▲APPENDIX D Statements on Responsibilities in Tax Practice 1
▲APPENDIX A Tax Rate Schedules and Tax Tables 1
▲PARTⅠCONCEPTUAL FOUNDATIONS OF THE TAXLAW 1
APPENDIX D Statements on Responsiblities in Tax Practice 1
▲APPENDIX B Tax Return Problem 1
Glossary 1
▲APPENDIX C Tax Forms 1
APPENDIX A Tax Rate Schedules and Tax Tables 1
APPENDIX B Tax Return Problem 1
GLOSSARY 1
PARTΙ CONCEPTUAL FOUNDATIONS OF THE TAX LAW 1
Index 1
APPENDIX C Tax Forms 1
INDEX 1
CHAPTER 1 Federal Income Taxation―An Overview 2
▲CHAPTER 1 FEDERAL INCOME TAXATION―AN OVERVIEW 2
Introduction 3
Definition and Evaluation of a Tax 3
Definition of a Tax 3
Standards for Evaluating a Tax 5
Tax Rates and Structures 7
Tax Rate Definitions 7
Tax Rate Structures 8
Income Taxes 11
Major Types of U.S. Taxes 11
Employment Taxes 12
Social Security Taxes 13
Unemployment Taxes 14
Sales Tax 15
Property Taxes 15
Other Taxes 16
Excise Taxes 16
Wealth Transfer Taxes 16
Sources of Federal Income Tax Law 18
Income 19
Federal Income Tax Terminology 19
Deductions 21
Income Tax Rates 21
Tax Prepayments 23
Tax Credits 24
Filing Returns 24
The Audit and Appeal Process within the IRS 25
Tax Return Selection Processes 26
Types of Examinations 26
Settlement Procedures 27
Individual Income Tax Calculation 27
Administrative Appeals 27
Deductions for Adjusted Gross Income 28
Deductions from Adjusted Gross Income 29
Tax Planning 31
Mechanics of Tax Planning 31
Personal and Dependency Exemptions 31
Timing Income and Deductions 32
Income Shifting 35
Tax Evasion and Tax Avoidance 36
Ethical Considerations in Tax Practice 37
Summary 40
Key Terms 40
Primary Tax Law Sources 41
Discussion Questions 42
Problems 44
Discussion Cases 48
Ethics Discussion Case 49
Tax Planning Case 49
CHAPTER 2 Income Tax Concepts 50
▲CHAPTER 2 Income Tax Concepts 50
Introduction 51
Ability-to-Pay Concept 52
General Concepts 52
Administrative Convenience Concept 53
Arm s-Length Transaction Concept 54
Pay-as-You-Go Concept 55
Entity Concept 56
Accounting Concepts 56
Assignment-of-Income Doctrine 59
Annual Accounting Period Concept 60
Accounting Method 60
Tax Bencfit Rule 61
Substance-over-Form Doctrine 61
Income Concepts 63
All-Inclusive Income Concept 63
Capital Recovery Concept 64
Legislative Grace Concept 64
Claim-of-Right Doctrine 65
Realization Concept 65
Constructive Receipt Doctrine 66
Comparing Claim of Right and Constructive Receipt 67
Wherewithal-to-Pay Concept 68
Legislative Grace Concept 69
Deduction Concepts 69
Business Purpose Concept 70
Capital Recovery Concept 72
Summary 75
Key Terms 75
Primary Tax Law Sources 76
Discussion Questions 77
Problems 78
Discussion Case 88
Tax Planning Case 88
Ethics Discussion Case 89
▲PARTⅡGROSS INCOME 91
PARTⅡ CROSS INCOME 91
▲CHAPTER 3 Income Sources 92
CHAPTER 3 Income Sources 92
Concept Review 93
Introduction 93
What Constitutes Income 94
Income Is Derived from Labor and Capital 95
Income as an Increase in Wealth 96
What Constitutes Income Current View 97
Common Income Sources 98
Earned Income 98
Unearned Income 100
Rental and Royalty Income 100
Annuities 101
Calculation of Gain/Loss on Sa?e of Investments 104
Income from Conduit Entitres 104
Transfers from Others 105
Prizes and Awards 105
Social Security Benefits 106
Unemployment Compensation 106
Alimony Received 110
Imputed Income 111
Below Market-Rate Loans 112
Payment of Expenses by Others 115
Bargain Purchases 116
Capital Gains and Losses―An Introduction 116
Capital Gain-and-Loss Netting Procedure 117
Tax Treatment of Capital Gains 119
Tax Treatment of Capital Losses 119
Capital Gains and Losses of Conduit Entities 120
Effect of Accounting Method 121
Cash Method 121
Exceptions Applicable to the Cash Method 122
Accrual Method 123
Exceptions Applicable to the Accrual Method 123
Hybrid Method 124
Exceptions Applicable to All Methods 125
Installment Sales 125
Long-Term Construction Contracts 125
Key Terms 126
Summary 126
Primary Tax Law Sources 127
Discussion Questions 129
