Tables of Contents for Comprehensive Volume

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Chapter/Section Title

Page #

Page Count

Preface

iii

An Introduction to Taxation and Understanding the Federal Tax Law

1-1

History of U.S. Taxation

1-2

Early Periods

1-2

Revenue Acts

1-3

Historical Trends

1-3

Criteria Used in the Selection of a Tax Structure

1-4

The Tax Structure

1-5

Tax Base

1-5

Tax Rates

1-5

Incidence of Taxation

1-5

Major Types of Taxes

1-6

Property Taxes

1-6

Ethical Considerations: Might It Matter Who the Previous Owner Was?

1-7

Tax in the News: Property Taxes Can Be a Negotiable Item

1-8

Transaction Taxes

1-8

Tax in the News: Can Speed Be Taxed?

1-9

Tax in the News: Internet Sales Often Go Untaxed

1-11

Death Taxes

1-11

Gift Taxes

1-12

Ethical Considerations: Is Granny Courting Disaster?

1-13

Income Taxes

1-14

Employment Taxes

1-15

Tax in the News: Visitors Beware! The City and State You Visit May Not Be All That Friendly

1-16

Other U.S. Taxes

1-17

Proposed U.S. Taxes

1-18

Tax Administration

1-19

Internal Revenue Service

1-19

The Audit Process

1-19

Statute of Limitations

1-21

Interest and Penalties

1-21

Tax Practice

1-22

Understanding the Federal Tax Law

1-23

Revenue Needs

1-24

Economic Considerations

1-24

Social Considerations

1-26

Equity Considerations

1-26

Political Considerations

1-29

Influence of the Internal Revenue Service

1-30

Influence of the Courts

1-31

Summary

1-32

Problem Materials

1-33

Tax Determination; Personal and Dependency Exemptions; An Overview of Property Transactions

2-1

Tax Formula

2-3

Components of the Tax Formula

2-3

International Implications: Citizenship Is Not Tax-Free

2-5

Application of the Tax Formula

2-8

Individuals Not Eligible for the Standard Deduction

2-9

Special Limitations for Individuals Who Can Be Claimed as Dependents

2-9

Personal and Dependency Exemptions

2-10

Personal Exemptions

2-10

Dependency Exemptions

2-11

Ethical Considerations: Claiming a Dependent

2-12

Phase-Out of Exemptions

2-15

Child Tax Credit

2-16

Tax Determination

2-16

Tax Table Method

2-16

Tax Rate Schedule Method

2-16

Computation of Net Taxes Payable or Refund Due

2-17

Unearned Income of Children Under Age 14 Taxed at Parents' Rate

2-19

Filing Considerations

2-21

Filing Requirements

2-21

Tax in the News: An IRS Dilemma That Will Not Go Away

2-23

Filing Status

2-24

Tax in the News: Visa Wants None of It

2-24

International Implications: Filing a Joint Return

2-25

Gains and Losses from Property Transactions---In General

2-27

Gains and Losses from Property Transactions---Capital Gains and Losses

2-28

Definition of a Capital Asset

2-28

Taxation of Net Capital Gain

2-29

Determination of Net Capital Gain

2-29

Treatment of Net Capital Loss

2-30

Tax Planning Considerations

2-30

Taking Advantage of Tax Rate Differentials

2-30

Income of Minor Children

2-31

Dependency Exemptions

2-31

Ethical Considerations: Manipulating Deductions

2-32

Problem Materials

2-33

Gross Income: Concepts and Inclusions

3-1

International Implications: From ``All Sources'' Is a Broad Definition

3-3

Gross Income---What Is It?

3-3

Definition

3-3

Economic and Accounting Concepts

3-3

Comparison of the Accounting and Tax Concepts of Income

3-5

Tax in the News: Politician's Use of Leftover Campaign Funds May Be Taxable

3-5

Tax in the News: Lottery Winner Wins and Loses

3-6

Form of Receipt

3-6

Recovery of Capital Doctrine

3-6

Year of Inclusion

3-7

Taxable Year

3-7

Accounting Methods

3-7

Ethical Considerations: Accounting Errors and Omissions

3-9

Exceptions Applicable to Cash Basis Taxpayers

3-10

Tax in the News: Congress Rescues Lottery Winners from Constructive Receipt Problems

3-11

Exceptions Applicable to Accrual Basis Taxpayers

3-13

International Implications: Credit Given Where Credit Due

3-13

Income Sources

3-14

Personal Services

3-14

Income from Property

3-15

Tax in the News: Do Tax Rates Inspire Executives to Do Their Own Plumbing?

3-15

Income Received by an Agent

3-17

Income from Partnerships, S Corporations, Trusts, and Estates

3-17

Income in Community Property States

3-18

Items Specifically Included in Gross Income

3-20

Alimony and Separate Maintenance Payments

3-20

Imputed Interest on Below-Market Loans

3-23

Ethical Considerations: A Concealed Loan

3-26

Income from Annuities

3-28

Prizes and Awards

3-31

Group Term Life Insurance

3-33

Unemployment Compensation

3-34

Social Security Benefits

3-34

Tax Planning Considerations

3-35

Nontaxable Economic Benefits

3-36

Tax Deferral

3-36

Shifting Income to Relatives

3-38

Accounting for Community Property

3-39

Alimony

3-39

Problem Materials

3-40

Gross Income: Exclusions

4-1

Items Specifically Excluded from Gross Income

4-2

Statutory Authority

4-4

Gifts and Inheritances

4-4

General

4-4

Tax in the News: Parents Are Not Eligible for the Foster Care Exclusion

4-4

Gifts to Employees

4-5

Tax in the News: Begging as a Tax-Disfavored Occupation

4-5

Employee Death Benefits

4-6

Life Insurance Proceeds

4-6

General Rule

4-6

Accelerated Death Benefits

4-7

Ethical Considerations: Investing in Death

4-7

Transfer for Valuable Consideration

4-8

Scholarships

4-8

General Information

4-8

Timing Issues

4-9

Disguised Compensation

4-10

Qualified Tuition Reduction Plans

4-10

Compensation for Injuries and Sickness

4-11

Damages

4-11

Ethical Considerations: Damage Allocation with a View toward the Tax Consequences

