Federal Tax Research, 13th Edition
r/d r/d r/d r/d Page 1-1
r/d
Solution Manual Federal Tax Research
r/d r/d r/d r/d
r/d 13th Edition by Roby Sawyers, Steven Gill
r/d r/d r/d r/d r/d r/d
r/d Chapters 1 -13 r/d r/d
,Page 1-2
r/d SOLUTIONS MANUAL r/d
CHAPTER 1 r/d
INTRODUCTION TO TAX PRACTICE AND ETHICS r/d r/d r/d r/d r/d
DISCUSSION QUESTIONS
r/d
1-1. In the United States, the tax system is an outgrowth of the following five disciplines: law,
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d accounting, economics, political science, and sociology. The environment for the tax system is r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
provided by the principles of economics, sociology, and political science, while the legal and
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d accounting fields areresponsible for the system‘s interpretation and application. r/d r/d r/d r/d r /d r/d r/d r /d r/d
Each of these disciplines affects this country‘s tax system in a unique way. Economists address
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
such issues as howproposed tax legislation will affect therate of inflation or economic growth.
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r /d r /d r/d
Measurement of the social equity of a tax and determining whether a tax system discriminates
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d against certain taxpayers areissues that are examined bysociologists and political scientists.
r/d r/d r /d r/d r/d r/d r/d r/d r/d r/d r/d r /d
Finally, attorneys areresponsible for theinterpretation ofthe taxation statutes, andaccountants
r/d r/d r/d r/d r /d r/d r /d r/d r/d r/d r/d r/d
ensure that these same statutes areapplied consistently.****8880()
r/d r/d r/d r/d r/d r/d r/d r /d
Page 4 r/d
1-2. The other major categories oftax practice in addition totax research are as follows:
r/d r/d r /d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
• Tax compliance r/d
• Tax planning r/d
• Tax litigation r/d
Page 5
r/d r/d
1-3. Tax compliance consists of gathering pertinent information, evaluating and classifying that
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d information, and filing any necessary tax returns. Compliance also includes other functions r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d necessary to satisfy governmental requirements, such as representing a client during an Internal
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
Revenue Service (IRS) audit.
r/d r/d r/d r /d
,Federal Tax Research, 13th Edition
r/d r/d r/d r/d Page 1-3 r/d
Page 5 r/d
1-4. Most of the tax compliance work is performed by commercial tax preparers, enrolled agents (EAs),
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d attorneys, and certified public accountants (CPAs). Noncomplex individual, partnership,and
r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d corporate tax returns often are completed by commercial tax preparers. The preparation of more
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d complex returns usually is performed by EAs, attorneys, and CPAs. The latter groups alsoprovide
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d tax planning services andrepresent their clients beforethe IRS.
r/d r/d r /d r/d r/d r /d r/d r/d r/d
An EA is one who is admitted to practice before the IRS by passing a special IRS-administered
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d examination, or who has worked for the IRS for five years and is issued a permit to represent clients r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d before the IRS. CPAs and attorneys are not required to take this examination and are automatically
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d admitted to practice before the IRS if they are in good standing with the appropriateprofessional
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d licensing board. r /d
Page 5 and Circular 230 r/d r/d r/d r/d
1-5. Tax planning is the process of arranging one‘s financial affairs to minimize any tax liability. Muchof
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d modern tax practice centers around this process, and the resulting outcome is tax avoidance.
r /d r/d r/d r/d r/d r/d r /d r/d r/d r /d r/d r/d r/d
There is nothing illegal or immoral in the avoidance of taxation as long as the taxpayer remains within
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d legal bounds. In contrast, tax evasion constitutes the illegal nonpayment of a tax and cannotbe
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d condoned. Activities of this sort clearly violate existing legal constraints and fall outside of the
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d domain of the professional tax practitioner. r/d r/d r/d r/d r/d
Page 6 r/d
1-6. In an open tax planning situation, the transaction is not yet complete; therefore, the tax practitioner
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
maintains some degree of control over the potential tax liability, and the transaction may be modi- fied
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d to achieve a more favorable tax treatment. In a closed transaction however, all of the pertinentactions
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d have been completed, and tax planning activities may be limited to the presentation of the situation to
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r /d
r/d the government in themost legallyadvantageous manner possible.