Problems 130
Discussion Cases 140
Tax Planning Case 141
Ethics Discussion Case 142
CHAPTER 4 Income Exclusions 143
▲CHAPTER 4 Income Exclusions 143
Concept Review 144
Introduction 144
Donative ltems 145
Gifts 146
Inheritances 147
Life Insurance Proceeds 147
Scholarships 149
Certain Death Benefits 149
Payments Made on Behalf of an Employee 150
Employment-Related Exclusions 150
Foreign Earned Income 150
Payments to Qualified Pension Plans 151
Group Term Life Insurance 152
Health and Accident Insurance Premiums 153
Meals and Lodging Prouided by the Employer 154
General Fringe Benefits 155
Employer Benefit Plans 156
Other Benefits Paid by an Employer 156
Medical Savings Accounts 158
Returns of Human Capital 158
Damage Payments for Personal Physical Injury or Phydsical Sickness 159
Workers Compensation 159
Payments from Health and Accident Policies 160
Investment-Related Exclusions 162
Municipal Bond Interest 162
Stock Dividends 163
Discharge of Indebtedness 164
Improvements by a Lessee 166
Summary 166
Key Terms 168
Primary Tax Law Sources 168
Discussion Questions 170
Problems 171
Integrative Problems 179
Tax Planning Case 181
Discussion Case 181
Ethics Discussion Case 182
PART Ⅲ DEDUCTIONS 183
▲PART Ⅲ DEDUCTIONS 183
CHAPTER 5 Introduction to Business Expenses 184
▲CHAPTER 5 Introduction to Business Expenses 184
Introduction 185
Concept Review 185
Reporting Deductions 187
Conduit Entity Reporting 189
Profit-Motivated Expenditures 191
Classification of Deductions 191
Trade or Business Expenses 192
Trade or Business of Production-of-Income Expenses? 192
Expenses for the Production of Income 194
Rental Aclivity 195
Personal Expenditures 196
Mixed Business and Personal Expenditures 197
Mixed-Use Assets 197
Mixed-Use Expenditures 198
Tests for Deductibility 198
Ordinary Expense 199
Ordinary,Necessary,and Reasonable in Amount 199
Reasonable in Amount 200
Necessary Expense 200
Not a Personal Expense 201
Not a Capital Expenditure 202
Start-up Costs 203
Repair-and-Maintenance Expense 203
Not Frustrate Public Policy 204
Expenses of an Illegal Business 205
Lobbying Expenses and Other Political Activities 206
Not Related to Tax-Exempt Income 207
Expenditure Must Be for Taxpaver s Benefit 207
Hobby Expenses 208
Limited Mixed-Use Expenses 208
Vacation Home Expenses 210
Home Office Expenses 213
Timing of Deductions―Effect of Accounting Method 215
Cash Method 215
Accrual Method 217
Financial and Taxable Income Differences 221
Related Party Accrued Expenses 221
Summary 223
Key Terms 224
Primary Tax Law Sources 224
Discussion Questions 226
Problems 227
Comprehensive Problem 240
Discussion Cases 241
Tax Planning Case 242
Ethics Discussion Case 243
CHAPTER 6 Business Expenses 244
▲CHAPTER 6 Business Expenses 244
Concept Review 245
Introduction 245
Entertainment,Auto,Travel,Gift,and Education Expenses 246
Business Expenses 246
Meals and Entertainment 247
Auto Expenses 250
Travel Expenses 252
Business Gifts 254
Substantiation Requirements 255
Education Expenses 255
Compensation of Employees 256
Bad Debts 257
Other Business Expenses 260
Insurance Expense 260
Taxes 261
Individual Deductions for Adjusted Gross Income 263
Legal Fees 263
Reimbursed Employee Business Expenses 264
Accountable Reimbursement Plans 265
Nonaccountable Reimbursement Plans 265
Deductions for Self-Employed Taxpayers 268
Retirement Plan Contribution Deductions 269
Individual Retirement Accounts 269
Moving Expenses 271
Primary Tax Law Sources 272
Summary 272
Key Terms 272
Discussion Questions 274
Problems 275
Integrative Problem 283
Discussion Cases 285
Tax Planning Case 286
Ethics Discussion Case 286
CHAPTER 7 Losses Deductions and Limitations 287
▲CHAPTER 7 Losses―Deductions and Limitations 287
Introduction 288
Concept Review 288
Net Operating Losses 290
Annual Losses 290
Tax-Shelter Losses:An Overview 293
The At-Risk Rules 294
Passive Activity Losses 296
Passive Activity Definition 297
Types of Income 300