4-12

Workers' Compensation

4-12

Accident and Health Insurance Benefits

4-13

Employer-Sponsored Accident and Health Plans

4-13

Medical Reimbursement Plans

4-14

Tax in the News: More Small Businesses Provide Health Benefits

4-14

Long-Term Care Insurance Benefits

4-15

Meals and Lodging

4-15

Furnished for the Convenience of the Employer

4-15

Ethical Considerations: ``Employer Required'' Lodging

4-17

Other Housing Exclusions

4-18

Tax in the News: The Tax Benefits of Combat Duty

4-18

Other Employee Fringe Benefits

4-19

Specific Benefits

4-19

Cafeteria Plans

4-19

Flexible Spending Plans

4-20

General Classes of Excluded Benefits

4-20

Taxable Fringe Benefits

4-25

Foreign Earned Income

4-25

International Implications: U.S. Taxpayers Abroad Are Gone But Not Forgotten

4-28

Interest on Certain State and Local Government Obligations

4-28

Dividends

4-29

General Information

4-29

Stock Dividends

4-29

Educational Savings Bonds

4-30

Qualified State Tuition Programs

4-31

Tax Benefit Rule

4-31

Income from Discharge of Indebtedness

4-32

Tax Planning Considerations

4-34

Life Insurance

4-34

Employee Benefits

4-34

Investment Income

4-35

Problem Materials

4-36

Deductions and Losses: In General

5-1

Classification of Deductible Expenses

5-2

Deductions for Adjusted Gross Income

5-3

Itemized Deductions

5-4

Trade or Business Expenses and Production of Income Expenses

5-5

Business and Nonbusiness Losses

5-7

Reporting Procedures

5-7

Deductions and Losses---Timing of Expense Recognition

5-7

Importance of Taxpayer's Method of Accounting

5-7

Cash Method Requirements

5-8

Accrual Method Requirements

5-9

Disallowance Possibilities

5-11

Public Policy Limitation

5-11

International Implications: To Bribe or Not to Bribe

5-12

Political Contributions and Lobbying Activities

5-13

Excessive Executive Compensation

5-14

Tax in the News: Deducting Lobbying Expenses: The Battle Continues

5-14

Investigation of a Business

5-15

Hobby Losses

5-16

Ethical Considerations: When Is a Dairy Farm a Trade or Business?

5-17

Rental of Vacation Homes

5-19

Tax in the News: Go North, Young Man, Go North for a Vacation Home

5-19

Expenditures Incurred for Taxpayer's Benefit or Taxpayer's Obligation

5-23

Disallowance of Personal Expenditures

5-23

Disallowance of Deductions for Capital Expenditures

5-25

Transactions Between Related Parties

5-26

Substantiation Requirements

5-27

Expenses and Interest Relating to Tax-Exempt Income

5-28

Tax Planning Considerations

5-29

Time Value of Tax Deductions

5-29

Unreasonable Compensation

5-30

Excessive Executive Compensation

5-30

Shifting Deductions

5-30

Hobby Losses

5-30

Capital Expenditures

5-31

Problem Materials

5-33

Deductions and Losses: Certain Business Expenses and Losses

6-1

Bad Debts

6-3

Tax in the News: $34 Million Bad Debt Deduction Denied on Transfer of Royals Stock

6-3

Specific Charge-Off Method

6-4

Business Versus Nonbusiness Bad Debts

6-5

Loans Between Related Parties

6-6

Loss On Deposits in Insolvent Financial Institutions

6-6

Worthless Securities

6-7

Small Business Stock

6-8

Ethical Considerations: Year of Deduction for Worthless Securities

6-8

Losses of Individuals

6-9

Events That Are Not Casualities

6-9

Theft Losses

6-10

Tax in the News: Creative Deductions

6-10

Ethical Considerations: The Amount of a Theft Loss

6-11

When to Deduct Casualty Losses

6-11

Measuring the Amount of Loss

6-12

Statutory Framework for Deducting Losses of Individuals

6-15

Personal Casualty Gains and Losses

6-15

Research and Experimental Expenditures

6-16

Expense Method

6-18

Deferral and Amortization Method

6-18

Net Operating Losses

6-19

Tax in the News: Net Operating Loss Carryback and Carryover

6-20

Carryback and Carryover Periods

6-20

Tax Planning Considerations

6-21

Tax Consequences of the Groetzinger Case

6-21

Documentation of Related-Taxpayer Loans, Casualty Losses, and Theft Losses

6-21

International Implications: Altering Deductions

6-21

Small Business Stock

6-22

Casualty Losses

6-22

Net Operating Losses

6-22

Problem Materials

6-23

Depreciation, Cost Recovery, Amortization, and Depletion

7-1

Overview

7-2

Accelerated Cost Recovery System (ACRS and MACRS)

7-3

General Considerations

7-3

International Implications: Increased Depreciation Expenses of FCCs

7-4

Eligible Property Under ACRS or MACRS

7-5

Personalty: Recovery Periods and Methods

7-5

Realty: Recovery Periods and Methods

7-8

International Implications: Attracting Foreign Investment

7-8

Straight-Line Election Under ACRS and MACRS

7-10

Election to Expense Assets

7-12

Ethical Considerations: Section 179 and the Substantiation Requirements for Limited Personal Use

7-13

Business and Personal Use of Automobiles and Other Listed Property

7-13

Alternative Depreciation System (ADS)

7-17

Tax in the News: Use of the Wrong Depreciation Method

7-19

Amortization

7-20

Depletion

7-20

Intangible Drilling and Development Costs (IDC)

7-21

Depletion Methods

7-21

Tax in the News: Depletion and the Environment

7-21

Ethical Considerations: Computing Cost Depletion

7-22

Tax Planning Considerations

7-24

Cost Recovery

7-24

Amortization

7-25

Tax in the News: Should Depreciation Reduce Income for Purposes of Support?

