10.7 of Circular 230, certain individuals are authorized to represent a taxpayer before the IRS without being an attorney, CPA, or enrolled agent. These special situations include the following types of representation: • An individual may represent a member of his or her immediate family.

• A regular, full-time employee of an individual employer may represent the employer.

• A general partner or a regular, full-time employee of a partnership may represent the partnership.

• A bona fide officer or a regular, full-time employee of a corporation (including a parent, subsidiary, or other affiliated corporation), association, or organized group may represent the corporation, association, or organized group.

• A regular, full-time employee of a trust, receivership, guardianship, or estate may represent the trust, receivership, guardianship, or estate.

• An officer or a regular 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.

• An individual may represent any individual or entity who is outside the United States before personnel of the Internal Revenue Service when such representation takes place outside the United States.

• An individual who prepares and signs a taxpayer's tax return as the preparer, or who prepares a tax return but is not required (by the instructions to the tax return or regulations) to sign the tax return, may represent the taxpayer during an examination of the taxable year or period covered by that tax return, but this right does not permit such individual to represent the taxpayer before Appeals Officers, Revenue Officers, Counsel, or similar officers or employees of the Internal Revenue Service or the Department of Treasury.

51. In preparing or signing a return, an AICPA member ordinarily may rely without verification on information that the taxpayer or a third party has provided, unless such information appears to be incorrect, incomplete, or inconsistent. A more formal, audit-like review of documents or supporting evidence is generally not required for a member to sign the tax return. Where material provided by the taxpayer appears to be incorrect or incomplete, however, the member should obtain additional information from the taxpayer. In situations where the tax law requires that specific conditions be met, the member should determine, by inquiry, whether the conditions have been met. For example, the Code and Regulations impose substantiation requirements for the deduction of certain expenditures. In such a case, the member has an obligation to make appropriate inquiries regarding the client’s recordkeeping.

Although members are not required to examine supporting documents, they should encourage the taxpayer to provide such documents when deemed appropriate; for example, in the case of deductions or income from a pass-through entity, such as a partnership, the entity’s documents might be useful in preparing the owner’s tax returns.

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The member should make proper use of the prior year’s tax return when feasible to gather information about the taxpayer

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and to help avoid omissions and errors with respect to income, deductions, and credit computations.

52. A member must advise the taxpayer promptly, regardless of whether 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. Such advice should include a

recommendation for appropriate measures the taxpayer should take. 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.

The term ―error‖ includes any position, omission, or method of accounting that, at the time the return is filed, fails to meet the standards set out in SSTS No. 1. An error also includes a position taken on a prior year’s return that no longer meets these standards due to legislation, judicial decisions, or administrative pronouncements having retroactive effect.

However, an error does not include an item that has an insignificant effect on the taxpayer’s tax liability.

If the member is requested to prepare the current year’s return, and the taxpayer has not taken action to correct an error in a prior year’s return, the member should consider whether to proceed with the preparation of the current year’s return. If the current year’s return is prepared, the member should take reasonable steps to ensure that the error is not repeated. A member should advise a taxpayer, either orally or in writing, as to the correction of errors in the prior year’s return. In a case where there is a possibility that the taxpayer may be charged with fraud, the taxpayer should be referred to an attorney.

53. Under SSTS No. 1, a member should determine and comply with the standards, if any, that 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 the SSTSs, then the standard in SSTS No. 1 applies. This standard provides that, in providing professional services that involve tax return positions, a member should have a good-faith belief that the position has at least a realistic possibility of being sustained administratively or judicially on its merits 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.

A member may reach a conclusion that a position is warranted based on a well-reasoned construction of the applicable statute, well-reasoned articles or treatises, or pronouncements issued by the applicable taxing authority, regardless of whether such sources would be treated as authority under Internal Revenue Code Section 6662 (the accuracy-related penalty on underpayments). A position would not fail to meet these standards merely because it is later abandoned for practical or procedural considerations during an administrative hearing or in the litigation process.

In cases where the member believes that the taxpayer may have some exposure to a penalty, the statement suggests that the member advise the taxpayer of such risk. Where disclosure of a position on the tax return may mitigate the possibility of a taxpayer penalty under the Internal Revenue Code, the member should consider recommending that the taxpayer disclose the position on the return. Additionally, a member should not recommend a tax return position or prepare or sign a tax return reflecting a position that the member knows could exploit the audit selection process of a taxing authority, or serves as a mere arguing position advanced solely to obtain leverage in a negotiation with a taxing authority.

54. Frequently, legal and accounting questions are so intertwined in tax practice that they are difficult to distinguish.

Over the years, a number of court cases have addressed the issue of unauthorized practice of law by accountants and other tax preparers. Though state and federal court cases have some inconsistent results, the current belief is that CPAs and other nonattorneys who practice law before the IRS do not engage in the unauthorized practice of law if they are careful not to provide any general legal services. Thus, the following types of general law activities should be avoided by nonattorneys: Page 13

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• Expressing a legal opinion on any non-tax matter.

• Drafting wills or trust instruments.

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• Drafting contracts.

• Drafting incorporation papers.

• Drafting partnership agreements.

As long as CPAs and other nonattorneys stay within the practice of tax and do not cross over into the practice of general law, they can avoid the problem of unauthorized practice of law.

Indicate whether the statement is true or false.

1. Tax researchers should not consider the client’s potential liability in determining how much time to spend on a client’s problem. a. True b. False 2. A tax researcher can rely on tax journals as substantial authority under Section 6662 of the Code. a. True b. False 3. After the researcher has located authority that deals with the client's problem, he or she must develop conclusions and recommendations. a. True b. False 4. All primary source material has the same precedential value. a. True b. False 5. Commercial databases are ideal sources for having the most up-to-date information on tax laws and scenarios. a. True b. False 6. The U.S. Constitution is a statutory source of tax law. a. True b. False 7. If a computer search generates too much information, the search may use fewer libraries or more unique keywords. a. True b. False 8. Google Scholar is an example of an online, free tax-related internet site. a. True b. False 9. ―Wildcards‖ such as an asterisk can be used to search for word variations in most tax services. a. True b. False

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10. A tax researcher should ignore the personal preferences of a client and concentrate only on minimizing the client’s tax liability. a. True b. False 11. The search ―stock or securities‖ would find documents that contain both the term ―stock‖ and the term ―securities.‖ a. True b. False 12. Skilled tax research requires a combination of reasoning and creativity. a. True b. False 13. The tax research process should be approached in a structured, step-by-step manner. a. True b. False 14. The IRS website is a full-service, tax research resource. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

15. The first step in the tax research process is to: a. establish the facts b. identify the issues c. locate authority d. evaluate authority 16. Collateral estoppel is a legal concept which: a. allows relitigation on the same facts or same issues b. bars relitigation on the same facts or same issues c. requires that the court resolve factual issues in a taxpayer’s favor d. none of these are correct 17. In a closed-fact problem, the main goal of tax research is to: a. determine several alternative courses of future action for the taxpayer b. find support for an action the taxpayer has already taken c. determine several alternative courses of future action for the taxpayer and find support for an action the taxpayer has already taken d. none of these are correct 18. A reference source that enables the researcher to follow the judicial history of court cases is known as: a. a case reporter b. a judicial directory c. the Cumulative Bulletin Page 16

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d. a citator 19. Tax research issues can be divided into two main categories. These are: a. fact and law issues b. primary and secondary issues c. major and minor issues d. internal and external issues e. tax and nontax issues 20. Which of the following are basic connectors you can use to construct a search query? a. google b. not c. or d. * e. both not and or 21. Which of the following represents a law issue? a. intent of the transaction b. definition of a term used in the code c. date of transaction d. location of the transaction e. all of these are correct 22. Once the initial facts have been gathered and the issues defined, the tax researcher must: a. develop conclusions and recommendations b. evaluate the authority c. contact the IRS d. locate the authority 23. Once the research question has been stated, the researcher must next: a. gather the facts b. identify the keywords c. select a database and execute the search d. interpret and refine the search 24. Secondary sources are useful when: a. conflicting primary authority exists b. the issue is a closed-fact problem c. a researcher does not have access to primary sources d. a researcher disagrees with the client 25. Which of the following statements describes the tax research process? a. It is strictly linear. b. It requires mechanical skills combined with critical thinking.

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c. It requires the ability to use complex mathematical techniques to identify and locate tax authorities. d. All of these are correct.

26. Which of the following forms the basis for all tax provisions? a. secondary authority b. the administrative authority of the IRS c. judicial interpretation of the law d. the statutory authority of Congress 27. The IRS website can be used to perform which of the following tasks: a. obtain downloadable forms b. keyword search IRS tax publications c. file your tax return d. all of these are correct 28. A statutory source of federal tax law is: a. various rulings of the Treasury Department and the IRS b. collected rulings of the various courts on federal tax matters c. textbooks d. tax treaties 29. Which of the following is an example of secondary authority? a. tax treaties b. tax journals c. U.S. Constitution d. tax laws by Congress 30. The distinction between primary and secondary authority is important for which of the following reasons? a. to meet the accuracy threshold of "substantial authority" b. to avoid penalties under Section 6662 of the Code c. to search properly with connectors and wildcards d. to meet the accuracy threshold of "substantial authority" and to avoid penalties under Section 6662 of the Code 31. Which of the following is an administrative source of primary authority? a. U.S. Constitution b. collected rulings of the various courts on federal tax matters c. revenue rulings d. newsletters 32. Which of the following statements is INCORRECT regarding the CPA exam? a. The National Association of State Boards of Accountancy administers the test. b. Each state has its own test. c. CPA exam candidates must pass all four sections of the exam. d. The Regulation section requires tax research.

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33. The final step of the tax research process is to: a. develop conclusions and recommendations b. communicate recommendations c. document conclusions and recommendations d. litigate the tax-related dispute 34. The amount of a transaction represents a: a. law issue b. social issue c. fact issue d. political issue 35. Which of the following statements is CORRECT regarding online tax research? a. The method of constructing queries is the same for all databases. b. Most online tax services allow the use of connectors and wild cards. c. If a query generates too little information, the researcher should add more unique keywords. d. All of these are correct.

36. Tax journals perform which of the following functions? a. offer researchers expert analysis of unclear tax issues b. keep researchers aware of current developments c. suggest tax planning techniques d. all of these are correct 37. All of the following are goals of tax research EXCEPT: a. to balance the need for efficiency against the need for thoroughness b. to balance the client’s tax goals with the client’s nontax, personal considerations c. to find a defensible solution to a client’s problem d. to find a perfect solution to a client’s problem, no matter how long it takes

38. List the significant tax facts that often influence the client's situation: 39. List in sequential order the major steps involved in the tax research process.

40. Explain the difference in primary and secondary sources of tax information and give several examples of each.

41. Tax research has been described as an ―iterative process.‖ Explain what this means to the researcher and give an example of how this process might work with a hypothetical client.

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Answer Key 1. False 2. False 3. False 4. False 5. True 6. True 7. True 8. True 9. True 10. False 11. False 12. True 13. True 14. False 15. a 16. b 17. b 18. d 19. a 20. e 21. b 22. d 23. b 24. a 25. b Page 20

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26. d 27. d 28. d 29. b 30. d 31. c 32. b 33. b 34. c 35. b 36. d 37. d 38. Significant facts that often influence the client’s situation include the following: • The client’s tax entity, for example, individual, corporation, or trust.

• The client’s family status and stability.

• The client’s past, present, and projected marginal tax rates.

• The client’s place of legal domicile and citizenship.

• The client’s motivation for the transaction.

• The relationships among the client and other parties who are involved in the transaction.

• Whether special tax rules apply to the taxpayer due to the type of business in which the taxpayer is engaged (i.e., he or she is a farmer, fisherman, or long-term contractor).

• Whether the transaction is proposed or completed.

39. The tax research process can be broken down into six major steps, each an essential part of the overall research methodology. The steps in tax research are as follows. o Establish the facts o Identify the issues o Locate authority o Evaluate authority o Develop conclusions and recommendations o Communicate the recommendations 40. Primary authority consists of original pronouncements that come from government sources, including statutory, administrative, or judicial sources. Statutory authority comes out of the legislative branch of government, the U.S. Congress, and includes the Internal Revenue Code, legislative history, and tax treaties. Administrative documents come out of the IRS, including regulations, rulings, taxpayer publications, and other guidance documents. The judiciary releases

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court opinions which are a judicial primary source.

Secondary sources consist of interpretations of primary authority and are an unofficial source of tax information.

Secondary authority includes tax services, journals, textbooks, treatises and newsletters.

41. The process of tax research is iterative in the sense that, once an answer is found, it often causes a new issue to appear, which then requires the gathering of more information. After the researcher has more information, he or she has to go back to the research materials to reevaluate the problem. For example, if a client comes in asking if he or she can deduct alimony, the researcher can look up the general federal tax rules for alimony. When looking at those rules, the researcher finds that the alimony must be paid under a divorce or separation agreement executed on or before December 31, 2018. When the researcher goes back to the client to question him or her about the details of the divorce, the client explains that while it occurred in 2018, it was not a divorce, but an annulment. Now the researcher must go back and research the issue of whether an alimony deduction is allowed for payments made under a decree of annulment.

The researcher then finds that if an annulment has the same effect for support purposes as a divorce under local law, payments under an annulment decree qualify as deductible alimony.

In conclusion, the tax research process is not a linear process. Rather, the direction the research takes is dependent on how the facts and issues develop as the researcher gathers more information.

Indicate whether the statement is true or false.

1. Tax treaties are agreements negotiated between countries concerning the treatment of entities subject to tax in both countries. a. True b. False 2. Section 121(B)(2)(a)(b)(iii) would be a correct type of Code citation. a. True b. False 3. Taxpayers who file frivolous returns are subject to a $25,000 fine. a. True b. False 4. The Joint Conference Committee is called on to resolve differences between the House Ways and Means Committee version and the full House version of tax legislation. a. True b. False 5. In Pollock v. Farmers’ Loan and Trust Co., the Supreme Court held that the income tax was unconstitutional because it was a constitutionally prohibited "direct tax." a. True b. False 6. Historically, the 1913 income tax was a tax on wealthy and high-income taxpayers. a. True b. False 7. A report of Floor Debate is included in the Congressional Record and may include some detailed or technical Page 22

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information that is excluded from a Committee Report. a. True b. False 8. Circuit Courts are administrative sources of the federal tax law. a. True b. False 9. Subparagraphs are the major divisions of the Internal Revenue Code covering such broad topics as Income Taxes, and Estate and Gift Taxes. a. True b. False th

10. The 16 Amendment to the U.S. Constitution authorized the imposition of a Federal income tax. a. True b. False 11. Trade or business deductions are contained in Code Section 62. a. True b. False 12. Statutory sources of federal tax law come out of the legislative branch of the U.S. government. a. True b. False 13. The United States–Mexico–Canada Agreement (USMCA) is a non-tax international treaty that addresses some taxrelated issues. a. True b. False 14. Whenever a major new tax law is passed, CCH and RIA both publish the related Committee Reports. a. True b. False 15. When a Code provision and a provision under a treaty conflict, the one adopted earlier in time generally rules. a. True b. False 16. Treaties may expire because of a specific Congressional time limitation. a. True b. False 17. Congress cannot override a Presidential veto of a tax bill. a. True b. False Page 23

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18. Most tax legislation begins in the House of Representatives. a. True b. False 19. The term "not less than 50" represents only those numbers which are more than 50. a. True b. False 20. The ―General Explanation‖ of tax legislation, called the ―Blue Book,‖ is prepared by the Joint Conference Committee. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

21. Which of the following is CORRECT regarding the Floor Debate Report? a. It is contained in the Congressional Record. b. Technical or detailed information excluded from the committee report(s) may be included. c. It summarizes the discussions made in the House or the Senate concerning a proposed tax bill. d. All of these are correct.

22. If any differences exist between the House- and Senate-passed versions of a tax bill, the bill is referred to: a. the Finance Committee b. the President c. a Conference Committee d. the Supreme Court 23. Code Section 61 relates to: a. deductions for adjusted gross income b. the definition of gross income c. corporate tax rates d. the deduction for state taxes 24. The first federal income tax law was passed as a result of the: a. Civil War b. Mexican-American War c. Spanish-American War d. none of these are correct 25. Which of the following statements is CORRECT regarding the definition of terms in the Internal Revenue Code? a. All definitions are included in Section 7701. b. Definitions are always included within the Code section to which they apply. c. Definitions are written into the Code by the IRS rather than included in tax laws passed by Congress. d. Sometimes, a researcher may need to consult the regulations to find a complete definition of a term.

26. Which of the following statements is INCORRECT regarding tax treaties?

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a. They are authorized by the U.S. Constitution. b. They are usually initiated by the State Department, not the Treasury. c. The United States can have multiple types of tax treaties with one country. d. All of these are correct.

27. Subtitle A of the Internal Revenue Code deals with: a. estate and gift taxes b. employment taxes c. income taxes d. excise taxes 28. A ―tax protester‖ is: a. a person who files a ―frivolous‖ return with the IRS b. a person who brings a ―frivolous‖ matter before the Tax Court c. a person who may be subject to a penalty for frivolous Tax Court petitions d. all of these are correct e. none of these are correct 29. P.L. 107-16 is the citation for: a. the Conference report on the 16th public law enacted in the 107th Congress b. the 16th public law enacted in the 107th Congress c. a public law enacted by Congress but not signed by the President d. none of these are correct 30. Which of the following statements is CORRECT regarding Committee Reports? a. They are published in the Internal Revenue Bulletin. b. They can be found in most subscription online tax services. c. They explain the elements of proposed tax law changes and reasons for the changes. d. All of these are correct. e. None of these are correct.

31. The first Internal Revenue Code was: a. the Internal Revenue Code of 1939 b. the Internal Revenue Code of 1954 c. the Revenue Act of 1913 d. none of these are correct 32. A subtitle of the Internal Revenue Code: a. is indicated by a capital letter, such as ―Subtitle A‖ b. relates to a well-defined area of the law c. is used as a short-hand reference to describe types of corporations d. is indicated by a capital letter, such as ―Subtitle A,‖ and relates to a well-defined area of the law e. all of the above Page 25

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33. The overriding purpose of tax treaties is to: a. create "tax havens" b. minimize tax liability of multinational corporations c. require business taxpayers to file returns in all countries in which they operate d. eliminate the "double taxation" that a taxpayer would face if his or her income were subject to tax in both countries 34. Which of the following sections of the Internal Revenue Code deal with partnerships? a. the 700s b. the 300s c. Section 162 d. Section 501 35. Which of the following is an administrative source of the federal tax law issued by the IRS? a. court rulings b. Internal Revenue Code c. tax treaties d. revenue rulings e. none of these are correct 36. In the House of Representatives, tax law changes are primarily considered by: a. the Finance Committee b. a Conference Committee c. the Budget Committee d. the Ways and Means Committee 37. A ―technical corrections act‖ is: a. a set of changes made by IRS to fit new tax law provisions into the Code b. an act passed by Congress to remove errors in implementing and interpreting the new provisions of a tax law c. the act that provides the effective dates for a new tax law d. none of these are correct 38. Which of the following statements is CORRECT regarding the enactment into law of a tax bill? a. A tax bill must always be signed by the President to become law. b. A tax law must be approved by the Treasury Department. c. A tax law must either be signed into law by the President or Congress must override a presidential veto of the proposed law. d. None of these are correct.

