Basic Federal Income Tax Outline 2005

by Lieuallen, Gwendolyn Griffith

• ISBN13: 9780735551893
• ISBN10: 0735551898
• Format: Paperback
• Copyright: 2005-07-14
• Publisher: Wolters Kluwer

Summary

Relied on by generations of law school students, Emanuel Law Outlines include detailed reviews of critical issues and key topics, short answer questions, Q&A's, and correlation charts referencing leading casebooks.

Table of Contents

Preface	xxxix
Casebook Correlation Chart	xli
Capsule Summary	1	(1)
Getting Started in Federal Income Tax
Introduction---The Big Picture	1	(5)
Computation of Tax	1	(1)
Explanation of Process	2	(1)
Multiple Processes, Multiple Rates	2	(1)
A Note on Arithmetic	2	(1)
Six Fundamental Tax Questions	2	(1)
Who Is the Taxpayer?	2	(1)
Does the Taxpayer Have Income?	2	(1)
What Deductions May the Taxpayer Claim?	3	(1)
Timing Issues	3	(1)
Character of Income and Loss	3	(1)
Rates and Credits	3	(1)
Tax Form 1040---A Detailed Roadmap	3	(1)
Who Is the Taxpayer?	3	(1)
Income Issues	3	(1)
Deduction Issues	3	(3)
Timing Issues	6	(1)
Character	6	(1)
Tax Rate and Credit Issues	6	(1)
The Sources of Federal Income Tax Law	6	(8)
The U.S. Constitution---And How the Code Is Created	6	(1)
Direct Taxes	6	(1)
Origination	6	(1)
Uniformity	6	(1)
The Internal Revenue Code	6	(1)
The Code	6	(1)
Don't Forget---Tax Law Is How the Federal Government Raises Money	6	(1)
Some Things, Like Sausage and Legislation, You Don't Want to See Made	7	(1)
Administrative Interpretations of the Code	7	(1)
The Internal Revenue Service	7	(1)
Regulations	8	(1)
Other Published Administrative Guidance	8	(1)
Forms, Instructions, and Publications	8	(1)
Internal Revenue Manual	9	(1)
Unpublished Administrative Authority	9	(1)
Judicial Interpretation of the Code	9	(1)
How a Tax Case Gets to Court	9	(3)
The Process of Statutory Interpretation	12	(2)
Tax Ethics---Tax Return Positions and Sanctions	14	(1)
Taxpayer's Responsibility for Accuracy	14	(1)
Lawyer's Duty in Advising on Tax Return Positions	14	(1)
The Accuracy-Related Penalty	14	(1)
Negligence	14	(1)
Substantial Understatement of Tax	15	(1)
The Civil Fraud Penalty	15	(1)
Criminal Tax Sanctions	15	(1)
Reading the Code	15	(5)
Nomenclature of the Code	15	(1)
From Section to Subclause	15	(1)
Summary	16	(1)
Regulations	16	(1)
A Systematic Approach	16	(1)
Domain	16	(2)
Effect	18	(1)
Parsing---A Five-Step Approach to Unfamiliar Statutes	18	(1)
Step 1. Find the General Rule	18	(1)
Step 2. Find the Terms of Art and Their Definitions	18	(1)
Step 3. Find the Exceptions and Special Rules	18	(1)
Step 4. Find Related Statutory Material	18	(1)
Step 5. Summarize the Domain and Effect of the Statute in the Margin	18	(2)
Parsing Boxes	20	(1)
A Few Words on Tax Policy	20	(1)
Importance	20	(1)
Standards	20	(1)
Fairness	20	(1)
Administrative Practicality	21	(1)
Economic Effects	21	(1)
Relationship of Income Tax to Other Tax Systems	21	(1)
Income Tax	21	(1)
Other Tax Regimes	21	(1)
Estate and Gift Tax	21	(1)
Employment Tax	21	(1)
State and Local Tax	21	(1)
Foreign Tax Systems	21	(1)
Where Are We Going?	22	(3)
Quiz Yourself on Getting Started in Federal Income Tax	22	(2)
Exam Tips on Getting Started in Federal Income Tax	24	(1)
Identifying Gross Income
Where Are We?	25	(1)
IRC Section 61	26	(1)
Interpretation	26	(1)
What Is ``Income''?	26	(1)
Definitions of Income	26	(3)
Haig-Simons Definition---Theoretical Approach	26	(1)
Consumption Rights	26	(1)
Property Rights	26	(1)
Broad Definition	26	(1)
Practical Limitations	27	(1)
Another Approach--Economic Benefit	27	(1)
Receipt of Cash and Property	27	(1)
Receipt of Intangible Benefit	28	(1)
Items That Are Not Income	29	(2)
Imputed Income	29	(1)
Importance	29	(1)
Compare---Barter	29	(1)
Is It Income?	29	(1)
Policy	29	(1)
Capital Recovery	30	(1)
Capital Recovery---Timing	30	(1)
Basis	31	(1)
Loans	31	(1)
Discharge of Indebtedness Income	31	(1)
Possible Exclusion: §108	31	(1)
Where Are We Going?	31	(4)
