Writing Tax Research Memos

Tax professionals often must document and communicate their tax research. Clear written communication is important since tax planning ideas or IRS audits can cause prior tax returns to be amended or adjusted long after originally filed. The tax professional may have long since forgotten the reasons for his or her research conclusions, so it is essential that the relevant tax authorities and rationales be thoroughly documented and clearly explained. In some cases, the tax professionals who prepared the research memo may no longer be with the firm, increasing the importance of written communication that others can follow easily.

Writing a tax research memo is an art. Tax professionals do not universally use the same techniques. Generally, the more time taken to prepare a research memo, the less time necessary to review it. The method we propose is biased toward the ease of review and, thus, becomes more appropriate as the difference in compensation rates between the memo’s reviewer and preparer increases.

A quality tax research memo is the result of thorough research, careful interpretation of the tax authority located, application of the tax authority to the client’s facts, and clear communication of the research analysis and conclusions. On this web page, we focus primarily on the communication aspects of tax research. After reviewing these communication principles, please read the fact scenario that we provide for practice, complete the research, and write a research memo following the lesson guidelines. Then, compare your memo with the example research memo, which illustrates and applies the method we recommend.

 

Organize the Research Memo

Tax research memos should contain features allowing reviewers to read and understand their contents quickly. Organization is the key ingredient. Under the method we recommend, the research memo contains two parts: (1) the main text and (2) authoritative support materials. The main text is the portion the researcher writes and consists of facts, issues, conclusions, and analyses. We refer to the main text as Section A of the memo. The support materials, which are essentially attachments to Section A, are primary sources of the tax law (e.g., Code, regulations, judicial decisions, and rulings). We refer to the support materials as Section B.

All pages in Section A contain certain uniform features. At the top of each page, a two-line heading includes the client’s name and the relevant tax year. Not only does this information provide ease of reference, but it allows pages that become separated to be reunited with the correct file or research memo. In addition, the preparer should date and initial all pages in Section A (e.g., in the bottom right-hand corner). The date allows the reviewer to know when the research was completed. Among other things, the exact date permits the reviewer to determine whether the research preceded or succeeded a change in the tax law (e.g., a relevant Tax Court decision). Initialing each page allows the reviewer to know who was responsible for the research, especially if questions should arise or clarifications are needed later.

Pages in both Sections A and B should be numbered, and the number should appear in the same location on each page to provide ease of reference (e.g., at the bottom center). To distinguish between pages in different sections of the research memo, page numbers should include two parts--a section number and the page within that section. Thus, the pages of written analysis might be numbered A-1, A-2, A-3, etc. Similarly, each page of support materials could be numbered B-1, B-2, B-3, etc.

The paging system should be logical, understandable, and expandable. To be logical, the system must allow for easy cross-referencing, providing the reviewer with an easy-to-follow “road map” or audit trail through the memo (as discussed later). To be understandable, the system should not be unnecessarily complex. Keep it simple. To be expandable, the system should allow for additional pages to be added later without renumbering existing pages. For example, if two pages must be inserted later between pages B-6 and B-7, they could be numbered B-6a and B-6b. Generally, pages should not be numbered until the research project is thought to be complete. Numbering pages prematurely (especially in Section B) may require frequent and unnecessary expansions, complicating the paging and cross-reference system.

Support material in Section B should be arranged in order of authoritative weight. For example, the relevant Code sections should appear first (in Code section order), followed by regulations (also in Code section order). Thus, if §132 is the lowest numbered Code section cited in the research memo, the first three pages of §132 should be numbered B-1, B-2, and B-3. Assume you cite no Code section other than §132, and Reg. §1.61-21 is the lowest numbered regulation you cite; that is, no regulation is cited for a Code section before §61 and no regulation before the 21st is cited under §61. In this case, paging for Reg. §1.61-21 should begin with B-4. After the last regulation, all judicial decisions should appear (highest courts first and most recent dates first within each court), followed by all revenue rulings cited (most recent rulings first). Organizing the authoritative support in this logical order allows the reviewer to locate a particular source quickly, especially when the reviewer wishes to check for or review authoritative support before reading Section A. For example, the reviewer may know that Malat v. Riddell (S.Ct., 1966) is relevant to the research and wish to check whether the memo’s preparer consulted this decision before the former reads Section A. Listing authoritative support in a logical order mitigates the desirability or necessity to include a table of contents or similar guide to the support materials in Section B, especially when this section is lengthy.

