PEARSON’S FEDERAL TAXATION2019
PEARSON’SFEDERAL TAXATION2019COMPREHENSIVEA01 POPE8307 32 SE FM.indd 16/13/18 2:22 PM
A01 POPE8307 32 SE FM.indd 26/13/18 2:22 PM
PEARSON’SFEDERAL TAXATION2019COMPREHENSIVEEDITORSTIMOTHY J. RUPERTNortheastern UniversityKENNETH E. ANDERSONUniversity of TennesseeCONTRIBUTING AUTHORSTHOMAS R. POPECHARLENE HENDERSONUniversity of KentuckyLouisiana State UniversityD. DALE BANDYJARED MOOREUniversity of Central Florida (Emeritus)Oregon State UniversityN. ALLEN FORDWILLIAM J. MOSERUniversity of KansasMiami UniversityANNA C. FOWLERWILLIAM D. BRINKUniversity of Texas at Austin (Emeritus)Miami UniversityRICHARD J. JOSEPHSUSAN L. PORTERBryant UniversityUniversity of VirginiaDAVID S. HULSEMICHAEL S. SCHADEWALDUniversity of KentuckyUniversity of FloridaLEANN LUNAUniversity of Tennessee330 Hudson Street, New York, NY 10013A01 POPE8307 32 SE FM.indd 36/13/18 2:22 PM
Vice President, Business, Economics, and UK Courseware: Donna BattistaDirector of Portfolio Management: Adrienne D’AmbrosioSpecialist Portfolio Manager: Lacey VitettaEditorial Assistant: Elisa MarksVice President, Product Marketing: Roxanne McCarleySenior Product Marketer: Tricia MurphyProduct Marketing Assistant: Marianela SilvestriManager of Field Marketing, Business Publishing: Adam GoldsteinField Marketing Manager: Nayke PopovichVice President, Production and Digital Studio, Arts and Business: Etain O’DeaDirector of Production, Business: Jeff HolcombManaging Producer, Business: Melissa FeimerContent Producer: Emily ThroneProject Manager: Melissa PelleranoOperations Specialist: Carol MelvilleDesign Lead: Kathryn FootManager, Learning Tools: Brian SuretteLearning Tools Strategist: Michael TrinchettoManaging Producer, Digital Studio and GLP, Media Productionand Development: Ashley SantoraManaging Producer, Digital Studio and GLP: James BatemanManaging Producer, Digital Studio: Diane LombardoDigital Studio Producer: Mary Kate MurrayDigital Studio Producer: Alana ColesDigital Content Team Lead: Noel LotzDigital Content Project Lead: Martha LaChanceFull-Service Project Management, Composition, and Cover Design: IntegraSoftware ServicesCover Art: Ryan Rodrick Beiler/ShutterstockPrinter/Binder: LSC Communications, Inc./WillardCover Printer: Phoenix Color/HagerstownPhoto credits: Ryan Rodrick Beiler/Shutterstock; Andrea Izzotti/Shutterstock; OrhanCam/ShutterstockCopyright 2019, 2018, 2017 by Pearson Education, Inc. or its affiliates. All Rights Reserved. Manufactured in the United States of America. This publication is protectedby copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form orby any means, electronic, mechanical, photocopying, recording, or otherwise. Forinformation regarding permissions, request forms, and the appropriate contacts withinthe Pearson Education Global Rights and Permissions department, please visit www.pearsoned.com/permissions/.Acknowledgments of third-party content appear on the appropriate page within the text,which constitutes an extension of this copyright page.PEARSON, ALWAYS LEARNING, and MYLAB are exclusive trademarks owned byPearson Education, Inc. or its affiliates in the U.S. and/or other countries.Unless otherwise indicated herein, any third-party trademarks, logos, or icons thatmay appear in this work are the property of their respective owners, and any referencesto third-party trademarks, logos, icons, or other trade dress are for demonstrative ordescriptive purposes only. Such references are not intended to imply any sponsorship,endorsement, authorization, or promotion of Pearson’s products by the owners ofsuch marks, or any relationship between the owner and Pearson Education, Inc.,or its a ffiliates, authors, licensees, or ghered.com ISBN-13: 978-0-13-473830-7A01 POPE8307 32 SE FM.indd 46/13/18 2:22 PM