7-26

Depletion

7-26

Tables

7-27

Problem Materials

7-34

Deductions: Employee Expenses

8-1

Employee versus Self-Employed

8-2

Tax in the News: Caddies or Golf Carts?

8-4

Employee Expenses---In General

8-4

Transportation Expenses

8-4

Qualified Expenditures

8-4

Computation of Automobile Expenses

8-6

Travel Expenses

8-7

Definition of Travel Expenses

8-7

Away-From-Home Requirement

8-7

Restrictions on Travel Expenses

8-8

Tax in the News: Some Taxpayers Are Never Away from Home

8-9

Combined Business and Pleasure Travel

8-10

Moving Expenses

8-11

Distance Test

8-11

International Implications: Conventions in Far Away Lands

8-11

Time Test

8-12

Treatment of Moving Expenses

8-12

Ethical Considerations: How Much Is That House Really Worth?

8-13

Education Expenses

8-14

General Requirements

8-14

Requirements Imposed by Law or by the Employer for Retention of Employment

8-14

Maintaining or Improving Existing Skills

8-15

Classification of Specific Items

8-15

Other Provisions Dealing With Education

8-15

Entertainment Expenses

8-16

Cutback Adjustment

8-16

Classification of Expenses

8-17

Restrictions Upon Deductibility

8-18

Tax in the News: Unnecessary ``Social Lubrication''

8-18

Other Employee Expenses

8-19

Office in the Home

8-19

Miscellaneous Employee Expenses

8-21

Contributions to Individual Retirement Accounts

8-22

Classification of Employee Expenses

8-23

Accountable Plans

8-23

Nonaccountable Plans

8-25

Reporting Procedures

8-25

Limitations on Itemized Deductions

8-26

Miscellaneous Itemized Deductions Subject to the 2 Percent Floor

8-26

Tax Planning Considerations

8-27

Self-Employed Individuals

8-27

Shifting Deductions Between Employer and Employee

8-27

Transportation and Travel Expenses

8-28

Moving Expenses

8-28

Education Expenses

8-28

International Implications: Expatriates and the Moving Expense Deduction

8-28

Entertainment Expenses

8-29

Ethical Considerations: The Tax Cost of Business Success

8-29

Unreimbursed Employee Business Expenses

8-30

Problem Materials

8-30

Deductions and Losses: Certain Itemized Deductions

9-1

General Classification of Expenses

9-2

Medical Expenses

9-2

General Requirements

9-2

Medical Expenses Defined

9-3

Tax in the News: Average Itemized Deductions

9-3

Tax in the News: Drop That Unhealthy Habit and Pick Up a Deduction

9-4

Capital Expenditures for Medical Purposes

9-5

Medical Expenses Incurred for Spouse and Dependents

9-6

Transportation, Meal, and Lodging Expenses for Medical Treatment

9-7

Amounts Paid for Medical Insurance Premiums

9-8

Year of Deduction

9-8

Reimbursements

9-8

Medical Savings Accounts

9-9

Taxes

9-10

Deductibility as a Tax

9-11

Property Taxes

9-11

State and Local Income Taxes

9-13

Interest

9-13

Allowed and Disallowed Items

9-14

Restrictions on Deductibility and Timing Considerations

9-18

Classification of Interest Expense

9-18

Charitable Contributions

9-19

Criteria for a Gift

9-20

Ethical Considerations: An Indirect Route to a Contribution Deduction

9-21

Qualified Organizations

9-21

Time of Deduction

9-21

International Implications: Choose the Charity Wisely

9-22

Record-Keeping and Valuation Requirements

9-22

Limitations on Charitable Contribution Deduction

9-23

Tax in the News: Contributions of the Rich and Famous

9-26

Miscellaneous Itemized Deductions

9-28

Ethical Considerations: Bunching to Increase Deductions

9-28

Other Miscellaneous Deductions

9-29

Comprehensive Example of Schedule A

9-29

Overall Limitation on Certain Itemized Deductions

9-29

Tax Planning Considerations

9-32

Effective Utilization of Itemized Deductions

9-32

Utilization of Medical Deductions

9-33

Tax in the News: Few Taxpayers Are Affected by the Three Percent Floor

9-33

Timing the Payment of Deductible Taxes

9-34

Protecting the Interest Deduction

9-34

Assuring the Charitable Contribution Deduction

9-35

Problem Materials

9-36

Passive Activity Losses

10-1

The Tax Shelter Problem

10-2

At-Risk Limits

10-3

Tax in the News: Is the Attack on Corporate Tax Shelters an Attempt to Close Loopholes or Increase Taxes?

10-4

Ethical Considerations: Manipulating the At-Risk Limits

10-6

Passive Loss Limits

10-6

Classification and Impact of Passive Income and Losses

10-6

Tax in the News: Relief for Innocent Spouse with a Tax Shelter Subplot

10-7

Taxpayers Subject to the Passive Loss Rules

10-10

Passive Activities Defined

10-11

Interaction of the At-Risk and Passive Activity Limits

10-21

Special Passive Activity Rules for Real Estate Activities

10-22

Tax in the News: Special Passive Activity Rules for Real Estate Investors May Be ``Icing on the Cake'' for Some Taxpayers

10-24

Ethical Considerations: How Active Is Active?