Quiz Yourself on Identifying Gross Income	31	(2)
Exam Tips on Identifying Gross Income	33	(2)
Specific Inclusions in Gross Income
Where Are We?	35	(1)
Compensation for Services	35	(2)
Identifying the Transaction	35	(1)
Provision of Services	35	(1)
Compensation	35	(1)
Forms of Compensation	36	(1)
Cash/Check	36	(1)
Property	36	(1)
Barter of Services	36	(1)
Related Issues	36	(1)
Exclusions	36	(1)
Timing	36	(1)
Character	37	(1)
Gross Income from Business	37	(1)
Identifying Business Income	37	(1)
Sole Proprietorships	37	(1)
Pass-Through Entities	37	(1)
Corporations	37	(1)
Related Issues	37	(1)
Trade or Business Expenses	37	(1)
Losses	38	(1)
Character	38	(1)
Gains Derived from Dealings in Property	38	(1)
Investment Income	38	(5)
Identifying Investment Income	38	(1)
Trade or Business	38	(1)
Investment Activity	38	(1)
Dividends	38	(1)
Interest	38	(1)
Definition	39	(1)
``Hidden'' Interest Payments	39	(1)
Related Issues	39	(1)
Rental Income	39	(1)
Definition	39	(1)
Related Issues	39	(1)
Royalty Income	39	(1)
Identifying Royalty Income	39	(1)
Related Issues	40	(1)
Income Derived from Annuities	40	(1)
What Is an Annuity?	40	(1)
The Tax Problem	40	(1)
Statutory Analysis---§72	40	(3)
Alimony and Separate Maintenance Payments	43	(4)
Identifying Alimony Income	44	(1)
Statutory Analysis---§71	44	(1)
General Rule	44	(1)
Definitional Issues	44	(1)
Special Rules and Exceptions---``Front-End Loaded'' Alimony	45	(2)
Related Material	47	(1)
Summary	47	(1)
Income from Discharge of Indebtedness	47	(4)
Recognizing the Basic Transaction	48	(1)
Loan Creation---A Tax Non-Event	48	(1)
Debtor's Tax Consequences---No Income	48	(1)
Creditor's Tax Consequences---No Income	48	(1)
Loan Repayment---A Tax Non-Event	48	(1)
The ``Forgiveness'' Transaction---A Tax Event	48	(1)
Debtor's Tax Consequences---Income	48	(1)
Creditor's Tax Consequences---Possible Deduction	49	(1)
Definition of Discharge	49	(1)
Common Examples of Discharge	49	(1)
Common Examples of Nondischarge	50	(1)
Income Excluded	51	(1)
Gift	51	(1)
Section 108	51	(1)
Several Items Not Usually Crucial in the Basic Tax Course	51	(2)
Income from Pensions	51	(1)
Vocabulary	51	(1)
Qualified Retirement Plans	52	(1)
Nonqualified Deferred Compensation Plans	52	(1)
Time Value of Money	52	(1)
Partner's Distributive Share of Partnership Income	52	(1)
Income in Respect of a Decedent	52	(1)
Estate	53	(1)
Other---If Right to Income	53	(1)
Character	53	(1)
Deductions and Credits	53	(1)
Income from an Interest in an Estate or Trust	53	(1)
Grantor Trusts	53	(1)
Mallinckrodt or ``Demand'' Trusts	53	(1)
Other Trusts	53	(1)
Some Odds and Ends---Prizes, Helpful Payments, and Embezzlements	53	(2)
Prizes and Awards---§74	54	(1)
General Rule	54	(1)
Definitional Issue---Prizes and Awards	54	(1)
Special Rules and Exceptions	54	(1)
Related Material	54	(1)
Helpful Payments	54	(1)
Moving Expenses	54	(1)
Unemployment Compensation	54	(1)
Social Security Benefits	54	(1)
Disability Payments	55	(1)
Embezzled Funds	55	(1)
Intent to Repay	55	(1)
Ability	55	(1)
Authority	55	(1)
Security	55	(1)
Where Are We Going?	55	(6)
Quiz Yourself on Specific Inclusions in Gross Income	55	(4)
Exam Tips on Specific Inclusions in Gross Income	59	(2)
Specific Exclusions from Gross Income
Where Are We?	61	(1)
Exclusions---Definition	62	(1)
Compare Deduction	62	(1)
Compare Credit	62	(1)
Compare Deferral	62	(1)
Construction	62	(1)
Death Benefits---§101	62	(3)
Life Insurance---A Primer	63	(1)
Why Buy Insurance?	63	(1)
Vocabulary	63	(1)
Statutory Analysis---§101	63	(1)
General Rule	63	(1)
Definitional Issues---Life Insurance Contract	64	(1)
Special Rules and Exceptions	64	(1)
Related Material	64	(1)
Summary	64	(1)
Gifts---§102	65	(2)
Policy	65	(1)
Support/Gifts	65	(1)
Estate and Gift Tax	65	(1)
Statutory Analysis	65	(1)
General Rule	65	(1)
Definitional Issue---Gift	66	(1)
Special Rules and Exceptions	66	(1)
Related Material	66	(1)
Summary	66	(1)