OVERVIEWPreface xxviiiINDIVIDUALSCORPORATIONSCHAPTER1AN INTRODUCTION TO TAXATION 1-1CHAPTER2DETERMINATION OF TAX 2-1CHAPTER3GROSS INCOME: INCLUSIONS 3-1CHAPTER4GROSS INCOME: EXCLUSIONS 4-1CHAPTER5PROPERTY TRANSACTIONS: CAPITAL GAINS AND LOSSES 5-1CHAPTER6DEDUCTIONS AND LOSSES 6-1CHAPTER7ITEMIZED DEDUCTIONS 7-1CHAPTER8LOSSES AND BAD DEBTS 8-1CHAPTER9BUSINESS AND EMPLOYEE EXPENSES AND DEFERRED COMPENSATION 9-1CHAPTER10DEPRECIATION, COST RECOVERY, AMORTIZATION, AND DEPLETION 10-1CHAPTER11ACCOUNTING PERIODS AND METHODS 11-1CHAPTER12PROPERTY TRANSACTIONS: NONTAXABLE EXCHANGES 12-1CHAPTER13PROPERTY TRANSACTIONS: SECTION 1231 AND RECAPTURE 13-1CHAPTER14SPECIAL TAX COMPUTATION METHODS, TAX CREDITS, AND PAYMENTOF TAX 14-1CHAPTER1TAX RESEARCH 1-1CHAPTER2CORPORATE FORMATIONS AND CAPITAL STRUCTURE 2-1CHAPTER3THE CORPORATE INCOME TAX 3-1CHAPTER4CORPORATE NONLIQUIDATING DISTRIBUTIONS 4-1CHAPTER5OTHER CORPORATE TAX LEVIES 5-1CHAPTER6CORPORATE LIQUIDATING DISTRIBUTIONS 6-1CHAPTER7CORPORATE ACQUISITIONS AND REORGANIZATIONS 7-1CHAPTER8CONSOLIDATED TAX RETURNS 8-1CHAPTER9PARTNERSHIP FORMATION AND OPERATION 9-1CHAPTER10SPECIAL PARTNERSHIP ISSUES 10-1CHAPTER11S CORPORATIONS 11-1CHAPTER12THE GIFT TAX 12-1CHAPTER13THE ESTATE TAX 13-1CHAPTER14INCOME TAXATION OF TRUSTS AND ESTATES 14-1CHAPTER15ADMINISTRATIVE PROCEDURES 15-1vA01 POPE8307 32 SE FM.indd 56/13/18 2:22 PM
vi Comprehensive OverviewTA B L E S2017 TAX TABLES AND RATE SCHEDULESAND 2018 WITHHOLDING TABLES (PARTIAL) T-1APPENDIXATAX RESEARCH WORKING PAPER FILE A-1APPENDIXBTAX FORMS B-1APPENDIXCMACRS TABLES C-1APPENDIXDGLOSSARY D-1APPENDIXEAICPA STATEMENTS ON STANDARDS FOR TAX SERVICES NOS. 1–7 E-1APPENDIXFCOMPARISON OF TAX ATTRIBUTES FOR C CORPORATIONS,PARTNERSHIPS, AND S CORPORATIONS F-1A01 POPE8307 32 SE FM.indd 6APPENDIXGRESERVED G-1APPENDIXHACTUARIAL TABLES H-1APPENDIXIINDEX OF CODE SECTIONS I-1APPENDIXJINDEX OF TREASURY REGULATIONS J-1APPENDIXKINDEX OF GOVERNMENT PROMULGATIONS K-1APPENDIXLINDEX OF COURT CASES L-1APPENDIXMSUBJECT INDEX M-16/13/18 2:22 PM
CONTENTSPREFACE xxviiiINDIVIDUALSCHAPTER1ccAN INTRODUCTION TO TAXATION 1-1History of Taxation in the United States 1-2Early Periods 1-2Revenue Acts from 1913 to the Present 1-3Revenue Sources 1-3Types of Tax Rate Structures 1-4The Structure of Individual Income TaxRates 1-4The Structure of Corporate Tax Rates 1-5Marginal, Average, and Effective Tax Rates forTaxpayers 1-5Determination of Taxable Income andTax Due 1-6Other Types of Taxes 1-7State and Local Income and Franchise Taxes 1-7Wealth Transfer Taxes 1-7Other Types of Taxes 1-11Criteria for a Tax Structure 1-12Equity 1-12Certainty 1-13Convenience 1-13Economy 1-13Simplicity 1-14Objectives of the Federal Income TaxLaw 1-14Entities in the Federal Income Tax System 1-16Taxpaying Entities 1-17Flow-Through Entities 1-20Other Entities 1-23Tax Law Sources 1-24Enactment of a Tax Law 1-24Steps in the Legislative Process 1-24Administration of the Tax Law and Tax PracticeIssues 1-26Organization of the Internal RevenueService 1-26Enforcement Procedures 1-27Selection of Returns for Audit 1-27Statute of Limitations 1-28Interest 1-28Penalties 1-28Administrative Appeal Procedures 1-29Components of a Tax Practice 1-29Tax Compliance and Procedure 1-29Tax Research 1-30Tax Planning and Consulting 1-30Financial Planning 1-31Computer Applications in Tax Practice 1-31Tax Return Preparation 1-31Tax Planning Applications 1-31Tax Research Applications 1-31Problem Materials 1-32Discussion Questions 1-32Problems 1-34Tax Strategy Problem 1-36Case Study Problem 1-36Tax Research Problem 1-36CHAPTER2ccDETERMINATION OF TAX 2-1Formula for Individual Income Tax 2-2Basic Formula 2-2Definitions 2-3Tax Formula Illustrated 2-6Deductions from Adjusted Gross Income 2-7Itemized Deductions 