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