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CHAPTER 2

WORKING WITH THE TAX LAW

LECTURE NOTES

TAX LAW SOURCES

STATUTORY SOURCES OF THE TAX LAW

1. Relationship Between the Constitution and the Sixteenth Amendment.

a. Constitution. The source of the Federal taxing authority is the U.S. Constitution: “The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.” (Art. I, § 8, Cl. 1)

b. Sixteenth Amendment. The Sixteenth Amendment is the foundation of our Federal income tax: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

c. The Constitution also authorizes Congress to create treaties with other countries.

2. Origin of the Internal Revenue Code.

a. Prior to 1939 Federal tax law was comprised only of the various revenue acts passed by Congress. This unwieldy accumulation of laws was inconvenient and confusing for both enforcement and compliance.

b. The Internal Revenue Code of 1939.

(1). In 1939 Congress codified the tax laws. Codification consists of organizing the provisions of the tax laws in a logical sequence and placing them in a separate part of the Federal Statutes.

(2). The Internal Revenue Code is now Title 26 of the U.S. Code.

(3). This codification is known as the Internal Revenue Code of 1939.

c. The Internal Revenue Code of 1954.

(1). Because of additional tax legislation since 1939, Congress reorganized and renumbered the Internal Revenue Code again in 1954.

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2-2 2015 Annual Edition/Instructor’s Guide with Lecture Notes

(2). This recodification is known as the Internal Revenue Code of 1954.

d. The Internal Revenue Code of 1986.

(1). The Tax Reform Act of 1986 made substantial changes to the Internal Revenue Code.

(2). While the Code was not renumbered as it was in 1954, it is, nonetheless, referred to as the Internal Revenue Code of 1986 because of the sweeping changes made.

e. Now Statutory amendments to the tax law are integrated into the Internal Revenue Code of 1986 (e.g. the Patient Protection and Affordable Care Act of 2010 and the American Taxpayer relief Act of 2012).

THE LEGISLATIVE PROCESS

3. a. Origin of a tax bill. Tax legislation normally originates in the House Ways and Means Committee of the House of Representatives. A tax bill might originate in the Senate when it is attached to other legislative proposals.

(1) The Tax Equity and Fiscal Responsibility Act of 1982 originated in the Senate, and its constitutionality was unsuccessfully challenged in the courts.

(2) The Senate version of the Deficit Reduction Act of 1984 was attached as an amendment to the Federal Boat Safety Act.

b. If acceptable to the committee, the proposed legislation is referred to the entire House of Representatives.

c. Approved bills are then sent to the Senate Finance Committee.

d. Bills are then referred to the entire Senate.

e. Approved bills are referred to the President who may either approve the bill (in which case it becomes law) of veto the bill.

f. A vetoed bill may still be overridden.

g. When the House and the Senate disagree on the provisions of a bill, it is referred to a joint committee in an attempt to resolve the differences.

h. Committee Reports.

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Working with the Tax Law 2-3

(1) Referrals from the House Ways and Means Committee, the Senate Finance Committee, and the Conference Committee usually are accompanied by Committee Reports.

(2) These reports explain the provisions of the proposed legislation. They are important, therefore, in subsequently interpreting the tax law. They are said to reveal Congressional intent.

ARRANGEMENT OF THE CODE

4. The Internal Revenue Code is Title 26 of the U.S. Code.

a. It is arranged by Subtitle, Chapter, Subchapter, Parts, and Sections.

b. However, the Internal Revenue Code (IRC) is primarily referenced by section number. For example, IRC section 61 defines gross income. The symbol “§” is generally used rather than the word “section,” e.g. IRC § 62(a) Gross Income Defined. The plural would be “§§” rather than “sections”

c. “Citing the Code” on page 2-5 illustrates how specific parts of the code section are referenced.