2-7Standard Deduction 2-10Dependency Requirements 2-12Child Credit 2-18Determining the Amount of Tax 2-19Filing Status 2-20Joint Return 2-20Surviving Spouse 2-21Head of Household 2-22Single Taxpayer 2-22Married Filing Separately 2-22Abandoned Spouse 2-23Children with Unearned Income 2-24Additional Medicare Tax and Net InvestmentIncome Tax 2-27Business Income and Business Entities 2-27Treatment of Capital Gains and Losses 2-30Definition of Capital Assets 2-30Tax Treatment of Gains and Losses 2-30Tax Planning Considerations 2-30Shifting Income Between FamilyMembers 2-30Splitting Income 2-31Maximizing Itemized Deductions 2-31Filing Joint or Separate Returns 2-32Compliance and Procedural Considerations 2-33Who Must File 2-33Due Dates and Extensions 2-34Use of Forms 1040, 1040EZ, and 1040A 2-35System for Reporting Income 2-35Problem Materials 2-36Discussion Questions 2-36Issue Identification Questions 2-37Problems 2-37viiA01 POPE8307 32 SE FM.indd 76/13/18 2:22 PM
viii Comprehensive ContentsTax Strategy Problems 2-42Tax Form/Return Preparation Problems 2-42Case Study Problems 2-43Tax Research Problems 2-43CHAPTER3ccGROSS INCOME: INCLUSIONS 3-1Economic, Accounting, and Tax Conceptsof Income 3-2Economic Concept 3-2Accounting Concept 3-2Tax Concept of Income 3-3To Whom Is Income Taxable? 3-6Assignment of Income 3-6Allocating Income Between Married People 3-6Income of Minor Children 3-8When Is Income Taxable? 3-8Cash Method 3-8Accrual Method 3-11Hybrid Method 3-12Items of Gross Income: Sec. 61(a) 3-13Compensation 3-13Business Income 3-13Gains from Dealings in Property 3-13Interest 3-13Rents and Royalties 3-15Dividends 3-16Alimony and Separate Maintenance Payments 3-19Pensions and Annuities 3-20Income from Life Insurance and EndowmentContracts 3-22Income from Discharge of Indebtedness 3-23Income Passed Through to Taxpayer 3-23Other Items of Gross Income 3-23Prizes, Awards, Gambling Winnings, and TreasureFinds 3-24Illegal Income 3-24Unemployment Compensation 3-24Social Security Benefits 3-24Insurance Proceeds and Court Awards 3-26Recovery of Previously Deducted Amounts 3-26Claim of Right 3-27Tax Planning Considerations 3-27Shifting Income 3-27Divorce Settlements 3-28Prepaid Income 3-28Taxable, Tax-Exempt, or Tax-Deferred Bonds 3-29Reporting Savings Bond Interest 3-29Deferred Compensation Arrangements 3-30Compliance and Procedural Considerations 3-30Problem Materials 3-31Discussion Questions 3-31Issue Identification Questions 3-34Problems 3-35Comprehensive Problems 3-38Tax Strategy Problems 3-38Tax Form/Return Preparation Problem 3-39Case Study Problems 3-39Tax Research Problem 3-40A01 POPE8307 32 SE FM.indd 8CHAPTER4ccGROSS INCOME: EXCLUSIONS 4-1Items That Are Not Income 4-2Unrealized Income 4-2Self-Help Income 4-3Rental Value of Personal-Use Property 4-3Selling Price of Property 4-3Major Statutory Exclusions 4-4Gifts and Inheritances 4-4Life Insurance Proceeds 4-5Awards for Meritorious Achievement 4-7Scholarships and Fellowships 4-7Distributions from Qualified Tuition Programs 4-7Payments for Injury and Sickness 4-8Employee Fringe Benefits 4-10Foreign-Earned Income Exclusion 4-19Income from the Discharge of a Debt 4-20Exclusion for Gain from Small BusinessStock 4-22Other Exclusions 4-22Tax Planning Considerations 4-23Employee Fringe Benefits 4-23Self-Help Income and Use of Personally OwnedProperty 4-24Compliance and Procedural Considerations 4-24Problem Materials 4-25Discussion Questions 4-25Issue Identification Questions 4-26Problems 4-26Comprehensive Problem 4-30Tax Strategy Problems 4-30Tax Form/Return Preparation Problems 4-31Case Study Problems 4-31Tax Research Problems 4-32CHAPTER5ccPROPERTY TRANSACTIONS: CAPITAL GAINS ANDLOSSES 5-1Determination of Gain or Loss 5-3Realized Gain or Loss 5-3Recognized Gain or Loss 