General Rule for Passive Activities 301
Taxpayers Subject to the Limits 301
Dispositions of Passive Activities 302
Exceptions for Rental Real Estate 305
Transaction Losses 307
Trade or Business Losses 308
Business Casualty and Theft Losses 308
Capital Losses 312
Investment-Related Losses 312
Specially Treated Inoestment Losses 313
Personal Use Losses 316
Summary 318
Key Terms 319
Primary Tax Law Sources 319
Discussion Questions 320
Problem3 321
Comprehensive Problem 330
Tax Planning Case 331
Ethics Discussion Case 331
Discussion Cases 331
CHAPTER 8 Taxation of Individuals 332
▲CHAPTER 8 Taxation of Individuals 332
Introduction 333
Concept Review 333
Personal and Dependency Exemptions 334
Gross Income Test 335
Support Test 335
Relationship or Member of Household Test 336
Citizen or Residency Test 337
Joint Return Test 337
Filing Status 337
Married,Filing Jointly 337
Married,Filing Separately 338
Single 338
Head of Household 339
Deductions from Adjusted Gross Income 340
Standard Deduction 340
Itemized Deductions 341
Medical Expenses 341
Taxes 343
Interest Expense 345
Charitable Contributions 347
Miscellaneous Itemized Deductions 349
Itemized Deductions and Exemptions―Reductions by High-:Income Taxpayers 351
Exemption and Standard Deduction Restrictions on Dependents 353
Calculating Tax Liability 353
Tax on Unearned Income of a Minor Child 354
Income Tax Credits 355
Earned Income Credit 355
Dependency Requirements 355
Adoption Tax Credit 357
Child-and Dcpendent-Care Credit 359
Filing Requirements 361
Summary 361
Primary Tax Law Sources 362
Key Terms 362
Discussion Questions 364
Problems 365
Integrative Problems 374
Discussion Cases 378
Tax Planning Case 379
Ethics Discussion Case 380
1996 Earned Income Credit Table 381
PARTⅣPROPERTY TRANSACTIONS 387
▲PART Ⅳ PROPERTY TRANSACTIONS 387
CHAPTER 9 Acquisitions of Property 388
▲CHAPTER 9 Acquisitions of Property 388
Concept Review 389
Introduction 389
Classes of Property 390
The Property Investment Cycle 391
Adjusted Basis 392
Increases in Basis 393
Decreases in Basis 394
Basis in Conduit Entities 396
Property Dispositions 397
Determining the Amount Invested 399
Initial Basis 399
Purchase of Assets 399
Purchase of Multiple Assets 401
Basis of a Bargain Purchase 401
Purchase of the Assets of a Business 402
Purchase of a Business 402
Constructed Assets 404
Purchase of Corporate Stock 404
Basis of Property Acquired by Gift 405
Specially Valued Property Acquisitions 405
General Rule for Gift Basis 406
Split Basis Rule for Loss Property 407
Holding Period 408
Basis of Property Acquired by Inheritance 408
Primary Valuation Date 408
Special Sales Price Basis 408
Alternate Valuation Date 409
Distribution Date 409
Other Considerations 410
Property Acquired from a Spouse 411
Personal Use Property Converted to Business Use 412
General Rule for Basis 412
Split Basis Rule 413
Stock Dividends 414
Basis in Securities 414
Taxable Stock Dividends 415
Wash Sale Stock Basis 416
Summary 417
Key Terms 420
Primary Tax Law Sources 420
Discussion Questions 421
Problems 422
Integrative Problem 430
Discussion Cases 431
Ethics Discussion Case 432
Tax Planning Case 432
CHAPTER 10 Cost Recovery on Property:Depreciation,Depletion and Amortization 433
▲CHAPTER 10 Cost Recovery on Property:Depreciation,Depletion,and Amortization 433
Introduction 434
Concept Review 434
Capital Recovery from Depreciation or Cost Recovery 436
Election to Expense Assets 438
Qualified Taxpayers 438
Limitations on Deduction 439
Annual Deduction Limit 439
Qualified Property 439
Annual Investment Limit 441
Active Trade or Business Income Limit 441
Modified Accelerated Cost Recovery(MACRS) 442
Property Subject to MACRS 443
Basis Subject to Cost Recovery 444
MACRS Recovery Period 445
MACRS Conventions 448
Mid-quarter Convention 450
Depreciation Method Alternatives 452
Using MACRS Percentage Tables 454
MACRS Straight-line Election 456
Alternative Depreciation System(ADS) 456