10-25

Dispositions of Passive Interests

10-25

Tax Planning Considerations

10-26

Utilizing Passive Losses

10-26

Problem Materials

10-28

Tax Credits

11-1

Tax Policy Considerations

11-3

Overview and Priority of Credits

11-4

Refundable Versus Nonrefundable Credits

11-4

Tax in the News: Tax Credits Affect Taxpayer Behavior

11-4

General Business Credit

11-5

Treatment of Unused General Business Credits

11-6

Business-Related Tax Credit Provisions

11-7

Tax Credit for Rehabilitation Expenditures

11-7

Ethical Considerations: Using the Rehabilitation Expenditures Credit

11-9

Business Energy Credits

11-9

Work Opportunity Tax Credit

11-9

Welfare-To-Work Credit

11-10

Research Activities Credit

11-11

Low-Income Housing Credit

11-13

Disabled Access Credit

11-13

Other Tax Credits

11-14

Earned Income Credits

11-14

Tax in the News: ``Earned Income Credit'' or ``Easy Income for Cheats''?

11-16

Tax Credit for Elderly or Disabled Taxpayers

11-17

Foreign Tax Credit

11-18

Adoption Expenses Credit

11-19

International Implications: Foreign Tax Credit Simplification for the Small Investor

11-19

Child Tax Credit

11-20

Credit for Child and Dependent Care Expenses

11-21

Tax in the News: The IRS Comes to the Rescue---Sometimes

11-21

Ethical Considerations: Using the Credit for Child and Dependent Care Expenses

11-23

Education Tax Credits

11-23

Tax Planning Considerations

11-25

Foreign Tax Credit

11-25

Credit for Child and Dependent Care Expenses

11-25

Problem Materials

11-29

Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges

12-1

Determination of Gain or Loss

12-3

Realized Gain or Loss

12-3

Recognized Gain or Loss

12-6

Nonrecognition of Gain or Loss

12-6

Ethical Considerations: Avoiding the Disallowance of Losses on Personal Use Assets

12-7

Recovery of Capital Doctrine

12-7

Basis Considerations

12-8

Determination of Cost Basis

12-8

Tax in the News: Frequent-Flier Miles and Basis

12-9

Gift Basis

12-11

Tax in the News: Mark, Tim, and the IRS

12-13

Property Acquired from a Decedent

12-15

Disallowed Losses

12-17

Ethical Considerations: Transactions between Spouses

12-17

Conversion of Property from Personal Use to Business or Income-Producing Use

12-19

Additional Complexities in Determining Realized Gain or Loss

12-21

Summary of Basis Adjustments

12-22

General Concept of a Nontaxable Exchange

12-24

Like-Kind Exchanges---§ 1031

12-25

Like-Kind Property

12-26

Exchange Requirement

12-27

Boot

12-28

Basis and Holding Period of Property Received

12-29

Involuntary Conversions---§ 1033

12-31

Involuntary Conversion Defined

12-31

Ethical Considerations: Purchasing Property in Expectation of Condemnation

12-32

Computing the Amount Realized

12-32

Replacement Property

12-33

Time Limitation on Replacement

12-34

Nonrecognition of Gain

12-35

Involuntary Conversion of a Personal Residence

12-36

Reporting Considerations

12-37

Sale of a Residence---§ 121

12-37

Tax in the News: Your Home on the Road

12-37

Requirements for Exclusion Treatment

12-38

Calculation of the Amount of the Exclusion

12-39

Ethical Considerations: Maximizing the § 121 Exclusion

12-41

Principal Residence

12-41

Involuntary Conversion and Using §§ 121 and 1033

12-42

Other Nonrecognition Provisions

12-42

Exchange of Stock for Property---§ 1032

12-42

Certain Exchanges of Insurance Policies---§ 1035

12-43

Exchange of Stock for Stock of the Same Corporation---§ 1036

12-43

Certain Reacquisitions of Real Property---§ 1038

12-43

Transfers of Property Between Spouses or Incident to Divorce---§ 1041

12-43

Rollovers Into Specialized Small Business Investment Companies---§ 1044

12-43

Rollover of Gain from Qualified Small Business Stock into Another Qualified Small Business Stock---§ 1045

12-44

Tax Planning Considerations

12-44

Tax Consequences of Alice's Proposed Transaction

12-44

Cost Identification and Documentation Considerations

12-45

Selection of Property for Making Gifts

12-45

Selection of Property for Making Bequests

12-46

Disallowed Losses

12-46

Like-Kind Exchanges

12-47

Involuntary Conversions

12-48

Sale of a Principal Residence

12-48

Problem Materials

12-50

Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions

13-1

General Considerations

13-2

Rationale for Separate Reporting of Capital Gains and Losses

13-2

General Scheme of Taxation

13-3

Tax in the News: Keep Track of Those Reinvested Dividends

13-3

Capital Assets

13-4

Definition of a Capital Asset

13-4

Effect of Judicial Action

13-6

Statutory Expansions

13-6

Sale or Exchange

13-8

Tax in the News: Exchanging Memberships in the NYSE

13-9

Worthless Securities and § 1244 Stock

13-9

Special Rule---Retirement of Corporate Obligations

13-9

Options

13-10

Patents

13-11

Franchises, Trademarks, and Trade Names

13-13

Lease Cancellation Payments

13-14

Holding Period

13-15

Review of Special Holding Period Rules

13-16

Special Rules for Short Sales

13-17

International Implications: Withholding on Dividends

13-17

Tax Treatment of Capital Gains and Losses of Noncorporate Taxpayers

13-20

Capital Gain and Loss Netting Process

13-21

Ethical Considerations: A Partner's Dilemma

13-24

Alternative Tax on Net Capital Gain

13-24

Treatment of Capital Losses

13-25

Tax Treatment of Capital Gains and Losses of Corporate Taxpayers

13-27

Overview of Section 1231 and the Recapture Provisions

13-27

Section 1231 Assets

13-29

Relationship to Capital Assets

13-29

Tax in the News: A Definition for Unrecaptured § 1250 Gain

13-29

Justification for Favorable Tax Treatment

13-30

Property Included

13-31

Property Excluded

13-31

Ethical Considerations: Determining How Long an Asset Has Been Held

13-32

Section 1231 Assets Disposed of by Casualty or Theft

13-32

General Procedure for § 1231 Computation

13-33

Tax in the News: Floods Cause Complex Tax Computations

13-34

Section 1245 Recapture

13-37

Ethical Considerations: Does Applying the Recapture Rules Make a Difference?