EFFECT OF TREATIES

5. Tax Treaties. In addition to the Internal Revenue Code, the United States often signs bilateral tax treaties with other countries.

a. The provisions of these treaties are not integrated into the Internal Revenue Code. However, the IRS (at www.irs.gov) as well as some tax publishing services provide this information.

b. When the Internal Revenue Code and treaties conflict, the most recent legislation prevails.

c. With certain exceptions, a taxpayer must disclose on the tax return any filing position for which a treaty overrides a tax law. There is a $1,000 per failure to disclose penalty for individuals and a $10,000 per failure to disclose penalty for C corporations

ADMINISTRATIVE SOURCES OF THE TAX LAW (see Exhibit 2.1 on page 2-8 in the text)

6. Treasury Department Regulations. The Treasury Department under § 7805(a) has a duty to issue rules and regulations to explain and interpret the Code.

a. Treasury Decisions. Final Regulations are issued as Treasury Decisions (TD’s) in the Federal Register. Regulations carry considerable authority as the official



interpretation of tax statutes. They are arranged in the same sequence as the Internal Revenue Code and have the force and effect of law.

b. Organization. Treasury Regulations are arranged in the same order as the Code.

(1) An additional number is added, however, as a prefix to indicate what type of tax the regulation is interpreting (e.g. 1 for income tax, 20, for estate tax, 31 for employment tax).

(2) The Code section being interpreted is provided next.

(3) The numbering convention after the coded section is in chronological order and has no relation the Code subsections. (See text page 2-7 for an illustration.)

c. Types of regulations issued.

(1) Legislative Regulations.

(2) Interpretative Regulations.

(3) Procedural Regulations.

(4) Temporary Regulations – may be cited as precedent and are found in the Federal Register, Internal Revenue Bulletin, and Cumulative Bulletin. They are issued as Proposed Regulations and automatically expire within three years after the date of issuance.

d. Validity of a Regulation. One way courts assess the validity of a Regulation is by the legislative re-enactment doctrine. Here a Regulation is considered to have received Congressional approval if the regulation was finalized many years earlier and during the interim period Congress has not amended the relevant statutory language.

7. Revenue Rulings and Revenue Procedures. These are official pronouncements of the National Office of the IRS.

a. Revenue Rulings are official pronouncements of the National Office of the IRS and provide guidance to both IRS personnel and taxpayers in handling routine tax matters. They usually deal with more restricted problems than Regulations and do not carry the same legal force and effect.

b. Revenue Procedures are issued in the same manner as Revenue Rulings, but they deal with the internal management practices and procedures of the IRS and do not carry the same legal force and effect.

8. Letter Rulings and Determination Letters. Letter rulings and determination letters have in common the fact that they apply only to the person who requested the ruling or letter.



a. Letter ruling. A letter ruling is a statement issued by the National Office of the IRS in response to a taxpayer’s request, which applies the tax law to a proposed transaction. Revenue rulings often results from a specific taxpayer’s request for a letter ruling. Like letter rulings, determination letters are issued at the request of taxpayers and provide guidance on the application of the tax law. They differ from letter rulings in that the issuing source is an IRS executive rather than the National Office of the IRS, and involve completed transactions. Determination letters are not published.

b. Determination letter. A determination letter is a statement issued by the Area Director in response to a taxpayer, which applies the tax law to a completed transaction.

9. Technical Memoranda and Technical Advice Memoranda. These sources are not the same.a. Technical Memoranda (TMs) are memoranda from the IRS Commissioner to the

Assistant Secretary of the Treasury for Tax Policy. They are drafted by the Legislation and Regulation Division of the Office of Chief Counsel and relate to proposed Treasury Decisions or Regulations.

b. Technical Advice Memoranda (TAMs) are furnished by the National Office of the IRS upon request of an Area Director or an Appeals Officer of the IRS in response to any technical or procedural question (e.g., a completed transaction).

10. Other Administrative Pronouncements.

a. Announcements of Proposed Regulations as well as the related public hearings.

b. Treasury Decisions.

c. Executive orders.

d. Tax conventions (i.e., international treaties).

e. Legislation (including Committee Reports).

f. Certain court decisions may be reproduced.

g. Announcements of court decisions in which the IRS acquiesces or does not acquiesce.

h. Punitive action (e.g., disbarment, suspension) taken against persons (e.g., attorneys, CPAs) practicing before the IRS.



