Federal h1Tax h1Research, h113th Page h11-1
Edition
Solution Manual Federal Tax Research
h1 h1 h1 h1
13th Edition by Roby Sawyers, Steven Gill
h1 h1 h1 h1 h1 h1 h1 h1
h1 Chapters 1 -13 h1 h1
,Page h11-2 SOLUTIONS
MANUAL
CHAPTER 1 h1
INTRODUCTION TO TAX PRACTICE AND ETHICS h1 h1 h1 h1 h1
DISCUSSION QUESTIONS
h1
1-1. In the United States, the tax system is an outgrowth of the following five disciplines:
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 law, accounting, economics, political science, and sociology. The environment for the
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 tax system is provided by the principles of economics, sociology, and political
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 science, while the legal and accounting fields are responsible for the system‘s
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 interpretation and application. h1 h1
Each of these disciplines affects this country‘s tax system in a unique way. Economists
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 address such issues as how proposed tax legislation will affect the rate of inflation or
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 economic growth. Measurement of the social equity of a tax and determining whether
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 a tax system discriminates against certain taxpayers are issues that are examined by
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 sociologists and political scientists. h1 h1 h1
Finally, attorneys are responsible for the interpretation of the taxation statutes, and
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
accountants ensure that these same statutes are applied consistently.****8880()
h1 h1 h1 h1 h1 h1 h1 h1 h1
Page 4 h1
1-2. The other major categories of tax practice in addition to tax research are as follows:
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
Tax compliance h1
Tax planning h1
Tax
litigation Page 5
h1 h1 h1
1-3. Tax compliance consists of gathering pertinent information, evaluating and classifying
h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 that information, and filing any necessary tax returns. Compliance also includes other
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 functions necessary to satisfy governmental requirements, such as representing a client
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 during an Internal Revenue Service (IRS) audit.
h1 h1 h1 h1 h1 h1
,Federal h1Tax h1Research, h113th Page h11-3
Edition
Page 5 h1
1-4. Most of the tax compliance work is performed by commercial tax preparers, enrolled
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 agents (EAs), attorneys, and certified public accountants (CPAs). Noncomplex individual,
h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 partnership, and corporate tax returns often are completed by commercial tax preparers.
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 The preparation of more complex returns usually is performed by EAs, attorneys, and
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 CPAs. The latter groups also provide tax planning services and represent their clients
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 before the IRS. h1 h1
An EA is one who is admitted to practice before the IRS by passing a special IRS-
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
administered examination, or who has worked for the IRS for five years and is issued a
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 permit to represent clients before the IRS. CPAs and attorneys are not required to take
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 this examination and are automatically admitted to practice before the IRS if they are in
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 good standing with the appropriate professional licensing board.
h1 h1 h1 h1 h1 h1 h1
Page 5 and Circular 230
h1 h1 h1 h1
1-5. Tax planning is the process of arranging one‘s financial affairs to minimize any tax
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 liability. Much of modern tax practice centers around this process, and the resulting
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 outcome is tax avoidance. h1 h1 h1
There is nothing illegal or immoral in the avoidance of taxation as long as the taxpayer
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 remains within legal bounds. In contrast, tax evasion constitutes the illegal nonpayment of
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 a tax and cannot be condoned. Activities of this sort clearly violate existing legal
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 constraints and fall outside of the domain of the professional tax practitioner.
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
Page 6 h1
1-6. In can copen ctax cplanning csituation, cthe ctransaction cis cnot cyet ccomplete; ctherefore, cthe
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
ctax h1cpractitionercmaintains h1csome h1cdegree h1cof h1ccontrol h1cover h1cthe h1cpotential h1ctax h1cliability,
h1
h1 cand h1cthe h1ctransaction h1cmay h1cbe h1cmodi- h1cfied h1cto h1cachieve h1ca h1cmore h1cfavorable h1ctax
ctreatment. h1cIn h1ca h1cclosed h1ctransaction h1chowever, h1call h1cof h1cthe h1cpertinentcactions h1chave h1cbeen
h1
ccompleted, h1cand h1ctax h1cplanning h1cactivities h1cmay h1cbe h1climited h1cto h1cthe h1cpresentation h1cof h1cthe
h1
h1 csituation h1cto h1cthe h1cgovernment h1cin h1cthe h1cmost h1clegally h1cadvantageous h1cmanner h1cpossible.