13-38

Tax in the News: Gas Stations for Sale

13-39

Section 1245 Property

13-40

Observations on § 1245

13-40

Section 1250 Recapture

13-41

Computing Recapture on Nonresidential Real Property

13-42

Computing Recapture on Residential Rental Housing

13-43

Section 1250 Recapture Situations

13-43

Unrecaptured § 1250 Gain (Real Estate 25% Gain)

13-44

Considerations Common to §§ 1245 and 1250

13-46

Exceptions

13-46

Other Applications

13-47

Special Recapture Provisions

13-49

Special Recapture for Corporations

13-49

Gain from Sale of Depreciable Property Between Certain Related Parties

13-49

Intangible Drilling Costs

13-49

International Implications: Depreciation Recapture in Other Countries

13-49

Reporting Procedures

13-50

Tax Planning Considerations

13-50

Importance of Capital Asset Status

13-50

Planning for Capital Asset Status

13-50

Effect of Capital Asset Status in Transactions Other Than Sales

13-51

Stock Sales

13-52

Maximizing Benefits

13-52

Year-End Planning

13-52

Timing of § 1231 Gain

13-53

Timing of Recapture

13-53

Postponing and Shifting Recapture

13-54

Avoiding Recapture

13-54

Problem Materials

13-55

Alternative Minimum Tax

14-1

Tax in the News: The AMT Goes All the Way to the Top

14-3

Individual Alternative Minimum Tax

14-3

AMT Formula for Alternative Minimum Taxable Income (AMTI)

14-3

Tax in the News: The AMT: Time for a Change

14-4

AMT Formula: Other Components

14-6

Tax in the News: To Give and to Receive

14-8

AMT Adjustments

14-9

Ethical Considerations: Donating Stock to Charity and Repurchasing in the Market

14-17

AMT Preferences

14-21

Illustration of the AMT Computation

14-23

AMT Credit

14-24

Corporate Alternative Minimum Tax

14-27

Repeal of AMT for Small Corporations

14-27

Ethical Considerations: Avoiding the Corporate AMT

14-28

AMT Adjustments

14-28

Tax in the News: The AMT: Even Less of a Headache for Small Corporations

14-29

Tax Preferences

14-31

Exemption

14-31

Other Aspects of the AMT

14-32

Tax Planning Considerations

14-32

Responding to Bob and Carol

14-32

Avoiding Preferences and Adjustments

14-32

Controlling the Timing of Preferences and Adjustments

14-32

Taking Advantage of the AMT/Regular Tax Rate Differential

14-33

Problem Materials

14-33

Accounting Periods and Methods

15-1

Accounting Periods

15-2

In General

15-2

Tax in the News: Acceleration of Income

15-3

Specific Provisions for Partnerships, S Corporations, and Personal Service Corporations

15-4

Ethical Considerations: Changing Tax Years

15-6

Making the Election

15-7

Changes in the Accounting Period

15-7

Taxable Periods of Less than One Year

15-8

Mitigation of the Annual Accounting Period Concept

15-9

Tax in the News: Utility Companies Receive Tax Relief for Customer Refunds

15-10

Accounting Methods

15-11

Permissible Methods

15-11

Cash Receipts and Disbursements Method---Cash Basis

15-11

Accrual Method

15-13

Hybrid Method

15-15

International Implications: Accrual Method Election for Foreign Tax Credits

15-15

Change of Method

15-16

Ethical Considerations: Change Accounting Method or File Amended Returns?

15-18

Special Accounting Methods

15-18

Installment Method

15-18

Ethical Considerations: A Related-Party Installment Sale Has Unexpected Results

15-24

Disposition of Installment Obligations

15-24

Interest on Deferred Taxes

15-25

Electing Out of the Installment Method

15-25

Long-Term Contracts

15-26

Tax Planning Considerations

15-30

Taxable Year

15-30

Cash Method of Accounting

15-30

Tax in the News: The Percentage of Completion Method Is Not Always Bad

15-30

Installment Method

15-31

Completed Contract Method

15-31

Problem Materials

15-32

Corporations: Introduction, Operating Rules, and Related Corporations

16-1

Tax Treatment of Various Business Forms

16-2

Sole Proprietorships

16-2

Partnerships

16-3

Regular Corporations

16-3

Tax in the News: Salary of $1.75 Million Ruled Reasonable

16-5

Limited Liability Companies

16-7

Tax in the News: Corporations Provide for Flexibility

16-7

Entity Classification Prior to 1997

16-8

Entity Classification After 1996

16-8

An Introduction to the Income Taxation of Corporations

16-9

An Overview of Corporate Versus Individual Income Tax Treatment

16-9

Specific Provisions Compared

16-10

Accounting Periods and Methods

16-10

Capital Gains and Losses

16-11

Passive Losses

16-12

Charitable Contributions

16-13

Ethical Considerations: Is It Better Not to Know?