5-5Basis Considerations 5-5Cost of Acquired Property 5-5Property Received as a Gift: Gifts After 1921 5-7Property Received from a Decedent 5-8Property Converted from Personal Use to BusinessUse 5-10Allocation of Basis 5-11Definition of a Capital Asset 5-13Influence of the Courts 5-14Other IRC Provisions Relevant to Capital Gains andLosses 5-14Tax Treatment for Capital Gains and Lossesof Noncorporate Taxpayers 5-16Capital Gains 5-16Adjusted Net Capital Gains (ANCG) 5-18Capital Losses 5-19Tax Treatment of Capital Gains and Losses: CorporateTaxpayers 5-226/13/18 2:22 PM
Contents Comprehensive ixSale or Exchange 5-22Worthless Securities 5-23Retirement of Debt Instruments 5-23Options 5-26Patents 5-27Franchises, Trademarks, and Trade Names 5-27Lease Cancellation Payments 5-28Holding Period 5-29Property Received as a Gift 5-29Property Received from a Decedent 5-29Nontaxable Exchanges 5-30Receipt of Nontaxable Stock Dividends and StockRights 5-30Justification for Preferential Treatment of Net CapitalGains 5-30Mobility of Capital 5-31Mitigation of the Effects of Inflation and the ProgressiveTax System 5-31Lowers the Cost of Capital 5-31Special Disallowance Rules 6-23Wash Sales 6-23Transactions Between Related Parties 6-26Hobby Activities 6-29Vacation Home 6-30Expenses of an Office in the Home 6-34Tax Planning Considerations 6-35Hobby Losses 6-35Unreasonable Compensation 6-36Timing of Deductions 6-36Compliance and Procedural Considerations 6-37Proper Classification of Deductions 6-37Proper Substantiation 6-37Business Versus Hobby 6-37Tax Planning Considerations 5-32Selection of Property to Transfer by Gift 5-32Selection of Property to Transfer at Timeof Death 5-33Problem Materials 6-38Discussion Questions 6-38Issue Identification Questions 6-39Problems 6-40Comprehensive Problems 6-45Tax Strategy Problems 6-46Tax Form/Return Preparation Problems 6-46Case Study Problem 6-49Tax Research Problems 6-49Compliance and Procedural Considerations 5-33Documentation of Basis 5-33Reporting of Capital Gains and Losses on ScheduleD 5-34ccITEMIZED DEDUCTIONS 7-1Problem Materials 5-41Discussion Questions 5-41Issue Identification Questions 5-42Problems 5-42Comprehensive Problem 5-47Tax Strategy Problems 5-47Tax Form/Return Preparation Problems 5-48Case Study Problems 5-49Tax Research Problems 5-49CHAPTER6ccDEDUCTIONS AND LOSSES 6-1Classifying Deductions as For Versus From AdjustedGross Income (AGI) 6-3Criteria for Deducting Business and InvestmentExpenses 6-4Business or Investment Activity 6-5Ordinary Expense 6-7Necessary Expense 6-7Reasonable Expense 6-8Expenses and Losses Incurred Directly by theTaxpayer 6-8General Restrictions on the Deductibilityof Expenses 6-9Capitalization Versus Expense Deduction 6-10Expenses Related to Exempt Income 6-11Expenditures Contrary to Public Policy 6-12Other Expenditures Specifically Disallowed 6-14Proper Substantiation Requirement 6-17When an Expense Is Deductible 6-18Cash Method 6-18Accrual Method 6-20A01 POPE8307 32 SE FM.indd 9CHAPTER7Medical Expenses 7-2Qualified Individuals 7-2Qualified Medical Expenses 7-3Amount and Timing of Deduction 7-6Taxes 7-9Definition of a Tax 7-9Deductible Taxes 7-9Limits on Itemized Deductions for State andLocal Taxes 7-9State and Local Income Taxes 7-10State and Local Sales Taxes 7-10Personal Property Taxes 7-10Real Estate Taxes 7-11Self-Employment Tax 7-12Nondeductible Taxes 7-12Interest 7-12Definition of Interest 7-13Classification of Interest Expense 7-13Timing of the Interest Deduction 7-19Charitable Contributions 7-21Qualifying Organization 7-21Type of Property Contributed 7-22Deduction Limitations 7-25Application of Carryovers 7-26Special Rules for Charitable Contributions Madeby Corporations 7-27Summary of Charitable Contributions DeductionLimitations 7-27Casualty and Theft Losses 7-28Tax Planning Considerations 7-29Medical Expense Deduction 7-29Interest Expense Deduction 7-30Deduction for Charitable Contributions 7-316/13/18 2:22 PM