39. Which of the following statements is INCORRECT regarding effective dates in the Internal Revenue Code? a. All sections of a new tax law go into effect at the same time. b. New Code provisions may not go into effect immediately upon adoption by Congress. c. Some effective dates can precede passage of the act. d. All of these are correct.

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40. Which of the following issues is NOT addressed by tax treaties? a. what tax disclosures must be made by a visitor to a host country b. treatment of business and investment income earned by a foreign visitor in the United States c. treatment of business and investment income earned by a foreign citizen in his home country d. how to compute the taxable amount in the host country e. all of these are correct 41. The current Internal Revenue Code is the: a. Internal Revenue Code of 2011 b. Internal Revenue Code of 1986 c. Internal Revenue Code of 1954 d. none of these are correct 42. Each Congress lasts for: a. 2 years b. 1 year c. 3 years d. 4 years 43. Regarding the taxing powers of the federal government, the U.S. Constitution requires that: a. taxes imposed by Congress must apply uniformly throughout the United States b. no direct taxes may be imposed on income c. all revenues from the federal income tax must be apportioned to the population of the states from which they were collected d. all of these are correct 44. Which of the following statements is INCORRECT regarding the structure of the Internal Revenue Code? a. Code section numbers start over in each chapter. b. Each Code section is used only once in the Internal Revenue Code. c. Code sections inserted between existing section numbers are indicated by adding a capital letter to the Section number (e.g., Section 25A) d. The Internal Revenue Code is Title 26 of the United States Code.

45. Which of the following statements is INCORRECT regarding the reasons tax researchers may have difficulty in interpreting the Internal Revenue Code? a. Code sections can appear to conflict. b. Definitions can be significantly different from the common use of a term. c. All exceptions to a Code section are addressed within that same section. d. Frequently, phrases modify percentage or dollar amounts.

46. What is a tax protester and what types of sanctions are tax protesters subject to?

47. List several issues that tax treaties commonly address.

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48. What information is included in the history of a Code section?

49. Describe the steps in the legislative process by which a tax bill becomes law.

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Answer Key 1. True 2. False 3. False 4. False 5. True 6. True 7. True 8. False 9. False 10. True 11. False 12. True 13. True 14. True 15. False 16. True 17. False 18. True 19. False 20. False 21. d 22. c 23. b 24. a 25. d Page 29

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26. b 27. c 28. d 29. b 30. d 31. a 32. d 33. d 34. a 35. d 36. d 37. b 38. c 39. a 40. c 41. b 42. a 43. a 44. a 45. c 46. A tax protester is someone who refuses to cooperate with the tax laws or pay tax based on frivolous or groundless legal positions. Frequently, tax protesters challenge the constitutionality of the federal income tax. Congress has passed several laws to discourage tax protesters. A taxpayer is subject to a $5,000 fine if he or she files a ―frivolous‖ tax return as a form of protest against the IRS or the U.S. budgetary process. Also, the Tax Court can impose a penalty of up to $25,000 if the taxpayer brings a frivolous matter before the Court.

47. Any tax matter may be covered in a tax treaty with another country. Types of issues commonly covered by treaties include: • How to treat the business and investment income of a visiting taxpayer.

• When the visitor is subject to the host country’s tax laws.

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• How to offset the possibility of taxing the same income or assets more than once.

• How to compute the taxable amount in the host country.

• To what extent the host-country withholding and taxes are applied to a visitor’s transactions.

• How taxes levied by a state/province/canton are treated by the taxpayer.

• What tax disclosures must be made by a visitor.

48. The history of a Code section includes a list of Public Laws that have altered or amended the section. This listing generally includes a reference to the section as it existed prior to amendment as well as the effective date of the amendment to the law.

49. Most tax legislation originates in the House of Representatives. In the House, tax law changes are considered by the House Ways and Means Committee. Upon approval of a bill by the Committee, the bill is sent to the full House for a vote.

If it is passed, it goes to the Senate. In the Senate, the bill is referred to the Senate Finance Committee. When the Finance Committee approves the bill, it goes to the Senate floor for a vote. If the Senate passes a different version than the House version, the bill is sent to the Joint Conference Committee where the differences are resolved in negotiations. The compromise bill from the Joint Conference Committee must then be approved by both the House and the Senate. If approved, the legislation is sent to the President for his signature. If the President signs the measure, it becomes a Public Law and the new provisions are incorporated into the Internal Revenue Code. If the bill is vetoed by the President, Congress can override the veto with a sufficient revote.

Indicate whether the statement is true or false.

1. Both Revenue Rulings and Letter Rulings have the same precedential value as far as authority in tax matters is concerned. a. True b. False 2. The Internal Revenue Bulletin is currently published in twice-yearly bound volumes as the Cumulative Bulletin. a. True b. False 3. A Regulation can never be made effective retroactively. a. True b. False 4. The IRS disclaims responsibility for damages that a taxpayer may suffer in erroneously relying on its taxpayer publications. a. True b. False 5. The IRS’s official publication for its pronouncements is the Internal Revenue Manual. a. True b. False 6. IRS Technical Memoranda summarize and explain regulations. a. True b. False Page 31

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7. The IRS issues General Regulations under the general authority granted to the IRS to interpret the language of the Code, usually under a specific Code (or committee report) directive of Congress. a. True b. False 8. The U.S. Treasury Department is a part of the Internal Revenue Service. a. True b. False 9. IRS publications are published in the monthly Internal Revenue Bulletin as well as on the IRS website. a. True b. False 10. If a taxpayer disagrees with the scope or language of a Regulation, he or she has the burden of proving that the Regulation is improper. a. True b. False 11. The courts may invalidate IRS Regulations if they are found to conflict with the Code. a. True b. False 12. T.D. 9479 refers to a Treasury Determination letter. a. True b. False 13. Actions on Decision are published by the IRS in the Internal Revenue Bulletin and before 2009 in semiannual Cumulative Bulletins. a. True b. False 14. Technical Advice Memoranda are issued in response to a request by an IRS agent. a. True b. False 15. The IRS, under no circumstances, has the authority to decline to issue Letter Rulings. a. True b. False 16. A nonacquiescence indicates that the IRS disagrees with the adverse decision in the case and will follow the decision only for the specific taxpayer whose case resulted in the adverse ruling. a. True b. False 17. Temporary Regulations must be followed by taxpayers until they are superseded or until they expire. a. True Page 32

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b. False 18. Proposed Regulations have the effect of law. a. True b. False 19. Field Service Advice (FSAs) are binding guidance provided by the IRS National Office to IRS service centers. a. True b. False 20. An IRS Technical Advice Memorandum applies strictly to the taxpayer for whose audit it was requested and cannot be relied upon by other taxpayers. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

21. Which statement is INCORRECT regarding Proposed Regulations? a. They do not have the same effect as law. b. Proposed Regulations are useful for understanding the IRS's current position on an issue but generally should not be relied on by a taxpayer unless the IRS provides explicit advice on doing so. c. Proposed Regulations carry the same authority as Final Regulations. d. None of these are correct.

22. Which of the following IRS pronouncement citations is INCORRECT? a. Notice 07-10, 2007 C.B. 324 b. Publication 519 c. Rev. Proc. 2011-14, 2011 I.R.B. 532 d. Action on Decision 2010-002 e. all of these citations are correct 23. All of the following types of tax documents are published in the Internal Revenue Bulletin EXCEPT: a. IRS Revenue Procedures b. IRS Letter Rulings c. Treasury decisions d. new tax treaties e. all of these documents are published in the Internal Revenue Bulletin 24. Revenue Procedures deal with: a. specific taxpayer requests for the IRS’s position on a tax issue b. applying the Code and Regulations to a specific factual situation c. the internal practice and procedures of the IRS in the administration of the tax laws d. all of these are correct 25. The IRS’s general authority to issue binding rules and regulations comes from which source?

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a. the U.S. Constitution b. an Executive Order of the President c. a section of the Internal Revenue Code itself d. none of these are correct 26. Which of the following Regulations deals with estate taxes? a. Reg. §1.162-21(a)(2) b. Reg. §20.2503-4 c. Reg. §1.6662-5T d. Reg. §31.3121(a)-2 e. None of these are correct.

27. Treasury Decisions are published first, officially, in: a. the Internal Revenue Bulletin b. first in the Internal Revenue Bulletin and then in the Federal Register c. the Federal Register d. Congressional Committee Reports 28. Which citation represents the CORRECT numbering scheme for identification of IRS written determinations? a. 9538005, where ―95‖ is the year, ―38‖ is the week of the year, and ―005‖ is the number of the ruling/memoranda that week b. LTR 2010-43, where ―2010‖ is the year and ―43‖ is the number of the ruling or memoranda for that year c. 1996 C.B. 6, where 1996 is the year and 6 is the page number for the ruling or memoranda d. 200917024 where ―2009‖ is the year, ―17‖ is the week of the year, and ―024‖ is the number of the ruling/memoranda for that week 29. Which of the following statements is INCORRECT with regard to IRS Revenue Rulings? a. Revenue Rulings apply the Code and Regulations to a specific factual situation. b. Revenue Rulings are published chiefly to give guidance to taxpayers. c. A Revenue Ruling is an official pronouncement of Congress. d. All of these are correct.

30. Which of the following IRS pronouncements has the highest weight of authority? a. IRS Revenue Rulings b. IRS Taxpayer Publications c. IRS Announcements d. All of these IRS pronouncements have equal weight of authority.

31. An acquiescence indicates that a court decision will be: a. appealed by the IRS b. followed in similar situations only if it favors the IRS c. followed in similar situations, even if it is adverse to the IRS d. ignored by the IRS 32. Most official IRS pronouncements are written by: Page 34

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a. The IRS Office of Chief Counsel b. The IRS Commissioner c. The Treasury Secretary d. IRS Field Office Staff Members 33. In the citation Reg. §1.162-2(a)(1), the number "162" stands for the: a. type of Regulation b. related Code section c. Code of Federal Regulations d. Regulation paragraph 34. Temporary Regulations expire: a. after an IRS hearing on the regulations b. at the end of the public comment period c. five years after issuance pursuant to the statute d. three years after issuance pursuant to the statute e. Temporary Regulations never expire 35. The Commissioner of the IRS is appointed by the: a. The Treasury Secretary b. The President of the United States c. The Chief Counsel of the IRS d. General Counsel of the Treasury Department 36. Which of the following regulations bears the greatest precedential value? a. Legislative regulations b. Interpretive regulations c. Both legislative and interpretive regulations are about the same. d. Regulations cannot have precedential value.

37. Regulations may have retroactive effect in which of the following circumstances: a. The Regulation is designed to prevent abuse by taxpayers. b. The Regulation relates to internal Treasury Department policies, practices, or procedures. c. The Regulation may apply retroactively by Congressional directive. d. All of these are correct.

38. Determination Letters are: a. issued by the National Office of the IRS on proposed transactions b. issued by a local IRS office, usually on completed transactions c. published first in the Internal Revenue Bulletin d. issued to IRS field agents as audit guidance 39. IRS General Counsel Memoranda: a. convey the IRS decision to acquiesce/nonacquiesce in a court decision Page 35

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b. summarize and explain published IRS Regulations c. have been replaced with chief counsel advice after 2002 d. have only short-term value 40. The IRS, as an administrative agency, is responsible for: a. formulating and interpreting the tax laws b. interpreting and enforcing the tax laws c. formulating and evaluating the tax laws d. planning and formulating the tax laws 41. Which of the following is CORRECT with respect to Private Letter Rulings? a. They are issued by the IRS National Office in response to a specific taxpayer request. b. They can be cited as precedent by other taxpayers. c. They are published weekly by the IRS in the Internal Revenue Bulletin. d. They are also known as Technical Advice Memoranda. e. None of these are correct.

42. The Internal Revenue Bulletin would include: a. new tax laws issued by Congress b. actions on decisions c. tax treaties d. IRS notices e. all of these are correct 43. In the citation Rev Rul. 87-90, 1987-1 CB 198, the number "90" is the: a. ruling number for the year b. year of ruling c. paragraph number in the CB d. volume number in the CB 44. Which of the following statements is INCORRECT regarding the effective date of Regulations? a. A Regulation becomes effective 18 months after the statute on which it is based was enacted. b. A Regulation is effective on the date on which the Regulation is filed with the Federal Register. c. Temporary Regulations are effective immediately upon publication. d. All of these are correct.

45. A indicates that the IRS disagrees with the adverse decision in the case and will follow the decision only for the specific taxpayer whose case resulted in the adverse ruling. a. nonacquiescence b. acquiescence c. noncommittal d. none of these are correct

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46. Define general and legislative regulations, and explain the distinction.

47. List the three types of IRS written determinations and briefly explain the differences.

48. Compare and contrast IRS Proposed Regulations, IRS Temporary Regulations, and IRS Final Regulations. Explain the weight of authority and citations for each type of regulation.

49. Describe the Internal Revenue Bulletin, and identify the types of documents published in the Bulletin. Explain when it is published and the citations used to reference the Bulletin.

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Answer Key 1. False 2. False 3. False 4. True 5. False 6. True 7. True 8. False 9. False 10. True 11. True 12. False 13. True 14. True 15. False 16. True 17. True 18. False 19. False 20. True 21. c 22. a 23. b 24. c 25. c Page 38

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26. b 27. c 28. d 29. c 30. a 31. c 32. a 33. b 34. d 35. b 36. c 37. d 38. b 39. c 40. b 41. a 42. e 43. a 44. a 45. a 46. General regulations are issued under the general authority granted to the IRS to interpret the language of the Code. Legislative regulations are issued by the IRS as directed by the Congress to effectively perform a law-making function and to specify the substantive requirements of a tax provision.

47. The three types of IRS written determinations are Private Letter Rulings, Technical Advice Memoranda, and Determination Letters. Private Letter Rulings are issued by the National Office of the IRS in response to a taxpayer’s request for the IRS’s position on a specified tax issue, usually a proposed transaction. Technical Advice Memoranda are issued by the IRS National Office in response to a request by an IRS agent when a question arises during an audit.

Thus, Technical Advice Memoranda deal with completed transactions. Determination Letters are similar to Private Letter Rulings, but they are issued by a local IRS office such as a District Director, to a taxpayer, generally on the tax treatment of a completed transaction.

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48. Regulations are issued by the IRS and Treasury Department and constitute official interpretation of the Code. Regulations are intended to provide guidance on new legislative tax law or perhaps to address issues that have arisen related to existing Code. Regulations are not law but rather rules issued by an agency (in this case the Treasury) to provide the IRS’s position on the meaning of the law and give directions on how taxpayers might comply. Although not law, Regulations retain significant authority and must generally be followed.

Regulations are largely drafted by the Office of the Chief Counsel inside the Treasury. Issues to consider for Regulations are identified from various sources such as comments from the Commissioner of the IRS, the Chief Counsel and other Treasury Department staff, taxpayers, practitioners, outside organizations, and other comments on tax law directed at professionals or the taxpaying public. The Regulations may also be issued to deal with recent court decisions, common issues dealt with in private letter rulings, and of course, recently enacted legislation.

Regulations often begin as an Advance Notice of Proposed Rulemaking (ANPRM) which indicates the Treasury’s consideration of an issue for publication of guidance and will seek input from the public about the tax issue. Once the Regulations are drafted, a Notice of Proposed Rulemaking (NPRM) is issued announcing the Proposed Regulations. The NPRM will include a preamble explaining the purpose of the Regulations, asking for public input, announcing a public hearing (if one is to be held), and the text of the Proposed Regulations themselves. Before and during the hearings process, the NPRMs are referred to as Proposed Regulations and, unlike Final Regulations, do not have the effect of law.

Proposed Regulations are useful for understanding the IRS’s current position on an issue but generally should not be relied on by a taxpayer unless the IRS provides explicit advice on doing so.

Although Proposed Regulations do not carry the same authority as Final Regulations, Temporary Regulations have the same authority as Final Regulations. Temporary Regulations are not subject to the public hearing procedure that typifies the development of a Final Regulation, and they are effective immediately upon publication. Until a Temporary Regulation is replaced with the Final Regulation under a Code section, the tax researcher should treat the Temporary Regulation as though it were final. Thus, Temporary Regulations are fully in effect and must be followed until they are superseded.

Regulations can have retroactive effect in certain circumstances: • Within 18 months of enactment of the underlying Code section.

• To prevent taxpayer abuse.

• To correct a procedural defect.

• If it relates to Treasury and IRS internal policies.

• By specific Congressional directive.

• The Commissioner can allow taxpayers to elect to apply new regulations retroactively.

49. The Internal Revenue Bulletin (IRB) is the IRS’s primary publication used to communicate with the public. It is issued weekly on Mondays and is available on the IRS website. Through 2008, every six months, it is bound into the Cumulative Bulletin (CB), which is the official print publication of IRB documents.

Many, but not all, of the IRS’s administrative pronouncements are published in the IRB, including IRS Regulations, Revenue Rulings, Revenue Procedures, Actions on Decisions, Announcements, and Notices. Private Letter Rulings, Technical Advice Memoranda, and Determination Letters are not published in the IRB. Other types of documents besides IRS pronouncements are published in the IRB, including Congressional tax acts and committee reports, procedural rules, tax treaties, and other notices.

Internal Revenue Bulletin citations: 2010-17 I.R.B. 609 or 2008-1 C.B. 310 th The first citation is to the weekly Internal Revenue Bulletin in 2010. The IRB citation indicates the 17 weekly I.R.B. in 2010, page 609. For the Cumulative Bulletin, the citation above indicates the first volume of the C.B. for 2008 beginning on page 310.

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Indicate whether the statement is true or false.

1. The appellant is the party who appeals a decision to a higher court. a. True b. False 2. The U.S. Tax Court may examine the entire return of a taxpayer whose case it is hearing. a. True b. False 3. If the taxpayer’s Circuit Court of Appeals has not yet ruled on an issue, a researcher should consider a decision on the same issue by a Court of Appeals outside of the taxpayer’s circuit. a. True b. False 4. The Small Cases Division of the Tax Court can hear only cases involving a disputed deficiency, including penalties, of $15,000 or less. a. True b. False 5. The Tax Court was formerly known as the Board of Tax Appeals. a. True b. False 6. There are 11 Circuit Courts of Appeals in the federal court system. a. True b. False 7. In most tax cases, the Internal Revenue Code places the burden of proof on the taxpayer. a. True b. False 8. The common form of legal citation is as follows: case name, volume number, page number, reporter abbreviation. a. True b. False 9. District Courts hear cases based on the entire U.S. Code, not just the Internal Revenue Code. a. True b. False 10. En banc refers to a court case heard by the full court. a. True b. False 11. A regular Tax Court decision generally involves a new or unusual point of law, as determined by the Chief Judge of the Court.

