What is a Tax Research Memo?
A tax research memo serves as a guide for a tax professional illustrating potential tax consequences to a client or a tax position. A taxpayer will typically be required to document the issue with a well written tax research memo. A tax research memo will report on a statute or regulation that governs certain tax consequences or positions. While there are many different interpretations of the same tax issue , it is important that a tax research memo adequately explains and supports a tax position. If there is no documentation of the tax position, this can come back to haunt a taxpayer or a tax professional if there is a dispute with the Internal Revenue Service.
The Components of a Tax Research Memo
Although every memo is different, there are some components that are most common. I have discussed a couple of them in prior blog posts, but let’s break down those pieces and discuss them in detail.
Client confidentiality and privilege
Unless otherwise indicated, all tax memos are subject to client confidentiality and legal privilege. What that means is that you likely cannot share the conclusions in the memo or the contents of the memo with anyone other than the intended recipient (or their agent – such as another attorney in the firm working on the client’s matter). That is why tax attorneys have to be careful with email and letters to non-client third parties in litigation matters – if the information in the email or letter is discussed, it could rip a hole in the privilege. Many times, if there is a question on whether something is covered by the privilege or not, the recommended practice is to send the email directly to the client (or recipient of the memo or letter) with a BCC to the attorney.
Statement of Facts
This section narrows down the issues in the memo to the facts that are relevant to the analysis. Often times, the statement of facts is the longest section of the memo, because it means boiling down information and organizing it in a logical manner. It must be concise, but contain all of the relevant facts, including the dates that are important to the analysis.
Issue
The issue is what the answer to the statement of facts is. Once the issue has been articulated, it will be answered in the conclusion.
Conclusion
The conclusion provides the answer to the issue, after discussing the law, which sets up the analysis section.
Analysis
The analysis section is the meat and potatoes of the memo. It discusses the law that supports the conclusion and explains how the law was applied to the facts. In this section, the facts are vitally important, including how they differ from other situations, how they are similar to the issues discussed in cases or rulings, and whether they are different enough to matter. A good analysis takes time to complete, so write the memo with the understanding that it will not be completed the same day you start it.
How to Perform Tax Research
Any tax professional will tell you that effective legal tax research is absolutely critical to successful tax planning and compliance, as well as the basis for virtually all tax litigation. The reality is that the vast majority of tax advice we give is based on our effective analysis of the law and our interpretation of the rules that apply to a particular client, and our ability to convincingly persuade a court that our legal analysis makes sense under the facts presented in the client’s case. In fact, almost all of the income I earn as a tax lawyer is based on the arguments that we present to courts—if we’re wrong in our analysis, then we lose the case, and typically the client ends up paying substantial amounts of money in penalties and interest.
The first step in any legal research project is setting a plan—what issue are you addressing, what statutes does the law depend on, what regulations cover the issue, what cases have been decided on this matter previously, and are there any other administrative guidance on this issue?
Wikipedia has an excellent collection of articles on how to perform legal research (at least on U.S. law). The best source of legal rules (statutes and regulations) is Westlaw’s Statutes and Administrative Codes (Statutes & Court Rules link, on the left side, Texas link, Regulations by Subject link). For federal cases, the best starting point is the United States Supreme Court. For federal regulations, the treasury regulations should be the starting point. We also recommend the IRS Administrative rulings (C.C.A.’s, A.O.D.’s, Rev. Rul.’s, Rev. Procs, I.T.A.A.’s, I.T.’s, T.A.A.’s, and T.C.M.’s) and the Tax Court memorandum opinions. The Tax Court is a tax-specific court that will hand down a "memorandum" opinion similar to a decision by the appellate court—meaning it is not designed for publication, but is still persuasive authority. State law varies, obviously, from jurisdiction to jurisdiction, so check your state’s court website for guidance.
