Chapter
Underlying Rationale of the Federal Income Tax
¶1171 Objectives of the Tax Law
¶1187 Tax Policy and Reform Measures
¶1195 Essential Tax Terms Defined
Chapter 2 Tax Research, Practice, and Procedure
¶2001 Classification of Materials
¶2021 Statutory Authority
¶2035 Administrative Authority
Secondary Source Materials
¶2075 Analysis of Tax Law Sources
¶2125 Types of Tax Research Situations
¶2147 Research Cases and Examples
¶2153 Internet-Based Tax Research Systems
¶2211 Organization of the IRS
¶2215 Representation of Taxpayers
¶2245 Taxpayer Compliance Assistance
Tax Practice and Procedure
¶2301 Examination of Returns
¶2315 Settlement Agreements
¶2333 Interest on Under/Overpayments
¶2355 Statute of Limitations
¶2370 Disclosure of a Position on a Return
¶2375 Ethics Rules for Practitioners
Chapter 3 Individual Taxation—An Overview
¶3001 Components of the Tax Formula
¶3015 Deductions for Adjusted Gross Income
¶3025 Adjusted Gross Income
¶3035 Itemizing v. Standard Deduction
¶3045 Personal Exemptions
¶3065 Tax Credits and Prepayments
¶3075 Net Tax Due or Refund
¶3085 Classification of Taxpayers
¶3201 Taxpayer and Spouse
¶3227 High-Income Phaseout of Exemptions
Filing Status and Requirements
¶3301 Married Individuals Filing Jointly
¶3315 Married Individuals Filing Separately
¶3345 Heads of Households
¶3365 Tax Returns of Dependents
¶3375 Filing Requirements
¶3405 Self-Employment Tax
¶4015 The Legal/Tax Concept of Income
Economic Benefit, Constructive Receipt, and Assignment of Income Doctrines
¶4101 Economic Benefit Doctrine
¶4125 Constructive Receipt Doctrine
¶4201 Assignment of Income Doctrine
¶4215 Community Property Income
¶4225 Tenancy by the Entirety
¶4235 Joint Tenants and Tenants in Common
Items Included in Gross Income
¶4301 List of Income Items
¶4315 Compensation for Services
¶4325 Compensation v. Gift
¶4345 Scholarships and Fellowships
¶4355 Gross Income Derived from Business
¶4375 Partnerships and S Corporations
¶4395 Rent and Royalty Income
¶4451 Divorce and Separation
¶4601 Restricted Stock Plans
¶4615 Incentive Stock Option (ISO) Plans
¶4625 Employee Stock Purchase Plans
¶4655 Nonstatutory Stock Option Plans
Chapter 5 Gross Income—Exclusions
Common Exclusions from Gross Income
¶5001 Gifts and Inheritances
¶5015 Life Insurance Proceeds
¶5035 Recovery of Tax Benefit Items
¶5075 Interest on Government Obligations
¶5115 Group-Term Life Insurance
¶5145 Compensation for Injuries and Sickness
¶5155 Accident and Health Plans
¶5165 Qualified Long-Term Care Insurance
¶5201 Educational Assistance Plans
¶5215 Tuition Reduction Plans
¶5235 Dependent Care Assistance Programs
Chapter 6 Deductions: General Concepts and Trade or Business Deductions
Categories of Allowable Deductions
¶6001 Classification of Tax Deductions
¶6101 Deductions “For” vs. “From” AGI
¶6115 Deductions “For” AGI
¶6125 Deductions “From” AGI—Itemized Deductions
Trade or Business Deductions
¶6201 Overview—Code Sec. 162
¶6215 Expense Must Be Incurred in a Trade or Business Activity
¶6225 Expense Must Be Ordinary and Necessary
¶6235 Expense Must Be Reasonable
¶6245 Expense Must Be Paid or Incurred During the Taxable Year
Expenses Incurred for the Production of Income
¶6301 Code Sec. 212—Production of Income or Protection of Assets
¶6315 Investment Expense Deductions
¶6325 Tax Planning and Compliance Expenses
Other Allowable Deductions “For” AGI
¶6505 Business Investigation Start-Up and Organizational Costs
¶6535 Transportation Expenses
¶6565 Qualified Higher Education Expenses
¶6570 Student Loan Interest
¶6575 Health Insurance and Health Savings Accounts
¶6585 Manufacturing Deduction
Employee Business Expenses
¶6601 Employee Business Expenses—In General
Limitations on the Deductibility of Expenses
¶6701 Certain Deductions Limited or Disallowed