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a. True b. False 12. District Court judges hearing tax cases are tax specialists. a. True b. False 13. The U.S. Court of Federal Claims is a trial-level court. a. True b. False 14. Judicial decisions constitute a primary source of the tax law. a. True b. False 15. District Court decisions can vary significantly among the districts. a. True b. False 16. Each U.S. Court of Appeals is independent and need not follow other Circuit Courts in making its decisions. a. True b. False 17. The two levels of appellate courts in the federal court system are the U.S. Courts of Appeals and the U.S. Supreme Court. a. True b. False 18. Either the taxpayer or the IRS may initiate legal proceedings in the federal court system. a. True b. False 19. Tax Court Summary Opinions are published in a printed reporter by the Government Printing Office (GPO). a. True b. False 20. If the Supreme Court refuses to review a lower case, it doesn't mean that the Supreme Court is upholding the lower court decision. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

21. In which of the following courts does the taxpayer have to pay first and then sue for a refund? a. the Tax Court Small Cases Division b. the District Courts and U.S. Court of Federal Claims Page 42

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c. the U.S. Courts of Appeal d. all of these are correct 22. In which of the following courts is a jury trial available? a. U.S. District Courts b. Tax Court c. U.S. Court of Federal Claims d. All of the above.

23. An appeal from the Tax Court is to the: a. U.S. Court of Appeals where the taxpayer is located b. District Court where the taxpayer is located c. U.S. Court of Federal Claims d. Supreme Court 24. A ―writ of certiorari‖ is: a. the process by which the Supreme Court agrees to review a lower court decision b. a judgment notwithstanding the verdict c. the procedure for determining if the authorities can hold an individual in custody d. a reversal of the prior decision of a court 25. Under the Golsen rule, the Tax Court must: a. compute the tax liability due the government b. reach the same decision in each region of the county c. follow the Court of Appeals that has direct jurisdiction over the taxpayer d. none of these are correct 26. In a court case, ―dictum‖ or ―dicta‖ is: a. a statement or remark that is not necessary to support the court’s decision b. the legal concept that bars relitigation on the same set of facts c. a judgment that reverses the determination of a jury d. none of these are correct 27. When a Tax Court decision is said to be entered under Rule 155, it means: a. the Court computed the refund due the taxpayer b. the Court reaches a decision without calculating the tax c. the Court must follow the Court of Appeals that has direct jurisdiction over the taxpayer d. the case cannot be appealed 28. The citation ABC v. U.S, 967 U.S. 567 (2012) tells the tax researcher that this is a decision by which court? a. District Court b. Tax Court c. Supreme Court d. Court of Appeals Page 43

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29. Tax Court Memorandum decisions can be located in which of the following reporters? a. CCH b. AFTR2d c. the Tax Court of the United States Reports (T.C.) d. none of these are correct 30. The United States Tax Cases reporter is published by: a. RIA b. CCH c. West Publishing d. the Government Printing Office (GPO) 31. Which statement is CORRECT regarding the United States Tax Court? a. The Tax Court will hear any federal case. b. The Tax Court is an appeals court. c. The Tax Court must follow decisions of the District Court with jurisdiction over the taxpayer. d. None of these are correct.

32. A taxpayer who loses in the Small Cases Division of the Tax Court may appeal directly to the: a. Appellate division of the IRS b. District Court in the taxpayer’s circuit c. U.S. Court of Appeals in the taxpayer’s circuit d. Decisions in the Small Cases Division cannot be appealed 33. The citation ABC v. U.S., 375 F.2d. 456 (1992) tells the tax researcher that this is a decision by which court? a. a U.S. District Court b. the Tax Court c. a U.S. Circuit Court of Appeals d. none of these are correct 34. Where are current U.S. Court of Federal Claims decisions published? a. West’s U.S. Court of Federal Claims reporter (Fed. Cl.) b. West’s Federal Reporter, Third Edition (F.3d.) c. West’s Federal Supplement series (F. Supp.) d. none of these are correct 35. Which reporter is the official, government reporter for U.S. Supreme Court tax cases? a. S.Ct. b. U.S. c. AFTR2d d. The government does not print Supreme Court cases.

36. Which of the following statements is CORRECT regarding the U.S. Court of Federal Claims? a. It hears monetary claims against the federal government, including tax refund claims. b. It is composed only of judges who are specialists in technical tax law.

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c. It must apply the law of the U.S. Court of Appeals in the taxpayer’s circuit. d. All of these are correct. e. None of these are correct.

37. An appeal from any of the Circuit Courts of Appeals is to the: a. U.S. District Court b. U.S. Court of Federal Claims c. Court of Appeals for the Federal Circuit d. U.S. Supreme Court 38. If taxpayers choose NOT to pay a tax deficiency, then they must petition which court? a. the District Court b. the U.S. Court of Federal Claims c. the Tax Court d. the U.S. Court of Appeal 39. A decision of which of the following court(s) CANNOT be found in RIA's American Federal Tax Reports (AFTR or AFTR2d)? a. the District Courts b. the Tax Court c. the Supreme Court d. the U.S. Court of Federal Claims e. none of these are correct 40. Decisions of which court(s) are published by West Publishing Company in its Federal Supplement (F.Supp.) Series? a. District Courts b. U.S. Court of Federal Claims c. U.S. Courts of Appeal d. all of these are correct 41. Which of the following is a secondary court reporter? a. AFTR b. U.S. c. F.Supp. d. F.2d. e. none of these are correct 42. Examples of instances where the burden of proof is on the government, rather than on the taxpayer, include: a. when the IRS uses statistics to recreate income b. when the taxpayer introduces credible evidence c. when the liability is a penalty or addition to tax d. all of these are correct 43. Which of the following statements is INCORRECT regarding headnotes and case briefs? a. Headnotes are usually inserted at the beginnig of a case by the court reporter editors.

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b. Headnotes help researchers quickly determine if a case is relevant. c. Case briefs are a summary of a case identifying the facts, issue, holding and analysis. d. All of the above statements are correct.

44. In Francis T. Foster, et ux. v. Commissioner, 138 T.C. a. year of decision b. page number c. volume number d. paragraph number

(2012), No. 4, "138" stands for the:

45. In which of the following courts would a taxpayer want to argue an ―emotional issue‖ rather than a ―technical‖ issue? a. the Supreme Court b. the District Courts c. the U.S. Court of Federal Claims d. the U.S. Tax Court

46. Why would a taxpayer want to bring a case in the U.S. Court of Federal Claims?

47. Identify the publisher, citation abbreviation, and types of cases that can be found in two of the three reporters given below.

U.S. Tax Cases Federal Reporter American Federal Tax Reports 48. Briefly explain how the burden of proof concept is applied.

49. Describe the federal court system and its jurisdiction over tax issues. Identify the appeals and trial-level courts.

Then, describe the factors that would go into a taxpayer’s decision to bring his or her case in a particular federal court.

Finally, explain the basic rules of precedence for tax cases in the federal court system.

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Answer Key 1. True 2. True 3. True 4. False 5. True 6. False 7. True 8. False 9. True 10. True 11. True 12. False 13. True 14. True 15. True 16. True 17. True 18. True 19. False 20. True 21. b 22. a 23. a 24. a 25. c Page 47

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26. a 27. b 28. c 29. a 30. b 31. d 32. d 33. c 34. a 35. b 36. a 37. d 38. c 39. b 40. a 41. a 42. d 43. d 44. c 45. b 46. The U. S. Tax Court and District Court of Appeals limit their cases to a geographic appellate circuit while the Federal Claims Court appeals its actions to the Federal Circuit Court of Appeals. The different circuits may have different precedent on similar tax issues. A taxpayer would want to bring a case in the U.S. Court of Federal Claims if the Court of Appeals in the taxpayer’s circuit has decided the issue adversely to the taxpayer, and the Federal Circuit Court of Appeals, which establishes precedent for the U.S. Court of Federal Claims, has established a rule favorable to the taxpayer.

47. U.S. Tax Cases Published by Commerce Clearing House Citation Abbreviation: USTC Decisions included: Supreme Court tax cases Courts of Appeal tax cases Page 48

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District Court tax cases U.S. Court of Federal Claims and Court of Claims tax cases Federal Reporter Published by West Publishing Company Citation Abbreviation: F. F.2d. and F.3d.

Decisions included: All Court of Appeals decisions Pre-1982 Court of Claims decisions American Federal Tax Reports Published by RIA Citation Abbreviation AFTR and AFTR2d Decisions included: Supreme Court tax cases Courts of Appeal tax cases District Court tax cases U.S. Court of Federal Claims and Court of Claims tax cases 48. As a general rule, in most litigation the plaintiff (the party initiating the case) has the burden of convincing the court that he or she is correct. Because the taxpayer is the plaintiff (called the petitioner in the Tax Court) in civil tax cases, he or she initially bears the burden of proof. The taxpayer’s burden includes two prongs: (1) providing prima facie evidence to support a finding contrary to the IRS and (2) proving that the IRS’s determination is wrong by a preponderance of the evidence. However, in a wave of anti-IRS sentiment in 1998, § 7491 was introduced, serving to shift the burden of proof to the IRS if the taxpayer ―introduces credible evidence‖ on any factual issue relevant to the tax liability. The shift to the IRS is conditional on the taxpayer being able to substantiate the item and on the taxpayer having maintained all records and having cooperated with the IRS’s reasonable requests for witnesses, information, documents, meetings, and interviews.

The shift of burden under § 7491 is not available to corporations, partnerships, or trusts with net worth exceeding $7 million or more than 500 employees. Section 7491 also leaves the burden with the IRS in instances where income has been reconstructed using statistical information, or when the liability is a penalty or addition to tax. There are a small number of other situations in which the burden of proof remains with the IRS, such as the accumulated earnings tax, expatriation, hobby classification when the three-out-of-five rule of § 183(d) is met, and fraud.

The burden of proof always remains with the IRS in criminal actions. When reading a published opinion, the tax researcher should note whether the decision was based in part on the IRS’s or the taxpayer’s failure to meet a needed evidentiary burden, or whether the IRS or the taxpayer established the position with sufficient proof. The first situation should be considered a weaker precedent than the second. Understanding the ―strength‖ of a court decision is an important part of tax research.

49. The U.S. federal court system has five courts in total: three trial courts and two appellate-level courts. The trial courts are the U.S. Tax Court, the U.S. District Courts around the country, and the U.S. Court of Federal Claims. The two appellate levels are the 13 Courts of Appeal and the U.S. Supreme Court. An appeal from the Tax Court and District Court is to the Court of Appeals where the taxpayer resides or is located. An appeal from the U.S. Court of Federal Claims is to the Court of Appeals for the Federal Circuit. Decisions from the U.S. Circuit Courts of Appeal can be appealed to the Supreme Court, which may not choose to hear the case.

A taxpayer could choose the Tax Court if the taxpayer did not want to pay the deficiency first. The Tax Court is the only trial court in which the taxpayer does not have to pay first and sue for a refund. The taxpayer may also want to choose the Tax Court if the issue is highly technical, since Tax Court judges are tax specialists while District Court judges are generalists. If the taxpayer has an ―emotional‖ issue, the taxpayer could request a jury trial in the U.S. District Court where the taxpayer lives or is located. Jury trials can only be brought in the U.S. District Courts.

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A taxpayer would want to bring a case in the U.S. Court of Federal Claims if the Court of Appeals in the taxpayer’s circuit has decided the issue adversely to the taxpayer but the Federal Circuit Court of Appeals, which establishes precedent for the U.S. Court of Federal Claims, has established a rule favorable to the taxpayer.

The Tax Court, under the Golsen rule, must apply the rule established in the taxpayer’s Circuit Court of Appeal. If that Circuit has not decided the issue, the Tax Court may make its own decision. Each U.S. Court of Appeals is independent and need not follow the precedents set by other circuits. All courts must follow a Supreme Court precedent.

Indicate whether the statement is true or false.

1. There are four primary search methods in Checkpoint: (1) keyword, (2) contents, (3) index, and (4) citation. a. True b. False 2. The "Terms & Connectors" type of keyword search is useful when a researcher is unsure as to which keywords would be most effective. a. True b. False 3. Checkpoint (formerly RIA Checkpoint) is a commercial tax and accounting research service offered by CCH. a. True b. False 4. The Federal Tax Coordinator (FTC) is generally considered the most comprehensive of the three editorial sources in Checkpoint. a. True b. False 5. It is imperative that a citator be examined to determine how later legal sources have considered the document of interest. a. True b. False 6. The footnote links in Checkpoint editorial services are not important to tax researchers. a. True b. False 7. A Checkpoint Contents search can be difficult to use. a. True b. False 8. Thomson Reuters Checkpoint offers two main types of keyword searches: Terms & Connectors and Intuitive Search. a. True b. False 9. The only support recognized by the IRS and courts are primary sources and not the editorial explanations of a tax Page 50

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service. a. True b. False 10. A citator is a tool through which a tax researcher can learn the history of a legal source and evaluate the strength of its holdings. a. True b. False 11. The advantage of an index search is that the tax meanings of the words are considered as well as the context in which the words are found. a. True b. False 12. The Federal Tax Coordinator is a topical service. a. True b. False 13. Commercial tax services provide editorial explanations and expert analysis of primary tax law. a. True b. False 14. Keyword searches are not available when a researcher enters a tax service through the Table of Contents in Thomson Reuters Checkpoint. a. True b. False 15. An Index search can be more effective than a keyword search because the researcher has the benefit of the tax expertise of the indexer. a. True b. False 16. Thomson Reuters Checkpoint will NOT automatically use its Thesaurus and look for synonyms when you put in a search query. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

17. The Federal Tax Coordinator (FTC) is published by: a. Thomson Reuters Checkpoint b. CCH c. Westlaw d. BNA 18. The starting point in approaching any tax research problem is to: Page 51

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a. browse the Table of Contents b. formulate relevant tax questions and identify the issues associated with them c. evaluate the tax problem and suggest solutions to the taxpayers d. none of these are correct 19. Which of the following statements best describes Checkpoint? a. It has little value to accounting professionals. b. It organizes information by database. c. It has a limited database of cases. d. None of these statements accurately describe Checkpoint.

20. Which of the following is INCORRECT regarding Checkpoint? a. Access to its entire library is available from one screen. b. It's a free research service. c. It is owned by Thomson Reuters. d. All of these are incorrect.

21. Which statement is CORRECT regarding commercial tax services? a. They provide free access to all primary source tax materials. b. They eliminate the need for reading primary tax law source materials. c. They act as an index for and explanation of primary tax law. d. All of these are correct.

22. In some tax services, quotation marks are placed around the keywords to: a. reduce the number of documents retrieved b. indicate that the words should be searched separately c. maximize the number of documents retrieved d. indicate that the words should be searched as an exact phrase 23. If you want to retrieve documents relating to amortizing legal fees paid for the organization of a partnership, which search query would likely yield the best results in Thomson Reuters Checkpoint? a. amortizing and legal fees b. amortiz* ―legal fees‖ partnership c. amortization organization not corporations d. amortize and ―legal fees‖ or partnerships 24. The tax research platform "Checkpoint" is a product of which publisher? a. CCH b. Thomson Reuters c. BNA Tax & Accounting d. none of the these are correct 25. Which strategy would be the most useful to a tax researcher unfamiliar with a particular tax topic? a. Read the editorial explanation of the topic and the overview of the applicable law. b. Perform a Google™ or Bing™ search.

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c. Select a database to search. d. None of these are correct.

26. Boolean connectors are used: a. when the researcher is unsure as to which keywords would be most effective in a search b. to define the relationship between keywords c. in intuitive searches d. none of these are correct 27. Checkpoint’s flagship editorial content tax service is entitled the: a. Federal Tax Coordinator b. Federal Tax Handbook c. Standard Federal Income Tax Reporter d. United States Tax Reporter 28. Checkpoint’s annotated service is known by the following acronym: a. the U.S. Master Tax Guide b. AFTR c. USTR d. none of these are correct 29. If you performed an intuitive search that returned 1000 documents, what could you do to narrow your search? a. Reduce the number of databases searched. b. Search within results. c. Use terms and connectors to better define the relationship between keywords. d. All of the these actions would help narrow the search results.

30. One of the greatest benefits of Checkpoint and any Internet service is: a. the lack of information available b. only published IRS documents can be researched c. the currency of the information provided d. only a few Courts are covered 31. Topical tax services: a. provide annotations b. divide the tax law into transactions and related subject matter with underlying tax principles as an organizing format c. have explanations that are organized by Internal Revenue Code section numbers d. all of these are correct 32. Which is an editorial service provided by Checkpoint? a. Federal Tax Coordinator b. United States Tax Reporter c. Federal Tax Handbook d. all of these are correct Page 53

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33. The key to effective tax research is: a. finding your answer in free Internet sources b. avoiding preparer penalties c. finding the pertinent material necessary to arrive at an informed conclusion about the best treatment of a tax problem d. all of these are correct 34. Which service of Checkpoint is an annotated tax service? a. Standard Federal Income Tax Reporter b. USTR c. Tax Research Consultant d. Federal Tax Coordinator 35. Which statement is CORRECT regarding annotated tax services? a. They are organized by Internal Revenue Code section. b. They provide annotations, which are comprehensive, detailed analyses of related court cases and administrative rulings. c. They divide the tax law into transactions and related subject matter with underlying tax principles as an organizing format. d. All of these are correct.

36. The database which is organized by the numerical structure of Code is the: a. topical database b. IRS database c. Court cases database d. annotated database 37. Primary source materials are important to the researcher because they are: a. easily found b. the source of "substantial authority" c. listed in all publications d. difficult to understand

38. Describe the four common search methods used in Thomson Reuters Checkpoint.

39. Explain the difference between an annotated tax service and a topical tax service. Give an example of each.

40. Why would a researcher use a Table of Contents or Index search instead of a keyword search?

41. Select three different primary sources, one from each area of tax law (legislative, administrative, and judicial), and provide a specific example of a source that is available in Checkpoint.

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42. What is the difference between a Terms & Connectors search and an Intuitive Search in Thomson Reuters Checkpoint? Give an example of each.

43. Why would a practitioner need a commercial, subscription tax service when most tax sources are available on the Internet for free?