For federal tax cases, our favorite researcher is Bloomberg Law, although Westlaw also has robust content and research capabilities. Bloomberg is less intuitive than the basic "search box" feature on Lexis/Nexis, and I ended up reading their small PDF manual on conducting legal research on Bloomberg, but on tax issues Bloomberg Law’s results are just better than what you’ll find on Westlaw or Lexis/Nexis. Additionally, Bloomberg Law has extensive secondary sources (law reviews, treatises, legal encyclopedias), transaction guides, and company information. To be honest, the sheer breadth of information available on Bloomberg is mind-boggling at times, and I suggest developing a plan before you start your search.
Remember that, even if you do not have access to Google Scholar’s feature that allows you to search through cases (the "court case" tab on this web page), you can still search through Google Scholar’s "Law" tab on the home page and find free and public access to most cases.
Writing the Intro and Statement of Facts
Crafting a compelling introduction with a clear statement of facts is critical for any tax research memo. Reading a case law book or website is is mind-numbing and has all the outward excitement of a trip to the dentist. So many lawyers reading research memos are looking for a short-cut to the answer and simply read the introduction and statement of facts. You’d better have these sections of your tax research memo dialed in.
The introduction is the most important part of your tax research memo because it will get the reader’s attention, let them know that you’ve put in the time to research the issue, and give them the answer in their format (a bullet list). If your reader doesn’t make it past the introduction, then your 15 hours of research were a waste of time.
Your introduction should be written like you would talk to another tax lawyer with knowledge of the area. Your introduction should state the troublesome issue, what you found in your research, and the conclusion. My typical introduction looks like this:
This memorandum addresses your questions regarding the sale of an individual’s medical practice and the related tax issues.
Specifically, you asked:
- Whether the state medical board has jurisdiction to determine valuation;
- When a medical practice is an asset of the estate; and
- Whether the value of the practice is included in the decedent’s estate.
Here, the medical board does not have jurisdiction to determine how a medical practice should be valued for state tax purposes. The practice is generally an asset of the estate when the decedent has retired from practice or has no remaining ownership interest. The value of the practice may be included in decedent’s estate when the practice is an asset of the estate.
When I write a draft of a tax return or some other technical document, I often write a draft of the introduction and statements of facts first. Doing this lets me focus on the organization of the memo before I worry about the research and craft the section that is the most challenging.
The statement of facts for a tax research memo should be very easy because you are writing the information already known to the reader and that most people never put down so they can read later. The statement of facts should include all the important facts related to the answer. Here’s a simple example statement of facts:
- Client is a 70-year-old doctor.
- She intends to retire in 5 years.
- Husband owns 10 shares of stock issued by Doctor. Doctor is structured as an C Corporation.
- Husband wants to know if the medical board can determine the value of the practice.
- Doctor is profitable but is uncertain what it is worth.
Tax Case Law and Relevant Authority Analysis
The synthesis of tax law and cases is regularly done through an organization or clarity of the tax law and relevant law for easy understanding, application and communication with the reader. An analysis should begin with a summarization of the purpose or nature of the IRS code section or regulation. Statutes will likely reference legislative intent and regulatory material. Any secondary material should be reviewed to supplement understanding of the applicable rules and law. This material may also be included to support your practical perspective on an application of the rule or law for a given law for proper application.
An individual will review the factual setting in which the law will be applied. A review of the statute and its language may demonstrate whether certain requirements have been fulfilled to trigger taxation or receipt of a deduction. It may also explore if there are any exceptions or exclusions. However, a review of the facts is not always important or workable if an issuer is requesting the memo in order to understand the language or law of the relevant section or regulation and its possible interpretation by the IRS.
An analysis of the tax law should focus on primary authority before considering secondary authority. One should read and digest the statute and its language. A review of the relevant statutes may provide detailed language or citations to relevant legislative history. There will not always be a plethora of interpretations so it will be necessary to consider Alternative Bases for Interpretation and use secondary authority in these instances.