¶6715 Hobby Expenses and Losses
¶6725 Personal Deductions
¶6735 Public Policy Restrictions
¶6745 Lobbying and Political Contributions
¶6755 Meals and Entertainment Expenses
¶6765 Expenses and Interest Relating to Tax-Exempt Income
¶6775 Related Party Transactions
¶6785 Payment of Another Taxpayer’s Obligation
¶6795 Capital Expenditures
Business Deductions Related to Capital Expenditures
¶6801 Depreciation of Tangible Property
¶6805 Alternative MACRS System
¶6815 Depreciation of Real Property
¶6825 Code Sec. 179 Election to Expense Certain Depreciable Assets
¶6845 Depreciation of Automobiles
¶6855 Property Converted from Personal to Business Use
¶6875 Research and Experimental Expenditures
¶6885 Depletion of Natural Resources
¶6901 Substantiation of Tax Deductions
Chapter 7 Deductions: Business/Investment Losses and Passive Activity Losses
Tax Shelters and At-Risk Rules
Passive Activity Loss Rules
¶7201 Application of Rules
¶7205 Classification of Income
¶7211 Disallowance of Passive Losses and Credits
¶7225 Disposition of a Passive Activity
¶7231 Taxpayers Affected by Passive Losses
¶7235 Material Participation
¶7261 Identifying an Activity
¶7281 Rental Real Estate Activities
¶7287 Change of Activity Status
Business and Investment Losses
¶7301 Business Casualty and Theft Losses
¶7331 Net Operating Losses (NOLs)
¶7351 Home Office Expenses
¶7371 Vacation Home Expenses
¶7375 Manufacturing Deduction under Code Section 199
Chapter 8 Deductions: Itemized Deductions
¶8001 Requirements for the Deduction
¶8015 Medical Care Expenses
¶8025 Capital Expenditures
¶8035 Transportation and Lodging Expenses
¶8045 Hospital and Other Institutional Care
¶8055 Medicines and Drugs
¶8065 Medical Insurance Premiums
¶8101 Summary of Deductible Taxes
¶8201 Requirements for Deduction
¶8205 Personal (Consumer) Interest
¶8210 Qualified Education Loan Interest
¶8215 Qualified Residence Interest
¶8225 Investment Interest
¶8235 Trade or Business Interest
¶8245 Passive Investment Interest
¶8255 Payments for Services
¶8275 Mortgage Insurance Premiums
¶8301 Qualified Organizations
¶8315 Valuation of Charitable Donations
¶8325 Limitations on Charitable Contributions
¶8355 Filing and Substantiation Requirements
Personal Casualty and Theft Losses
Miscellaneous Itemized Deductions
¶8601 Employee Business Expenses
¶8603 Reimbursed Employee Expenses
¶8605 Unreimbursed Employee Expenses
¶8655 Job-Seeking Expenses
¶8675 Work Clothes and Uniforms
¶8680 Tax Counsel and Return Preparer Fees
¶8701 Rent and Royalty Expenses
¶8745 Miscellaneous Investment Expenses
¶8785 Unrecovered Investment in Annuity
Chapter 9 Tax Credits, Prepayments, and Alternative Minimum Tax
Nonrefundable Tax Credits
¶9015 Household and Dependent Care Credit
¶9025 Elderly and Disabled Persons Credit
¶9031 American Opportunity Tax and Lifetime Learning Credits
¶9033 Credit for Qualified Retirement Savings
¶9034 Adoption Assistance Credit
¶9042 Residential Credits
¶9045 General Business Credit
¶9105 Withholding of Tax on Wages Credit
¶9115 Social Security Tax Refunds Credit
¶9125 Earned Income Credit
¶9135 Withholding of Tax at Source Credit
¶9155 Gasoline and Special Fuels Tax Credit
¶9165 Estimated Tax Payments Credit
¶9415 Adjustments to Taxable Income
¶9425 Tax Preference Items
¶9455 Carryover of Credit
¶9475 Alternative Minimum Tax Planning
Chapter 10 Property Transactions: Determination of Basis and Gains and Losses
Factors in Determining Gain or Loss
¶10,001 Definition of Realized Gain or Loss
¶10,035 Recognition and Nonrecognition of Gain or Loss
¶10,135 Fair Market Value
¶10,145 Property Acquired by Gift
¶10,175 Property Acquired from Decedent
¶10,201 Stock Transactions
¶10,215 Personal-Use Property Conversion
¶10,245 Installment Reporting
Chapter 11 Property Transactions: Nonrecognition of Gains and Losses