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Answer Key 1. True 2. False 3. False 4. True 5. True 6. False 7. True 8. True 9. True 10. True 11. True 12. True 13. True 14. False 15. True 16. True 17. a 18. b 19. b 20. b 21. c 22. d 23. b 24. b 25. a Page 56

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26. b 27. a 28. c 29. d 30. c 31. b 32. d 33. c 34. b 35. a 36. d 37. b 38.

The four primary ways to search in Checkpoint are: (1) keyword, (2) contents, (3) index and (4) citation. A keyword search is similar to using a search engine on the Internet such as Bing or Google. One additional step that distinguishes a Checkpoint search from a typical search is the selection of the databases from which to search. Simply enter the keywords and search the selected databases. A contents search is similar to flipping through the table of contents in a printed book. Each of the databases in Checkpoint (both primary and editorial) contains a table of contents that can be browsed through to identify the ―chapter‖ that contains the relevant information. An index search is similar to a contents search except instead of the table of contents, the alphabetically organized index of the database can be browsed for the topics of import. A citation search is used when the source document of importance is already known and the researcher simply wants to go directly to that document.

39. An annotated tax service is organized following the order of the Internal Revenue Code. First the Code is presented, then committee reports, Regulations, explanations, and lastly annotations of related court cases and administrative rulings. A topical service divides the tax law into transactions or subjects with underlying tax principles as an organizing format. It integrates a discussion of the primary and secondary sources of the tax law into its editorial analysis.

Examples of annotated services include Thomson Reuters Checkpoint's United States Tax Reporter (USTR). Examples of topical services include Thomson Reuters Checkpoint's Federal Tax Coordinator (FTC).

40. A search in the Table of Contents or in the Index is sometimes a very effective method of limiting the number of documents retrieved and guaranteeing their pertinence to the research project. Drilling down in the Table of Contents is a method that should be used when the researcher has an idea of the location within the tax service where the relevant documents may be located but is having a hard time selecting keywords.

An Index search also can assist a researcher who is unfamiliar with a tax issue because the researcher can get the benefit of the expertise of the indexer in locating the primary documents of interest. Because individuals do indexing, the tax meaning of terms in the index is considered and the tax terms are put in context. It also is beneficial to start with an Page 57

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Index

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search to help researchers identify effective terms for their general keyword searches.

41.

Legislative: Internal Revenue Code, various other statutes that affect tax, Public Laws that affect taxes, archived Code, the US Constitution.

Administrative: Regulations (final proposed and temporary); Circular 230; Administrative rulings such as Revenue Rulings and Revenue Procedures; IRS Notices, Announcements and Releases; Letter Rulings and Memoranda.

Judicial: Trial level (Tax, District) court decisions, Appellate-level decision and Supreme Court decisions that are tax related.

42. In Thomson Reuters Checkpoint, a Terms & Connectors search allows the researcher to use Boolean connectors, punctuation, and other special search syntax to define the relationship between keywords. To perform an effective Terms & Connectors search, the researcher must understand the search rules and Boolean connectors available in the Thomson Reuters Checkpoint system. For example, a space between words is treated as an ―and.‖ Quotation marks must be used for a phrase search.

Example: To search for documents relating to the treatment of guaranteed payments to a partner, you could enter the following Terms & Connectors search in Thomson Reuters Checkpoint: • partner and “guaranteed payments.”

To search in Thomson Reuters Checkpoint using the Intuitive Search feature, a researcher can enter the relevant tax question in standard English without using Boolean connectors, punctuation, or any other special search syntax. The program will determine the key terms for searching and the relationships among the words (i.e., connectors to apply). This type of search is useful when a tax researcher is unsure as to which keywords would be the most effective.

Example: To search for documents relating to the treatment of guaranteed payments to a partner, you could simply enter the following question: • What is the tax treatment of guaranteed payments made to a partner 43. A tax practitioner needs a subscription, commercial tax service even though many primary tax sources are available on the Internet for free because subscription tax services organize the large assortment of primary and secondary tax law sources into an expert collection with numerous, value-added features. Commercial tax services include not only primary source documents, but also such features as editorial explanations of the tax law, expert analyses, summaries and headnotes of court opinions and rulings, an expert index, and a Thesaurus function. The collection and organization of tax research materials facilitates more efficient, effective, and comprehensive searches for solutions to tax problems, resulting in much faster and accurate searches. Also, because tax practitioners are being more closely scrutinized by the IRS and the SEC, conducting quality tax research that is carefully documented has become much more crucial.

Commercial tax services allow you to save your search history, create folders of relevant documents, and check your knowledge of tax issues by consulting editorial explanations and expert analysis.

Indicate whether the statement is true or false.

1. All commercial citators allow the researcher to retrieve entries by entering either the case name or case citation. a. True b. False Page 59

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2. A typical AnswerConnect subscription will contain a minimum of two editorial sources of interest: U.S. Master Tax Guide and Standard Federal Tax Reporter. a. True b. False 3. Tax treatises are editorial analyses that provide in-depth coverage of a particular tax area. a. True b. False 4. The case that is referred to in the opinion of another case is called the ―precedent.‖ a. True b. False 5. Topic search is one of AnswerConnect's primary ways of searching for information. a. True b. False 6. A citator is a service that indexes cited cases, gives their full citations, and lists the citing cases and where each citing case can be found. a. True b. False 7. Headnote numbers are the same in all of the various case reporters. a. True b. False 8. Coverage of treatises by AnswerConnect is as comprehensive as would likely be found in a periodical or journal article. a. True b. False 9. The CCH Citator lists journal articles published by WG&L. a. True b. False 10. In a citator, the highest level court to address the case is listed first, and the trial-level court is listed last. a. True b. False 11. Citators provide all information related to a case. a. True b. False 12. Treatises provide a compromise between comprehensive coverage of a topic and the ability to locate relevant information quickly. a. True b. False Page 60

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13. Tax journals and newsletters are generally not cited as authority in professional tax research. a. True b. False 14. The CCH Citator provides parallel citations to most other court reporters, including RIA’s court reporter. a. True b. False 15. Performing a keyword search in AnswerConnect is equal to performing a search on the Internet using a search engine. a. True b. False 16. A topic gives the same results as a citator. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

17. A broad knowledge of tax law, a reasonable level of experience, and persistence are necessary for: a. losing weight b. looking at Google c. researching the tax law d. contracting tax law researchers 18. The precedential value of a case refers to: a. whether it was appealed b. the monetary value at stake in that case c. the legal authority established by that case d. all of these are correct 19. Which search is used in AnswerConnect to search TAXES: The Tax Magazine, The CCH Federal Tax Weekly, the CCH Tax Briefings, and other newsletters and periodicals? a. index search b. contents search c. citation search d. keyword search 20. The AnswerConnect search for which you must know the Code section, regulation, ruling, paragraph, or other source document is called the: a. citator search b. annotated search c. keyword search d. index search 21. Which of the following statements is CORRECT regarding the CCH Citator? a. The CCH Citator references the case in the U.S. Tax Cases Reporter.

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b. Only selected cases that the editors have determined most affect a case’s precedential value are included in the citator listing. c. The CCH Citator uses a general rather than a specific location citation for citing cases. d. All of these are correct.

22. The paragraphs in which the editors of the court reporter summarize the court’s holdings on each issue of a case and the CCH Citator does not reference are called the: a. Lexcites b. headnotes c. footnotes d. table of authorities 23. Practitioners may use the author of a treatise or article as a research associate thereby: a. using them as primary sources b. waiting for the right article to be found c. learning how to research IntelliConnect d. saving hours of research time 24. What is the starting point in approaching any tax research problem? a. Form a conclusion. b. Interpret editorial data. c. Identify issues associated with the questions. d. Access IntelliConnect.

25. Tax treatises and periodicals are: a. controlling authority b. secondary sources c. primary sources d. updated daily 26. Which statement is CORRECT regarding commercial tax services? a. They provide free access to all primary source tax materials. b. They eliminate the need for reading primary tax law source materials. c. They act as an index for and explanation of primary and secondary tax law source materials. d. All of the these are correct.

27. AnswerConnect offers three ways to search for tax information: keyword search, topical search, and: a. a one-to-four star system that indicates the extent to which cited cases discuss the case of interest b. headnotes that address only the tax issues in a case c. case evaluation symbols such as warning flags to indicate how the later court has treated a cited case d. annotated search 28. The search in AnswerConnect that is very similar to performing a search on the Internet is called the: a. index search b. citation search Page 62

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c. keyword search d. contents search 29. Publications which contain articles and news briefs that are designed to keep readers up to date in specific or general areas of the tax law are called: a. tax periodicals b. tax treatises c. the Worldwide Tax Daily d. The Tax Adviser 30. Charts that provide quick access to tax rates, deduction limits, depreciation tables, and other frequently used tax information are available from AnswerConnect in the: a. the Browser b. Newswire c. the TOOLS/SMARTCHARTS tab d. Wordpress 31. The CCH Federal Tax Weekly is an example of what type of tax periodical? a. a weekly newsletter b. a professional and practitioner journal c. a scholarly review d. an annual proceeding 32. The major difference between tax treatises and periodicals or journals is that tax treatises: a. are published less often b. publish articles not likely to be encountered in practice c. provide more comprehensive coverage d. are not written by prominent experts 33. Editorial analyses that provide in-depth coverage of a particular tax area are called: a. tax periodicals b. tax treatises c. citators d. tax research 34. Why do tax practitioners use a commercial tax service when most primary sources are available for free on the Internet? a. Commercial tax services provide editorial explanations and expert analysis of primary tax law. b. Practitioners are able to provide faster, more accurate solutions to clients' tax problems. c. Tax services facilitate more efficient, effective, and comprehensive searches. d. Commercial tax services organize tax law source materials into a single database system. e. All of these are correct.

35. AnswerConnect, like most tax services, organizes information by: a. the list of cases that are cited by the case of interest Page 63

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b. full-text documents for legal citations c. database d. the manner in which annotations and topics are integrated 36. A case making reference to another case is called the: a. cited case b. citing case c. precedent d. local citation 37. If All Current Cases is clicked while on a case, the following will be presented: a. only cases cited by the current case b. cases that cite the same IRC section as the current case c. only cases citing the current case in the last 3 years d. only cases that cite the current case 38. AnswerConnect offers access to a bevy of primary source materials under which heading? a. Key Numbers b. Federal Tax Editorial Content c. Primary sources are not segregated by source but are available. d. Sources: Primary Tax Law Area 39. What is one of the advantages of using CCH AnswerConnect? a. AnswerConnect has to be shut down every time it is not in use. b. Researchers can start searching effectively with little training. c. It allows opening up to three searches simultaneously. d. Searching is nothing like a typical browser search.

40. AnswerConnect has retained only one editorial source as a segregated database: a. U.S. Master Tax Guide b. Current IRS publications c. Standard Federal Tax Reporter d. Consultant topical organization

41. The three primary ways to search in AnswerConnect are as follows: (1) keyword, (2) topic, and (3) annotated. Briefly describe each one.

42. Distinguish between the following terms: ―cited case‖ and ―citing case.‖ 43. Select three different primary sources, one from each area of tax law (legislative, administrative, and judicial), and provide a specific example of a source that is available in AnswerConnect.

44. What roles does a citator play in tax research?

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45. Identify the different types of tax periodicals. Explain how tax periodicals are used in tax research and why they are valuable to a tax researcher.

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Answer Key 1. False 2. False 3. True 4. False 5. True 6. True 7. False 8. False 9. False 10. True 11. False 12. True 13. True 14. False 15. True 16. False 17. c 18. c 19. d 20. b 21. d 22. b 23. d 24. c 25. b Page 66

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26. c 27. d 28. c 29. a 30. c 31. b 32. c 33. b 34. a 35. d 36. b 37. b 38. c 39. b 40. a 41. A keyword search is similar to using a search engine on the Internet such as Bing or Google. The

AnswerConnect search engine is more sophisticated, allowing for more intuitive keywords.

A topical search is like an index search in which AnswerConnect has developed a list of common topics that can be drilled down to find the level of detail the researcher is seeking. This way, the researcher is using the expertise of the AnswerConnect professionals to organize information by topic.

An annotated search requires knowledge of the particular IRC section or sections that are likely to contain the relevant information.

42. When one case refers to another case, it cites the case. The case making reference to the other case is called the citing case. The case that is referenced is the cited case. The citing case will contain the name of the cited case and where the cited case can be found.

43. Statutory: Internal Revenue Code, various other statutes that affect tax, public laws that affect taxes, archived Code, and the U.S. Constitution.

Administrative: Regulations (final proposed and temporary); Circular 230; administrative rulings such as Revenue Rulings and Revenue Procedures; IRS Notices, Announcements and Releases; and Letter Rulings and Memoranda .

Judicial: Trial-level (Tax, District) court decisions, appellate-level decisions, and Supreme Court decisions that are tax related Page 67

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44. Tax practitioners are required to rely on tax law that is constantly evolving. They must determine if subsequent events have affected the legal standing of the sources upon which they rely. Thus, they need a tool to help them ascertain which legal sources are still good law, which primary sources provide strong precedents, and which have little or no value. A citator is a legal reference tool through which a tax researcher can learn the history of a legal source and evaluate the strength of its holdings. Basically, a citator can help a researcher ascertain whether a particular primary source document is still good law.

Before a researcher relies on the opinion in a case or the analysis in a ruling, it is important to ascertain its legal standing. Thus, when a case or ruling relevant to a client’s tax situation is found, a researcher should examine its citator entry to determine how later legal sources have treated the document of interest. Citators index cases, give their full citations, and list other cases that have cited the case and where each citing case can be found. Given the tremendous number of court cases and rulings issued annually, the citator is a vital tool in the research process. If the primary sources have not been checked through a citator, the research process is not complete. It is important for a researcher to consider a case in context, to trace its judicial history, and to monitor the reaction of subsequent courts.

By using a citator properly, a researcher can review subsequent courts’ reactions and determine the strength of the precedent established by the earlier opinion. Similarly, citators indicate when a ruling has been made obsolete, superseded, or cited favorably or discredited by a court case.

In short, a tax practitioner’s research is not complete until a citator is consulted to determine if the relevant primary source material found by the research still represents good law.

45. Tax periodicals contain a variety of articles and news briefs that are designed to keep researchers up to date on changes, developments, and analyses of the tax law. Tax periodicals include annual proceedings, scholarly reviews, professional journals, and newsletters. Tax articles can suggest new viewpoints on tax issues, give guidance for solving complex problems, or explain a new law. Tax articles also can lead a researcher to pertinent primary sources.

Tax practitioners researching a topic can capitalize on an outside author’s expert judgment to save research time. Tax periodicals also are useful when primary sources are unclear or primary sources do not address an issue. A secondary source or editorial article by an expert in the field may suggest a possible answer. Annual proceedings and scholarly reviews offer considerable depth of coverage of tax issues. Professional journals offer practical insights by the authors and ―how-to‖ practice tips. Tax newsletters keep tax practitioners abreast of the current changes and trends in the tax law. While tax researchers cannot rely on secondary sources such as tax periodicals for controlling authority, tax periodicals can help lead a practitioner to the correct answer.

Indicate whether the statement is true or false.

1. The West Group, an authoritative legal publisher, offers tax research capabilities through its Westlaw and WestlawNext services. These services were designed by attorneys, for attorneys. a. True b. False 2. Realizing how important tax research has become, LexisNexis developed a service exclusively for tax practitioners called the Lexis Advance Tax. a. True b. False 3. Perhaps the only tax services not available on LexisNexis are its competitors Checkpoint and Westlaw. a. True b. False Page 68

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4. Today, BNA is owned by Bloomberg, provides 350 news services, and is the largest independent publisher of business and government analysis for professionals. a. True b. False 5. Tax Journals published for the purpose of keeping tax practitioners abreast of current changes and trends in the tax law are referred to as Professional Notes. a. True b. False 6. BNA provides a State Tax Series of portfolios organized by individual state rather than by state tax issues. a. True b. False 7. Like BNA, Westlaw is accessible via the Internet and through wireless mobile devices. a. True b. False 8. Most search indexes and databases such as Google Scholar, JSTOR, Business Source Premier, Thomson Reuters Web of Science, and ABI/Inform, facilitate the locating of relevant tax articles by focusing on a guided search strategy. a. True b. False 9. One of the most important tax newsletters available to practitioners is the BNA Daily Tax Report (DTR). DTR is available online; through wireless devices, including iPhones; and in hard copy. a. True b. False 10. Virtually all law schools train their students using the Westlaw system. a. True b. False 11. BNA Portfolios are grouped by area of common topic into COLLECTIONS (e.g., there are multiple portfolios on income tax accounting that will be displayed if one clicks on that heading). a. True b. False 12. BNA offers four different ways to do a keyword search in the tax databases: Quick Search, Advanced Search, Go To, and Guided Search. a. True b. False 13. The citation for a printed tax journal article should take the following standard format: Sanders, Debra, Susan Gill, and Jill Zuber. 2009. Deductibility of bankruptcy costs and the origin of the claim. The Tax Advisor 40 (8): at 528. a. True b. False Page 69

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14. Tax Analysts produces a variety of comprehensive state, federal, and international news, analysis, and commentary publications for the public on a daily, weekly, monthly, and quarterly basis. a. True b. False 15. All major tax services include a publication as part of their service aimed at keeping the subscriber abreast of important tax law developments. These publications are called Newsletters. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

16. Which of the following is not a series of the more than 500 BNA Portfolios? a. U.S. Income b. Estate, Gift & Trust c. Municipal d. U.S. International e. Accounting for Income Taxes 17. The BNA Portfolios most unique and useful feature is called the: a. Keyword Section b. Guided Section c. Working Papers Section d. Topical Section 18. All major law schools, as well as organizations such as the National Tax Association, and the American Taxation Association, produce publications referred to as: a. newsletters b. journals of multistate state taxation c. scholarly reviews d. tax analyses 19. BNA Portfolios are grouped by area of common topic into: a. Sub-Folders b. Collections c. Journals d. Guides 20. Which of the following is one of the two ways to search BNA? a. Keyword Search b. Quick Search c. Go To Search d. Guided Search 21. The Westlaw search engine designed to tailor search results to the most relevant items based on the expertise of Page 70

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experienced law researchers is called the: a. WestSearch search engine b. Boolean Terms search engine c. Wildcard search engine d. Regulations search engine 22. In addition to the portfolios, BNA also offers the following source(s): a. expert analysis b. events and training c. cases and decisions d. all of these are correct 23. The customized version of the services that LexisNexis offers to academic institutions and public libraries is called: a. Nexis Uni b. Tax Center c. KeySearch d. LexisNexis Academic 24. The service that presents the practitioner with databases that include primary sources and analytical materials is called: a. Lexis Advance Tax b. Sources Unlimited c. Federal Topical d. Business and News 25. The research source available in Westlaw that is very effective for validating statutes, regulations, and administrative rulings is called a(n): a. keyword b. citator c. inciter d. searcher 26. The Westlaw research service which helps determine whether a case, law, or regulation remains good law is called: a. KeyCite b. KeySearch c. WestlawNext d. Campus Research 27. The legal oriented services by the West Group designed by attorneys, for attorneys is called: a. Westlaw b. WestlawNext c. Tax Management d. Mertens Law of Federal Income Taxation 28. Possibly the world's largest full-text information resource, accessible through mobile devices as well as conventional Page 71

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personal computers, is called:

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a. BNA Bloomberg b. Westlaw c. LexisNexis d. CCH 29. The publications containing a variety of articles and news briefs that are designed to keep readers up to date in specific or general areas of the tax law are called: a. Law Publisher's best b. Tax Periodicals c. Law Review d. Taxation Legal 30. Clicking BNA Picks will present: a. The most popular articles in the database b. Closely related portfolios c. Primary sources that link to the currently open portfolio d. Journal articles and treatises that discuss the current portfolio 31. The service developed by LexisNexis exclusively for tax practitioners is called the: a. LexisNexis Academic b. Tax Research Consultant c. Lexis Advance Tax d. Lexis Portfolios 32. The collection of papers, seminars, lectures, panel discussions, and demonstrations presented at yearly conferences of tax professionals is called the: a. annual proceedings b. annual webinars c. annual awards d. annual law news 33. The Westlaw service to which many schools and universities subscribe, which has a more limited range of data than WestlawNext is called: a. WestlawNow b. Westlaw Universal Research c. Westlaw Campus Research d. Westlaw Taxation Research 34. The process of evaluating the validity of a case and locating additional authority often is called: a. analyzing b. primary researching c. citating d. shepardizing 35. The BNA Portfolios can be accessed directly by clicking on the headings under: Page 73

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a. Cases and Decisions b. Practice Tools c. Expert Analysis d. Indexes and Finding Aids 36. To find a specific publication in Nexus Uni, a researcher can: a. enter the publication name directly into the keyword search box b. use find publication under the Guided Search function c. build more sophisticated searches in Advanced Search d. all of the above 37. The search that uses the West Key Numbering System, which organizes key issues found in court cases into hundreds of numbered topics, is called: a. KeyCite b. KeySearch c. WestlawNext d. Keyword Search 38. BNA Bloomberg is best known in the tax community as the publisher of the: a. BNA Collections b. BNA Tax Management Portfolio c. BNA Bloomberg Tax & Accounting Center d. BNA Citators

39. What are KeySearch and the West Key Number System?

40. How is each BNA Portfolio arranged?

41. Why might some researchers find the citators in Westlaw or Shepard’s superior to those found in Checkpoint or AnswerConnect?