 

Clearly State Facts

At the beginning of Section A, provide a complete statement of the facts. As with other parts of Section A, a heading should precede this part to clearly identify and set off the facts. All potentially relevant facts should be stated clearly. Careless or ambiguous statements of facts or omitted facts can lead to inefficient research or, worse, inappropriate conclusions. Clearly stating facts is particularly important when more than one person is involved in the research project. For example, the person who began the research might leave the firm before finishing. The facts should be written clearly so that whoever continues the research project (or deals with the issues in a later IRS audit) will understand them with virtually no chance of misinterpretation. When research is based on misconceptions or incorrect facts, part or all of the research often must be redone. Depending on the situation, the tax professional may bear the cost of these mistakes and resulting inefficiencies.

Facts often are gathered at different times and through different means. For example, facts might be obtained initially through a face-to-face meeting with the client. After the research has begun, the tax professional may realize the need for additional facts or clarifications, which might be obtained through a follow-up telephone conversation, e-mail correspondence, or a formal letter.

Though additional facts might be incorporated through cross reference from section A of the research memo, it is often preferable to weave all facts together so that they reside in one location and are organized so that related facts are together. Documents containing relevant facts (e.g., contracts, court orders, and hand-written notes) can be incorporated through cross-reference and included in a Section C of the research memo.

 

Express Issues Clearly and Conclusions Early

As with the statement of facts, the tax professional should express all issues clearly and unambiguously; that is, the meaning of issues should be subject to only one possible interpretation. When the issue is written unclearly or ambiguously, the tax professional may research the wrong issue. Or, the reviewer may be uncertain about the issue and whether the correct issue was researched. The example below demonstrates how confusing an ambiguously worded issue can be for the researcher and, even more so, for the reviewer:

Ambiguous:

Did John request a determination letter to ascertain that a deductible charitable contribution was made?

The meaning of this issue is unclear. Does the researcher wish to determine whether the donee organization possesses a determination letter? If so, this question of fact should be verified through contacting the organization. Whatever information the researcher discovers from this contact should be included in the facts section (discussed earlier). Since this issue is not of a legal nature, it should not appear as a separately stated issue requiring legal research. Alternatively, the researcher may wish to know whether the contribution John made is deductible. Perhaps the researcher has mistakenly assumed that John must ask for a copy of the organization’s determination letter to be entitled to a deduction. Another possibility is that the researcher meant to refer to a qualified receipt rather than a determination letter. The point is that the issue is expressed ambiguously and, thus, may cause research inefficiencies or errors.

Issues should be written in question form. In contrast to issues within judicial briefs, research memo issues should be couched in the specific context of the client’s facts. Also, issues need not be formulated to demand “yes” or “no” responses. Consider the examples below:

Too General, Vague:


How much can a taxpayer deduct for money donated to her church last year?

Not a Question:

A question arises as to how much Judy Smith can deduct of the $60,000 she donated to the First Universal Church in 2001.

Better:

How much of the $60,000 Judy Smith donated to the First Universal Church in 2001 can she deduct?

Provide sufficient detail so that the issue’s tax implication is clear, but avoid including a detailed cite within the issue. As appropriate, express issues in the context of major tax concepts like gross income, capital gain, exclusion, deduction, credit, and basis. On income-related issues, gross income is usually the relevant tax concept to emphasize rather than “income” or “taxable income.” Omitting reference to the relevant tax concept or referring to the wrong tax concept often results in ambiguity. Consider the examples below:

Unclear Tax Concept:


What is the tax treatment for a company under Reg. §1.162-5(c)(1) when it pays its employee’s tuition?

Explicit Tax Concept:


Can Borden Company deduct the $2,300 it pays to Smith to cover his tuition?