Sale of a Personal Residence
¶11,001 The General Rules
¶11,005 Principal Residence
¶11,015 Special Provisions
¶11,025 Definitions Related to Residence
¶11,215 Qualifying Property
¶11,245 Assumption of Liabilities
¶11,255 Basis of Acquired Property
¶11,275 Three-Party Exchanges
¶11,301 Definition of an Involuntary Conversion
¶11,305 Involuntary Conversion Rules for Property Damaged in Disaster
¶11,315 Replacement Property—Mandatory Rules
¶11,325 Replacement Property—Elective Rules
¶11,335 Severance Damages
¶11,345 Qualifying Replacement Property
¶11,355 Condemnation of Real Property—Special Rule
¶11,385 Reporting Requirements
¶11,395 Depreciation Rules
Other Transactions Involving Nonrecognition
¶11,401 Corporate and Partnership Exchanges
¶11,405 Stock-for-Stock Exchanges
¶11,415 Insurance Contract Exchanges
¶11,435 U.S. Obligations Exchanges
¶11,455 Reacquisitions of Real Property
Chapter 12 Property Transactions: Treatment of Capital and Section 1231 Assets
Special Rules and Limitations on Transactions
¶12,025 Capital Asset Definition
Special Situations in Capital v. Ordinary Treatment
¶12,115 Sale of a Business
¶12,155 Lease Cancellation Payments
¶12,201 Computation of Holding Period
¶12,215 Special Rules for Holding Period
¶12,301 Determination of Taxable Income
¶12,315 Capital Loss Carryovers
¶12,401 Corporate Taxpayers Distinguished
Special Provisions for Certain Investments
¶12,501 Nonbusiness Bad Debts
¶12,515 Worthless Securities
¶12,525 Small Business Stock
¶12,530 Gains on Small Business Stock
¶12,535 Dealers in Securities
¶12,545 Subdivided Real Estate
Section 1231 Assets and Procedure
¶12,615 Definition of Section 1231 Assets
¶12,645 Computational Procedures
¶12,655 Personal Casualty and Theft Gains and Losses
Depreciation Recapture—Section 1245
¶12,715 Definition of Section 1245 Property
¶12,725 Computational Procedures
¶12,735 Depreciation Methods
¶12,745 ACRS or MACRS Property
¶12,755 Summary: Section 1245 Recapture
Depreciation Recapture—Section 1250
¶12,801 Definition of Section 1250 Property
¶12,825 Nonresidential Real Property— Pre-1981 Acquisitions
¶12,835 Nonresidential Real Property—ACRS
¶12,841 Nonresidential Real Property—MACRS
¶12,845 Residential Real Property—Pre-1981 Acquisitions
¶12,855 Residential Real Property—ACRS
¶12,861 Residential Real Property—MACRS
¶12,865 Low-income Housing—Pre-1987 Acquisitions
¶12,875 Summary: Section 1250 Recapture
Recapture Rules in Other Events
¶12,901 Gifts and Inheritances
¶12,915 Like-Kind Exchanges and Involuntary Conversions
¶12,925 Charitable Contributions
¶12,935 Installment Sales
Chapter 13 Tax Accounting
Taxable Income and Tax Liability for Various Entities
¶13,001 Recapitulation of Taxable Income and Tax Liability
¶13,015 Election of the Tax Year
Change of Accounting Periods
¶13,101 IRS Permission or Consent
¶13,115 Exceptions to Permission Requirements
¶13,175 Accounting Period Tax Planning
¶13,180 Special Rules—The Tax Year
¶13,225 Limitations on Use of Cash Method
¶13,230 Special Rules—Cash Method
¶13,240 Accrual Method Tax Planning
¶13,245 Separate Sources of Income
Change of Accounting Methods
¶13,301 IRS Permission or Consent
¶13,325 Adjustment—Voluntary/Required Change
¶13,355 Time and Form of Application
¶13,365 Accounting Method Tax Planning
¶13,401 Use of Inventories
¶13,415 Valuation of Inventory
¶13,435 Uniform Capitalization Rules
¶13,445 Lower-of-Cost-or-Market (LCM) Method
¶13,453 Valuation of Inventory Items
¶13,473 Dollar-Value LIFO Method
¶13,481 Simplified Dollar-Value LIFO Method
¶13,485 Estimates of Inventory Shrinkage
¶13,501 Alternative Accounting Methods
¶13,515 Comparison of the Methods
¶13,535 Capitalization of Expenses
¶13,601 Use of Installment Method
¶13,655 Computation of Gain