42. How can finding a BNA Portfolio on point with a practitioner’s tax issue be like hiring someone to do the research?

43. What are some of the Tax Analysts publications? Describe them briefly.

44. What are some of BNA's publications? Describe each briefly.

45. What are Scholarly Reviews? Who contributes to the publications? Expand on this.

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Answer Key 1. True 2. True 3. True 4. True 5. False 6. False 7. True 8. False 9. True 10. True 11. True 12. False 13. True 14. False 15. True 16. c 17. c 18. c 19. b 20. a 21. a 22. d 23. a 24. a 25. b Page 75

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26. a 27. a 28. c 29. b 30. b 31. c 32. a 33. c 34. d 35. c 36. d 37. b 38. b 39. Westlaw KeySearch uses the West Key Numbering System, which numbers key issues (topics) found in court

cases into approximately 450 numbered topics. These topics are further subdivided with the result that there are more than 100,000 unique Key Numbers. The KeySearch option, available on the Key Number screen, formulates a query for the researcher based on underlying terms for the topic selected by the researcher and adds the Key Numbers associated with the topic. This type of search is beneficial when the researcher is unfamiliar with the area of tax law and is having difficulty pinpointing keywords to use as search terms.

40. Each BNA Tax Management Portfolio begins with a Portfolio Description, which gives a brief overview of the topic and the order in which the materials will be presented. The Table of Contents follows this description. The remainder of the Portfolio contains two sections: (A) Detailed Analysis and (B) Working Papers.

41. Westlaw was built by attorneys for attorneys, and citations are the centerpiece of the service. Shepard’s is the oldest citation service. Both provide color-coded symbols to assist the researcher in identifying relevant citing cases. Additionally, both services produce a table of authorities allowing for a quick review of citing cases.

42. When a BNA Portfolio is on point with the tax issues, the practitioner can use the Portfolio’s authors as a research associate, by capitalizing on the authors’ expert judgments and references on the relevant topic thereby saving hours of research time. BNA Portfolios cover tax issues in a comprehensive manner.

43. Tax Analysts produces a variety of comprehensive state, federal, and international news, analysis, and commentary publications for tax professionals on a daily, weekly, monthly, and quarterly basis. In addition, Tax Analysts publishes its own tax services. However, what Tax Analysts is best known for in the tax community is its outstanding news publications Tax Notes and Tax Notes Today (TNT).

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The daily Tax Analysts news services, available only online, offer up-to-the-minute coverage of federal (Tax Notes Today), state (State Tax Today), and international (Worldwide Tax Daily) tax news. The weekly print series includes Tax Notes, State Tax Notes, and Tax Notes International. The Tax Analysts newsletters are also available through LexisNexis. Tax Notes Today is updated continually throughout the day, not just once a day, so practitioners can be as up to date as they desire. The amount of information included in these newsletters is staggering.

44.

One of the most important tax newsletters available to practitioners is the BNA Daily Tax Report (DTR). DTR is available online; through wireless devices, including iPhones; and in hard copy. Subscribers may also receive notification of breaking tax news as soon as it occurs with DTR real time e-mail alerts. Showing both breadth in coverage and a quality of analysis similar to the Tax Analysts TNT, DTR offers up-to-date information concerning statutory, administrative, and judicial tax law developments that affect state, federal, and international taxation. In addition, the newsletter contains interviews with governmental officials, articles reviewing current events, and the full text of key documents discussed in the newsletter. Some of these documents are not available from other tax services. Monthly and quarterly indexes are provided.

45.

All major law schools and a few business schools produce publications referred to as law reviews or academic journals. These publications are edited either by faculty members or by students under the guidance of the school’s faculty. Most law reviews also use an outside advisory board comprised of practicing attorneys and law professors at other universities to aid in selecting and reviewing articles. The articles appearing in these scholarly reviews are usually written by tax practitioners, academics, students, or noted commentators. Some law schools produce journals that are limited to a specific area of law, such as constitutional or labor law. Most of the general law reviews feature one to three tax articles per year; however, some law reviews are dedicated exclusively to tax matters.

Besides law schools, academic organizations such as the National Tax Association (NTA) and the American Taxation Association (ATA) publish scholarly journals and proceedings from their annual conferences.

Indicate whether the statement is true or false.

1. A native country’s taxation of its citizens’ foreign-source income involves inbound transactions. a. True b. False 2. A ―saving clause‖ in U.S. treaties prevents U.S. residents from using treaty provisions to avoid taxes on U.S. source income. a. True b. False 3. U.S. tax law uses a territorial approach for taxing non-U.S. taxpayers. a. True b. False 4. The transfer pricing rules target multinational companies that use the price-setting process in intercompany transactions to report low taxable income in high-tax countries and high taxable income in low-tax countries. a. True b. False Page 77

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5. Generally, inventory sales are sourced by the location of the transaction.

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a. True b. False 6. BNA offers Country Portfolios covering the taxation of business operations in specific countries. a. True b. False 7. In practice, most of the countries in the world do not use a pure worldwide model of taxation. a. True b. False 8. U.S.-adopted tax treaties usually do not address state and local tax issues. a. True b. False 9. The ultimate goal of a corporate tax director in international tax planning is to reduce the company’s overall global effective tax rate. a. True b. False 10. Tax Notes International, published by the Tax Analysts, is a weekly publication. a. True b. False 11. Lexis Advance Tax offers the business primers ―Doing Business in…‖ for a variety of countries, which provide an overview of different countries’ tax environments. a. True b. False 12. Originally, the International Bureau of Fiscal Documentation (IBFD) was simply a document repository, but now it provides expert research products. a. True b. False 13. The U.S. has a modified territorial system of taxation wherein the earnings of a controlled foreign corporation are subject to immediate taxation in the U.S. a. True b. False 14. Checkpoint offers the unique RIA International Create-A-Chart function that facilitates the creation of tax-comparison charts with links to controlling authority, detailed explanations, and analysis by WG&L treatises. a. True b. False 15. With a territorial model of taxation, a foreign tax credit is needed to ensure that the income is not taxed twice. a. True Page 79

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b. False 16. A transaction country is a country where the taxpayer resides or an entity is located. a. True b. False 17. CCH AnswerConnect offers Tax Notes International. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

18. The law that prevents the income taxation of interstate commerce if a company’s only business within the state is the solicitation of orders for sales of tangible personal property is called the: a. Interstate Commerce Law b. Interstate Income Law c. Legal Perspective Law d. Public Law 86-272 19. U.S. treaties can be accessed quickly in the BNA International Portfolio under which heading? a. Country Portfolios b. Global Tax Guide c. Tax Treaties d. International Tax Monitor 20. Which of the following statements describes the international tax services offered by LexisNexis? a. LexisNexis contains a Westlaw International Tab. b. Only primary sources are available. c. LexisNexis contains international publications by BNA, CCH, Wiley, and Tax Analysts. d. All of the these statements accurately describe LexisNexis international tax services.

21. Which of the following clauses of the federal Constitution immunizes the federal government from taxation by the states? a. Due Process Clause b. Commerce Clause c. Supremacy Clause d. Equal Protection Clause 22. The CCH AnswerConnect International Practice Area Service includes the following: a. Worldwide Tax Rates and Answers b. Permanent Establishment Smart Chart c. International Tax Topics by country d. International Tax Treaties e. all of these are correct.

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23. Foreign taxpayers (also known as nonresident aliens) generally are subject to federal taxes only on: a. average wages after taxes b. the tax wedge c. U.S. source income d. all income 24. The Bloomberg BNA service makes finding state tax information easy by the use of: a. a keyword search by state or states b. the Go To States search c. selecting a portfolio and then a state d. all of these are correct 25. The federal clause most frequently providing the basis for state taxation disputes related to the states' power to tax out- of-state individuals and entities is the: a. Supremacy Clause b. Federal Clause c. Commerce and Due Process Clause d. Legal Perspective Clause 26. Most states in the United States use which type of judicial system? a. only superior courts b. one-tier judicial system c. two-tier judicial system d. three-tier judicial system 27. The State Taxation treatise is published by: a. Bloomberg BNA b. WG&L c. CCH d. Westlaw 28. Once tax statutes are enacted, they must be interpreted and enforced. These duties usually fall to entities created by either statutory or constitutional provisions. These entities are called: a. state legislatures b. constitutional statutes c. judicial systems d. administrative agencies 29. Which federal Constitutional clause limits the territorial scope of a state’s taxing authority? a. Supremacy Clause b. Commerce Clause c. Equal Protection Clause d. Due Process Clause 30. The details of the tax law for a specific country can be found in CCH AnswerConnect by: Page 81

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a. jurisdiction b. topic c. jurisdiction or topic d. AnswerConnect only provides US-based tax law.

31. Thomson Reuters Checkpoint State and Local Tax (SALT) service is a comprehensive analysis of: a. state imports and exports b. state and local taxes c. state and local tax issues d. international tax issues 32. The OECD is an organization known for its: a. belief in democratic governments and market economies b. role in helping to obtain multilateral economic agreements for countries c. publication of economic and social data and statistics d. all of these are correct 33. The backbone of the CCH AnswerConnect State service combines detailed explanations, primary source materials, and practical compliance guidance. CCH calls it: a. the all states database b. search states c. state tax reporters d. state tax unlimited 34. In today's expanding tax planning and compliance, tax practitioners need to service their clients by adding to federal tax planning: a. tax analysis b. investment planning c. state and local tax planning d. estate planning 35. Tax practitioners need to expand their local service to clients to include: a. income tax b. state and local tax c. multijurisdictional taxation d. tax planning 36. The Checkpoint tax product which provides a comprehensive set of analytical treaties and texts is named: a. RIA International Taxes Weekly b. Tax Management Portfolios c. RIA International Tax Library (ITL) d. Worldwide Tax Treaties 37. The clause with a goal to create a national economy unencumbered by discriminatory, arbitrary jurisdictional standards of the states is called the: Page 82

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a. Supremacy Clause b. Due Process Clause c. Commerce Clause d. Equal Protection Clause 38. Companies conducting business in more than one state are subject to multistate taxation. In order to create uniformity and consistency in the measurement and determination of business and nonbusiness income, the following legislation was drafted: a. Uniform Division of Income for Tax Purposes b. Multilateral Income Agreement c. Income Treaty d. Multistate Accord 39. The state entity responsible for enacting laws regarding state revenue sources and consequently passing bills amending and augmenting their state’s taxing code is called the: a. judicial agency b. administrative body c. state legislature d. state tax commission 40. The tax service that provides state-by-state access to all the state-level tax laws and regulations as well as a host of analysis and other editorial materials is called: a. IntelliConnect State b. Bloomberg BNA State c. Checkpoint SALT d. Lexis Advance Tax 41. The easiest way to find specific state tax information in Nexis Uni is: a. using Narrow By Jurisdiction and a keyword search b. browsing the state tax reporters c. Nexis Uni does not have state tax information d. none of these are correct 42. Generally, state constitutions limit the rates and types of taxes that can be imposed, and they require that

tax laws show uniformity, provide equal protection, and have a: a. good background b. profitable end c. public purpose d. referendum 43. Bloomberg BNA’s Premier International Tax Library includes: a. an international create-a-chart feature b. CCH’s Tax Treaties Reporter c. Tax Notes International d. Foreign Income Portfolios Page 83

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44. Which of the following is not a broad earnings categorization for a controlled foreign corporation? a. Subpart F income b. certain tax-exempt income c. GILTI d. transfer pricing 45. Tax treaties can prevent double taxation by: a. providing reduced tax rates and reduced withholding b. not allowing the exemption of certain types of income from taxation c. including a ―savings clause‖ d. all of these are correct 46. Generally, local governments are authorized to impose taxes by the: a. state statutory or constitutional provisions b. state Governor c. President of the United States d. Chairman of the U. S. Treasury 47. When deciding where to locate new plants or headquarters, businesses must consider the level of: a. revenues b. expenses c. diversions d. state and local taxation 48. The Internet site www.taxsites.com which contains links to numerous tax resources is called the: a. E-mail Highlights b. Tax and Accounting Sites Directory c. Cyberspace Tax Research d. Complete Internet Tax Research 49. The Tax Service that offers an extensive library of databases for state tax research reached through its State Materials tab is called: a. LexisNexis Academic b. Bloomberg BNA c. Westlaw Campus d. Checkpoint SALT 50. From an economic perspective, the objective of the international tax rules of each country should be to: a. prevent other countries from copying it b. ease taxing system interactivity c. shelter profits d. discourage investments

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51. Briefly explain the U.S. model for international taxation of controlled foreign corporations.

52. How is the source of income determined for the purpose of taxation? Briefly identify the sourcing rules for the following types of income: dividends, services, sales of inventory and income from property.

53. Why are taxpayers emphasizing multijurisdictional tax planning?

54. ―The Code provisions always take precedence over treaty provisions.‖ Comment.

55. What is the International Bureau of Fiscal Documentation, and what is its mission?

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Answer Key 1. False 2. True 3. True 4. True 5. True 6. True 7. True 8. True 9. True 10. True 11. True 12. True 13. False 14. True 15. False 16. False 17. False 18. d 19. c 20. c 21. c 22. e 23. c 24. d 25. c Page 86

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26. d 27. b 28. d 29. d 30. c 31. b 32. d 33. a 34. c 35. c 36. c 37. c 38. a 39. c 40. d 41. a 42. c 43. d 44. d 45. a 46. a 47. d 48. b 49. c 50. b 51. Earnings from a controlled foreign corporation (CFC) now fall Page 87

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into three broad categories: 1. Subpart F as generally defined under old law but taxed at the new 21 percent rate 2. A narrow category of exempt income, which is not subject to U.S. tax 3. A new category of income called Global Intangible Low-Taxed Income (GILTI) eligible for a new 50 percent deduction, reducing the tax rate—at least theoretically—to 10.5 percent, or half the tax rate applicable to subpart F income.

In order to provide some parity between the taxation of GILTI earned by a CFC and foreign income earned directly by a U.S. corporation, the new law includes a new regime called Foreign Derived Intangible Income (FDII), which reduces the tax rate on income from certain export sales, licenses, and services provided to persons outside the United States.

52. Source determinations govern which country should properly be taxing income. The source determination of income is dependent on performance location and/or property location. Income from interest and dividends generally is sourced by the residency of the payor. Thus, dividends from a U.S. domestic corporation and interest from a state bond are sourced within the United States. However, to attract foreign investment, the United States allows a tax exemption on interest paid from a U.S. bank to a nonresident. For income from property, such as rents, royalties, or gains from property sales, it is the location of the property that is relevant. Sales of inventory often are sourced by the location of the transaction, not by the origin of the inventory. Thus, inventory purchased in a foreign country but sold within the United States produces domestic sourced income. Income for personal services usually is sourced according to where the services are performed, not the residency of the compensating entity or the citizenship of the personal service provider.

53. There are numerous reasons for the emphasis on state and local tax planning. State and local tax environment is becoming increasingly complex and challenging to navigate due to states' ever-increasing expansion of their taxation systems. Taxpayers are finding it increasingly difficult to stay abreast of and comply with the evolving requirements. For many businesses this is an untapped planning opportunity in which practitioners can provide value-added services.

While each of the various taxes paid to states may be small, the percentage of total state taxes paid by a business can be almost one-half of its tax bill. Coordinated state tax planning can substantially reduce this percentage, especially where the taxpayer operates in various state and local taxing jurisdictions and has some flexibility as to where its property and labor force are located. International taxation is experiencing the same increasing complexity, and compliance and strategy are becoming more commonplace as more firms expand into global markets.

54. Sometimes, the Code and tax treaties may provide conflicting treatment of some types of foreign sourced income.

Unlike most countries, in the United States, treaty provisions do not take precedence over the Code. Instead, efforts are made, to the extent possible, to apply these provisions in harmony with each other if a treaty provision and a Code provision are in conflict. If this is not possible, then the most recently issued provision generally prevails.

55.