x Comprehensive ContentsCompliance and Procedural Considerations 7-32Medical Expenses 7-32Charitable Contributions 7-32Taxes 7-34Problem Materials 7-36Discussion Questions 7-36Issue Identification Questions 7-37Problems 7-38Comprehensive Problem 7-41Tax Strategy Problems 7-42Tax Form/Return Preparation Problems 7-42Case Study Problems 7-44Tax Research Problems 7-45CHAPTER8ccLOSSES AND BAD DEBTS 8-1Transactions That May Result in Losses 8-2Sale or Exchange of Property 8-2Expropriated, Seized, Confiscated, or CondemnedProperty 8-3Abandoned Property 8-3Worthless Securities 8-3Demolition of Property 8-4Classifying the Loss on the Taxpayer’s Tax Return 8-4Ordinary Versus Capital Loss 8-5Disallowance Possibilities 8-6Passive Losses 8-7Computation of Passive Losses and Credits 8-7Carryovers 8-8Definition of a Passive Activity 8-10Taxpayers Subject to Passive Loss Rules 8-12Real Estate Businesses 8-14Other Rental Real Estate Activities 8-15Casualty and Theft Losses 8-17Casualty Defined 8-17Theft Defined 8-19Deductible Amount of Casualty Loss 8-19Limitations on Personal-Use Property 8-20Netting Casualty Gains and Losses on Personal-UseProperty 8-21Casualty Gains and Losses Attributable to Business andInvestment Property 8-22Timing of Casualty Loss Deduction 8-22Bad Debts 8-24Bona Fide Debtor-Creditor Relationship 8-24Taxpayer’s Basis in the Debt 8-25Debt Must Be Worthless 8-26Nonbusiness Bad Debts 8-26Business Bad Debts 8-28Deposits in Insolvent Financial Institutions 8-28Net Operating Losses 8-29Computing the Net Operating Loss for Individuals 8-29Carryover Periods 8-32Excess Business Losses 8-33Tax Planning Considerations 8-33Bad Debts 8-33Casualties 8-34Compliance and Procedural Considerations 8-34Casualty Losses 8-34Worthless Securities 8-34A01 POPE8307 32 SE FM.indd 10Problem Materials 8-35Discussion Questions 8-35Issue Identification Questions 8-37Problems 8-37Tax Strategy Problems 8-41Tax Form/Return Preparation Problems 8-42Case Study Problems 8-44Tax Research Problem 8-44CHAPTER9ccBUSINESS AND EMPLOYEE EXPENSES AND DEFERREDCOMPENSATION 9-1Part I: Employee and Self-Employed Expenses 9-2Classification and Limitations of EmployeeExpenses 9-2Nature of the Employment Relationship 9-3Limitations on Unreimbursed EmployeeExpenses 9-4Travel Expenses 9-5Deductibility of Travel Expenses 9-5Definition of Travel Expenses 9-6General Qualification Requirements 9-6Business Versus Pleasure 9-8Foreign Travel 9-9Additional Limitations on Travel Expenses 9-9Transportation Expenses 9-10Definition and Classification 9-10Treatment of Automobile Expenses 9-11Reimbursement of Automobile Expenses 9-13Entertainment Expenses 9-1350% Disallowance for Meal and EntertainmentExpenses 9-14Classification of Expenses 9-14Business Meals 9-15Entertainment Facilities and Club Dues 9-16Business Gifts 9-16Limitations on Entertainment Tickets 9-17Reimbursed Employee Business Expenses 9-17Moving Expenses 9-20Expense Classification 9-21Definition of Moving Expenses 9-21Treatment of Employer Reimbursements 9-22Education Expenses 9-22Classification of Education Expenses 9-23General Requirements for a Deduction 9-24Office in Home Expenses 9-25General Requirements for a Deduction 9-25Deductions and Limitations 9-26Part II: Deferred Compensation 9-28Qualified Pension and Profit-Sharing Plans 9-29Qualification Requirements for a QualifiedPlan 9-30Tax Treatment to Employees and Employers 9-31Nonqualified Plans 9-33Employee Stock Options 9-35Plans for Self-Employed Individuals 9-37Simplified Employee Pensions (SEP IRAs) 9-39Simple Retirement Plans 9-39Individual Retirement Accounts (IRAs) 9-39Traditional IRA 9-406/13/18 2:22 PM