¶13,675 Electing Out of Installment Reporting
¶13,685 Dispositions of Installment Obligations
¶13,699 Interest on Deferred Payment Sales
¶13,710 Advantages and Disadvantages of Installment Method
Chapter 14 Deferred Compensation and Education Savings Plans
Employer-Sponsored Deferred Compensation Plans: “Qualified” and “Nonqualified”
¶14,001 Qualified Employer-Sponsored Plans
¶14,015 Nonqualified Employer-Sponsored Plans
Basic Types of Employer-Sponsored Qualified Retirement Plans
¶14,101 Defined Contribution Plans
¶14,110 Defined Benefit Plans
¶14,115 Profit-Sharing Plans
¶14,120 Stock Bonus Plans
¶14,125 Employee Stock Ownership Plans (ESOPs)
¶14,130 Money Purchase Pension Plans
Qualified Plan Requirements
¶14,201 Sources of Legislative Authority
¶14,205 Nondiscrimination Requirements
¶14,215 Limitations on Contributions to a Defined Contribution Plan
¶14,225 Limitations on Benefits Provided by a Defined Benefit Plan
¶14,235 Required Minimum Distribution Rules
¶14,245 Early Withdrawal Restrictions
¶14,255 Participation Requirements
¶14,265 Coverage Requirements
¶14,275 Vesting Requirements
¶14,285 “Exclusive Benefit of the Employee” Requirement
Tax Consequences to Employer and Employee
¶14,301 Contributions and Distributions: Basic Terminology
¶14,305 Contributions and Deductions—General Rules
¶14,315 Earnings on Contributions
¶14,325 Partial Distributions—Computing Tax Liability
¶14,335 Lump-sum Distributions—Computing Tax Liability
Common Retirement Plans For Large Businesses
¶14,405 Roth 401(k) Plans
¶14,415 Qualified Annuity (403(a)) Plans
¶14,425 Tax-Sheltered Annuity (403(b)) Plans
¶14,435 Section 457(b) Deferred Compensation Plans
¶14,445 Retirement Plans for Federal and Postal Employees
Common Retirement Plans For Small Businesses
¶14,501 Plans for Small Businesses—Basic Concepts
¶14,515 Solo 401(k) Plans
¶14,535 Simplified Employee Pension (SEP) Plans
Personal Retirement Plans For Working Individuals
¶14,601 Common Rules for Traditional and Roth IRAs
¶14,625 Specific Rules for Traditional IRAs
¶14,635 Rules Specific for Roth IRAs
Nonqualified Deferred Compensation Plans
¶14,701 Nonqualified Plans—Basic Concepts
¶14,715 Employee Stock Purchase Plans
¶14,725 Incentive Stock Options (ISOs)
¶14,735 Nonqualified Stock Options (NSOs)
¶14,745 Restricted Stock Plans
¶14,755 Variable Annuity Contracts
¶14,765 Short-Term Informal Arrangements
Education Savings Vehicles
¶14,801 Coverdell Education Savings Accounts
Chapter 15 Tax Planning for Individuals
General Principles of Tax Planning
¶15,001 Avoiding Income Recognition
¶15,015 Deferral or Acceleration of Income
¶15,025 Acceleration or Deferral of Deductions
¶15,035 Itemized or the Standard Deduction
Self-Employed v. Employee Tax Planning
¶15,101 Health Insurance Plans
¶15,115 Trade or Business Expenses
¶15,255 Divorce Settlements
Fixed and Other Assets Tax Planning
¶15,401 Expensing Election
¶15,411 Leasing v. Buying
¶15,425 Like-Kind Exchanges
¶15,445 Involuntary Conversions
¶15,465 Section 1231 Assets
¶15,501 Itemized Deductions—Two-Tier System
¶15,515 Checklist of Itemized Deductions
¶15,535 State and Local Taxes
¶15,545 Charitable Contributions
¶15,547 Charitable Gifting
¶15,555 Personal Interest
¶15,565 Qualified Residence Interest
¶15,575 Investment Interest
¶15,585 Business Meals and Entertainment
¶15,595 Business and Educational Travel
¶15,605 Home Office Expenses
¶15,701 Individual Retirement Accounts (IRAs)
¶15,715 Section 401(k) Plans
¶15,725 Retirement Plan Distributions
Chapter 16 Partnerships, Corporations, and S Corporations
Choice of Business Organization
¶16,001 General Considerations
¶16,005 Limitation of Liability
Characteristics of a Partnership
¶16,101 Organizing a Partnership
¶16,109 Organization Expense & Start-Up Costs
¶16,115 Partner’s Basis in the Partnership
