Tax Law and Return Position

Tax Law and Return Position

Legitimately reducing the overall tax burden and minimizing cash outflows for tax purposes is what all companies seek to achieve. Whereas positions taken in tax returns may be in good faith and well grounded, the varying interpretations and complexities of tax law may inhibit these positions. The following will review the primary and secondary sources of tax law, define substantial authority, and explain the role that the courts and Internal Revenue Service play in the interpretation and source of tax law.

Primary Source of Tax Law

The primary sources of tax law comes from the government's legislative, administrative, and judicial branches, which provide primary authority through treaties, statutes, rulings, regulations, and judicial decisions. The United States Constitution, Article 1, section 8 gives Congress the authority to "lay and collect taxes, Duties, Imposts, and Excises." The Internal Revenue Code: Article 26 of the United States Code covers all matters concerned with taxation. Additionally, the primary sources consist of treasury regulations, IRS pronouncements, and court opinions.

Secondary Sources of Tax Law

Secondary sources of tax law come from tax periodicals and tax services, and are created to explain, locate, interpret, and analyze primary tax resources. One of the most important types of secondary sources of tax law is treatises. These are scholarly works providing in-depth analysis on different subjects that are written by legal experts. Law review, journal articles, and newsletters are also important secondary sources of tax law. These are typically more current and narrowly focused than treatises. Using secondary sources of tax law can help locate primary sources of law directly and provide a quick overview of the research topic. A tax advisor should always cite primary authorities when presenting research results.

Substantial Authority

The passage of the Emergency Economic Stabilization Act of 2008 set forth the standard of conduct that tax return preparers must adhere to in order to avoid penalties being imposed under section 6694 of the Internal Revenue Code of 1986. This standard is known as substantial authority, which is an objective standard that is justified if the evidence of the supporting position is substantial in relation to the evidence of the authorities in support of a contrary treatment. The substantial authority standard in practice is generally interpreted as requiring a likelihood of approximately 40 percent that the position will be upheld on its merits if