Maintaining Context in XSLT Functions

Question

For the following XML:

<X12>
    <GROUP>
        <TS_850>
            <REF>
                <REF01>CR</REF01>
                <REF02>53222</REF02>
            </REF>
        </TS_850>
    </GROUP>
</X12>

This code works:

<xsl:variable name="REF02">
    <xsl:for-each select="X12/GROUP/TS_850/REF">
        <xsl:if test="REF01='CR'">
            <xsl:value-of select="REF02"/>
        </xsl:if>
    </xsl:for-each>
</xsl:variable>

...

<xsl:value-of select="$REF02"/>

However, this code does not:

<xsl:function name="test:valueWhereValue">
    <xsl:param name="context" />
    <xsl:param name="conditionalElement" />
    <xsl:param name="conditionalValue" />
    <xsl:param name="outputElement"/>

    <xsl:for-each select="$context">
        <xsl:if test="$conditionalElement = $conditionalValue">
            <xsl:value-of select="$outputElement" />
        </xsl:if>
    </xsl:for-each>
</xsl:function>

...

<xsl:copy-of select="test:valueWhereValue(X12/GROUP/TS_850/REF, REF01, 'CR', REF02)"></xsl:copy-of>

As best I can tell, the two code snippets should be functionally equivalent. However, according to my debugger, REF01 and REF02 don't actually reference nodes the way I would expect in the function version. It seems like I'm not actually entering the proper context with my for-each statement in the function, which prevents the children nodes from selecting properly. Why is that, and how can I fix my function?