The International Bureau of Fiscal Documentation (IBFD) is a not-for-profit organization organized in 1938 to provide authoritative expertise to tax practitioners around the globe with regard to cross-border taxation. The IBFD relies on independent tax research as well as its research specialists to contribute international tax information and education materials to its customers. Originally the IBFD was simply a tax document repository, but now it focuses on research products, which it distributes to both the private and public sectors. Because it is an independent agency, the IBFD strives to produce objective and unbiased products, including software, tax courses, personalized client research (for private and governmental use), daily newsletters, journals, and numerous books on international tax issues. Besides its publications, the IBFD has a library that is regarded as the world’s leading resource for international and comparative taxation. Free online access to this library is available at www.ibfd.org.

Indicate whether the statement is true or false.

1. In slides and other visual aids, fancy fonts and many colors should be used to create a more sophisticated presentation.

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a. True b. False 2. More research engagements entail closed-fact settings than open-fact situations. a. True b. False 3. Generally, it is better to cite more recent court decisions than older decisions to support one’s position. a. True b. False 4. Generally, the file memo should be accompanied in the file by briefs of one or more pertinent cases or administrative pronouncements. a. True b. False 5. IRS agents are not bound by District Court decisions. a. True b. False 6. Even if all of the judicial precedent supports a taxpayer’s position, the court still may hold against the taxpayer. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

7. Which of the following statements is CORRECT with respect to conflicting tax laws? a. Revenue Rulings and Revenue Procedures seldom are held to be invalid by a court. b. Regulations are frequently held to be invalid by a court. c. The decisions of courts that are higher in the judicial hierarchy should receive additional precedential weight. d. All of the these are correct.

8. Which of the following statements is INCORRECT regarding letters to unsophisticated clients? a. Citations to controlling authority should not be included. b. The letter should give the answer in the first paragraph. c. A practitioner should always attach a file memo to give the client more detailed information. d. All of these are correct.

9. The best way for a practitioner to confirm his or her understanding of the discussion in a telephone conversation with a client is to: a. tape all client telephone calls b. take accurate notes during the conversation c. send a hard copy of a follow-up letter to the client d. ensure important discussions with clients only take place face to face 10. Which of the following is CORRECT with respect to a file memo?

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a. It should include only the strengths of the client’s position. b. It should include a list of the tax issues that are in dispute and a matching conclusion for each identified issue. c. It should be prepared only in closed-fact situations. d. All of these are correct.

11. Other factors being equal, decisions of which of the following Circuit Courts should be given additional weight when evaluating sources? a. the Second and Ninth Circuits b. the Sixth and Ninth Circuits c. the Federal and First Circuits d. all the these courts have equal weight 12. The heart of tax research communication is: a. the file memo b. primary source material c. secondary source material d. network links 13. Which of the following statements is INCORRECT regarding the use of visual aids in oral presentations? a. Visual aids should be used to illustrate ideas that are difficult to convey strictly with words. b. On average, allow at least three minutes of spoken presentation for each slide. c. Slides should be colorful with substantial amounts of text. d. All of these are correct.

14. Effective written business communication often makes use of which of the following guidelines? a. Write in direct, active voice and use short sentences. Organize your writing in paragraphs and use transition words to help the reader follow your logic and thought process. b. Consider the reader--all audiences are not the same. Writing for another tax professional is very different from writing for a client who is not skilled in tax law. c. Be organized. Make sure you understand the objective of your communication and organize your thoughts and your message before you start to write. d. All of these are correct.

15. IRS agents are bound only by which types of authority? a. the Code b. the Code, administrative pronouncements and Supreme Court decisions c. Second and Ninth Circuit Court Decisions d. the Code and Regulations 16. Initial determinations of the facts of a tax issue are likely to be incomplete because: a. taxpayers tend to see the dispute only from their side b. taxpayers not being trained in the tax law may be unable to determine which facts are important to convey c. fact-gathering often depends on the reliability of the memory of taxpayers d. all of these are correct Page 90

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17. To effectively convey the results of a tax research project, the practitioner must: a. consult IRS officials b. apply professional judgment and communication skills c. have an informal discussion with the client d. all of these are correct 18. In order to provide the greatest amount of information to the greatest number of listeners, the speaker should direct remarks to the: a. front of the room b. back of the room c. highlights and general results of the research d. the host or hostess 19. The audience for tax research communication is primarily: a. the client b. the practitioner’s supervisor c. none of these are correct d. all of these are correct 20. Sound writing tips include: a. be brief and to the point b. write in direct, active voice and use short sentences c. use correct grammar and punctuation d. all of these are correct 21. Tax-related communications can come in many forms, for example: a. a posting on a general, business, or tax-oriented blog b. a speech to a general audience c. an article for publication in a professional journal d. an appearance on a broadcast with more or less serious tone e. all of these are correct 22. In client files, a practitioner should include all of the following types of underlying legal authority EXCEPT: a. underlined or highlighted portions of important legal documents b. case, regulation, and ruling briefs that are pertinent to the file memo c. a listing of legal citations and computer files that would show a researcher’s analysis d. all of this information should be included in a client file 23. An effective speaker should: a. not be afraid of silence b. get physically close to the audience c. vary the pitch of his or her voice d. all of these are correct 24. The two major elements of a client file are: Page 91

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a. invoices and full-text court opinions b. internal firm memos and invoices c. a client letter and a research memo d. a written summary of telephone conversations and e-mails

25. State the purposes for which a file memorandum is designed.

26. Identify the major elements of a client letter, and briefly discuss the difference between a letter to a sophisticated client and to an unsophisticated client.

27. Identify five types of tax-related communications.

28. You are preparing for an audit with an IRS agent for an important client. Your research has uncovered several favorable rulings and court decisions. What are the key points that should guide you in evaluating sources of the law?

29. Amy and Frank got married and they have approached you seeking your views about the gift tax and income tax consequences on the following facts.

As per the prenuptial agreement, Amy gave to Frank $100,000 of appreciated stock on the morning of their wedding.

Amy’s basis in the stock was $35,000. Under the terms of the agreement, Frank surrendered all other marital rights and claims to Amy’s assets in exchange for these securities. Both Frank and Amy are residents of Arizona.

The file memo you prepared contains the following legal conclusions, based on controlling authority: • IRC Section 2501 imposes a tax on the transfer of property by gift, not when it is received by the donee, but upon the transfer. The donor is taxed, not the donee.

• The Supreme Court has held that prenuptial transfers in relinquishment of marital rights are not adequate and full consideration for the transfer of property. So, the transfer is treated as a gift.

• Since the prenuptial agreement is enforceable only after the marriage, the transfer has not taken place until after the marriage occurred. Thus, the transfer is eligible for the gift tax marital deduction.

• Although the transaction resulted in a gift, no gift tax is imposed due to the application of the annual exclusion and the unlimited gift tax marital deduction.

• Neither party recognizes gross income upon release of the marital rights. Gross income does not include the value of property acquired by gift.

• The donee takes the donor’s income tax basis in the transferred property.

Based on the information provided above, draft a client letter to an unsophisticated client explaining the gift tax consequences and the income tax consequences of the stock transfer.

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Answer Key 1. False 2. True 3. True 4. True 5. True 6. True 7. c 8. c 9. c 10. b 11. a 12. a 13. c 14. d 15. b 16. d 17. b 18. c 19. d 20. d 21. e 22. d 23. d 24. c 25. A file memorandum is designed to: Page 93

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• organize the facts, issues, and conclusions of the project; • facilitate a review of the research activities by the practitioner’s supervisors or colleagues; and • allow for a subsequent examination of the research issue by the original researcher or by his or her successor, with respect to the same or another client’s identical or related fact situation.

26. In general, the client letter should be structured as follows: • Salutation/social graces/general conclusion.

• Summary of the research project results.

• Objective of the report.

• Statement of facts and disclaimer as to the scope of the tax professional’s knowledge base.

• Summary of critical sources of law that lead to result.

The ―answer‖ to the client’s question should be in the first paragraph. A letter to an unsophisticated client should not include any detailed references to the controlling law, but should only discuss the research results in a general way. A letter to an unsophisticated client should not use technical tax terms, but instead should be written in a more conversational style. The file memo should not be attached to an unsophisticated client letter, but may be attached for a more sophisticated client.

27. Tax-related communications can include any of the following: • Telephone call or text message.

• Informal discussion in person or via e-mail.

• Letters prepared for someone familiar with the tax laws or someone unfamiliar with the tax laws.

• Tax articles for publication in a newspaper, magazine, or professional journal.

• Directed discussion among tax peers.

• Speech to general audience or to a conference of tax professionals.

• File memoranda to be read in the future by the author or by a peer with similar training.

• Appearance on a news broadcast or program.

• Posting on a general, business, or tax-oriented blog.

28. The following points must be considered in evaluating the research results relating to favorable rulings and court decisions: • The IRS agent is bound only by the Code, administrative pronouncements (Regulations, rulings, notices, etc.), and Supreme Court decisions. Support your best arguments by building on a use of those items.

• The most important Court of Appeals decisions are those from the taxpayer's circuit. If the taxpayer’s circuit has not ruled on the issue, then look to the Second, Ninth, and Federal Circuits.

• Regulations are seldom held to be invalid while Revenue Rulings and Revenue Procedures are frequently modified or held to be invalid by courts.

• Generally, taxpayers are bound by decisions of the national courts—the Tax Court and Court of Federal Claims— unless they are overturned in a pertinent appeal or the taxpayer’s Circuit has held differently.

• Higher-level court decisions are more important than lower-level court decisions.

• More recent decisions generally are better authority than older decisions.

29. Client Letter: Citi Tax Services Tucson Page 94

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San Luis AZ 85706 October 08, 20XX Amy and Frank Skyline Heights San Luis, AZ 85738 Dear Frank and Amy, Thank you for approaching me on the matter relating to the tax treatment of your prenuptial agreement. I understand that the transfer of appreciated stock that took place on the morning of the wedding is as per the prenuptial agreement. It is my pleasure to inform you that the transaction will not result in the imposition of any federal tax for either of you.

My research has uncovered that the Supreme Court has held that the transfer of property under a prenuptial agreement is not supported by "full and adequate consideration" because relinquishment of marital rights does not amount to "full and adequate consideration." Therefore, it is to be treated as a gift.

Fortunately, however, the treatment of your transaction as a gift will not result in the imposition of federal income tax or federal gift tax.

Federal income tax is not imposed upon the transfer because "gifts" do not form a part of gross income either for the donor or for the donee. Although a gift has occurred, no gift tax is due, because the unlimited gift tax marital deduction neutralizes the transfer.

This research has been restricted to the identical cases, that is, in which, pursuant to a prenuptial agreement, a taxpayer surrendered his or her other marital rights in exchange for a sum of money or other property.

My conclusion is based upon the facts that you have given me and upon the reliability of the court cases that I found.

Sincerely, Good Student, CPA for Citi Tax Services

Indicate whether the statement is true or false.

1. Spreading income among related taxpayers is one of the goals of tax planning behavior. a. True b. False 2. Any business-related expenses that are incurred in connection with the determination of a tax are deductible. a. True b. False 3. Tax planning analyses should be based on the average tax rates that the individual will pay or save by adopting a particular course of action. a. True b. False 4. When tax rates are constant, delaying income recognition or accelerating deductions can be beneficial. a. True Page 95

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b. False 5. Under a proportional tax rate system, the tax rate is constant. a. True b. False 6. The effective average tax rate can be found by dividing the total tax liability by the economic income. a. True b. False 7. Taxpayers are rewarded more for finding ways to save taxes than for earning an equal amount in the marketplace. a. True b. False 8. The judicial doctrine "business purpose" can decrease the taxpayer’s ability to employ effective planning techniques. a. True b. False 9. Taxpayers can use the step-transaction doctrine to obtain various tax advantages. a. True b. False 10. Taxpayers can always minimize their tax liability simply by moving income and assets out of one jurisdiction to another. a. True b. False 11. The progressive nature of the tax system tends to increase the advantage of income splitting. a. True b. False 12. Whenever a series of transactions results in significant tax savings, the IRS may attempt to apply the concept of substance over form by collapsing several transactions into one. a. True b. False 13. With respect to tax planning activities, the decision maker must compare the after-tax benefits with the pretax costs. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

14. Under a progressive tax rate system, the applicable tax rate: a. is applied against the taxpayer’s net holdings of tangible assets b. decreases as the tax base grows larger c. increases as the tax base grows larger Page 96

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d. is independent of the tax base 15. Most sales and property taxes in the United States employ a: a. proportional rate structure b. regressive rate structure c. progressive rate structure d. consumption rate structure 16. Which of the following tax law rules creates incentives for tax planning? a. The federal income tax itself is deductible in determining taxable income. b. Reducing the amount of income tax that is paid decreases a taxpayer’s allowable deductions. c. The federal income tax itself is not allowed as a deduction in determining taxable income. d. None of these are correct.

17. Which of the following tax rate systems is applicable to the U.S. individual income tax? a. proportional tax rate system b. regressive tax rate system c. progressive tax rate system d. none of these are correct 18. Which of the following is the basic formula for computing a taxpayer’s tax liability? a. Tax Liability = Tax Base ÷ Tax Rate b. Tax Liability = Tax Base × (1 – Tax Rate) c. Tax Liability = Tax Base × Tax Rate d. None of these are correct 19. Where ATC = after-tax cost, BTC = before-tax cost, and MTR = marginal tax rate, the after-tax cost of tax planning can be expressed as: a. ATC = BTC × (1 – MTR) b. a factor of the time value of money c. MTR × taxable income = ATC d. ATC = BTC ÷ (1 – MTR) 20. A proportional tax rate system represents: a. a progressive tax rate structure b. a flat tax rate structure c. the U.S. federal income tax system d. none of these are correct 21. The tax rate which is computed by simply dividing the total tax liability by the corresponding tax base is known as the: a. capital gains tax rate b. average tax rate c. effective tax rate d. marginal tax rate Page 97

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22. Allowing an investment to increase in value without selling it is an example of tax planning by: a. changing the timing of recognition of taxable income b. changing the character of income c. spreading income among related parties d. none of these are correct 23. Taxpayers often can legally reduce their exposure to taxation by: a. avoiding the recognition of taxable income b. deducting federal taxes c. not appearing before tax officials d. postponing deductions 24. Which of the following is a feature of a properly accomplished tax planning? a. It allows the tax professional to exercise a higher degree of creativity. b. It forces the client to identify financial goals and general means by which to achieve them. c. It affords the practitioner the greatest possible degree of control over the prescribed transactions and the tax consequences. d. All of these are correct.

25. Investing in non-dividend-paying stock that is expected to appreciate yearly by 5 percent instead of investing in 5 percent corporate bonds is an example of tax planning by: a. spreading income through portfolio diversification b. avoiding income recognition c. changing the timing of recognition of taxable income d. changing the character of income 26. Choosing tax-free fringe benefits instead of an equivalent hike in salary is an example of tax planning by: a. accelerating income recognition b. changing the timing of recognition of taxable income c. avoiding income recognition d. all of these are correct 27. Tax planning: a. is a completely legal means for saving taxes b. is the same as tax evasion c. endeavors to understate the taxpayer’s real wealth d. all of these are correct 28. Which of the following is the most common tax that is found in contemporary industrialized societies? a. a tax on consumption b. a proportional tax c. a tax on income d. none of these are correct Page 98

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29. Often, by moving assets or income out of one government authority into another, tax reductions can be affected. This process is called: a. changing the timing of recognition of income b. changing the timing of recognition of deductions c. deferring the payment of tax d. changing tax jurisdictions 30. The tax rate that is the present value of the additional tax on one dollar of additional taxable income is referred to as the: a. nominal tax rate b. effective tax rate c. before-tax cost d. none of these are correct 31. Under a regressive tax rate structure, the applicable tax rate: a. increases as the tax base grows larger b. remains unchanged irrespective of the level of the tax base c. best reflects the capacity of the taxpayer to pay d. decreases as the tax base grows larger 32. Which of the following are the two pervasive judicial doctrines that often limit the taxpayer’s ability to employ effective planning techniques? a. the progressive tax rate requirement and marginal rates b. business purpose and substance over form c. business purpose and changing tax jurisdiction d. all of these are judicial doctrines that limit effective tax planning

33. Harrison is subject to a 40 percent overall marginal tax rate. Is he better off if he receives a tax-free fringe benefit of $4,000 than if he receives an equivalent increase in his salary? Why or why not?

34. What is a statutory tax trap? Give an example.

35. Tax planning has been said to offer an opportunity for the most psychologically and financially rewarding work in tax practice. What is it about tax planning that would lead one to this conclusion?

36. a) Michael formed a new corporation by investing $200,000 cash. Following the advice of his tax consultant, Michael designated $120,000 to be used for the purchase of corporate stock and $80,000 as a loan to the corporation. What tax advantage does this arrangement have over structuring the entire investment as a purchase of stock? Explain. b) Dorothy has $30,000 to invest and is considering a corporate bond that pays 7 percent annual interest or a nondividend-paying stock that is expected to appreciate by 7 percent each year. Given that both investments are of similar risk, and the long-term capital gains tax rate is lower than the ordinary income tax rate, which option should Dorothy choose? Why? c) Gabriel is the sole shareholder of a management-consulting corporation. In addition, he has invested in passive rental Page 99

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activities that generate $20,000 per year in passive losses. According to the Code, such losses from passive activities cannot be applied as deductions to offset other types of taxable income. Advise Gabriel as to how he can salvage the $20,000 deduction.

37. A corporate taxpayer, who is subject to a marginal state and federal tax rate of 30 percent, is considering two mutually exclusive alternatives. Alternative A is to hire a public accounting firm at a cost of $5,000 to undertake research on a tax avoidance plan. If the plan is successful, it will save the corporation $4,900 in federal income taxes.

The probability of success for the plan is 75 percent. Alternative B is to hire a marketing firm at a cost of $4,500 to develop a new marketing strategy. If it is successful, the new marketing strategy would generate new revenues of $5,500.

The probability of such success is 80 percent.

Which alternative should the corporation choose?

38. Identify the five goals of tax planning behavior and give an example of each.

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Answer Key 1. True 2. True 3. False 4. True 5. True 6. True 7. True 8. True 9. False 10. False 11. True 12. True 13. False 14. c 15. a 16. c 17. c 18. c 19. a 20. b 21. b 22. a 23. a 24. d 25. d Page 101

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26. c 27. a 28. c 29. d 30. d 31. d 32. b 33. Harrison would be better off if he receives a tax-free fringe benefit of $4,000 instead of an equivalent increase in his salary.

Value of compensation received Less: Tax on employee’s compensation After-tax increase in employee’s wealth

Salary increase $4,000 1,600 $2,400

Fringe benefit $4,000 $4,000

34. Statutory tax traps are rules designed by Congress to prevent certain techniques of tax avoidance. For example, Section 482 of the Internal Revenue Code gives the IRS the power to reallocate both income and deductions among related companies to reflect ―true taxable income.‖ Under that section, the IRS may make an allocation of income from one foreign subsidiary to another foreign subsidiary of a U.S. multinational corporation to reflect the market value of services provided by one subsidiary to the other. The IRS will make this allocation if the subsidiary providing the services does not charge market value for those services.