Another common mistake is to emphasize financial accounting concepts, such as net income and expense, rather than the analogous tax concepts, namely gross income and deduction. Look at the examples below, the first of which, if taken literally, involves the non-tax issue of how to report a payment for financial statement purposes:

Accounting Concept:


Can Bikes-R-Us, Inc. expense the rental payment to its chief financial officer?

Tax Concept:

Can Bikes-R-Us, Inc. deduct the rental payment to its chief financial officer?

Number and arrange issues in the most logical order. Generally, important issues should be addressed first, but avoid the temptation to list numerous obscure and irrelevant issues. Some issues cannot be addressed until other issues are resolved first. To maintain a logical progression, dependent issues should follow precedent issues.

The presentation of research findings and conclusions should not resemble a mystery novel. Immediately after each issue, give a clear and unambiguous conclusion in a separate sentence. Then, proceed to logically and methodically explain how you arrived at your conclusion. In other words, do not make the reviewer wade through the entire analysis before revealing the conclusion. Highlight your conclusion up front. Research memos are easier to read when the reviewer knows from the outset where the analysis will end.

 

Cite Tax Authority

Documentation is a very important part of communicating the results of tax research. Unsupported statements or opinions are worthless to the reader who desires to verify your findings. Supporting cites should be to primary sources, except in rare, unusual situations.

The tax professional should provide complete and specific cites. For example, do not write §864 or Reg. §1.162-1 when you actually want the reviewer to see §864(c)(4)(C) or Reg. §1.162-1(a)(2). However, avoid unnecessary redundancies such as Code §864(c)(4)(C), Code section 864(c)(4)(C), IRC §864(c)(4)(C), or Treas. Reg. §1.162-1(a)(2). In tax research, reviewers understand statutory cites to be references to the Internal Revenue Code and regulatory cites to be references to Treasury Regulations.

Under the method we recommend, the tax researcher provides authoritative support in Section B for positions taken in Section A. Thus, Section A cites to judicial decisions should include only the title, court, and year of the decision. For example, Jones v. U.S. (DC-Pa, 1987), Smith v. CIR (TC, 1998), Brown v. CIR (TCM, 1983), U.S. v. Spencer (CA-2, 1990), and CIR v. Jacobs (S.Ct., 1942) are appropriate cites. Note that the volumes and page numbers are missing as these do not convey information about the authority’s legal weight and, thus, serve only to clutter the analysis. The reviewer does not need this additional information since, under the method we recommend, the authoritative support is provided in Section B. Likewise, citations to Revenue Rulings should not include the volume and page number. For example, Rev. Rul. 99-12 is sufficient.

Abbreviate very common tax terms as appropriate, especially in cites. Thus, use Reg. rather than Regulation or Treasury Regulation, Rev. Rul. rather than Revenue Ruling, CIR or Comm. in judicial citations rather than Commissioner or Commissioner of Internal Revenue, IRS rather than Internal Revenue Service, Code or IRC rather than Internal Revenue Code, and U.S. rather than United States. However, avoid the temptation to abbreviate many words or phrases beyond those that are commonly accepted. For more information about appropriate abbreviations, see the lesson on wordiness.

 

Attach Tax Authority

Attaching copies of tax authorities and cross referencing from Section A’s analysis to authoritative support in Section B takes time. But it saves the reviewer time. Thus, whether attaching support makes sense depends on the time and compensation trade-offs between the tax memo’s preparer and the reviewers.

The photocopied support materials (that appear in Section B) must include the full text (beginning to end) of any Code section, regulation, ruling, or judicial decision cited. If §951(a) is cited in Section A, the entire §951 should be included in Section B. Similarly, if you cite Reg. §1.61-2(a)(1), you must include all of Reg. §1.61-2 in your support materials, not just the page from the second regulation from which you are citing. If you cite a judicial decision or revenue ruling, the entire decision or ruling must be included. This procedure allows the reviewer to examine your supporting authority in context if he or she wishes. Reviewers sometimes do not have ready or convenient access to authoritative support. Even when reviewers can be assumed to have ready access, it is important to direct the reviewer to the exact passage on the correct page that is relevant. Unless the researcher and the reviewer are using the same research materials, even a page reference will not necessarily lead the reviewer to the correct page of a referenced source because the paging system may differ. For example, how can the researcher using RIA’s CheckPoint refer the reviewer to the exact location in a judicial decision if the latter will be locating the decision using LEXIS or hard copy materials like United States Tax Cases (USTC)? Attaching copies of support materials avoids these potential inefficiencies.