, Page h11-4 SOLUTIONS
MANUAL
Page c6 h1
1-7. Tax clitigation cis cthe cprocess cof csettling ca cdispute cwith cthe cIRS cin ca ccourt cof
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
claw. h1cTypically, h1ca h1ctaxcattorneyh1chandles h1ctax h1clitigation h1cthat h1cprogresses h1cbeyond h1cthe
h1
cfinal h1cIRS h1cappeal.
h1
Page c6 h1
1-8. CPAs cserve cis ca csupport ccapacity cin ctax clitigation.
h1 h1 h1 h1 h1 h1 h1 h1
Page c6 h1
1-9. Tax cresearch cconsists cof cthe cresolution cof cunanswered ctaxation cquestions.
h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 cThe h1ctax h1cresearch h1cprocesscincludes h1cthe h1cfollowing:
1. Identification cof cpertinent cissues; h1 h1 h1
2. Specification cof cproper cauthorities; h1 h1 h1
3. Evaluation cof cthe cpropriety cof cauthorities; cand,
h1 h1 h1 h1 h1 h1
4. Application cof cauthorities cto ca cspecific csituation.
h1 h1 h1 h1 h1 h1
Page c6 h1
1-10. Circular c230 cis cissued cby cthe cTreasury cDepartment cand capplies cto call cwho
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 cpractice h1cbefore h1cthe h1cIRS.cPage h1c7
1-11. In caddition cto cCircular c230, cCPAs cmust cfollow cthe cAICPA‘s cCode cof
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 cProfessional h1cConduct h1cand h1cStatements h1con h1cStandards h1cfor h1cTax h1cServices. h1cCPAs
h1 cmust h1calso h1cabide h1cby h1cthe h1crules h1cof h1cthe h1cappropriatecstate h1cboard(s) h1cof h1caccountancy.
Page c7 h1
1-12. A creturn cpreparer cmust cobtain c18 chours cof ccontinuing ceducation cfrom can cIRS-
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
approved cCE cProvider. cThe chours cmust cinclude ca c6 ccredit chour cAnnual cFederal
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 cTax h1cRefresher h1ccourse h1c(AFTR) h1cthat h1ccovers h1cfiling h1cseason h1cissues h1cand h1ctax h1claw
cupdates. h1cThe h1cAFTR h1ccourse h1cmust h1cinclude h1ca h1cknowledge-cbased h1ccomprehension h1ctest
h1
cadministered h1cat h1cthe h1cconclusion h1cof h1cthe h1ccourse h1cby h1cthe h1cCE h1cProvider.
h1
Edition
Solution Manual Federal Tax Research
h1 h1 h1 h1
13th Edition by Roby Sawyers, Steven Gill
h1 h1 h1 h1 h1 h1 h1 h1
h1 Chapters 1 -13 h1 h1
,Page h11-2 SOLUTIONS
MANUAL
CHAPTER 1 h1
INTRODUCTION TO TAX PRACTICE AND ETHICS h1 h1 h1 h1 h1
DISCUSSION QUESTIONS
h1
1-1. In the United States, the tax system is an outgrowth of the following five disciplines:
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 law, accounting, economics, political science, and sociology. The environment for the
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 tax system is provided by the principles of economics, sociology, and political
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 science, while the legal and accounting fields are responsible for the system‘s
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 interpretation and application. h1 h1
Each of these disciplines affects this country‘s tax system in a unique way. Economists
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 address such issues as how proposed tax legislation will affect the rate of inflation or
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 economic growth. Measurement of the social equity of a tax and determining whether
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 a tax system discriminates against certain taxpayers are issues that are examined by
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 sociologists and political scientists. h1 h1 h1
Finally, attorneys are responsible for the interpretation of the taxation statutes, and
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
accountants ensure that these same statutes are applied consistently.****8880()
h1 h1 h1 h1 h1 h1 h1 h1 h1
Page 4 h1
1-2. The other major categories of tax practice in addition to tax research are as follows:
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
Tax compliance h1
Tax planning h1
Tax
litigation Page 5
h1 h1 h1
1-3. Tax compliance consists of gathering pertinent information, evaluating and classifying
h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 that information, and filing any necessary tax returns. Compliance also includes other
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 functions necessary to satisfy governmental requirements, such as representing a client
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 during an Internal Revenue Service (IRS) audit.
h1 h1 h1 h1 h1 h1
,Federal h1Tax h1Research, h113th Page h11-3
Edition
Page 5 h1
1-4. Most of the tax compliance work is performed by commercial tax preparers, enrolled
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 agents (EAs), attorneys, and certified public accountants (CPAs). Noncomplex individual,
h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 partnership, and corporate tax returns often are completed by commercial tax preparers.