16-14

Net Operating Losses

16-15

Deductions Available Only to Corporations

16-16

Determining the Corporate Income Tax Liability

16-18

Corporate Income Tax Rates

16-18

Alternative Minimum Tax

16-19

Tax Liability of Related Corporations

16-19

Controlled Groups

16-20

Ethical Considerations: A Bookkeeper's Mistake

16-23

Procedural Matters

16-24

Filing Requirements for Corporations

16-24

Estimated Tax Payments

16-24

Reconciliation of Taxable Income and Financial Net Income

16-25

Tax Planning Considerations

16-26

Corporate Versus Noncorporate Forms of Business Organization

16-26

Operating the Corporation

16-27

Related Corporations

16-30

Problem Materials

16-31

Corporations: Organization and Capital Structure

17-1

Organization of and Transfers to Controlled Corporations

17-2

In General

17-2

Tax in the News: Corporations in Cyberspace--- A Look Into the New Millennium

17-3

Property Defined

17-4

Stock Transferred

17-5

Control of the Corporation

17-6

Ethical Considerations: A Gift of Shares

17-7

Assumption of Liabilities---§ 357

17-9

Basis Determination and Related Issues

17-12

Capital Structure of a Corporation

17-14

Capital Contributions

17-14

Debt in the Capital Structure

17-15

Tax in the News: Freedom from the Trap of Double Texation: Just How Successful Can That Be?

17-16

Investor Losses

17-18

Stock and Security Losses

17-18

Business Versus Nonbusiness Bad Debts

17-18

Section 1244 Stock

17-20

Gain from Qualified Small Business Stock

17-21

Tax Planning Considerations

17-21

Working with § 351

17-21

Tax in the News: A Change in Stockholders' Right Difficult to Implement without Controversy

17-22

Selecting Assets to Transfer

17-23

Ethical Considerations: The Control of a New Corporation: Insiders versus Outsiders

17-24

Debt in the Capital Structure

17-24

Investor Losses

17-25

Problem Materials

17-26

Corporations: Distributions Not in Complete Liquidation

18-1

Taxable Dividends---In General

18-3

Earnings and Profits (E & P)

18-3

Computation of E & P

18-3

Tax in the News: Investors Earn Their Strypes

18-4

Summary of E & P Adjustments

18-7

Current Versus Accumulated E & P

18-7

Allocating E & P to Distributions

18-7

Property Dividends---In General

18-11

Property Dividends---Effect on the Shareholder

18-11

Tax in the News: Stock Buybacks Continue to Grow

18-11

Property Dividends---Effect on the Corporation

18-12

Constructive Dividends

18-13

Types of Constructive Dividends

18-14

Tax in the News: Hard Work Pays Off!

18-15

Tax Treatment of Constructive Dividends

18-16

Stock Dividends and Stock Rights

18-17

Stock Dividends

18-17

International Implications: Deemed Dividends from Controlled Foreign Corporations

18-17

Stock Rights

18-18

Stock Redemptions

18-19

Overview

18-19

Tax in the News: Stock Buybacks by Small Corporations Stimulate Redemptions

18-20

Historical Background

18-21

Stock Attribution Rules

18-21

Not Essentially Equivalent Redemptions

18-22

Disproportionate Redemptions

18-23

Ethical Considerations: Convertible Preferred Stock---Conversion versus Redemption

18-25

Complete Termination Redemptions

18-25

Redemptions to Pay Death Taxes

18-26

Effect on the Corporation Redeeming Its Stock

18-28

Other Corporate Distributions

18-28

Tax Planning Considerations

18-29

Corporate Distributions

18-29

Ethical Considerations: Playing Games with the Statute of Limitations

18-30

Constructive Dividends

18-31

Ethical Considerations: Disallowed Deductions

18-32

Stock Redemptions

18-32

Problem Materials

18-33

Corporations: Distributions in Complete Liquidation and an Overview of Reorganizations

19-1

Liquidations---In General

19-2

The Liquidation Process

19-2

Liquidations and Other Distributions Compared

19-3

Liquidations---Effect on the Distributing Corporation

19-4

The General Rule

19-4

Antistuffing Rules

19-4

Liquidations---Effect on the Shareholder

19-8

The General Rule

19-8

Special Rule for Certain Installment Obligations

19-8

Liquidations---Parent-Subsidiary Situations

19-9

Tax Treatment When a Minority Interest Exists

19-10

Indebtedness of the Subsidiary to the Parent

19-10

Basis of Property Received by the Parent Corporation---The General Rule

19-11

Basis of Property Received by the Parent Corporation---The Exception

19-11

International Implications: Exception to § 332 for Foreign Subsidiary Liquidations

19-12

Corporate Reorganizations

19-14

In General

19-14

Summary of the Different Types of Reorganizations

19-15

Tax in the News: Mergers of Corporations Lead to Mergers of Computer Systems

19-15

Summary of the Tax Consequences in a Tax-Free Reorganization

19-16

Tax Planning Considerations

19-19

Effect of a Liquidating Distribution on the Corporation

19-19

Effect of a Liquidating Distribution on the Shareholder

19-19

The Role of the Letter Ruling

19-20

Problem Materials

19-20

Corporate Accumulations

20-1

Penalty Tax on Unreasonable Accumulations

20-2

The Element of Intent

20-3

Imposition of the Tax and the Accumulated Earnings Credit

20-4

Reasonable Needs of the Business

20-5

Tax in the News: Applying the Bardahl Formula Could Be Misleading

20-8

Mechanics of the Penalty Tax

20-10

Personal Holding Company Penalty Tax

20-11

Definition of a Personal Holding Company

20-12

Ethical Considerations: Staying Single for the Sake of the Company

20-14

Calculation of the PHC Tax

20-18

Comparison of the Accumulated Earnings and PHC Taxes

20-22

International Implications: Foreign Investment Vehicles Can Trigger U.S. Tax

20-23

Tax Planning Considerations

20-24

The Penalty Tax on Unreasonable Accumulations

20-24

Avoiding the PHC Tax

20-26

Problem Materials

20-27

Partnerships

21-1

Overview of Partnership Taxation

21-2

Froms of Doing Business---Federal Tax Consequences

21-2

Tax in the News: Partnerships in the Movies

21-3

What is a Partnership?