ADDITIONAL LECTURE RESOURCE

Provider of the Tax Source

Internal Revenue Code Congress/PresidentRegulations U.S. Treasury DepartmentRevenue Ruling National Office of IRSLetter Ruling National Office of IRSNotices and Announcements National Office of IRSDetermination Letter Area Director of IRSTechnical Advice Memorandum National Office of IRSTreasury Decision U.S. Treasury DepartmentRevenue Procedure National Office of IRSGeneral Counsel Memorandum General Counsel’s Office of IRSAction on Decision Office of Chief Counsel of IRSField Service Advice Office of Chief Counsel of IRSTechnical Expedited Advice Memorandum National Office of IRS

JUDICIAL SOURCES OF THE TAX LAW

11. Precedential Value. American law, following English common law, is frequently “made” by judicial decisions. Under the doctrine of stare decisis, each decision has precedential value for future decisions with the same controlling set of facts.

12. Trial Courts (Courts of Original Jurisdiction). A taxpayer chooses the route to pursue a tax conflict from among four alternatives (as illustrated in Figure 2.3 on page 2-11 and Concept Summary 2.1 on page 2-13 in the text).

a. U.S. Court of Federal Claims (hears tax and other claims against the Federal government). This court formerly was called the U.S. Claims Court. There is only one U.S. Court of Federal Claims and meets most often in Washington, D.C. Decisions are appealed to the U.S. Court of Appeals (Federal Circuit).

b. U.S. Tax Court (hears only tax cases). Taxpayer does not pay the deficiency before trial. Decisions are appealed to the U.S. Court of Appeals (Regional Circuit).

c. Small Cases Division of the U.S. Tax Court (hears only tax cases). No appeal available.

d. U.S. District Courts (hears tax as well as nontax cases). A jury trial is available. Decisions are appealed to the U.S. Court of Appeals (Regional Circuit). See Figure 2.4 on page 2-14 in the text.



13. Small Cases Division. The broken line between the U.S. Tax Court and the Small Cases Division in Figure 2.3 of the text indicates that there is no appeal from the Small Cases Division.

a. $50,000 or less. This court hears cases involving amounts of $50,000 or less.

b. No written record. The proceedings are informal, and there was no written record of such cases before 2002. Some of the more recent cases can now be found on the U.S. Tax Court Internet Website (http://www.ustaxcourt.gov/).

c. Informal Proceedings.

(1) No necessity for the taxpayer to be represented by a lawyer or other tax adviser.

(2) Special trial judges, rather than Tax Court judges, preside over the proceedings.

(3) Decisions are not precedent for any other court and are not reviewable by any higher court.

14. Appellate Courts. The two appellate courts are the Circuit Courts of Appeals (11 geographical circuits, the circuit for the District of Columbia, and the Federal Circuit) and the Supreme Court (see Figure 2.4 in the text).

a. All courts must follow the decisions of the U.S. Supreme Court.

b. A particular Court of Appeals need not follow the decisions of another Court of Appeals.

c. District Courts, the Tax Court, and the Court of Federal Claims must abide by the precedents set by the Court of Appeals of jurisdiction.

d. Appeal to the Supreme Court

(1) Appeal to the Supreme Court is not automatic.

(2) A Writ of Certiorari is a request to appeal a case to the Supreme Court.

(3) If the Supreme Court agrees to hear a case it will grant the Writ. The Court rarely hears a tax case.




JURISDICTION OF THE COURTS OF APPEALS

First Fourth Eighth TenthMaine Maryland Arkansas ColoradoMassachusetts North Carolina Iowa KansasNew Hampshire South Carolina Minnesota New MexicoRhode Island Virginia Missouri OklahomaPuerto Rico West Virginia Nebraska Utah

North Dakota WyomingSouth Dakota

Second FifthConnecticut Canal Zone EleventhNew York Louisiana Ninth AlabamaVermont Mississippi Alaska Florida

Texas Arizona GeorgiaThird CaliforniaDelaware HawaiiNew Jersey Sixth Idaho FederalPennsylvania Kentucky Montana U.S. Court of Federal Virgin Island Michigan Nevada Claims

Ohio OregonTennessee Washington

District of Columbia GuamWashington, D.C. Seventh

IllinoisIndianaWisconsin

WORKING WITH THE TAX LAW - TAX RESEARCH

15. Definition of Research. Tax research is the method whereby one determines the best available solution to a situation that possesses tax consequences.

a. In other words, it is the process of finding a professional conclusion to a tax problem.

b. The problem might originate either from completed or proposed transactions.