¶16,120 Partnership Income and Deductions
¶16,125 Reporting Requirements
¶16,141 Contributions to the Partnership
¶16,157 Partnership Liabilities—Contributed Property
¶16,165 Basis Allocations by Partners
¶16,171 Admission of a New Partner
¶16,175 Partnership Distributions
¶16,181 Sale or Exchange of Partnership Interest
¶16,187 Estimated Income Tax
¶16,195 Family Partnerships
Characteristics of a Corporation
¶16,215 Corporate Formation
¶16,225 Corporate Income, Deductions, and Credits
¶16,235 Charitable Contributions
¶16,241 Corporate Distributions
¶16,245 Regular Rates and Graduated Scale
¶16,250 Personal Service Corporations
¶16,255 Corporate Alternative Minimum Tax
¶16,265 Minimum Tax Computation
¶16,285 Corporate Liquidations
¶16,315 S Corporation Election
¶16,335 Termination of Election
¶16,345 Tax on S Corporation Income
¶16,355 Allocation of Income, Deductions, and Credits
¶16,365 Treatment of Losses
¶16,375 Treatment of Distributions
¶16,385 Accumulated Adjustments Account
Chapter 17 Federal Estate Tax, Federal Gift Tax, and Generation-Skipping Transfer Tax
Impact of Economic Growth and Tax Relief Reconciliation Act of 2001, Tax Relief Act of 2010, and American Taxpayer Relief Act of 2012
Assessment of the 2010 Tax Relief Act
Legal Terms Common to Estates and Trusts
Computation and Payment of Estate Tax
¶17,001 Estate Tax Computation—Summary
¶17,009 Applicable Credit Amount
¶17,015 Unified Rate Schedule
¶17,025 Payment of Tax and Returns
¶17,035 Credits Against Tax
¶17,101 Property Includible in Gross Estate
¶17,105 Code Section 2031(c) Exclusion
¶17,109 Present and Future Interests in Property
¶17,117 Gifts Within Three Years of Death
¶17,125 Retained Life Estates
¶17,141 Revocable Transfers
¶17,157 Co-Ownerships of Property
¶17,165 Powers of Appointment
¶17,175 Part-Sale, Part-Gift Transfers
Valuation of Gross Estate
¶17,181 General Principles
¶17,185 Specific Properties
¶17,187 Listed Securities
¶17,191 Closely Held Stock
¶17,193 Buy-Sell Agreements
¶17,195 Special Use Valuation for Farmland and Closely Held Business Realty
Deductions from the Gross Estate
¶17,201 Expenses, Debts, and Losses
¶17,217 Marital Deduction
¶17,225 Charitable Contributions
¶17,230 State Death Taxes
¶17,301 Definition of Transfers by Gift
¶17,315 Basis of Property Transferred by Gift
¶17,325 Present v. Future Interests
¶17,341 General Considerations
¶17,345 Marital Deduction
¶17,355 Charitable Deduction
¶17,365 Valuation of Gifts
¶17,375 Nontaxable Transfers
¶17,385 Co-Ownerships of Property
¶17,395 Powers of Appointment
¶17,405 Liability for Tax
¶17,415 Gift Tax Computation—Summary
Generation-Skipping Transfer (GST) Tax
¶17,501 Nature and Purpose of Tax
¶17,535 Exemptions from Tax
¶17,575 Credits and Deductions
Chapter 18 Income Taxation of Trusts and Estates
¶18,001 Decedent’s Final Income Tax Return
¶18,015 Income and Deductions on Final Return
¶18,025 Federal Income Tax Concerns of an Estate
¶18,035 Fiduciary Responsibilities
¶18,045 Estate Federal Income Tax Return
¶18,215 Trust Federal Income Tax Return
Federal Income Taxation Scheme—Estates and Trusts
¶18,301 Distributable Net Income (DNI) System
¶18,325 DNI Computations—Simple Trusts
¶18,331 Depreciation and Depletion Deductions
¶18,345 Dni Computations—Complex Trusts and Estates
¶18,357 Charitable Contributions—Complex Trusts and Estates
¶18,365 Tax Return Special Rules
¶18,371 Alternative Minimum Tax
¶18,373 Gifts, Legacies, and Bequests
¶18,381 Property Distributions
¶18,387 Termination of Estate or Trust
Taxation of Trusts—Special Rules
Tax Rate Schedules for 2013
Internal Revenue Code Sections Cited
Private Letter Rulings Cited
Regulations Sections Cited
Federal Taxation: Basic Principles (2014)
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