When authoritative support (e.g., a regulation) is cited in Section A, provide a cross reference (i.e., a page number such as B-12) in the right-hand margin to the exact page of that authority in Section B. On the cross-referenced page in Section B, clearly direct the reviewer’s attention to the exact location on the page using a pastel highlighter, underlining, marginal brackets, arrows, asterisks, or similar techniques. This is very important. It emphasizes the pertinent passage and absolves the reviewer from reading every word. Never highlight the headnote (or syllabus) of a ruling or judicial decision. Headnotes are not part of the official opinion, carry no legal weight, and sometimes are ambiguous, misleading, or wrong.

Do not highlight passages in Section B that are not specifically cited in Section A since the result can be distracting. In fact, avoid the temptation to highlight large portions of the page; try to narrow it down to one or two sentences or a few lines. The reviewer always can read this material in context if desired. When the reviewer sees a cross-reference in the right-hand margin of Section A and turns to the cross-referenced page in section B, he or she should immediately see the specific sentence to which you refer. Do not expect the reviewer to wade through several highlighted sentences or paragraphs to find the specific passage that you reference.

 

Apply Tax Law to Facts

Applying the tax law to a client’s facts involves two distinct steps. First, discuss tax authority in sufficient detail to show its relationship to the client’s situation. Second, build a “bridge” that logically connects each cited authority with the facts. You should not simply refer the reviewer to your source. Do not force the reviewer to interpret the tax authority, wonder how your cited authority relates to the issue, or otherwise guess your line of reasoning. Make it so clear that misinterpretation is impossible. Consider the example below, which involves the statutory law:

Insufficient:

The theft loss is deductible in 2001 according to §165(e).

Better:

Section 165(e) indicates that theft losses are deductible in the taxable year sustained. Thus, the theft loss is deductible in 2001.

When a ruling or judicial decision is cited as authority, a bit more detail is often required to clearly establish the source’s relationship to the client’s facts. Look at these examples:

Insufficient:

Based on Johansson v. U.S. (CA-5, 1964), our client is engaged in a trade or business within the U.S. since his horse entered the Kentucky Derby.

Worse:

Our client is engaged in a trade or business within the U.S. since his horse entered the Kentucky Derby. See Johansson v. U.S. (CA-5, 1964).

Better:

The taxpayer in Johansson v. U.S. (CA-5, 1964) was a professional boxer who engaged in only one U.S. prize fight. The court held that the one event was so significant that it constituted a U.S. trade or business. Similarly, our client is engaged in a trade or business within the U.S. since his horse entered the Kentucky Derby.

In the analysis of each issue, sometimes the clearest tax authority is a ruling or judicial decision. In these cases, a good approach is to begin with the relevant Code provision. If it narrows the focus or clarifies the statutory law, discuss any related regulation next. Finally, finish the analysis with the on-point or analogous judicial decision or ruling. Expanding on the example above, consider the following:

Improved:

Under §871(b)(1), a nonresident alien is taxed at regular rates on income effectively connected with a U.S. trade or business. However, the phrase “trade or business” is not defined in either the Code or regulations. The nonresident alien in Johansson v. U.S. (CA-5, 1964) was a professional boxer who engaged in only one U.S. prize fight. The court held that the one event was so significant that it constituted a U.S. trade or business; thus, the winnings were effectively connected income. Similarly, our client is engaged in a trade or business within the U.S. since his horse entered the Kentucky Derby. His winnings constitute effectively connected income that is taxable at regular U.S. rates.

Please read the fact scenario that we provide for practice, complete the research, and write a research memo following the lesson guidelines. Then, compare your memo with the example research memo, which illustrates and applies the method we recommend.

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