Contents Comprehensive xiRoth IRA 9-41Coverdell Education Savings Account 9-44Health Savings Accounts 9-45Tax Planning Considerations 9-45Moving Expenses 9-45Providing Nontaxable Compensation to Employees 9-46Rollovers to Roth IRA 9-46Compliance and Procedural Considerations 9-47Substantiating Travel and Entertainment Expenses 9-47Reporting Employee Business Expenses 9-47Reporting Office in Home Expenses 9-48Qualification of Pension and Profit-Sharing Plans 9-48Problem Materials 9-51Discussion Questions 9-51Issue Identification Questions 9-54Problems 9-54Comprehensive Problem 9-61Tax Strategy Problem 9-62Tax Form/Return Preparation Problems 9-62Case Study Problems 9-63Tax Research Problem 9-64CHAPTER10ccDEPRECIATION, COST RECOVERY, AMORTIZATION,AND DEPLETION 10-1Depreciation and Cost Recovery 10-2General Considerations 10-2Depreciation Methods 10-4Calculation of Depreciation 10-5MACRS Restrictions 10-12Amortization 10-17Sec. 197 Intangibles 10-17Research and Experimental Expenditures 10-19Computer Software 10-20Depletion, Intangible Drilling and Development Costs 10-21Depletion Methods 10-22Treatment of Intangible Drilling and DevelopmentCosts 10-23Tax Planning Considerations 10-24Alternative Depreciation System Under MACRS 10-24Use of Units of Production Depreciation 10-24Structuring a Business Combination 10-24Compliance and Procedural Considerations 10-25Reporting Cost Recovery, Depreciation, Depletion,and Amortization Deductions 10-25Problem Materials 10-28Discussion Questions 10-28Issue Identification Questions 10-30Problems 10-30Comprehensive Problem 10-35Tax Strategy Problem 10-36Tax Form/Return Preparation Problems 10-36Case Study Problems 10-37Tax Research Problem 10-37CHAPTER11ccACCOUNTING PERIODS AND METHODS 11-1Accounting Periods 11-2Required Payments and Fiscal Years 11-3Changes in the Accounting Period 11-4Returns for Periods of Less than 12 Months 11-5A01 POPE8307 32 SE FM.indd 11Overall Accounting Methods 11-7Cash Receipts and Disbursements Method 11-7Accrual Method 11-9Hybrid Method 11-10Inventories 11-11Determination of Inventory Cost 11-11Special Accounting Methods 11-15Long-Term Contracts 11-15Installment Sales Method 11-17Deferred Payment Sales 11-21Imputed Interest 11-22Imputed Interest Computation 11-23Accrual of Interest 11-23Gift, Shareholder, and Other Loans 11-24Change in Accounting Methods 11-25Amount of Change 11-26Reporting the Amount of the Change 11-27Obtaining IRS Consent 11-27Tax Planning Considerations 11-28Accounting Periods 11-28Accounting Methods 11-28Installment Sales 11-28Compliance and Procedural Considerations 11-28Reporting Installment Sales on Form 6252 11-28Procedures for Changing to LIFO 11-30Problem Materials 11-30Discussion Questions 11-30Issue Identification Questions 11-31Problems 11-32Comprehensive Problem 11-34Tax Strategy Problems 11-35Tax Form/Return Preparation Problem 11-35Case Study Problems 11-35Tax Research Problems 11-36CHAPTER12ccPROPERTY TRANSACTIONS: NONTAXABLEEXCHANGES 12-1Like-Kind Exchanges 12-2Like-Kind Property Defined 12-2A Direct Exchange Must Occur 12-4Three-Party Exchanges 12-4Receipt of Boot 12-5Basis of Property Received 12-6Exchanges Between Related Parties 12-7Transfer of Non–Like-Kind Property 12-8Holding Period for Property Received 12-8Involuntary Conversions 12-9Involuntary Conversion Defined 12-10Tax Treatment of Gain Due to Involuntary Conversioninto Boot 12-10Replacement Property 12-12Obtaining Replacement Property 12-13Time Requirements for Replacement 12-14Sale of Principal Residence 12-15Principal Residence Defined 12-16Sale of More than One Principal Residence Within aTwo-Year Period 12-17Nonqualified Use After 2008 12-19Involuntary Conversion of a Principal Residence 12-206/13/18 2:22 PM