16. Tax Research Procedures. Tax research involves the following procedures:

a. Identifying and refining the problem.

b. Locating the appropriate tax law sources.

c. Assessing the validity of the tax law sources.

d. Arriving at the solution or at alternative solutions with due consideration given to nontax factors.



e. Effectively communicating the solution to the taxpayer or the taxpayer’s representative. See Figure 2.6 and Figure 2.7 on pages 2-27 and 2-28 in the text.

(1) A clear statement of the issue.

(2) In more complex situations, a short review of the fact pattern that raises the issue.

(3) A review of the pertinent tax law sources (e.g., Code, Regulations, Revenue Rulings, judicial authority).

(4) Any assumptions made in arriving at the solution.

(5). The solution recommended and the logic or reasoning supporting it.

(6) The references consulted in the research process.

f. Following up on the solution (where appropriate) in the light of new developments.

17. Identifying the Problem. This step consists of gathering all the information about the tax consequences of an existing or a proposed transaction.

18. Refining the Problem. This step generally involves analyzing alternative proposals and the possible tax implications of each option.

LOCATING THE APPROPRIATE TAX LAW SOURCES

19. Locating the appropriate tax law sources. The next step is to research the tax law to fine authoritative sources of the tax law that describe or explain the appropriate tax treatment of various alternative proposals. The major publishers of tax research services are:

a. CCH IntelliConnect, Commerce Clearing House. Includes the Standard Federal Tax Reporter.

b. RIA Checkpoint, Research Institute of America. Includes the United States Tax Reporter and the Federal Tax Coordinator.

c. ATX/Kleinrock Tax Expert, CCH/Wolters Kluwer.

d. Tax Management Portfolios, Bureau of National Affairs (BNA).

e. Tax Management Portfolios, Bloomberg BNA.

f. Westlaw services. Includes access to Tax Management Portfolios and Federal Tax Coordinator



f. TaxCenter, LexisNexis, primary law sources and various materials taken from CCH, Kleinrock, and Bloomberg BNA.

g. Federal Research Library, Tax Analysts (a nonprofit organization), primary law sources including treaties, with newsletters and commentaries.

20. Working with Tax Services. Instruction in using the various tax services is beyond the scope of this text. However, there are two important observations. First, always check for the most current developments. Second, always read the pertinent Code sections and regulations relevant to the question at hand.

21. Tax Commentary. Various tax publications often discuss topics relevant to the issue being researched. These article will often cite primary sources, thereby reducing the research effort.

ASSESSING TAX LAW SOURCES

22. Interpreting the Internal Revenue Code.

a. The Internal Revenue Code is the tax law, as passed by Congress.

b. Because it is law, it is written using rather precise legal terminology that is, sometimes, difficult to interpret. Further, several Code sections are often interrelated, further compounding interpretation.

c. Nonetheless, because it is the governing law, it should be the starting point for most tax research.

23. Assessing the Significance of a Treasury Regulation.

a. Treasury Regulations are the official interpretation of the Code. As such examining agents (Internal Revenue Agents) must give the Regulations the same weight as the Code when interpreting tax law.

b. Taxpayers disagreeing with the interpretation of a Treasury Regulation have the burden of proof to show that the Regulation is not consistent with the Code and Committee Reports.

c. Occasionally Congress will direct the Secretary of the Treasury to prescribe regulations to administer Code provisions. These so called Legislative Regulations have the force of law.

24. Assessing the Significance of Other Administrative Sources of the Tax Law.



Revenue Rulings. Revenue Rulings reflect the IRS interpretation of the tax law in specific situations. They do not, however, have the force of law and can be overturned in court.

