JATA - Spring 1984

Volume 5, No. 2

WORDS: A New Approach to Determining the Factors Affecting Tax Court Decisions Involving Real Estate Transactions

Ronald L. Taylor and Robert W. Ingram


This paper presents an alternative methodology for developing explanatory factors that are associated with Tax Court decisions. The WORDS computer program was used for measuring the content of narrative data in tax cases. The procedure is illustrated by developing factors that distinguish between capital gain and ordinary income in real estate transactions. The results are compared with another study on the same issue which used a traditional tax modeling methodology. Fifteen factors were identified by WORDS, of which seven were significant. A logistic regression model was able to classify correctly 80 percent of the total observations in a jackknife holdout sample, indicating that the WORDS themes were consistent across the sample and are reliable measures of important factors that influence Tax Court decisions.

Valuation of Blocks of Stock: A Number of Unresolved Issues Still Remain

Sandra S. Kramer


Administration of the transfer taxes requires that all property transferred must be valued. When the property transferred is a block of corporate stock, that valuation task presents a myriad of problems. After decades of IRS pronouncements and judicial decisions dealing with this valuation task, many questions remain unanswered. This article discusses two of the many unresolved issues. First, the author presents the general framework for deciding if a minority discount, blockage discount, or control premium is applicable. Then, the article explores the question of precisely what stock is relevant to the valuation task and the role that family control of the corporation plays in the valuation process.

An Economic Perspective on the Certification of Specialists in Tax Accounting

Steven B. Johnson


The certification of specialists in tax accounting has become a controversial issue in recent years. This controversy appears to have assumed greater intensity since August 1982 when the American Taxation Association (ATA) committee appointed to study the question proposed implementation of a specific certification arrangement. This paper examines the primary issues underlying the controversy in order to focus future debate and to facilitate informed participation by the various interested parties. First, the basic characteristics of the proposed certification is characterized as a "market screening/signaling mechanism" whose function is to help potential buyers differentiate high- and low-quality services. Conditions necessary for an occupational certification arrangement to attain this objective are enumerated. Finally, the proposed certification arrangement is analyzed in terms of its ability to satisfy these conditions. Although no conclusions are drawn as to the market impact of the proposed certification arrangement, its potential strengths and weaknesses are identified.

The Equity and Motivating Effects of the Maximum Tax

Laurence A. Madeo and Silvia A. Madeo


The history of the maximum tax on earned income makes it clear that Congress had two goals in enacting it as part of the 1969 Tax Reform Act-to promote horizontal equity among high-income taxpayers and to motivate taxpayers toward "economically productive" activities. An analysis of tax return data from the 1976 Individual Tax Model file provides evidence that the maximum tax did contribute to horizontal equity, especially at AGI levels above $100,000. Simulated results for 1975, 1977, and 1979 (representative of the various changes in the maximum tax) show that the maximum tax continued to contribute to horizontal equity throughout the eleven years it was in effect. The 1976 data also provide indirect evidence that maximum tax beneficiaries were less likely to have engaged in tax sheltering activities than other taxpayers in their AGI class. Following the Economic Recovery Tax Act of 1981, the absence of the maximum tax as part of the rate structure may reduce horizontal tax equity among high-income taxpayers.

GCMs, TMs, and AODs-The "Working Law" of the Internal Revenue Service

Michael G. Gallagher


As a result of a recent freedom-of-information lawsuit, numerous memoranda which comprise the "working law" of the Internal Revenue Service (IRS) and are now available to tax researchers. These documents -GCMs, TMs, and AODs-are sometimes referred to as "underlying documents" because they explain or comment on the related "action documents" which provide advice to taxpayers. The IRS has taken the position that these documents may not be cited as precedents by taxpayers. Whether they are citable to courts as precedents is a question for the judiciary to decide. Notwithstanding the Service's stance, the value of these documents in explaining the IRS position on a given issue is of considerable utility to tax researchers.

The Election to Capitalize Carrying Charges Following ERTA and TEFRA

Michael H. Morris and William D. Nichols


In spite of the many tax law changes that were enacted by the Economic Recovery Tax Act of 1981 and the Tax Equity and Fiscal Responsibility Act of 1982, taxpayers may continue to elect to capitalize carrying charges on the acquisition of certain depreciable assets. However, the new accelerated cost recovery system, the new investment tax credit provisions, and the new investment tax credit basis adjustment (or the election to claim a two percentage-point reduction in the investment tax credit) will all affect this election. Although the expense-capitalization decision appears to have a complex solution which depends on the required (or desired) rate of return, marginal tax rate, and recovery period, this analytical study reduces the solution to a simple comparison of rates of return.

A Guide to the Tax Treatment of Corporate Liquidations

Mary Sue Gately


The tax consequences of a particular corporate liquidation depend on many factors, e.g., whether or not the shareholder is a corporation, whether or not a corporate shareholder qualifies as the "parent" corporation, and whether or not certain elections have been made with respect to the liquidation. Different combinations of factors will result in different tax consequences. Tax consequences must be considered at the shareholder level and at the corporate level. In order to simplify the initial analysis of the tax consequences which many result from a corporate liquidation, decision tables were prepared for use by students involved in the study of corporate liquidations. General explanations of the applicable Internal Revenue Code provisions accompany the tables.