xii Comprehensive ContentsTax Planning Considerations 12-20Avoiding the Like-Kind Exchange Provisions 12-20Sale of a Principal Residence 12-21Compliance and Procedural Considerations 12-22Reporting of Involuntary Conversions 12-22Reporting of Sale or Exchange of a PrincipalResidence 12-23Problem Materials 12-23Discussion Questions 12-23Issue Identification Questions 12-24Problems 12-25Comprehensive Problem 12-29Tax Strategy Problem 12-29Tax Form/Return Preparation Problems 12-30Case Study Problem 12-31Tax Research Problems 12-31CHAPTER13ccPROPERTY TRANSACTIONS: SECTION 1231AND RECAPTURE 13-1History of Sec. 1231 13-2Overview of Basic Tax Treatment for Sec. 1231 13-3Net Gains 13-3Net Losses 13-3Tax Rate for Net Sec. 1231 Gain 13-4Section 1231 Property 13-5Section 1231 Property Defined 13-5Real or Depreciable Property Used in Trade orBusiness 13-5Involuntary Conversions 13-6Condemnations 13-6Other Involuntary Conversions 13-7Procedure for Sec. 1231 Treatment 13-7Recapture Provisions of Sec. 1245 13-8Purpose of Sec. 1245 13-9Recapture Provisions of Sec. 1250 13-10Purpose of Sec. 1250 13-11Section 1250 Property Defined 13-11Unrecaptured Section 1250 Gain 13-12Taxation of Gains on Sale or Exchange of DepreciableReal Property 13-12Low-Income Housing 13-15Additional Recapture for Corporations 13-16Summary of Secs. 1231, 1245, and1250 Gains 13-17Recapture Provisions—Other Applications 13-18Gifts of Property Subject to Recapture 13-18Transfer of Property Subject to Recaptureat Death 13-18Charitable Contributions 13-18Like-Kind Exchanges 13-19Involuntary Conversions 13-19Installment Sales 13-19Section 179 Expensing Election 13-20Conservation and Land ClearingExpenditures 13-20Intangible Drilling Costs and Depletion 13-21Gain on Sale of Depreciable Property BetweenRelated Parties 13-22A01 POPE8307 32 SE FM.indd 12Tax Planning Considerations 13-23Avoiding the Recapture Provisions 13-23Compliance and Procedural Considerations 13-24Reporting Sec. 1231 Gains and Losses onForm 4797 13-24Reporting Gains Recaptured as Ordinary Incomeon Form 4797 13-24Reporting Casualty or Theft Gain or Loss onForm 4684 13-24Problem Materials 13-28Discussion Questions 13-28Issue Identification Questions 13-29Problems 13-30Comprehensive Problem 13-35Tax Strategy Problems 13-35Tax Form/Return Preparation Problems 13-36Case Study Problems 13-36Tax Research Problem 13-37CHAPTER14ccSPECIAL TAX COMPUTATION METHODS, TAX CREDITS,AND PAYMENT OF TAX 14-1Alternative Minimum Tax 14-2AMT Computation 14-3AMT Tax Rates and Brackets 14-3AMT Exemption Amount 14-3AMT Tax Preference Items 14-4AMT Adjustments 14-4AMT Credits 14-6Summary Illustration of the AMTComputation 14-7Self-Employment Tax 14-8What Constitutes Self-EmploymentIncome 14-9Personal and Business Tax Credits 14-10Use and Importance of Tax Credits 14-10Value of a Credit Versus a Deduction 14-10Nonrefundable Personal Tax Credits 14-11Foreign Tax Credit 14-17Business Related Tax Credits 14-19Refundable Personal Credits 14-23Provisions Related to Health Insurance 14-24Health Insurance Premium AssistanceCredit (Also Known as Premium TaxCredit) 14-24Payment of Taxes 14-26Withholding of Taxes 14-27Estimated Tax Payments 14-28Tax Planning Considerations 14-30Avoiding the Alternative Minimum Tax 14-31Avoiding the Underpayment Penalty for EstimatedTax 14-31Cash-Flow Considerations 14-31Use of General Business Tax Credits 14-31Foreign Tax Credits and the Foreign Earned IncomeExclusion 14-32Compliance and Procedural Considerations 14-32Alternative Minimum Tax (AMT) FilingProcedures 14-326/13/18 2:22 PM
