The Tools & Techniques of Income Tax Planning, 7th Edition

Stephan Leimberg, Michael S. Jackson, Jay Katz, John J Scroggin, Robert S Keebler

• Verlag: The National Underwriter Company
• Jahr: 2020
• ISBN:
  9781949506587
• Auflage: 7
• Thema: Diritto
• Thema: Antitrust

With the passage of the SECURE Act in late 2019 and the recent COVID-19 legislation, financial advisors, planners, and insurance professionals are in need of up-to-date, reliable tools and expert insights into income tax planning techniques.

Every area of tax planning covered in this book is accompanied by the tools and techniques you can use to:

• Help your clients successfully navigate the latest income tax rules and regulations;
• Quickly simplify the tax aspects of complex planning strategies; and
• Confidently advise your individual clients as well as small- and medium-size business owners.

New in the 7thEdition:

• New chapters on the SECURE Act and COVID-19 legislation
• Details on IRS an DOL regulatory changes
• Updated advice on retirement planning issues, including COVID-19 hardship distributions, changing RMD requirements, and new contribution rules
• Coverage of new rules eliminating the "stretch IRA" and planning advice to help clients meet their estate planning goals
• Litigation updates

Topics Covered:

• SECURE Act and COVID-19 legislation
• HSA eligibility
• Contribution limitations
• HSA deductions
• Tax reporting
• Employer contributions
• Comparability testing
• Testing periods
• Use by self-employed individuals
• HRAs and FSAs
• And more! See the "Table of Contents" section for a full list of topics

As with all the resources in the highly acclaimed Leimberg Library, every area covered in this book is accompanied by the tools, techniques, practice tips, and examples you can use to help your clients successfully navigate the complex course of income tax planning and confidently meet their needs.

SOURCES OF INCOME TAX LAW FUNDAMENTALS

CHAPTER 1

Clearly anyone who has prepared a tax return or dealt with tax issues realizes that the federal income tax laws can be hard to comprehend and difficult to apply. The sheer number of tax provisions and their complexity can be somewhat daunting. Even the IRS, the nation’s tax collection agency, acknowledges that “for anyone not familiar with the inner workings of tax administration, the array of IRS guidance may seem, well, a little puzzling at first glance.”¹ Since Albert Einstein expressed his concern that tax laws were among the most complex of all human tasks, this statement by the IRS could be one of the great understatements of all time!

Yet, all tax professionals as well as financial planners must have a good general working knowledge of the tax laws in order to effectively assist clients. This chapter identifies the sources of federal tax law, the relative importance of each federal tax law source, and how to identify a source by its citation.

Obviously, federal tax law begins with the Internal Revenue Code (Code), a codification of tax statutes enacted by Congress. As discussed later in the chapter, the IRS and the Treasury Department promulgate regulations interpreting the Code providing guidance to taxpayers who are required to comply with the tax law. Regulations generally have the force of law. Disputes between the IRS and taxpayers are often litigated. Although the binding effect of judicial decisions varies with the level of the court, judicial interpretation of tax law is often impactful. Finally, on a less formal basis, the IRS issues revenue ruling, revenue procedures and other pronouncements that provide additional guidance for taxpayers. Although this type of guidance lacks the force and effect of law, it provides useful help to taxpayers.

Additionally, legislative history and tax publications are also helpful secondary authorities that offer explanations and interpretations of the tax law. Although these sources are not binding, they are helpful tools to assist the taxpayer.

In addition to a working knowledge of the Code, regulations, IRS rulings (and other IRS authored guidance), and court decisions, tax professionals and financial planners should be tuned into potential changes in tax law. Pending legislation, newly issued regulations and pending tax litigation awaiting court resolution are key examples of potential “game changers.” In recent years, most of the focus has been on whether Congress would enact “extenders” of provisions scheduled to expire as opposed to substantive changes of tax law. However, in the evolving world of tax law, substantive changes are inevitable.