25. Assessing the Significance of Judicial Sources of the Tax Law. While court cases have precedential value, the weight of that value depends on several variables:

The level of the court The legal residence of the taxpayer The type of decision The weight of the decision Subsequent events

26. Assessing the Significance of Other Sources.

a. Primary Sources. The Constitution, the Internal Revenue Code, Treasury Regulations, judicial decisions, Committee Reports, tax treaties, and IRS pronouncements are the primary sources of the tax law.

b. Secondary Sources. Legal periodicals, treatises, legal opinions, General Counsel Memoranda, and written determinations are secondary sources.

c. Substantial Authority. Generally, primary sources are considered authoritative while secondary sources are not.

(1) The exception is that, for purposes of the accuracy related penalty, some secondary sources are considered substantial authority.

(2) Note, most IRS publications intended to provide helpful individual and business tax guidance (e.g., pub. 17), are not considered authoritative sources.

COMMUNICATING TAX RESEARCH

27. Emphasize the six bullet points in the text about the importance of communicating the results of tax research.

COMPUTERS AND TAX RESEARCH

28. Online Commercial Services. There are several online tax research services (see Exhibit 2.2 on page 2-29 in the text). These services generally provide both primary and secondary sources of the tax law and allow researchers to search, link, store, and export the results of tax research.

29. Additional Online Sources. Exhibit 2.2 on page 2-29 in the text lists several web sites that provide tax information.

a. The IRS provides all of its forms and publications free on line.



b. The courts, (including the tax court) also provide free access to opinions.

c. The Internal Revenue Code and the Treasury Regulations are available free from several sources including the IRS web site.

d. Additionally, there are a variety of web sites and blogs that provide free tax related information and analysis. (Note that quality of these sources may be difficult to ascertain.

TAX RESEARCH ON THE CPA EXAM

30. The Uniform CPA Exam. Tax questions on the CPA exam are included in the three-hour regulation section. In addition to multiple choice questions, there are simulations that provide some authoritative literature that the candidate must research in completing the case study.

31. The AICPA maintains a web site to assist with the Uniform CPA Exam; www.cpa-exam.org. The site includes tutorials and sample tests including simulations.




Primary and Secondary Tax Sources

Primary Secondary

16th Amendment to Constitution XTax Treaty XInternal Revenue Code Section XU.S. Supreme Court Decision XU.S. Circuit Court of Appeals Decision XTax Court Memorandum Decision XTax Court Regular Decision XU.S. District Court Decision XU.S. Court of Federal Claims Decision XSmall Cases Division of U.S. Tax Court XFinal Regulation XTemporary Regulation X *Proposed Regulation XRevenue Ruling XRevenue Procedure XSenate Finance Committee Report XBluebook XLetter Ruling XTechnical Advice Memorandum XActions on Decisions XDetermination Letter XHarvard Law Review article XField Service Advice XGeneral Counsel Memorandum X

* For three years.





Figure 2--2

LOCATION OF JUDICIAL SOURCES

USTC AFTR F.Supp. F.3d Cls.Ct. S.Ct.Series Series Series Series Series Series a

U.S. DistrictCourts(tax cases) Yes Yes Yes No No No

U.S. TaxCourt b No c No

c No No No No

U.S. Courtof FederalClaims d

(tax cases) Yes Yes No e Yes e Yes e No

U.S. Courts ofAppeal(tax cases) Yes Yes No Yes No No

U.S. Supreme Ct.(tax cases) Yes Yes No No No Yes

U.S. DistrictCourts f

(all cases) No No Yes No No No

U.S. Courts ofAppeal(all cases) No No No Yes No No

U.S. Supreme Court(all cases) No No No No No Yes



Notes:

a Answers also apply to the United States Supreme Court Reports (abbreviated U.S.) and to the United States Reports, Lawyers Edition (abbreviated L.Ed.).

b Regular (not Memorandum) decisions are published by the U.S. Government Printing Office in Tax Court of the United States Reports.