Contents Comprehensive xiiiWithholdings and Estimated Tax Payments 14-32General Business Tax Credits 14-33Nonrefundable Personal Tax Credits 14-33Problem Materials 14-32Discussion Questions 14-33Issue Identification Questions 14-35Problems 14-36Comprehensive Problem 14-40Tax Strategy Problem 14-41Tax Form/Return Preparation Problems 14-42Case Study Problems 14-43Tax Research Problem 14-43CORPORATIONSCHAPTER1ccTAX RESEARCH 1-1Overview of Tax Research 1-2Steps in the Tax Research Process 1-3Importance of the Facts to the Tax Consequences 1-5Creating a Factual Situation Favorable to theTaxpayer 1-6The Sources of Tax Law 1-7The Legislative Process 1-7The Internal Revenue Code 1-8Treasury Regulations 1-9Administrative Pronouncements 1-11Judicial Decisions 1-14Tax Treaties 1-24Tax Periodicals 1-24Tax Services 1-25The Internet as a Research Tool 1-26Keyword Searches 1-27Search by Citation 1-28Noncommercial Internet Services 1-28Citators 1-28Using the Citator 1-30Professional Guidelines for Tax Services 1-30Treasury Department Circular 230 1-30AICPA’s Statements on Tax Standards 1-31Sample Work Papers and Client Letter 1-34Problem Materials 1-34Discussion Questions 1-34Problems 1-35Comprehensive Problem 1-38Tax Strategy Problem 1-38Case Study Problem 1-39Tax Research Problems 1-39CHAPTER2ccCORPORATE FORMATIONS AND CAPITALSTRUCTURE 2-1Organization Forms Available 2-2Sole Proprietorships 2-2Partnerships 2-3Corporations 2-5A01 POPE8307 32 SE FM.indd 13Limited Liability Companies 2-8Limited Liability Partnerships 2-8Check-the-Box Regulations 2-8Legal Requirements and Tax Considerations Relatedto Forming a Corporation 2-9Legal Requirements 2-9Tax Considerations 2-9Section 351: Deferring Gain or Loss UponIncorporation 2-12The Property Requirement 2-12The Control Requirement 2-13The Stock Requirement 2-16Effect of Sec. 351 on the Transferors 2-16Tax Consequences to TransfereeCorporation 2-20Assumption of the Transferor’s Liabilities 2-22Other Considerations in a Sec. 351Exchange 2-25Choice of Capital Structure 2-27Characterization of Obligations as Debt orEquity 2-27Debt Capital 2-28Equity Capital 2-29Capital Contributions by Shareholders 2-29Capital Contributions by Nonshareholders 2-31Worthlessness of Stock or Debt Obligations 2-32Securities 2-32Unsecured Debt Obligations 2-33Tax Planning Considerations 2-34Avoiding Sec. 351 2-34Compliance and Procedural Considerations 2-36Reporting Requirements Under Sec. 351 2-36Problem Materials 2-37Discussion Questions 2-37Issue Identification Questions 2-38Problems 2-38Comprehensive Problems 2-43Tax Strategy Problems 2-44Case Study Problems 2-44Tax Research Problems 2-45CHAPTER3ccTHE CORPORATE INCOME TAX 3-1Corporate Elections 3-2Choosing a Calendar or Fiscal Year 3-2Accounting Methods 3-4Determining a Corporation’s Taxable Income and TaxLiability 3-5Corporate Tax Rate 3-5Sales and Exchanges of Property 3-5Business Expenses 3-8Special Deductions 3-14Exceptions for Closely Held Corporations 3-19Controlled Groups of Corporations 3-21What Is a Controlled Group? 3-21Application of the Controlled Group Test 3-25Special Rules Applying to Controlled Groups 3-25Consolidated Tax Returns 3-266/13/18 2:22 PM
xiv Comprehensive ContentsTax Planning Considerations 3-27Compensation Planning for ShareholderEmployees 3-27Compliance and Procedural Considerations 3-29Estimated Taxes 3-29Requirements for Filing and PayingTaxes 3-33When the Return Must Be Filed 3-33Tax Return Schedules 3-33Financial Statement Implications 3-37Scope, Objectives, and Principles ofASC 740 3-38Temporary Differenc
overview preface xxviii individuals chapter 1 an introduction to taxation 1-1 chapter 2 determination of tax 2-1 chapter 3 gross income: inclusions 3-1 chapter 4 gross income: exclusions 4-1 chapter 5 property transactions: capital gains and losses 5-1 chapter 6 deductions and losses 6-1 chapter 7 itemized deductions 7-1 chapter 8 losses and bad debts 8-1
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