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 The preparation of more complex returns usually is performed by EAs, attorneys, and
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 CPAs. The latter groups also provide tax planning services and represent their clients
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 before the IRS. h1 h1
An EA is one who is admitted to practice before the IRS by passing a special IRS-
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
administered examination, or who has worked for the IRS for five years and is issued a
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 permit to represent clients before the IRS. CPAs and attorneys are not required to take
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 this examination and are automatically admitted to practice before the IRS if they are in
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 good standing with the appropriate professional licensing board.
h1 h1 h1 h1 h1 h1 h1
Page 5 and Circular 230
h1 h1 h1 h1
1-5. Tax planning is the process of arranging one‘s financial affairs to minimize any tax
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 liability. Much of modern tax practice centers around this process, and the resulting
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 outcome is tax avoidance. h1 h1 h1
There is nothing illegal or immoral in the avoidance of taxation as long as the taxpayer
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 remains within legal bounds. In contrast, tax evasion constitutes the illegal nonpayment of
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 a tax and cannot be condoned. Activities of this sort clearly violate existing legal
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 constraints and fall outside of the domain of the professional tax practitioner.
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
Page 6 h1
1-6. In can copen ctax cplanning csituation, cthe ctransaction cis cnot cyet ccomplete; ctherefore, cthe
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
ctax h1cpractitionercmaintains h1csome h1cdegree h1cof h1ccontrol h1cover h1cthe h1cpotential h1ctax h1cliability,
h1
h1 cand h1cthe h1ctransaction h1cmay h1cbe h1cmodi- h1cfied h1cto h1cachieve h1ca h1cmore h1cfavorable h1ctax
ctreatment. h1cIn h1ca h1cclosed h1ctransaction h1chowever, h1call h1cof h1cthe h1cpertinentcactions h1chave h1cbeen
h1
ccompleted, h1cand h1ctax h1cplanning h1cactivities h1cmay h1cbe h1climited h1cto h1cthe h1cpresentation h1cof h1cthe
h1
h1 csituation h1cto h1cthe h1cgovernment h1cin h1cthe h1cmost h1clegally h1cadvantageous h1cmanner h1cpossible.
, Page h11-4 SOLUTIONS
MANUAL
Page c6 h1
1-7. Tax clitigation cis cthe cprocess cof csettling ca cdispute cwith cthe cIRS cin ca ccourt cof
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
claw. h1cTypically, h1ca h1ctaxcattorneyh1chandles h1ctax h1clitigation h1cthat h1cprogresses h1cbeyond h1cthe
h1
cfinal h1cIRS h1cappeal.
h1
Page c6 h1
1-8. CPAs cserve cis ca csupport ccapacity cin ctax clitigation.
h1 h1 h1 h1 h1 h1 h1 h1
Page c6 h1
1-9. Tax cresearch cconsists cof cthe cresolution cof cunanswered ctaxation cquestions.
h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 cThe h1ctax h1cresearch h1cprocesscincludes h1cthe h1cfollowing:
1. Identification cof cpertinent cissues; h1 h1 h1
2. Specification cof cproper cauthorities; h1 h1 h1
3. Evaluation cof cthe cpropriety cof cauthorities; cand,
h1 h1 h1 h1 h1 h1
4. Application cof cauthorities cto ca cspecific csituation.
h1 h1 h1 h1 h1 h1
Page c6 h1
1-10. Circular c230 cis cissued cby cthe cTreasury cDepartment cand capplies cto call cwho
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 cpractice h1cbefore h1cthe h1cIRS.cPage h1c7
1-11. In caddition cto cCircular c230, cCPAs cmust cfollow cthe cAICPA‘s cCode cof
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 cProfessional h1cConduct h1cand h1cStatements h1con h1cStandards h1cfor h1cTax h1cServices. h1cCPAs
h1 cmust h1calso h1cabide h1cby h1cthe h1crules h1cof h1cthe h1cappropriatecstate h1cboard(s) h1cof h1caccountancy.
Page c7 h1
1-12. A creturn cpreparer cmust cobtain c18 chours cof ccontinuing ceducation cfrom can cIRS-
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
approved cCE cProvider. cThe chours cmust cinclude ca c6 ccredit chour cAnnual cFederal
h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1 h1
h1 cTax h1cRefresher h1ccourse h1c(AFTR) h1cthat h1ccovers h1cfiling h1cseason h1cissues h1cand h1ctax h1claw
cupdates. h1cThe h1cAFTR h1ccourse h1cmust h1cinclude h1ca h1cknowledge-cbased h1ccomprehension h1ctest
h1
cadministered h1cat h1cthe h1cconclusion h1cof h1cthe h1ccourse h1cby h1cthe h1cCE h1cProvider.
h1