c Both CCH and RIA (formerly P-H) have separate services for reporting the decisions (both Regular and Memorandum) of the U.S. Tax Court.

d All decisions (both tax and non-tax) of the U.S. Court of Federal Claims are published by the U.S. Government Printing Office in the Claims Court Reporter Series. From 1960 to October 1, 1982, Court of Claims decisions were published in the Court of Claims Reporter Series.

e From 1932 to 1960, the Court of Claims decisions were published in the F.Supp. Series. Beginning October 1982, the Claims Court decisions are published in the Claims Court Reporter. Beginning October 30, 1992, the Claims Court underwent a further name change. The new designation, U.S. Court of Federal Claims, begins with Volume 27 of the former Cl.Ct. (West citation) now abbreviated as Fed.Cl.

f “All cases” has reference to non-tax as well as tax decisions. Thus, it would include such varied issues as interstate transportation of stolen goods, civil rights violations, and anti-trust suits.



RESEARCH PROBLEMS

1. a. In this Tax Court Memorandum decision, the court upheld the IRS’s methods of income reconstruction and imposed a civil fraud penalty.

b. In this letter ruling, a proposed merger between members of an affiliated group qualified for tax-free reorganization treatment under § 355.

c. The IRS issued a nonaquiescence to Algerine Smith Estate, 198 F.2d 515 (CA-5, 1999).

2. a. Code § 708(a) provides that an existing partnership shall be considered as continuing if it is not terminated.

b. Code § 1371(a) provides that, with exceptions, Subchapter C shall apply to S corporations and its shareholders.

c. Code § 2503(a) provides that the term ‘‘taxable gifts” means the total amount of gifts made during the calendar year, less the deductions provided in Subchapter C.

3. a. Regulation § 1.170A-4(A)(b)(2)(ii)(C) provides that the care of the ill means alleviation or cure of an existing illness and includes care of the physical, mental, or emotional needs of the ill.

b. Regulation § 1.672(b)-1 defines a nonadverse party as any person who is not an adverse party.

c. Regulation § 20.2031-7(f) provides several tables for valuation of annuities, life estates, terms for years, and remainders.

4. A subtitle of the Internal Revenue Code should contain tax provisions related to a well-defined area of tax law. Subtitle E encompasses §§5001-5891 and contains tax law provisions related to excise taxes (e.g., alcohol, tobacco, firearms). Note that while other IRC sections may not address these excise taxes specifically, they are indirectly addressed in various other code sections. For example, § 164 addresses the deductibility of taxes and § 56 addresses taxes deductible for alternative minimum tax purposes.

5.a. Higgens v. Comm., 312 U.S. 212 (1941).

b. Talen v. U.S. 355 F.Supp. 2d 22 (D. D. C., 2004).

c. Rev. Rul. 2008-18, 2008-13 IRB 674.

d. Pahl v. Comm., 150 F. 3d 1124 (CA-9, 1998).


e. Veterinary Surgical Consultants PC, 117 T. C. 141 (2001).

f. Yeagle Drywall Co., TC Memo. 2001-284.

6. Using the citation, find the case in RIA Checkpoint or find the case on the U.S. Tax Court website (https://www.ustaxcourt.gov), under “Opinions Search” tab.

The issue in Green concerns the deductibility of commuting expenses. The taxpayer, Thomas Green, was a television executive whose office, his primary place of work, was in Manhattan. However, Mr. Green claimed that the den in his Long Island home was also a place of business because he worked there in the evenings. As a result, Mr. Green deducted the commuting costs he incurred driving between his home and his clients’ offices, on the way to his Manhattan office. The Tax Court concluded that these costs were nondeductible commuting expenses.

Mr. Green used an IRS publication (Publication 17, Your Federal Income Tax) to support the conclusion that his expenses were deductible commuting expenses. However, IRS publications are not primary sources of tax law on which research conclusions should be based. This was confirmed by the Tax Court. In the opinion, the judge said that even if the sentence taken out of context from the publication could support Mr. Green’s conclusion, “…the sources of authoritative law in the tax field are the statute and regulations, and not informal publications such as Your Federal Income Tax.”