Limitations on Listed Property 457
Listed Property in General 457
Limitation on Passenger Autos 459
Adequate Record Keeping 459
Depletion Methods 460
Depletion 460
Cost Depletion 461
Percentage Depletion 462
Intangible Assets 463
Summary 464
Key Terms 466
Discussion Questions 467
Primary Tax Law Sources 467
Problems 468
Integrative Problems 475
Discussion Cases 476
Ethics Discussion Case 477
Tax Planning Cases 477
APPENDIX TO CHAPTER 10 MACRS Class Lives and MACRS Depreciation Schedules 478
CHAPTER 11 Property Dispositions 493
▲CHAPTER 11 Property Dispositions 493
Introduction 494
Concept Review 494
Realized Gain or Loss 496
Amount Realized 497
Effect of Debt Assumptions 499
Capital Gains and Losses 500
Character of Gain or Loss 500
Long-Term versus Short-Term Classification 501
Capital Asset Definition 501
Capital Gain-and-Loss Netting Procedure 502
Capital Gain Exclusion on Qualified Small Business Stock 506
Net Capital Loss Position 507
Net Capital Gain Position 507
Capital Gains and Losses―Planning Strategies 507
Short Sales 508
Basis of Securities Sold 510
Worthless Securities 510
Section 1231 Gains and Losses 511
Definition of Section 1231 Property 512
Section 1231 Netting Procedure 512
Disposition of Rental Activities 515
Depreciation Recapture 516
Section 1245 Recapture Rule 517
Section 1250 Recapture Rule 518
Installmenl Sales of Depreciable Assets 519
Section 1245 and Section 1250 Properties 520
Summary 522
Primary Tax Law Sources 523
Key Terms 523
Discussion Questions 524
Problems 525
Integrative Problem 536
Comprehensive Problems 537
Tax Planning Cases 538
Discussion Cases 538
Ethics Discussion Case 540
CHAPTER 12 Nonrecognition Transactions 541
▲CHAPTER 12 Nonrecognition Transactions 541
Introduction 542
Concept Review 542
Commonalities of Nonrecognition Transactions 543
Rationales for Nonrecognition 543
Exchange Requirement 548
Life-Kind Exchanges 548
Life-Kind Property Requirements 549
Receipt of Boot 553
Effect of Boot 553
Related Party Exchanges 556
Carryover of Tax Attributes 557
Involuntary Conversions 558
Treatment of Involuntary Conversion Gains and Losses 559
Qualified Replacement Property 561
Principal Residence 562
Sale of a Principal Residence 562
Replacement Period 563
Deferral of Gain 564
Gain Exclusion Requirements 566
Sale of a Principal Residence―Taxpayers Older Than 55 566
One-Time Exclusion of Gain 567
Interaction of Deferral and Exclusion Provisions 568
Summary 569
Key Terms 570
Discussion Questions 571
Primary Tax Law Sources 571
Problems 572
Comprehensive Problem 580
Tax Planning Cases 581
Discussion Cases 581
Ethics Discussion Case 582
APPENDIX TO CHAPTER 12 Selected SIC Product Classes 583
▲PART Ⅴ INCOME TAX ENTITIES 587
PARTⅤINCOME TAX ENTITIES 587
▲CHAPTER 13 Choice of Business Entity―Part1 588
CHAPTER 13 Choice of Business Entity―PartⅠ 588
Concept Review 589
Introduction 589
Nontax Factors 590
Sole Proprietorship 591
Partnership 592
Corporation 593
S Corporation 594
Limited Liability Company 595
Limited Liability Partnership 596
General Income Tax Factors 597
Incidence of Income Taxation 597
Planning Commentary 597
Sole Proprietorship 598
Partnership 599
Corporation 600
S Corporation 602
Personal Service Corporation 602
Double Taxation 603
Employee versus Owner 604
Planning Commentary 606
Formation 606
Transfers to an Entity 607
Partnership 607
Sole Proprietorship 607
Corporation 608
Basis Consicerations 608
Sole Proprietorship 609
Partnership 609
Partnership Debt Effects 610
Recourse and Nonrecourse Loans 610
Corporation 612
Organizational Costs 613
Corporation Debt Effects 613
Accounting Periods 614
Partnership 615
S Corporation 616
Accounting Methods 617
Partnership 618
Corporation 618
S Corporation 619
Operations 619
Sole Proprietorship 619
Planning Commentary 619
Investment Income and Expenses 621
Section 1231 Gains and Losses 621
Passive Activity Items 621
Charitable Contributions 621
Personal Expenses 621
Capital Gains and Losses 621