21-4

Elections Related to Partnership Status

21-4

Partnership Taxation

21-5

Partnership Reporting

21-6

Partner's Ownership Interest in a Partnership

21-7

Conceptual Basis for Partnership Taxation

21-9

Anti-Abuse Provisions

21-9

Formation of a Partnership: Tax Effects

21-9

Gain or Loss on Contributions to the Partnership

21-9

Exceptions to § 721

21-11

Tax Issues Relative to Contributed Property

21-12

Inside and Outside Bases

21-14

Tax Accounting Elections

21-14

Initial Costs of a Partnership

21-15

Method of Accounting

21-17

Taxable Year of the Partnership

21-18

Operations of the Partnership

21-20

Measuring and Reporting Income

21-20

Ethical Considerations: A Preparer's Tax Responsibility for Partner's Tax Returns

21-23

Partnership Allocations

21-23

Basis of a Partnership Interest

21-26

Loss Limitations

21-31

Transactions between Partners and Partnerships

21-36

Guaranteed Payments

21-37

Other Transactions Between Partners and Partnerships

21-38

Partners as Employees

21-39

Distributions from the Partnership

21-39

Proportionate Nonliquidating Distributions

21-41

Proportionate Liquidating Distributions

21-46

Sale of a Partnership Interest

21-48

General Rules

21-48

Effect of Hot Assets

21-49

Tax Planning Considerations

21-50

Choosing Partnership Taxation

21-50

Formation and Operation of a Partnership

21-50

Transactions Between Partners and Partnerships

21-51

Tax in the News: Partnerships Around the World-And Beyond

21-52

Drafting the Partnership Agreement

21-52

Overall Comparison: Forms of Doing Business

21-52

Problem Materials

21-57

S Corporations

22-1

Introduction

22-2

An Overview of S Corporations

22-3

When to Elect S Corporation Status

22-4

Qualifying for S Corporation Status

22-5

Definition of a Small Business Corporation

22-5

Tax in the News: Flexibility with QSSSs

22-6

Ethical Considerations: Extortion Payments

22-8

Making the Election

22-8

Shareholder Consent

22-9

Loss of the Election

22-10

Eithcal Considerations: A Voluntary ``Involuntary'' Termination

22-12

Operational Rules

22-12

Computation of Taxable Income

22-12

Allocation of Income and Loss

22-14

Tax Treatment of Distributions to Shareholders

22-16

Tax Treatment of Property Distributions by the Corporation

22-20

Tax in the News: AAA Versus OAA

22-20

Shareholder's Basis

22-22

Treatment of Losses

22-24

Tax on Pre-Election Built-In Gain

22-27

Ethical Considerations: A Helpful Appraisa

22-29

Passive Investment Income Penalty Tax

22-31

Other Operational Rules

22-31

Tax Planning Considerations

22-32

When the Election is Advisable

22-32

Making a Proper Election

22-34

Preserving the Election

22-34

Planning for the Operation of the Corporation

22-35

Problem Materials

22-40

Exempt Entities

23-1

General Considerations

23-2

Tax in the News: Living the Good Life

23-3

Types of Exempt Organizations

23-4

Requirements for Exempt Status

23-4

Serving the Common Good

23-4

Not-For-Profit Entity

23-4

Net Earnings and Members of the Organization

23-4

Political Influence

23-6

Tax Consequences of Exempt Status: General

23-6

Prohibited Transactions

23-6

Tax in the News: How Soon Is Soon Enough?

23-7

Feeder Organizations

23-10

Private Foundations

23-11

Tax Consequences of Private Foundation Status

23-11

Taxes Imposed on Private Foundations

23-12

Unrelated Business Income Tax

23-14

Tax in the News: The Big Five of Private Foundations

23-14

Ethical Considerations: Unfair Competition: Exempt Entity versus Taxable Entity

23-15

Unrelated Trade or Business

23-16

Unrelated Business Income

23-19

Unrelated Business Taxable Income

23-19

Unrelated Debt-Financed Income

23-21

Reporting Requirements

23-24

Obtaining Exempt Organization Status

23-24

Ethical Considerations: Tax-Exempt Bingo

23-25

Annual Filing Requirements

23-26

Disclosure Requirements

23-27

Tax Planning Considerations

23-27

General

23-27

Maintaining Exempt Status

23-27

Private Foundation Status

23-28

Tax in the News: How Honest Are Charities?

23-28

Unrelated Business Income Tax

23-30

Problem Materials

23-30

Taxation of International Transactions

24-1

Overview of International Taxation

24-2

Tax Treaties

24-3

Sourcing of Income and Deductions

24-4

Tax in the News: Why the Treaty Process Stalls

24-5

Income Sourced Inside the United States

24-5

Income Sourced Outside the United States

24-8

Allocation and Apportionment of Deductions

24-8

Section 482 Considerations

24-9

Tax in the News: Partying Around the World

24-10

Foreign Currency Transactions

24-10

Tax Issues

24-11

Functional Currency

24-11

Branch Operations

24-12

Distributions from Foreign Corporations

24-12

Foreign Taxes

24-12

Section 988 Transactions

24-13

U. S. Persons with Foreign Income

24-13

Foreign Sales Corporations

24-14

Tax in the News: Deja Vu: FSCs under Attack by European Union

24-14

Ethical Considerations: Export Tax Benefits: Unnecessary Subsidy or Important Incentive?

24-15

Cross-Border Asset Transfers

24-15

Tax Havens

24-16

Foreign Corporations Controlled by U. S. Persons

24-17

Tax in the News: Who Are These CFCs?

24-19

The Foreign Tax Credit

24-21

Tax in the News: More U. S. Companies Set Up Foreign Operations

24-27

Possessions Corporations

24-28

U. S. Taxation of Nonresident Aliens and Foreign Corporations

24-29

Nonresident Alien Individuals

24-29

Ethical Considerations: Should There Be Some ``Heart'' in Tax Law?