One may review the various levels of taxation in the U.S. Interest charges may apply when there is an underpayment of taxes. Taxpayers may pay lesser, or no, taxes than a taxpayer set forth in a relevant statute or regulation due to exemption status. A person or entity could seek to avoid being subject to certain taxes or sets of taxes through being set forth in a relevant statute or regulation. The purpose of a tax may also be relevant such as compensation for a service or payment for a use in order to determine if a transaction or set of transactions would be subject to taxation. Taxation might also be used in order to recover costs or establish rules or policy that discourage certain actions.
Conclusion Sentence and Drafting
You’re almost there! You’ve gone through the process of identifying the tax issues in play and taxed your brain as you worked through the analysis. Now comes the good part, you get to tell the taxpayer what you think tax treatment is appropriate for the particular set of facts because that’s why they hired you. Formulating a conclusion from your analysis takes experience, but unless you completely miss an issue or you’re really creative, be assured that the 172 page hypothetical tax returns you’ve been working on don’t necessarily need to result in a completely convoluted conclusion.
More likely than not, the conclusion should look similar to the following (this is the take home problem discussed in class): As mentioned above, the conclusion section should follow the introduction and contain a specific statement of the conclusion reached. For example: "In light of all the facts and relevant authorities discussed above, A will not be able to deduct the payments to H under section 162(a)(1) because her employment with P did not require her to incur those medical expenses for the benefit of P. Thus, A will not be required to recognize income under section 83(a)(i)"
Sometimes, however, it is necessary to summarize the relevant analysis prior to your conclusion section. For example: "Under the doctrine of constructive receipt, H will be required to report the home equity line of credit proceeds as income this year because the advance of the proceeds was within his reach and he could have obtained them at any time." After the relevant analysis is summarized, a specific statement of the conclusion reached must follow. More often than not, that specific statement will be the "bottom line" revenue rulings or fact pattern turnaround opinion language—upon the current facts the IRS will or will not rule a certain way.
If your conclusion differs from the IRS rulings or other authorities you discussed in your analysis, you should explain the reasons for your differing conclusion . If you reached the same conclusion as the IRS and it is a well accepted position, a conclusory statement along the lines of "it is our position that the Service would rule, in accordance with its previously issued revenue ruling" would suffice.
Almost every conclusion should end with a "no prescriptions" or alternatively, "two prescriptions." Taxpayers want to go away knowing exactly what needs to be done and nothing I have ever seen would be done without a clear "to do" list. And, as noted above, sometimes simply telling the taxpayer what the IRS would do would suffice. But, more often than not, it is necessary to go one step further and either instruct the taxpayer on how to complete his or her form, or provide the taxpayer with additional forms and appropriate instructions. Sometimes, depending upon the type of memo, the instructions that accompany the "to do" list may be more helpful than the "to do" list itself, so don’t overlook the importance of these additional instructions.
If you do what I suggest in this post, you should end up with a conclusion that looks something like: "The above research was performed based upon the following facts. It is our position that A will not be able to deduct the payments to H under section 162(a)(1) because her employment with P did not require her to incur those medical expenses for the benefit of P. Thus, A will not be required to recognize income under section 83(a)(i). It is further our position that H will be required to report the home equity line of credit proceeds as income this year under the doctrine of constructive receipt because the advance of the proceeds was within his reach and he could have obtained them at any time.
The appropriate revenue rulings are included for your review as well as the appropriate forms and instructions to complete those forms are attached hereto.
Formatting and Pagination
Each jurisdiction has its own requirements for filing documents with the court and directing memos to judges’ chambers. Familiarize yourself with these rules and comply with them. As a general rule, you should double space between the obligatory header and your first sentence, and between each heading and the following analysis or discussion. The standard margin for judges’ chambers copies is 1", but margin settings of 1 ½" are acceptable. The font must be no smaller than 12 point, but 14 point font is preferred.