r/d r/d r/d r/d r /d r/d r /d r /d
, Page 1-4
r/d SOLUTIONS MANUAL r/d
Page 6 r/d
1-7. Tax litigation istheprocess of settling a dispute with theIRS in a court of law. Typically, a tax
r/d r/d r/d r/d r /d r/d r/d r/d r/d r /d r/d r/d r/d r/d r/d r/d r /d r /d r/d
attorneyhandles tax litigation that progresses beyond the final IRS appeal.
r/d r/d r/d r/d r/d r/d r /d r /d r/d r/d r/d
Page 6 r/d
1-8. CPAs serve is a support capacityin tax litigation.
r/d r/d r/d r/d r/d r/d r/d r/d
Page 6 r/d
1-9. Taxresearch consists of theresolution of unanswered taxation questions. Thetaxresearch process
r/d r/d r/d r/d r/d r/d r/d r/d r/d r /d r/d r/d r/d
includes the following:
r/d r/d r/d
1. Identification ofpertinent issues; r /d r/d r/d
2. Specification ofproper authorities; r /d r/d r/d
3. Evaluation of the proprietyof authorities; and, r /d r/d r/d r/d r/d r/d
4. Application of authorities to a specific situation. r/d r/d r/d r/d r/d r/d
Page 6 r /d
1-10. Circular 230 is issued bytheTreasuryDepartment and applies to all who practice before the IRS.Page
r/d r/d r /d r /d r/d r/d r/d r /d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d 7
1-11. In addition to Circular 230, CPAs must follow the AICPA‘s Code of Professional Conduct and
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d Statements on Standards for Tax Services. CPAs must also abide by the rules of the appropriate
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
state board(s) of accountancy.
r/d r/d r /d r/d
Page 7 r/d
1-12. A return preparer must obtain 18 hours of continuing education from an IRS-approved CE Provider.
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d The hours must include a 6 credit hour Annual Federal Tax Refresher course (AFTR) that covers
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r /d
r/d filing season issues and tax lawupdates. The AFTR course must include a knowledge-based
r/d r /d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d comprehension test administered at the conclusion of the course bythe CE Provider. r/d r/d r/d r/d r/d r /d r/d r/d r/d r/d r/d r /d
r/d r/d r/d r/d Page 1-1
r/d
Solution Manual Federal Tax Research
r/d r/d r/d r/d
r/d 13th Edition by Roby Sawyers, Steven Gill
r/d r/d r/d r/d r/d r/d
r/d Chapters 1 -13 r/d r/d
,Page 1-2
r/d SOLUTIONS MANUAL r/d
CHAPTER 1 r/d
INTRODUCTION TO TAX PRACTICE AND ETHICS r/d r/d r/d r/d r/d
DISCUSSION QUESTIONS
r/d
1-1. In the United States, the tax system is an outgrowth of the following five disciplines: law,
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d accounting, economics, political science, and sociology. The environment for the tax system is r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
provided by the principles of economics, sociology, and political science, while the legal and
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d accounting fields areresponsible for the system‘s interpretation and application. r/d r/d r/d r/d r /d r/d r/d r /d r/d
Each of these disciplines affects this country‘s tax system in a unique way. Economists address
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
such issues as howproposed tax legislation will affect therate of inflation or economic growth.
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r /d r /d r/d
Measurement of the social equity of a tax and determining whether a tax system discriminates
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d against certain taxpayers areissues that are examined bysociologists and political scientists.
r/d r/d r /d r/d r/d r/d r/d r/d r/d r/d r/d r /d
Finally, attorneys areresponsible for theinterpretation ofthe taxation statutes, andaccountants
r/d r/d r/d r/d r /d r/d r /d r/d r/d r/d r/d r/d
ensure that these same statutes areapplied consistently.****8880()
r/d r/d r/d r/d r/d r/d r/d r /d
Page 4 r/d
1-2. The other major categories oftax practice in addition totax research are as follows:
r/d r/d r /d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
• Tax compliance r/d
• Tax planning r/d
• Tax litigation r/d
Page 5
r/d r/d
1-3. Tax compliance consists of gathering pertinent information, evaluating and classifying that
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d information, and filing any necessary tax returns. Compliance also includes other functions r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d necessary to satisfy governmental requirements, such as representing a client during an Internal
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
Revenue Service (IRS) audit.
