An analysis of tax court cases relevant to financial planners.

Author:Hanke, Steven A.

    Comprehensive financial planning requires knowledge in a broad range of topics including taxation. The Guide to Certified Financial Planning (CFP) certification available at makes special efforts to clarify the coverage of current tax law in the certification examination. In addition, the latest topic list for the examination indicates that it is necessary to understand tax issues related to all major areas of financial planning. After passing the CFP exam financial planning professionals must stay current on ever-changing tax regulations because these changes can have a significant impact on net financial gains realized by their clients.

    The uniqueness of their clients' individual situation often requires financial planners to seek guidance beyond the Internal Revenue Code (I.R.C.). The reference materials that can be potentially helpful include Treasury Regulations, Internal Revenue Service (I.R.S.) Revenue Rulings and I.R.S. Publications. However, it is possible that these resources cannot address the clients' dilemma. In such scenarios, another resource can be court decisions that deal with the facts applicable to their clients. In a discussion about the educational importance of Tax Court cases to retirement planners with the Executive Director & CEO of the American Society for Pension Professionals and Actuaries (ASPPA), Brian Graff stated that "planning professionals need to be familiar with relevant case law as well as regulatory developments."

    Financial planners can become aware of relevant court cases through journals designed for financial planners, subscribed tax research services, etc. The actual value of a relevant court case to a financial planner is largely dependent on its readability. If the case is very difficult to read, the financial planner is less likely to appropriately analyze the impact of the case ruling on his/her client. Intuitively, when the previous experience with using hard-to-read court cases is confusing and frustrating, the financial planner can be reluctant to rely on court cases in the future analysis. The readability of relevant court cases is therefore important for the effectiveness of financial planning.

    In this study, we examine whether the readability of Tax Court cases that are particularly relevant to financial planners have changed over the past five decades. Our results show significant difference in the readability of court cases by code sections while there is no significant difference in the readability by decision types. These findings indicate that the assessment of the readability in these court cases is more complex than originally suggested in prior research. Further, there is some evidence of deteriorating readability for the court cases. The cases have only become significantly more difficult to read when they involve certain I.R.C. sections. Tax Court cases may be of limited use to financial planners if they are more difficult to read than other financial planning materials. Accordingly, we compare the readability of court cases and other published works for financial planning purposes. We find that court cases are more difficult to read.

    The remainder of this paper proceeds as follows. Section II provides an overview of readability research while Section III shows the development of our hypotheses. Section IV describes the sample selection and Section V discusses the results. Section VI provides conclusions.


    The concern over the readability of government documents and private sector disclosures is not a new phenomenon. For instance, a 1978 General Accounting Office (GAO 1995) report states a need to improve the readability of I.R.S. tax forms and publications. Another more recent example includes the Plain Writing Act that was passed on October 13, 2010. The act is intended to increase the understandability of all federal government communications by requiring them to be written in "plain" English. Financial professionals are not isolated from the readability-enhancing movement. The Securities and Exchange Commission (SEC 2011) requires that, beginning in 2011, investment advisers' primary disclosure document (i.e., Form ADV Part 2) to clients be written in "plain" English.

    The Flesch Readability Ease (FRE) score is commonly used by prior researchers to access the readability of business-to-investor documents. FRE is computed as 206.835 - (1.015*average number of words per sentence) - (84.6*average syllables per word). The score ranges from zero (very difficult) to 100 (very easy). Although other aspects of writing can impact the readability of a document, Klare (1974) states that there is little benefit from adding factors beyond the highly predictive variables of length in words and sentences as captured in the FRE score. The FRE score is assessable through the Grammar option in Microsoft Word (, 2010).

    Table 1 presents a summary of FRE scores in select prior research examining the readability of business-to-investor documents. We focus on the readability research that reports the FRE score to ensure the comparability of our results. The FRE scores of these documents are generally in the very difficult (0-30) or difficult (30-50) ranges. Jones and Shoemaker (1994) perform a meta-analysis of annual report readability studies reporting FRE scores and find a mean value of 26. Furthermore, there is evidence of a decrease in the readability of various business-to-investor documents. For example, in a longitudinal study of a single United Kingdom (UK) firm, Jones (1988) reports that the FRE score of the chairman's narratives in the annual report decreases from 53 in 1952 to 32 in 1986.

    Three studies collectively show a decrease in the readability within corporate annual reports by analyzing a sample of large corporations surviving between 1948 and 1974. Poshalian and Crissy (1952) establish the baseline sample of 26 firms and report the average FRE score of 34 for their annual...

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