24-30

Foreign Corporations

24-31

The Foreign Investment in Real Property Tax Act

24-33

Expatriation to Avoid U. S. Taxation

24-35

Tax Planning Considerations

24-35

The Foreign Tax Credit Limitation and Sourcing Provisions

24-36

The Foreign Corporation as a Tax Shelter

24-37

Planning Under Subpart F

24-37

Maximizing FSC Benefits

24-37

Transferring Intangible Assets Offshore

24-38

Problem Materials

24-38

Tax Administration and Practice

25-1

Tax Administration

25-2

Tax in the News: Should the IRS Be Larger?

25-3

IRS Procedure-Letter Rulings

25-4

IRS Procedure-Other Issuances

25-5

Administrative Powers of the IRS

25-5

The Audit Process

25-6

Ethical Considerations: Do You Live in an Audit-Friendly Part of the Country?

25-7

The Taxpayer Appeal Process

25-9

Offers in Compromise and Closing Agreements

25-11

Interest

25-11

Tax in the News: The IRS Strives to Become Consumer-Friendly

25-12

Taxpayer Penalties

25-13

International Implications: Advance Pricing Agreements Reduce International Uncertainty

25-15

Ethical Considerations: Good Faith Valuations

25-17

Statutes of Limitations

25-20

Tax in the News: How Agreeable Should a Taxpayer Be?

25-21

Tax Practice

25-22

The Tax Practitioner

25-22

Ethical Considerations---``Statements on Responsibilities in Tax Practice''

25-26

Tax Planning Considerations

25-28

Strategies in Seeking an Administrative Ruling

25-28

Considerations in Handling an IRS Audit

25-29

Ethical Considerations: Should the Client Attend an Audit?

25-30

Penalties

25-32

Problem Materials

25-33

The Federal Gift and Estate Taxes

26-1

Transfer Taxes---In General

26-2

Nature of the Taxes

26-2

Tax in the News: Are Transfer Taxes Worthwhile?

26-3

International Implications: Expatriation to Avoid U. S. Taxes

26-4

International Implications: Death and Taxes Certain for Foreign Individuals?

26-5

Valuation for Estate and Gift Tax Purposes

26-8

Key Property Concepts

26-9

The Federal Gift Tax

26-10

General Considerations

26-10

Ethical Considerations: What Constitutes the Obligation of Support

26-11

Transfers Subject to the Gift Tax

26-11

Annual Exclusion

26-13

Deductions

26-14

Computing the Federal Gift Tax

26-14

Procedural Matters

26-16

The Federal Estate Tax

26-17

Gross Estate

26-17

Ethical Considerations: A Joint Bank Account and a Subsequent Marriage

26-25

Taxable Estate

26-27

Tax in the News: For Whose Benefit?

26-28

Computing the Federal Estate Tax

26-33

Estate Tax Credits

26-33

Tax in the News: How Binding Is a Scheduled Change in the Law?

26-35

Procedural Matters

26-36

The Generation-Skipping Transfer Tax

26-36

The Problem

26-36

The Solution

26-36

Tax Planning Considerations

26-37

The Federal Gift Tax

26-37

The Federal Estate Tax

26-38

Problem Materials

26-41

Income Taxation of Trusts and Estates

27-1

An Overview of Subchapter J

27-2

What is a Trust?

27-4

Other Definitions

27-4

What is an Estate?

27-5

Tax in the News: Doing Estate Planning on Television

27-6

Nature of Trust and Estate Taxation

27-6

Filing Requirements

27-6

Tax Accounting Periods, Methods, and Payments

27-7

Tax Rates and Personal Exemption

27-7

Tax in the News: Everyone Gets Wet When You Soak the Rich

27-8

Alternative Minimum Tax

27-9

Taxable Income of Trusts and Estates

27-9

Entity Accounting Income

27-9

Gross Income

27-12

Ordinary Deductions

27-14

Deductions for Losses

27-15

Charitable Contributions

27-16

Deduction for Distributions to Beneficiaries

27-17

Tax Credits

27-20

Taxation of Beneficiaries

27-20

Distributions by Simple Trusts

27-20

Distributions by Estates and Complex Trusts

27-21

Character of Income

27-23

Losses in the Termination Year

27-24

Tax in the News: Don't Trust Your Dictionary

27-25

Tax Planning Considerations

27-26

A Trust or Estate as an Income-Shifting Device

27-26

Income Tax Planning for Estates

27-27

Ethical Considerations: Should a Tax Adviser Also Be a Trustee?

27-28

Income Tax Planning with Trusts

27-28

Distributions of In-Kind Property

27-29

Problem Materials

27-29

Working with the Tax Law

28-1

276

Tax Sources

28-2

Statutory Sources of the Tax Law

28-2

Tax in the News: Small Is Beautiful?

28-3

Ethical Considerations: The President and the IRS

28-7

Administrative Sources of the Tax Law

28-7

Tax in the News: Some News About the IRS

28-9

Judicial Sources of the Tax Law

28-12

Working with the Tax Law---Tax Research

28-21

Identifying the Problem

28-21

Refining the Problem

28-21

Locating the Appropriate Tax Law Sources

28-22

Assessing the Validity of the Tax Law Sources

28-24

Arriving at the Solution or at Alternative Solutions

28-27

Communicating Tax Research

28-27

Working with the Tax Law---Tax Planning

28-28

Nontax Considerations

28-29

Tax Evasion and Tax Avoidance

28-30

Follow-Up Procedures

28-31

Tax Planning---A Practical Application

28-31

Tax in the News: Audits and Fraud Busters

28-31

Ethical Considerations: Tax Avoidance

28-32

Electronic Tax Research

28-32

Problem Materials

28-38

APPENDIXES

Tax Rate Schedules and Tables

A-1

Tax Forms

B-1

Glossary of Key Terms

C-1

Table of Code Sections Cited

D-1

Table of Regulations Cited

D-14

Table of Revenue Procedures and Revenue Rulings Cited

D-18

Comprehensive Tax Return Problems

E-1

Subject Index

I-1