r/d r/d r/d r /d
,Federal Tax Research, 13th Edition
r/d r/d r/d r/d Page 1-3 r/d
Page 5 r/d
1-4. Most of the tax compliance work is performed by commercial tax preparers, enrolled agents (EAs),
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d attorneys, and certified public accountants (CPAs). Noncomplex individual, partnership,and
r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d corporate tax returns often are completed by commercial tax preparers. The preparation of more
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d complex returns usually is performed by EAs, attorneys, and CPAs. The latter groups alsoprovide
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d tax planning services andrepresent their clients beforethe IRS.
r/d r/d r /d r/d r/d r /d r/d r/d r/d
An EA is one who is admitted to practice before the IRS by passing a special IRS-administered
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d examination, or who has worked for the IRS for five years and is issued a permit to represent clients r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d before the IRS. CPAs and attorneys are not required to take this examination and are automatically
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d admitted to practice before the IRS if they are in good standing with the appropriateprofessional
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d licensing board. r /d
Page 5 and Circular 230 r/d r/d r/d r/d
1-5. Tax planning is the process of arranging one‘s financial affairs to minimize any tax liability. Muchof
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d modern tax practice centers around this process, and the resulting outcome is tax avoidance.
r /d r/d r/d r/d r/d r/d r /d r/d r/d r /d r/d r/d r/d
There is nothing illegal or immoral in the avoidance of taxation as long as the taxpayer remains within
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d legal bounds. In contrast, tax evasion constitutes the illegal nonpayment of a tax and cannotbe
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d condoned. Activities of this sort clearly violate existing legal constraints and fall outside of the
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d domain of the professional tax practitioner. r/d r/d r/d r/d r/d
Page 6 r/d
1-6. In an open tax planning situation, the transaction is not yet complete; therefore, the tax practitioner
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
maintains some degree of control over the potential tax liability, and the transaction may be modi- fied
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d to achieve a more favorable tax treatment. In a closed transaction however, all of the pertinentactions
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d have been completed, and tax planning activities may be limited to the presentation of the situation to
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r /d
r/d the government in themost legallyadvantageous manner possible.
r/d r/d r/d r/d r /d r/d r /d r /d
, Page 1-4
r/d SOLUTIONS MANUAL r/d
Page 6 r/d
1-7. Tax litigation istheprocess of settling a dispute with theIRS in a court of law. Typically, a tax
r/d r/d r/d r/d r /d r/d r/d r/d r/d r /d r/d r/d r/d r/d r/d r/d r /d r /d r/d
attorneyhandles tax litigation that progresses beyond the final IRS appeal.
r/d r/d r/d r/d r/d r/d r /d r /d r/d r/d r/d
Page 6 r/d
1-8. CPAs serve is a support capacityin tax litigation.
r/d r/d r/d r/d r/d r/d r/d r/d
Page 6 r/d
1-9. Taxresearch consists of theresolution of unanswered taxation questions. Thetaxresearch process
r/d r/d r/d r/d r/d r/d r/d r/d r/d r /d r/d r/d r/d
includes the following:
r/d r/d r/d
1. Identification ofpertinent issues; r /d r/d r/d
2. Specification ofproper authorities; r /d r/d r/d
3. Evaluation of the proprietyof authorities; and, r /d r/d r/d r/d r/d r/d
4. Application of authorities to a specific situation. r/d r/d r/d r/d r/d r/d
Page 6 r /d
1-10. Circular 230 is issued bytheTreasuryDepartment and applies to all who practice before the IRS.Page
r/d r/d r /d r /d r/d r/d r/d r /d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d 7
1-11. In addition to Circular 230, CPAs must follow the AICPA‘s Code of Professional Conduct and
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d Statements on Standards for Tax Services. CPAs must also abide by the rules of the appropriate
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
state board(s) of accountancy.
r/d r/d r /d r/d
Page 7 r/d
1-12. A return preparer must obtain 18 hours of continuing education from an IRS-approved CE Provider.
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d The hours must include a 6 credit hour Annual Federal Tax Refresher course (AFTR) that covers
r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r /d
r/d filing season issues and tax lawupdates. The AFTR course must include a knowledge-based
r/d r /d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d r/d
r/d comprehension test administered at the conclusion of the course bythe CE Provider. r/d r/d r/d r/d r/d r /d r/d r/d r/d r/d r/d r /d