7. IRC § 7463 (b) states that a decision entered into by any small case decision “shall not be reviewed in any other court and shall not be treated as precedent for any other case.”

In a reviewed opinion Larry Mitchell 131 T.C. 215 (2008) the court held that an ex-wife’s share of military retirement payments is subject to tax. This same issue had been previously litigated by the taxpayer in Mitchell, T. C. Summ. 2004-160.

In the past the Tax Court has used collateral estoppel in small tax case decisions to stop (estop) a party from litigating the same issue in a regular Tax Court case. As a result, this reviewed decision seems to contradict their stance. Judge Holmes stated that this Tax Court decision means “that they are without effect on future litigation at all.”

8. In the Tax Court case Kathryn Bernal:

a. Docket number 930-02.

b. Filed on February 20, 2003.

c. Respondent is David Jojola for the IRS.

d. Kathryn Bernal, the taxpayer, acted as her own attorney (e.g., pro se).

e. This case was assigned to and written by the Chief Trial Judge Peter J. Panuthos.



f. The court granted respondent’s (IRS) motion to dismiss for lack of jurisdiction. Taxpayer mailed her petition beyond the 3-year available time period.

9. Section 152(f)(3) allows the IRS to disallow a dependency deduction where a relationship is in violation of local law:

‘‘An individual is not a member of the taxpayer’s household if at any time during the taxable year of the taxpayer the relationship between such individual and the taxpayer is in violation of local law.” S. Rep. No. 1983, 85th Cong., 2d Sess. Indicates that it was the intention of Congress to preclude any dependency deduction for the partner of a taxpayer when the two are living in a quasimarital relationship, which is illicit under the laws of the state in which they reside.

John T. Untermann, 38 T.C. 93 (1962) holds that marital allowances are available only if the man and woman taxpayers are legally married under the laws of the state in which they reside. In a more recent decision [Cassius L. Peacock, III, 37 TCM 177, T.C. Memo. 1978-30] involving the interpretation of Arizona law, the exemption was denied on the same grounds.

The couple might consider moving to another state to salvage the deduction in future years. If a state has no criminal sanctions for sexual activity between consenting adults (e.g., California), the dependency exemption would be allowable. See, for example, In Re Shackelford v. U.S. [80-1 USTC ¶ 9276, 45 AFTR2d 80-1074 (D.Ct. Mo., 1980)] where the court interpreted Missouri law so as to permit an unmarried female to claim a dependency exemption for a male who was living with her and had no source of income. See Chapter 16 for a general discussion of personal and dependency exemptions.

10. To find the case, go to the website and click on the US Tax Court link on the left hand side of the page. Enter the name Mark Spitz in the search bar.

a. The tax years are 2001 and 2002, as indicated in the first sentence of the case, and not 2006, the year in the citation, which is the year the case was decided.

b. As noted above, 2006.c. The court decided in favor of the IRS. d. At the end of the decision the penalty in Sec. 6662 is discussed. This section

imposes a 20-percent accuracy-related penalty on any portion of a tax liability underpayment (the situation in which Mr. Spitz finds himself) attributable to a substantial understatement of income tax. Mr. Spitz was found not liable for the penalty because the court indicated that he was unsophisticated in tax law and had relied on a competent advisor to prepare his return.

11. The Internet Activity research problems require that the student access various sites on the Internet. Thus, each student’s solution likely will vary from that of the others.


You should determine the skill and experience levels of the students before making the assignment, coaching them where necessary so as to broaden the scope of the exercise to the entire available electronic world.

Make certain that you encourage students to explore all parts of the World Wide Web in this process, including the key tax sites, but also information found through the web sites of newspapers, magazines, businesses, tax professionals, government agencies, political outlets, and so on. They should work with Internet resources other than the Web as well, including newsgroups and other interest-oriented lists.

Build interaction into the exercise wherever possible, asking the student to send and receive e-mail in a professional and responsible manner.

12. See the Internet Activity comment above.

13. See the Internet Activity comment above.


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