35. For most practitioners, tax planning represents the ―glamour‖ end of the practice because properly accomplished tax planning (1) forces the client to identify broad financial goals and general means by which to accomplish them, thereby engaging the practitioner in more activities than otherwise might be the case; (2) allows the tax professional to show a higher degree of creativity than in any other part of the practice; and, (3) provides the practitioner the greatest degree of control over the prescribed transactions and their tax consequences, especially in open-fact situations.

36. a) Michael formed a new corporation by investing $200,000 cash. Following the advice of his tax consultant, Michael designated $120,000 to be used for the purchase of corporate stock and $80,000 as a loan to the corporation. In this way, if Michael wants to receive large amounts of cash back from the corporation in the future, the entity simply will repay part or all of the loan principal to him, tax free, rather than making a large (taxable and nondeductible) dividend payment. Michael also can direct the corporation to pay interest on the loan; such payments are deductible by the corporation. Of course, both interest and dividends are taxable to Michael when he receives them. b) Dorothy has $30,000 to invest and is considering a corporate bond that pays 7 percent annual interest or a nondividend-paying stock that is expected to appreciate by 7 percent each year. Interest on corporate bonds is taxed as ordinary income at ordinary tax rates, which are higher than the long-term capital gains tax rate. If risk is similar for both investments, it is better to choose the investment that results in less tax liability. Capital gains on investments in non- dividend-paying stock are taxed only when the stock is sold, whereas interest on investment in corporate bonds is taxed on a yearly basis. In the given case, Dorothy should choose to invest in non-dividend-paying stock that appreciates by 7 Page 102

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percent each year, as it would result in lower tax liability. c) Gabriel is the sole shareholder of a management-consulting corporation. In addition, he has invested in passive rental activities that generate $20,000 per year in passive losses. According to the Code, such losses from passive activities cannot be applied as deductions to offset other types of taxable income. Accordingly, Gabriel cannot reduce current taxable income by the $20,000 passive loss from his rental activities. However, as the dominant shareholder of his corporation, Gabriel may be in a position to salvage the $20,000 deduction. If he reduces his salary from the corporation by $20,000 and instead takes from the corporation a $20,000 properly structured lease payment for the use of property that he owns which the corporation uses for business purposes (such as office equipment or automobiles), he may be able to create $20,000 in passive income from rental activities, against which the passive loss can be offset.

37.

Before-tax cost Tax Reduction (30%) After-tax cost

Alternative A Alternative B $5,000 $4,500 -1,500 -1,350 $3,500 $3,150

Possible pretax payoff Probability of success Expected pretax payoff Tax on expected payoff (30%) Expected after-tax payoff

$4,900 × 75% $3,675 0 $3,675

$5,500 × 80% $4,400 1,320 $3,080

Excess of after-tax payoff over after-tax cost

$ 175

$ (70)

Even though Alternative B offers a higher pretax payoff, a lower before-tax cost, and a higher probability of success, Alternative A should be accepted.

38. The five main goals of tax planning are: • Avoiding recognition of taxable income, such as choosing to receive a tax-free fringe benefit rather than an increase in a taxable salary.

• Changing the timing of recognition of income, gains, deduction, losses, and credits. For example, a cash method taxpayer can postpone recognition of income by waiting to bill clients until next year.

• Changing tax jurisdictions. A multistate company could relocate its warehouse and distribution center to a jurisdiction with a lower corporate income tax rate.

• Changing the character of income. A taxpayer can invest in a non-dividend-paying stock which will generate capital gains upon sale instead of a corporate bond, where the interest is taxed currently as ordinary income.

• Spreading income among related taxpayers. Taxpayers can use appropriate trusts to shift pretax income to their aging parents who are in a lower tax bracket.

Indicate whether the statement is true or false.

1. A taxpayer’s appeal must be in written form if the total proposed additional tax and penalties exceed $2,500. a. True b. False Page 103

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2. Form 911 is a Request for Taxpayer Advocate Assistance. a. True b. False 3. The objective of the Appeals Office is to resolve tax controversies without litigation on a basis that is fair and impartial to both the government and the taxpayer. a. True b. False 4. Generally, the IRS selects returns for examination through the use of mathematical models, including correlations and discriminant functions. a. True b. False 5. The National Research Program (NRP) provides statistics that are used in the development and update of the DIF formulas. a. True b. False 6. A power of attorney is necessary when a qualified representative goes to the IRS to represent a taxpayer. a. True b. False 7. The IRS examines each and every return critically in order to generate additional revenue for the Treasury. a. True b. False 8. A field examination is usually limited to an examination of corporations and individual business returns. a. True b. False 9. A taxpayer may be represented before the IRS only by attorneys. a. True b. False 10. The Chief Counsel is appointed by the President and reports to the Commissioner of the IRS. a. True b. False 11. Individual taxpayers have less than a 1 percent chance of being audited. a. True b. False 12. In absence of an administrative summons, a taxpayer cannot be required to accompany the representative to an interview. a. True Page 104

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b. False 13. The Tax Exempt and Government Entities (TEGE) Division of the IRS comprises three business divisions: employee plans, exempt organizations, and governmental entities. a. True b. False 14. Economic-reality factors are considered by the IRS in selection of returns for audit only where it has some other evidence that the taxpayer has over reported taxable income for the year. a. True b. False 15. There is a general common law privilege of confidentiality for non-criminal tax matters that exists between a taxpayer and his or her tax practitioner. a. True b. False 16. The IRS was established by Congress on July 1, 1862, to meet the fiscal needs of the Civil War. a. True b. False 17. The Appeals Office has the exclusive and final authority to settle cases that originate in any district irrespective of its jurisdiction. a. True b. False 18. A field audit by the IRS is always conducted at the taxpayer’s premises. a. True b. False 19. In cases where an IRS examiner questions only one or two items on a selected return, an examination is typically conducted by mail, called a correspondence examination. a. True b. False 20. The number of routine math errors has increased sharply due to increase in electronic filing. a. True b. False 21. A RAR contains a brief explanation of the proposed adjustments and lists the balance due or the overpayment. a. True b. False 22. The IRS treats an adjustment in tax resulting from an unallowable item identified in a return as a correction of a mathematical or clerical error. a. True b. False Page 105

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Indicate the answer choice that best completes the statement or answers the question.

23. The National Taxpayer Advocate: a. represents the IRS in Tax Court cases b. administers a taxpayer-intervention system c. assists the IRS in preparing proposed legislation, treaties, regulations, and executive orders d. prepares IRS rulings and other written determinations 24. The highest ranking legal adviser of the IRS is the: a. Attorney General b. Chief Attorney c. District Attorney d. Chief Counsel 25. The Tax Court will review a taxpayer’s case, provided that he or she files a petition with the court within: a. 10 days of the date of his or her statutory notice of deficiency b. 60 days of the date of his or her statutory notice of deficiency c. 30 days of the date of his or her statutory notice of deficiency d. 90 days of the date of his or her statutory notice of deficiency 26. After the assessment has been made, the taxes assessed must be collected within: a. 2 years b. 10 years c. 5 years d. 8 years 27. An office examination is scheduled when a selected return for examination: a. belongs to a taxpayer who previously was found guilty of manipulating a return b. belongs to a taxpayer who resides near the IRS local office c. requires a mere verification of record-keeping d. involves one or more issues that will require some analysis and the exercise of the IRS personnel’s judgment 28. Your client has just received an IRS summons to appear for an interview. The following statements are CORRECT concerning this interview EXCEPT: a. Provided your client gives prior notice to the IRS, the taxpayer may record the interview. b. The IRS may record the interview but must provide a transcript of the recording to the taxpayer if he requests a copy and pays for the duplication charges. c. Notes may not be taken by either the IRS agent or the taxpayer during the interview. d. The IRS investigator must explain various taxpayer rights to your client before commencing the interview.

29. Which of the following issues would most typically NOT be handled as a correspondence examination? a. mathematical errors b. clearly defined unallowable deductions c. errors detected through matching of Forms 1099 and W-2 Page 106

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d. questions concerning gambling income 30. A Form 911 is filed by the taxpayer as a request for which of the following? a. National Research Program b. Appeals Conference c. Tax Court Hearing d. Taxpayer Advocate Service Assistance 31. The statute of limitations refers to a: a. set of provisions that limits a tax return preparer’s rights b. specific period of time within which returns must be filed c. set of provisions that limits a taxpayer’s rights d. specific period of time within which all taxes must be assessed and collected and all refund claims must be made 32. Which of the following examinations involves complex issues that require more advanced knowledge of the internal revenue laws and accounting skills? a. correspondence examination b. field examination c. office examination d. arithmetical error examination 33. In case of underpayment of taxes, if the deficiency is not paid in a timely fashion, interest is imposed on the unpaid amount for a period that begins on the date of: a. filing the return and ends on the date of payment or the last working day of the respective year, whichever is later b. filing the return and ends on the date of payment c. the notice and demand and ends on the date of payment d. the notice and demand and ends on the date when the taxpayer receives the notice 34. When a taxpayer does not agree with the IRS agent’s proposed adjustments a: a. 30-day letter is issued b. RAR is issued c. 10-day notice is issued d. 21-day notice is issued 35. Michelle accidentally omitted from her 2019 tax return $8,000 of gross receipts she collected as the owner of a restaurant. Her 2019 return indicated collective gross receipts of $40,000. The IRS no longer can pursue Michelle with the threat of collection of the related tax, interest, and penalties as of April 15 of what year? a. 2021 b. 2023 c. 2026 d. 2027 e. There is no expiration date for the statute of limitations in this context.

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36. The procedure used to match the information recorded on a return with corresponding data received from third parties is referred to as the: a. Information Document Reconciliation Program b. Information Document Review Program c. Information Document Check Program d. none of these are correct 37. Robert accidentally omitted from his 2019 tax return $80,000 of the gross receipts that he collected as the owner of a restaurant. His 2019 return indicated collective gross receipts of $200,000. The IRS no longer can pursue Robert with the threat of collection of the related tax, interest, and penalties, as of April 15 of what year? a. 2021 b. 2024 c. 2026 d. 2027 e. There is no expiration date for the statute of limitations in this context.

38. The IRS: a. facilitates the processing of tax returns b. enforces the internal revenue laws of the United States c. is a bureau within the U.S. Department of Finance d. all of these are correct 39. If a taxpayer and the IRS cannot agree on the proposed adjustments after an appeals conference, the regional director of appeals will issue a: a. 30-day letter b. 90-day letter c. 21-day letter d. 10-day letter 40. A taxpayer’s return is classified for audit after receiving a high DIF score and being manually screened by an IRS classifier. Which of the following statements best describes whether the taxpayer will be contacted by an auditor or revenue agent? a. The taxpayer will be contacted since a high DIF score always will mean some type of audit. b. The taxpayer will be contacted because only the National Office has the power to decide that after screening, the return need not be audited. c. The taxpayer will not necessarily be contacted since after the Service Center review, it may be decided that an audit is unwarranted because the return will be manually inspected for audit determination. d. The taxpayer will not necessarily be contacted by an auditor or revenue agent since after the return is screened by the Service Center, it then is randomly selected for audit.

41. The Taxpayer Assistance Order (TAO) is issued by the: a. Secretary of Treasury b. Chief Counsel c. National Taxpayer Advocate d. Commissioner of IRS Page 108

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42. What is the formula that assigns numeric weights to certain (undisclosed by the IRS) return items, generating a composite score for the return? a. selection of returns formula b. unallowable items formula c. discriminant function formula (DIF) d. mathematical errors formula 43. Which of the following is NOT a factor in favor of the Protest/Appeals Process? a. An appeals officer can consider the hazards of litigation. b. The litigation path remains a possibility even if an appeal is pursued. c. The conclusion of the dispute, whether for or against the taxpayer, is expedited. d. The appeals process allows a further delay in the payment of the disputed tax.

44. Jackie filed her 2019 income tax return on February 15, 2020. There was no material understatement of income on her return, and the return was properly signed and filed. The statute of limitations for Jackie’s 2019 return expires on: a. February 15, 2023 b. April 15, 2023 c. February 15, 2026 d. April 15, 2026 45. The program that is designed to furnish the IRS with statistics concerning the type and number of errors that are made on a representative sample of individual income tax returns is the: a. Unallowable Items Program b. Mathematical/clerical Error Program c. National Research Program d. Discriminant Function Program 46. The Commissioner of the Internal Revenue Service (IRS) is appointed by the: a. President of the United States b. Secretary of the Treasury c. Senate d. Congress 47. How much time from the date of issue of a 30-day letter does a taxpayer have to request a conference with an appeals officer? a. 30 days b. 90 days c. 10 days d. 21 days 48. To whom does the Chief Counsel of the Internal Revenue Service report? a. Commissioner of the Internal Revenue Service b. Secretary of the Treasury c. Regional Council in National Office d. Attorney General Page 109

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49. A written revenue agent’s report (RAR) is prepared by the IRS agent and is given to the taxpayer: a. before the commencement of the examination b. upon conclusion of the examination c. during the examination d. none of these are correct 50. Jimmy purposely omitted from his 2019 tax return $40,000 of the gross receipts that he collected as the owner of a restaurant. His 2019 return indicated collective gross receipts of $200,000. The IRS no longer can pursue Jimmy with the threat of collection of the related tax, interest, and penalties, as of April 15 of what year? a. 2022 b. 2025 c. 2027 d. 2028 e. There is no expiration date for the statute of limitations in this context.

51. Sue filed her 2019 income tax return on April 10, 2020. In November she learned that 100 shares of stock that she owned had become worthless in 2019. Because she did not deduct this loss on the 2019 return, Sue intends to file a claim for refund. This claim must be filed by no later than April 15 of what year? a. 2021 b. 2024 c. 2026 d. 2027 e. There is no expiration date for the statute of limitations in this context.

52. In selecting returns for examination, the primary goal of the IRS is to review only those returns that: a. belong to taxpayers who were found guilty previously b. will result in a satisfactory increase in the tax liability c. have been filed for the first time d. contain mathematical/clerical errors 53. Madison and Robyn sold a piece of property for $250,000, claiming that their basis was $100,000, and reported a taxable gain of $150,000. Their 2019 return filed in February 2020 reported gross income of $250,000. Madison and Robyn later determine that the property’s basis was actually $25,000, not $100,000, resulting in a $75,000 understatement of income on the 2019 return. The statute of limitations period in which the IRS may assess additional tax in this situation expires on April 15 of what year? a. 2022 b. 2023 c. 2026 d. There is no expiration date for the statute of limitations in this context.

54. A ―DIF‖ score is a type of: a. fraud definition used by the IRS b. composite score that rates returns for potentially higher tax liability c. negligent penalty score d. score used for information purposes in collateral agreements Page 110

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55. A statutory notice of deficiency is also known as a: a. 30-day letter b. 10-day letter c. 90-day letter d. 21-day letter 56. If a return is identified as including an unallowable item, the IRS: a. computes the seemingly necessary adjustment in taxes and notifies the taxpayer by mail b. sends a formal notice of deficiency to the taxpayer c. considers the contact that it makes with a taxpayer under this circumstance to be an examination d. cancels the return and asks the taxpayer to file his return again 57. Signed into law in 1996, it guarantees taxpayers various rights to representation before the IRS. What is it called? a. the Constitution b. the Sixteenth Amendment c. the Taxpayer Bill of Rights d. the Taxpayer Advocate

58. ―If a taxpayer cannot resolve his or her dispute with the IRS administratively, he or she may seek judicial relief.‖ Explain how a taxpayer can seek relief through the judicial system.

59. What are the functions performed by the mathematical/clerical error program?

60. What are the ―pros‖ and ―cons‖ of filing a protest to an IRS Audit?

61. Under various provisions of the Internal Revenue Code, what are some of the various rights guaranteed to taxpayers?

62. What are the "dos and don’ts" in negotiating with a government auditor?

63. Enumerate how the IRS conducts a field examination.

64. Explain how the discriminant function system works.

65. Why would a taxpayer choose to go to District Court or the Court of Federal Claims and not to U.S. Tax Court?

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Answer Key 1. True 2. True 3. True 4. True 5. True 6. True 7. False 8. True 9. False 10. True 11. True 12. True 13. True 14. False 15. True 16. True 17. False 18. False 19. True 20. False 21. True 22. True 23. b 24. d 25. d Page 112

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26. b 27. d 28. c 29. d 30. d 31. d 32. b 33. c 34. a 35. b 36. d 37. c 38. a 39. b 40. c 41. c 42. c 43. c 44. b 45. c 46. a 47. a 48. a 49. b 50. e 51. d Page 113

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52. b 53. c 54. b 55. c 56. a 57. c 58. If a taxpayer cannot resolve his or her dispute with the IRS administratively, he or she may seek judicial relief. The taxpayer can choose from among the U.S. Tax Court, the pertinent district court, and the U.S. Court of Federal Claims to initiate the lawsuit against the government. The Tax Court will review the taxpayer’s case provided that he or she files a petition with the court within 90 days of the date of his or her statutory notice of deficiency. The district courts and the Court of Federal Claims cannot hear the taxpayer’s case unless he or she is suing for a refund. Consequently, the taxpayer first must pay the disputed tax, and then file an (unsuccessful) claim for refund to obtain a judicial review in either of these latter two forums.

59. The mathematical/clerical error program is one of a number of special programs that are conducted by IRS computers. This program checks every return for mathematical errors, recomputes the tax due after properly applying the numbers that are included in the return, and summarily assesses any additional tax that is due or allows refunds or credits based on (previously) miscomputed deductions or credits. A summary assessment may be made concerning any deficiency that results from a mathematical or clerical error. When a mathematical or clerical error is identified by the service center, the IRS mails the taxpayer a corrected tax computation and requests that he or she pay the additional tax within 10 days after the date of the notice, or 21 days if the tax underpayment is less than $100,000. If the deficiency is paid within this period, no interest is charged on the underpayment. If the deficiency is not paid in a timely fashion, however, interest is imposed on the unpaid amount for a period that begins on the date of the notice and demand and ends on the date of payment.

60. The advantages to filing a protest are as follows: (1) The filing of a protest allows for another review of the issue by an independent Appeals Officer.

(2) There is no reason to retain an attorney when filing a protest. Anyone authorized to practice before the IRS may represent the taxpayer.

(3) The filing of a protest will delay the resolution of the issue.

(4) The matter at issue can still be taken to U. S. Tax Court, the District Court, or Court of Federal Claims. The disadvantages would be as follows: (1) The interest and penalties continue to run if a protest is not filed.

(2) Professional assistance is usually required if a protest is not filed.

(3) Should a protest not be filed, new issues can be discovered.

