Tax Research and Planning

Tax Research and Planning Notes

Understanding Context of Transactions

  • Importance of having an open fact pattern in tax transactions.

  • Allows for better structuring to achieve desired outcomes for clients.

  • Preference for being proactive (acting as a "fortune teller") rather than reactive (being a "historian").

    • Quotation credit: Amy Chapman

Understanding Client Situations

  • The status and relationship of the taxpayer's family affect tax research and planning.

    • Filing Status: Married, single, head of household, etc. Impact on tax rates and liabilities.

    • Dependents: Number of children influences eligibility for credits such as the American Opportunity Tax Credit.

    • Designed to offset tuition expenses, but credited to parents.

    • If parents are high-earners and phased out of benefits, child with earned income can claim the credit.

Tax Structure Considerations

Entity Type

  • S Corporation vs. Partnership

    • S Corporation: More difficult to withdraw assets.

    • Partnership: Generally allows for easier asset withdrawal.

Domicile

  • Significant considerations for high net worth individuals.

    • Example: Client living in Florida but spending extensive time in California.

    • California actively seeks to prove residency for tax purposes.

  • Washington’s capital gains tax changes led to high net worth individuals leaving the state.

International Tax Considerations

  • US taxpayers taxed on worldwide income, regardless of domicile.

  • Legal terms: Citizenship, domicile, residence have different implications in tax law and treaties.

Tax Planning and Legislative Changes

  • Major tax law changes (e.g., Tax Cuts and Jobs Act and One Big Beautiful Bill Act).

    • Impact of Tax Cuts and Jobs Act (2017): Marginal rates changed from 39.6% to 37%, influencing client transactions.

    • Planning for Charitable Contributions: New ceiling on contributions and implications for tax deductions.

Client Motivation

  • Necessary to understand motivation behind transactions (tax maximization, structuring capital gains, etc.).

    • Situations requiring acceleration or delay of transactions based on upcoming tax changes.

Step-by-Step Tax Research Process

  1. Establishing Facts

    • Importance of clear and detailed facts in preparing legal memos.

    • Record assumptions when necessary.

  2. Identifying Issues

    • Differentiate between fact issues and law issues:

      • Fact Issues: Dates, amounts, transaction intents.

      • Law Issues: Determining applicable laws to questions (e.g., Code Section 1202).

  3. Locating Authority

    • Primary Authority Sources:

      • Statutory (Constitution, tax treaties, IRC).

      • Administrative (Treasury regulations, IRS rulings).

      • Judicial (Court cases).

    • Secondary Authority Sources:

      • Tax journals, publications, newsletters.

  4. Evaluating Authority

    • Importance of understanding the precedential value of courts and legislations.

    • Statutory authority carries the highest weight, whereas decisions from lower courts may not set a precedent.

  5. Developing Recommendations

    • Present alternatives and assess potential risks for clients.

    • Ensure communication of all findings and recommendations to clients.

  6. Communicating Conclusions

    • Document findings in writing to avoid misunderstandings.

    • Difference between client memo (succinctly written) and complaint file memo (detailed).

Substantial Authority and Compliance

  • Overview of Substantial Authority Test:

    • Must demonstrate at least a 40% likelihood of an argument's sustainability to avoid penalties.

    • Understanding of Reasonable Authority (20%-25%) and More Likely Than Not Authority (>50%).

  • Relevance of IRS guidelines to avoid penalties for inaccurate tax filings.

  • Importance of proper documentation and comprehensive authority citation in memos.

Resources for Tax Research

  • Access to online databases (Checkpoint, AnswerConnect) and secondary sources for guidance and law applications.

  • Journals and newsletters can provide updated strategies for tax planning.

Tax Research Challenges and Considerations

  • Different definitions of key terms across states can complicate tax research.

  • Evaluation of financial implications versus tax advantages in decision-making (e.g., investing in tax-advantaged instruments vs. cash flow realities).

  • Client relationships and communication dynamics can influence planning and recommendation validity.

Key Considerations in Client Interactions

  • Importance of accurately assessing and documenting client intentions and motivations.

  • Recognition of non-tax factors influencing decision-making process.

  • Discussion of penalties that may arise from non-compliance and clear understanding of laws and regulations.