Tax Credits 622
Net Operating Losses 622
Partnership 623
Income Reporting 623
Net Operating Losses 624
Transactions between Partners and Partnerships 626
Basis Considerations 627
Corporation 629
Capital Gains and Losses 630
Depreciation Recapture 630
Dividends-Received Deduction 631
Passive Activity Losses 633
Charitable Contributions 634
Tax Credits 636
Basis Considerations 636
Net Operating Losses 636
S Corporation 637
Dividends-Received Deduction 637
Corporate Depreciation Recapture 637
Net Operating Losses 638
Basis Considerations 638
Planning Commentary 640
Summary 643
Key Terms 644
Primary Tax Law Sources 644
Discussion Questions 646
Problems 648
Discussion Cases 658
Tax Planning Cases 658
Ethics Discussion Case 659
▲CHAPTER 14 Choice of Business Entity―PartⅡ 660
CHAPTER 14 Choice of Business Entity―PartⅡ 660
Concept Review 661
Introduction 661
Qualified and Nonqualified.Pension Plans 662
Compensation Plans 662
Keogh Plan 666
Other Pension Plans 666
Individual Retirement Accounts 668
Simplified Employee Pension Plan 669
Savings Incentive Match Plan for Employees 670
Distributions 671
Penalties 673
Planning Commentary 674
Nonqualified Stock Options 676
Stock Options 676
Incentive Stock Options 681
Reasonableness of Compensation 682
Fringe Benefits 684
Planning Commentary 686
Other Tax Liability Considerations 687
Social Security Taxes 687
Investment Tax Credit 690
Income Tax Credits 690
Foreign Tax Credit 691
Research and Experimental Credit 692
Rehabilitation Tax Credit 693
Reporting of Tax Credits 695
General Business Credit 695
The Alternative Minimum Tax 696
Basic Alternative Minimum Tax Computation 697
Alternative Minimum Tax Adjustments 698
Alternative Minimum Tax Preferences 702
Alternative Minimum Tax Exemptions 703
Alternative Minimum Tax Credits 703
Alternative Minimum Tax Credit against the Regular Tax 704
Tax Planning and the Alternative Minimum Tax 705
Accumulated Earnings Tax 706
Penalty Taxes on Corporations 706
Personal Holding Company Tax 707
Planning Commentary 708
Sole Proprietorship 709
Entity Distributions 709
Partnership 710
Corporation 712
S Corporation 714
Planning Commentary 716
Tax Planning 718
Children as Employees 719
Income Splitting 719
Family Entities 721
Planning Commentary 722
Summary 723
Key Terms 725
Primary Tax Law Sources 726
Discussion Questions 728
Problems 730
Discussion Cases 739
Ethics Discussion Case 740
Tax Planning 740
PARTⅥ TAX RESEARCH 741
▲CHAPTER 15 Tax Research 742
Legislative Sources 743
The U.S. Constitution 743
Primary Sources of Federal Income Tax Law 743
▲PART Ⅵ TAX RESEARCH 743
Introduction 743
CHAPTER 15 Tax Research 744
Internal Revenue Code of 1986 745
Tax Treaties 749
Administrative Sources 749
Treasury Regulations 749
Acquiescence and Nonacquiescence 750
Revenue Rulings and Procedures 750
Other Pronouncements 751
Judicial Sources 751
Trial Courts 752
Appellate Courts 753
Citations to Primary Authorities 753
Commitlee Reports 753
Supreme Court 753
Code and Regulations 754
Other IRS Pronouncements 755
Court Decisions 755
Secondary Sources of Federal Income Tax Law 756
Tax Services 756
Citators 757
Tax Periodicals 758
Computer Assisted Tax Research 758
Tax Research 760
Step1:Establish the Facts and Determine the Issues 760
Tax Compliance versus Tax Planning 760
Step2:Locate the Relevant Authorities 761
Step3:Assess the Importance of the Authorities 761
Code and Regulations 761
Pronouncements 762
Court Decisions 762
Step4:Reach Conclusions, Make Recommendations, and Communicate the Results 763
Comprehensive Research Example 763
Step1:Establish the Facts and Determine the Issues 763
Step2:Locate the Relevant Authorities 763
The Code 764
Step3:Assess the Importance of the Authorities 764
Regulations 765
Summary 766
Court Decision 766
Step4:Reach Conclusions,Make Recommendations, and Communicate the Rseults 766
Primary Tax Law Sources 767
Key Terms 767
Discussion Questions 768
Problems 769
Research Cases 770