THE INTERNAL REVENUE CODE

Congress derives its power to tax from the United States Constitution. Congress exercises this power by enacting tax statutes that are codified in the Code. Currently, the Code is more formally referred to as the Internal Revenue Code of 1986. Thus, all new provisions, amendments or repeals of tax provisions are to the 1986 Code. More broadly, the Code in its entirety is codified as Title 26 of the United States Code.²

Because the Code is the law, the IRS and all courts are required to follow it. Keep in mind, however, that even though the Code is voluminous, the meaning of each provision is far from clear. Unanswered questions arise daily as taxpayers attempt to apply the general provisions of the Code to many different factual situations. Thus, the role of the IRS is to administer and interpret the Code provisions enacted by promulgating regulations and other forms of guidance.

The Code is divided into subtitles, chapters, parts, sections, subsections, paragraphs, and subparagraphs. However, citations to provisions of the Code refer only to sections, subsections, paragraphs, and subparagraphs.³ A Code section may be referred to generally as “IRC Section 101.” However, when referring to a more specific part, the section should be cited as “IRC §101(a)(2)(B).” Separated into its essential components, this citation refers to:

• Internal Revenue Code Section 101;

• subsection (a);

• paragraph (2);

• subparagraph (B).

TREASURY REGULATIONS

Treasury regulations are issued by the IRS and the Treasury Department to: (1) provide guidance for new tax legislation (usually adding or amending provisions of the Code), and (2) address issues that arise with respect to existing Code sections. Through examples and exploratory material, the regulations reflect the IRS interpretation of the Code sections and direction to taxpayers as to how they must comply with those sections.

The Internal Revenue Regulations (Title 26) is one of 50 titles in the Code of Federal Regulations (CFR).⁴ Regulations are initially published in proposed form in the Federal Register⁵ in what is known as a “Notice of Proposed Rule Making” (NPRM). After public input has been fully considered by the IRS, through written comments and comments made in person at a public hearing, a final or temporary regulation is published as a “Treasury Decision” (TD) in the Federal Register.

Regulations are referred to by section numbers that roughly correspond to the sections of the Code. For example, the citation, “26 CFR §1.170-1(a)(3)” refers to a regulation that explains some aspect of Code Section 170.

Relative Weight of Regulations

There are two types of regulations, legislative and interpretative. Although both types are generally given the force and effect of law by the courts, legislative regulations carry the greater weight. In fact, they carry the same weight as the underlying Code. This is because, by specific mandate written into the text of the applicable Code section, Congress has authorized the Secretary of the Treasury to issue specific regulations.

For example, IRC section 469(l) (a legislative regulation dealing with the passive activity loss rules) provides: “The Secretary [of the Treasury] shall prescribe such regulations as may be necessary or appropriate to carry out provisions of this section . . .” The courts have interpreted this to mean that legislative regulations are entitled to “controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute.”⁶

Conversely, pursuant to IRC section 7805(a), interpretative regulations are issued under the general rule making authority of the Treasury Department. Because interpretative regulations are not promulgated with specific Congressional authority, they are subject to challenge if they do not implement the underlying Code section in a reasonable manner.⁷

A regulation (legislative or interpretative) promulgated by the Treasury may be in one of three forms: Proposed, Temporary or Final.

Proposed Regulation: As the name implies, a proposed regulation is simply insight provided by the IRS as to how it interprets (at least at that moment) a specific Code section(s). Similar to all regulations, they are published in the Federal Register. After the regulations are issued, the public is invited to submit comments and concerns. Based upon those comments, the IRS may or may not modify the regulations prior to their finalization. Although proposed regulations are not at the level of temporary or final regulations, according to the Internal Revenue Manual, a taxpayer may rely on them and examiners (revenue agents who audit taxpayer income tax returns) should follow them unless they are contrary to existing temporary or final regulations.⁸

Temporary Regulations: Following the enactment of tax legislation (amendments or additions to the Code), temporary regulations are sometimes promulgated to provide taxpayers with guidance with respect to “procedural and computation matters” in regard to the new tax law pending the issuance of final regulations.⁹

Final Regulations: As the name implies, final regulations set forth the IRS final interpretation of new or existing tax law. They supersede both proposed and temporary regulations.¹⁰

IRS RULING AND GUIDANCE

Revenue Rulings

A revenue ruling is an IRS interpretation of tax law as applied to a specific fact pattern set forth in the ruling. Published in the Internal Revenue Bulletin, revenue rulings are generally based on fact patterns that have recurred in a number of private letter rulings and/or technical advice memoranda (both discussed below) in which the IRS reached a similar conclusion. Although revenue rulings do not have the binding ef...