Use headings and subheadings to guide the reader through the memo. Pay careful attention to the capitalization of case names in the heading. Ensure proper abbreviations for the names of courts, e.g., "C.A." for "Court of Appeals" or "S.Ct." for "Supreme Court."
Footnote any statutory citation. You should explain abbreviations when they first appear in the text, and use each abbreviation consistently throughout the document. If there is a hyperlink to the authority, insert a period and space, and then follow it with a letter "s" for plural references (as in, "see generally C.G.S. 12-183s"). If there is no hyperlink, insert an endnote character set to the appropriate function.
The completed draft should be printed single-spaced and read aloud to catch syntax errors. Finally, add the signature block and your electronic signature.
Common Pitfalls to Avoid
The most common are probably:
- Not clearly stating the issue to be addressed in the memo in the introduction. Failure to do so is usually obvious to the reader "after the fact," but at the time it is a good idea to expressly state the issue to be addressed at the beginning to avoid eliminating that possibility for later making a known mistake.
- Forgetting to address the "bad facts" of the situation (which may render the issue moot) discussed in Part II of this memo. Or, alternatively, not noting the "good facts" of a client’s situation that should be emphasized as making a bad result less likely. Both of these are often missed in a hurry and "after the fact" stick out in their own ways as obvious gaps in the analysis that may have been easily recognized if initially included.
- Not preparing the memo by first organizing the various thoughts to be expressed in a logical manner. Note that such organization and logical flow of discussion is required in most reports prepared by tax practitioners and, in fact, probably should be standard practice for any carefully written document.
- Providing too brief a discussion on the area of tax law involved or not adequately reporting the law involved to cover all the "generalities" in the analysis and "filling in the blanks" or addressing the "harder" specific issues involved (like an IRS exam, start with the "easy" issue of organizing and reporting the law involved before addressing the "harder" specific issues). The same organization and logical flow of discussion applies here…you have to get from point A to point Z without skipping between points all of the way.
- Forgetting to also discuss related tax authorities (like court decisions) adverse to the position taken and pointing out their weaknesses, if possible (e.g., their failure to deal with your particular issue), that could be relied upon by the adversary in trying to discredit the quality of the position being taken on behalf of the taxpayer. To the extent one does so, the taxpayer should have no problem "accepting" a bad ruling by the IRS that is otherwise inconsistent with the tax law as reporting to him the reasonable possibility (although remote) of an IRS exam (or the failure to achieve a prospective ruling if requested) due to that bad ruling. Practitioners must still inform the taxpayer of the risks involved in relying upon a tax opinion even if the IRS issues a ruling on the subject in favor of the taxpayer.
Tax Research Memo Example
Tax Research Memo
Date: ______________
RE: Earnings stripping rules for Corporations under IRC § 163(j)
ISSUES
1. What are the earnings stripping rules for Corporations?
2. Did my Client violate the earnings stripping rules?
CONCLUSIONS
1. IRC § 163(j) imposes limitations on the amount of interest expense that corporations may deduct in any particular tax year. If the corporation has excess interest expense, this is treated as a carryforward to the next tax year. The rules do not apply to three groups of corporations (certain utility corporations, real estate investment trusts, and S corporations).
2. Yes, your Client violated the earnings stripping rules. They took on an unnecessary interest expense of $______ for the tax year ending _____ .
FACTS
Your Client is a Corporation that owes foreign parent group $______ in principal debt. The maturity date of the debt was ________. The interest rate was ________.
Your Client deducted _____% of its taxable income as interest expense.
ANALYSIS
1. Your Client is subject to the interest-stripping rules under IRC § 163(j). It has _________ average gross receipts for the past three years, ________ of which were gross receipts from domestic sources. A review of the loan agreement shows that your Client’s debt meets the definition of a "corporation."
2. Your Client’s interest expense is subject to the limitation of ____% of GPA, which is $_______. Your Client has excess interest expense of $______.
The excess interest expense is treated as a carryforward to the next tax year.