61. Answers will vary, but may include the following: • • • •

Representation before the IRS Recording an audit proceeding IRS explanation of its position Notice sent to both spouses on an audited joint return Page 114

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Confidentiality between taxpayer and CPA

62. Most practitioners develop over time a list of "dos and don’ts" in negotiating with a government auditor. In the very best case, one will have dealt with the same auditor many times and will have become familiar with the nuances of that particular auditor’s mode of operation. Whether or not this is the case, the following guidelines, dictated as much by common courtesy and decorum as by ethics and hardcore negotiating techniques, are likely to be useful.

• Do conduct yourself courteously and professionally, showing that you have prepared yourself for the audit • Do review the strengths and weaknesses of your position before the agent arrives • Do cooperate with the auditor and promptly respond to all requests • Do establish internal timetables and responsibilities for completing the audit • Do provide the auditor with adequate work accommodations • Don’t impede the audit process • Don’t allow the auditor free access to and through the taxpayer’s building • Don’t let the agent browse through taxpayer information • Don’t volunteer comments or information not requested by the agent • Don’t attempt to bully or intimidate the auditor • Do assign one person to be the primary on-premises contact with the auditor—he or she cannot interview taxpayer employees on a random basis • Do verify the auditor’s credentials before providing any information • Do request that all communications be in writing • Do keep track of time spent (by taxpayer, practitioner, and auditor) on the audit • Do meet at least daily with the auditor to review issues • Do agree to disagree on major irreconcilable issues • Do conduct a concluding conference to discuss audit recommendations • Do obtain copies of all government work papers affecting the potential assessment • Do request clarification on the rest of the appeals process 63. Examinations that present complex issues that require more advanced knowledge of the internal revenue laws and accounting skills usually are conducted on the taxpayer’s premises. A field examination is more comprehensive than a correspondence or office audit, and it usually is limited to an examination of corporation and individual business returns. In a field examination, the revenue agent reviews completely the entire financial operations of the taxpayer, including the business history of the taxpayer; the nature, amount, and location of taxpayer assets; the nature of the business operations; the extant accounting methods and system of internal control; and other financial attributes of the entity.

While an office audit ordinarily is limited to the items that are specified in the audit notification letter, a field examination may be open-ended. The agent is free to pursue any unusual items that are recorded in the tax return(s) or the records of the taxpayer (i.e., journals, ledgers, and worksheets) and to investigate other areas of which he or she may be suspicious.

The IRS prefers to conduct the field audit on the taxpayer’s premises because the taxpayer’s books and records may be more accessible and the agent is better able to observe the taxpayer’s business facilities and the scope of its operations.

However, it is sometimes possible to have the audit conducted at the office of the taxpayer’s representative instead. Only one such inspection of taxpayer books and records may be made for a tax year. The Code includes a broad set of restrictions regarding access to the taxpayer’s physical office by the IRS. Taxpayers refusing to admit IRS personnel are subject to a $500 fine.

64. Computer and manual methods are used to select returns for examination. Computer programs select certain returns for examination, based on the potential that exists for changes in the tax treatment of certain items on the return. Generally, this is done through the use of mathematical models, including correlations and discriminant Page 115

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functions.

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Once a return has been processed through the IRS automated computer program, each return is rated by computer for its audit potential by means of a mathematical model, the discriminant function formula (DIF). This formula assigns numeric weights to certain (undisclosed by the IRS) return items, generating a composite score for the return. In this regard, the higher the DIF score, the greater the potential for additional tax payments upon audit. Statistics provided by the Commissioner show a high correlation between DIF scores and such tax modifications, but the specifics of the formula are not disclosed.

When the computer selects a return that has a high probability for an adjustment, as indicated by a high DIF score, an employee at the service center manually inspects the return to confirm its audit potential. If an acceptable explanation for the DIF score cannot be found after this manual examination of the return and its attachments, including explanatory data that the computer did not consider, the return is forwarded to the Examination Division at the appropriate local IRS office.

65. Since the District Court and the Court of Federal Claims are refund actions, the tax must be paid before initiating the action. This would mean that all interest and penalties are not accruing during the litigation. Another reason for filing in District Court is the availability of a jury of one’s peers. When filing an action in U. S. Tax Court, there is no option for a jury.

The final reason for going to the Court of Federal Claims is that of an appellate route. The U. S. Tax Court and District Court of Appeals limit their cases to a geographic appellate circuit while the Court of Federal Claims appeals its actions to the Federal Circuit Court of Appeals. The different circuits may have different precedent on similar tax issues.

Indicate whether the statement is true or false.

1. A fraudulent failure-to-file tax return is subject to a 25 percent monthly penalty. a. True b. False 2. If a taxpayer understates gross income by 25 percent, the IRS has a 6-year statute of limitations on assessment. a. True b. False 3. Assessable penalties are subject to review by the Tax Court. a. True b. False 4. One example of reasonable cause that the Internal Revenue Manual describes would include a timely mailed return sent to the wrong IRS address. a. True b. False 5. Criminal and civil penalties are mutually exclusive. a. True b. False 6. If a taxpayer is convicted of criminal fraud, he or she can contest a civil fraud determination. a. True b. False Page 117

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7. The penalty for a willful failure to pay to the government a tax withheld from an employee's paycheck is one hundred percent of the unpaid tax. a. True b. False 8. A failure-to-pay penalty is imposed when the taxpayer fails to pay either a tax shown on his or her return or an assessed deficiency within 10 days of an IRS notice or demand. a. True b. False 9. Tax return preparers are subject to criminal prosecution for willful misconduct. a. True b. False 10. Unless a gross valuation misstatement is made, the accuracy-related penalty amounts to 20 percent of the portion of the tax underpayment. a. True b. False 11. A taxpayer can avoid the failure-to-file penalty if an extension of the return’s due date is granted by the IRS. a. True b. False 12. Failure to file as a result of a taxpayer not having the sufficient funds to pay the tax liability is an example of reasonable cause. a. True b. False 13. The Employee Withholding Allowance Certificate is required to be given by the employee to the employer. a. True b. False 14. Elton filed his 2019 income tax return on July 31, 2020, showing total tax of $5,000 and a refund of $100. All tax had been paid by the due date of April 15, 2020. The failure to file penalty is $0. a. True b. False 15. The penalty for failure to make payment of quarterly estimated income taxes is computed without any daily compounding and is not deductible. a. True b. False 16. Generally, an overpayment can be refunded or credited to the person who was subject to the original tax. a. True b. False 17. Assessable penalties typically are expressed as a flat dollar amount and are usually imposed on third parties, such as Page 118

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tax return preparers. a. True b. False 18. Bennie files his 2021 income tax return on April 15, 2022, showing a tax liability of $10,000 and a balance due of $1,000. Bennie does not pay the $1,000 until June 30, 2022. The failure-to-pay penalty is $15. a. True b. False 19. Underpayment is defined in § 6664 as the correct amount of tax, less the sum of the amount of tax reported by the taxpayer on the return, plus any amount previously assessed or collected, less the amount of rebates made. a. True b. False 20. An individual should make a claim for refund or credit in the Form 1040X. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

21. William, a taxpayer, timely mailed his tax return. However, it was returned for insufficient postage. IRS imposed a penalty. Can William claim waiver of penalty? a. Yes, William can claim waiver of penalty since it is his first tax return. b. Yes, William can claim waiver since the failure to file tax return is due to a reasonable cause. c. No, William cannot claim waiver since it is a case of willful neglect. d. No, William cannot claim waiver of penalty as he is a delinquent taxpayer.

22. Jennie received a 6-month extension (to October 15, 2021) to file her 2020 tax return. Jennie actually filed the return on November 20, 2021, paying the $20,000 amount due at that time. She has no reasonable cause for failing to file the return by October 15 or for failing to pay the tax that was due on April 15, 2021. How much is the failure-to-pay penalty? a. $800 b. $700 c. $2,000 d. $1,000 23. To avoid the penalty, the reasonable cause. a. IRS b. TRP c. taxpayer d. none of these are correct

must meet the burden of proof that the failure to file was the result of

24. Interest imposed by the IRS is compounded: a. annually b. quarterly Page 119

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c. daily

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d. monthly 25. When the accuracy-related penalty applies, interest on the penalty accrues from the: a. date on which the assessment is made b. date on which the penalty was imposed or December 31, whichever is earlier c. date on which the penalty was imposed d. due date of the return 26. An individual who is convicted of willfully aiding or assisting in the preparation of a false return is subject to which of the following penalties? a. imprisonment up to 2 years and/or fine that cannot exceed $10,000 b. imprisonment up to 5 years and/or fine that cannot exceed $50,000 c. imprisonment up to 10 years and/or fine that cannot exceed $15,000 d. imprisonment up to 3 years and/or fine that cannot exceed $100,000 27. The civil fraud penalty is: a. 5% b. 20% c. 25% d. 75% 28. Which of the following would lead to imposition of civil penalties? a. violation of civil protocols b. violation of tax laws as a result of negligence c. violation of tax statutes due to reasonable cause d. violation of social rules and norms 29. A tax return preparer may disclose information obtained from the taxpayer without being subject to civil and criminal penalty if such disclosure is: a. for other than the specific purpose of preparing a tax return b. pursuant to fulfillment of his own financial goals c. pursuant to any provisions of the code, or to a court order d. required for the growth of his profession 30. The burden of proof in a fraud case is on the: a. taxpayer b. tax court c. IRS d. tax practitioner 31. Kenny underpaid his taxes by $15,000. Of this amount, $7,500 was the result of negligence on his part. What is the amount of the negligence penalty? a. $0 b. $1,500 c. $3,000 Page 121

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d. $6,000 32. A tax return preparer (TRP) is: a. a CPA as required by the IRS b. not subject to any kind of penalty as he/she prepares returns on behalf of taxpayers c. any person who prepares tax returns gratuitously d. any person who prepares tax returns for compensation 33. Jennie received a 6-month extension (to October 15, 2021) to file her 2020 tax return. Jennie actually filed the return on November 20, 2021, paying the $20,000 amount due at that time. She has no reasonable cause for failing to file the return by October 15 or for failing to pay the tax that was due on April 15, 2021. How much is the failure-to-file penalty? a. $1,800 b. $1,900 c. $2,000 d. $1,000 34. The number of days the IRS is allowed in which it may refund an overpayment without incurring interest is: a. 15 days b. 20 days c. 35 days d. 45 days 35. Samuels, a calendar-year taxpayer, filed his 2017 federal income tax return on October 1, 2020. His return showed an overpayment of $1,200, for which Samuels requested a full refund. The IRS refunds the amount without any interest.

Which of the following could be the date of refund by the IRS? a. November 17, 2020 b. December 29, 2020 c. November 12, 2020 d. December 12, 2020 36. For § 6502, requests for equitable relief may be filed within: a. 3 years b. 10 years c. 7 years d. none of these are correct 37. Joanne filed her unextended 2020 tax return on September 14, 2021, paying the $5,000 amount due at that time.

Joanne has no reasonable cause for failing to file the return by April 15 or for failing to pay the tax that was due on April 15, 2021. Compute the failure-to-pay penalty. a. $25 b. $125 c. $150 d. None of the above.

38. Joanne filed her unextended 2020 tax return on September 14, 2021, paying the $5,000 amount due at that time.

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Joanne has no reasonable cause for failing to file the return by April 15 or for failing to pay the tax that was due on April

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15, 2021. Compute the failure-to-file penalty. a. $250 b. $1,250 c. $1,125 d. $1,000 39. The standard for conviction in a criminal case is establishment of: a. guilt with some reasonable doubt b. guilt beyond reasonable doubt c. any guilt even though highly doubtful d. criminal intent even though not implemented 40. Julian filed a valid extension for his 2020 tax return, giving him until October 15, 2021, to file his return. He filed his return on November 30 and paid $1,000 of tax due. For what period of time will Julian be subject to the failure-to-file and failure-to-pay penalties? a. 2 months for both b. 2 months for failure to file and 8 months for failure to pay c. 8 months for both d. None of the above.

41. Penalties that are based on a percentage of the delinquent tax are referred to as: a. assessable penalties b. ad valorem penalties c. criminal penalties d. nominal penalties 42. In which of the following cases does a taxpayer hold the right to refuse to answer inquiries that are made by the IRS in a criminal setting? a. The taxpayer would suffer a monetary loss by answering a criminal inquiry. b. The nature of the crime is not severe. c. The taxpayer is confident that a conviction will be obtained. d. The taxpayer would suffer a loss of some constitutional right by answering a criminal inquiry.

43. For purposes of calculating the interest rate on overpayments and underpayments, the federal short-term interest rate is rounded to the nearest: a. one-tenth percent b. one percent c. tenth percent d. none of these are correct

44. What is the procedure for claiming a refund or credit for overpayment of tax?

45. ―In case of both civil and criminal frauds, the burden of proof is on the IRS.‖ Explain.

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46. List some of the possible defenses that a taxpayer may use against a charge of criminal tax offense.

47. What are the requirements to be satisfied for the issue of an injunction by the IRS against a TRP who is guilty of misconduct to prohibit him or her from engaging in such misconduct or from practicing as a return preparer?

48. Could a taxpayer make such a small amount of income that a tax return not be filed and still have an unlimited statute of limitations on assessment?

49. Cite two instances that would lead to imposition of criminal penalties on tax return preparers.

50. How do the courts define reasonable cause? List the examples of reasonable cause.

51. Give an example of what it means for failure to make deposits of taxes. Describe the penalties involved.

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Answer Key 1. False 2. True 3. False 4. True 5. False 6. False 7. True 8. True 9. True 10. True 11. True 12. False 13. True 14. True 15. True 16. True 17. True 18. True 19. True 20. True 21. b 22. a 23. c 24. c 25. d Page 126

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26. d 27. d 28. b 29. c 30. c 31. b 32. d 33. a 34. d 35. c 36. b 37. b 38. c 39. b 40. b 41. b 42. d 43. b 44. A taxpayer must file a timely and valid claim at the service center for the district in which the tax was paid to receive a refund or credit for an overpayment of tax. The claim should be made by individuals on Form 1040X, Individual Amended Income Tax Return, and by corporations on Form 1120X, Corporation Amended Income Tax Return.

45. The burden of proof in criminal and civil fraud cases is on the IRS—it must show a fraudulent intent by the taxpayer.

This usually entails more than mere negligence, but a plan to defraud the government, often including a series of actions over time to evade the tax. In a criminal fraud case, the IRS must prove "beyond a shadow of any reasonable doubt" that the taxpayer’s actions were fraudulent. In a civil fraud case, there must be "clear and convincing evidence" that the taxpayer committed fraud. Ordinarily, the evidence that indicates that a taxpayer’s conduct was fraudulent is circumstantial. Thus, the court must infer the taxpayer’s state of mind from the evidence.

46. With respect to criminal tax cases, taxpayers have had some success in presenting one or more of the following defenses—that is, to establish some doubt in the minds of the court or the jury.

• Unreported income would have been fully offset by unreported deductions • Unreported income was in reality a gift or some other excludible receipt Page 127

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• The taxpayer was ignorant or confused as to the applicable law -- one cannot intend to violate the tax law if he or she does not know what the law is • The taxpayer relied on the erroneous advice of a competent tax adviser • The taxpayer's mental or emotional abilities were such that he or she could not have formed and executed a plan to evade tax • The statute of limitations had expired • The taxpayer enters a plea bargain and accepts conviction on a lesser offense 47. The IRS may seek an injunction against a TRP who is guilty of certain misconduct to prohibit him or her from engaging in such misconduct or from practicing as a return preparer. Before such an injunction can be issued, however, the preparer must have: • violated a preparer penalty or a criminal provision of the Code, • misrepresented his or her eligibility to practice before the IRS, • guaranteed the payment of any tax refund or the allowance of a credit, or • engaged in other fraudulent or deceptive conduct that substantially interferes with the administration of the tax laws.

48. Yes, a taxpayer who innocently fails to file a tax return is subject to an unlimited period of assessment for the tax [§6501(c)(3)].

49. Criminal penalties would be imposed on a tax return preparer if he/she: • aids or assists in the preparation or presentation of a false return, affidavit, claim, or other document, or • discloses or uses information for other than return preparation purposes.

50. No statutory or administrative definition exists for the term ―reasonable cause.‖ However, some courts define it to include such action as would prompt an ordinary, intelligent person to act in the same manner as did the taxpayer under similar circumstances. One of the most commonly encountered examples of reasonable cause is the reliance on the advice of competent tax counsel. However, a recent Tax Court decision held that a corporation was liable for employment tax penalties for failure to file its employment taxes on time even though the company had relied on a CPA to file the returns.

Other examples of reasonable cause that the Internal Revenue Manual describes include the following: • A timely mailed return that is returned for insufficient postage • Death or serious illness of the taxpayer or his or her immediate family • Destruction of the taxpayer’s residence, place of business, or records by fire or other casualty • Proper forms were not furnished by the IRS • Erroneous information obtained from IRS personnel • A timely mailed return sent to the wrong IRS address • An unavoidable absence by the taxpayer • An unavoidable inability to obtain records necessary to compute the tax • Some other inability to obtain assistance from IRS personnel 51. The IRC requires employers to collect and withhold income and Social Security taxes from their employees. Amounts that are withheld are considered to be held in a special trust fund for the United States, and they must be deposited in a government depository on or before certain dates prescribed by the statutes and regulations. An employer that does not have either the inclination or sufficient funds to meet its deposit obligations may be tempted to postpone the making of these deposits, that is, to ―borrow‖ from the government the cash provided by employees.

Consequently, the IRC imposes heavy civil and criminal penalties on those who are responsible for the failure to make a timely deposit of the withheld funds. A responsible party may be an officer or board member of a corporation rather than the corporation itself, even for charities and other exempt entities. Although officers of a corporation are routinely Page 128

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asserted to be ―responsible persons‖ for the trust fund penalty, under IRC § 6672, persons who are neither corporate officers nor employees can also be responsible for collecting and paying over trust fund taxes. A responsible person could be a creditor/lender, a trustee/fiduciary, or even an attorney.

If an employer fails to deposit on a timely basis taxes that were withheld from employees, a penalty equal to a percentage of the underpayment is imposed. This rate varies from 2 to 15 percent, depending on when the failure is corrected. The penalty may be avoided in situations in which the taxpayer can show that his or her actions were the result of reasonable cause and not willful neglect.

If any person who is required to collect, truthfully account for, and remit employment taxes willfully fails to do so, a penalty equal to 100 percent of the tax is imposed. Therefore, when a corporate employer willfully does not pay to the government employment taxes that it withheld from an employee, the IRS effectively may collect the tax from those who are responsible for the corporate actions, such as the corporate directors, president, or treasurer.

In addition to the civil penalties that have been discussed, criminal penalties may be imposed in an aggravated case of nonpayment.

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