Interest on State and Local Bonds---§103	67	(1)
Compensation for Personal Injury or Sickness---§104	67	(2)
Policy	67	(1)
No Income	67	(1)
Measurement	67	(1)
Adding Insult to Injury	67	(1)
Statutory Analysis---§104	67	(1)
General Rule	67	(1)
Definitional Issue---``Personal'' Injury or Sickness	68	(1)
Special Rules and Exceptions	68	(1)
Related Material	68	(1)
Summary	69	(1)
Discharge of Indebtedness Income---§108	69	(3)
Policy	69	(1)
Blood from a Turnip?	69	(1)
Subsidy	69	(1)
Statutory Analysis---§108	69	(1)
General Rule	69	(1)
Definitional Issues	70	(1)
Special Rules and Exceptions	70	(1)
Related Material	71	(1)
Summary	72	(1)
Qualified Scholarships---§117	72	(1)
Policy	72	(1)
Statutory Analysis---§117	72	(1)
General Rule	72	(1)
Definitional Issues	72	(1)
Special Rules and Exceptions---Not for Services	73	(1)
Related Material	73	(1)
Summary	73	(1)
Exclusion for Gain on Sale of Principal Residence---§121	73	(3)
Policy	74	(1)
Statutory Analysis---§121	74	(1)
General Rule	74	(1)
Definitional Issues	74	(1)
Special Rules and Exceptions	74	(1)
Related Material	75	(1)
Summary	76	(1)
Employment-Related Exclusions	76	(7)
Policy	76	(1)
Meals and Lodging---§119	76	(1)
Judicial Limitation on Gross Income---Benaglia v. Commissioner	76	(1)
Statutory Analysis	77	(1)
Special Rules and Exceptions	77	(1)
Related Material	78	(1)
Statutory Fringe Benefits	78	(1)
General Rule	78	(1)
Definitional Issues	78	(2)
Special Rules and Exceptions	80	(1)
Related Material	80	(1)
Insurance Premiums and Payments	80	(1)
Health Insurance---§106	80	(2)
Life Insurance Premiums	82	(1)
Group Legal Services	82	(1)
Dependent Care Assistance---§129	82	(1)
General Rule	82	(1)
Definitional Issues	82	(1)
Special Rules and Exceptions	82	(1)
Related Material---Dependent Care Credit	82	(1)
Summary	82	(1)
Educational Assistance	82	(1)
Adoption Assistance	83	(1)
Frequent Flyer Miles	83	(1)
Summary---Employment-Related Exclusions	83	(1)
Educational Incentives	83	(3)
Savings Bonds---§135	83	(1)
General Rule---Exclusion for Educational Expenses	84	(1)
Definitional Issues	85	(1)
Special Rules and Exceptions	85	(1)
Related Material	85	(1)
Summary	85	(1)
Section 529 Plans and Education Savings Accounts	85	(1)
Section 529 Plans	85	(1)
Education Savings Accounts	85	(1)
Child Support	86	(1)
Gain from Sale of Stock	86	(1)
Where Are We Going?	86	(5)
Quiz Yourself on Specific Exclusions from Gross Income	86	(3)
Exam Tips on Specific Exclusions from Gross Income	89	(2)
Deductions---In General
Where Are We?	91	(1)
Role of Deductions	91	(3)
Deduction---Definition	91	(1)
Compare Exclusion	91	(1)
Effect	92	(1)
Compare Credits	92	(1)
The Upside-Down Subsidy	92	(1)
Narrow Construction	92	(1)
Role	92	(1)
Adjusted Gross Income	92	(1)
Computation	92	(1)
Principal Deductions	92	(1)
Taxable Income	93	(1)
Computation	93	(1)
Standard Deduction	94	(1)
Itemized Deduction	94	(1)
Personal Exemption	94	(1)
Common Themes of Deduction Controversies	94	(1)
An Event	94	(1)
Personal Versus Business Deductions	94	(1)
No Deduction for Personal Expenditures	94	(1)
Deduction for Business Expenses	95	(1)
Policy	95	(1)
Personal or Business?	95	(1)
Expense or Capital Expenditure?	95	(1)
Where Are We Going?	95	(4)
Quiz Yourself on Deductions---In General	96	(1)
Exam Tips on Deductions---In General	97	(2)
Personal Deductions
Where Are We?	99	(1)
Above-the-Line and Below-the-Line Deductions	99	(1)
Alimony	100	(1)
General Rule	100	(1)
Definitional Issue---Alimony	100	(1)
Special Rule---Front-End Loaded Alimony	100	(1)
Related Material	100	(1)
Inclusion	100	(1)
Child Support	100	(1)
Property Settlements	100	(1)
Summary	100	(1)
Moving Expenses	100	(1)
General Rule	100	(1)
Definitional Issues	100	(1)
Moving Expenses	100	(1)
Employment	100	(1)
Distance Requirement	101	(1)
Related Material---Coordination with §132: Employer Reimbursement	101	(1)
Summary	101	(1)
Contributions to Regular IRAs	101	(1)
Contributions Limited to Earned Income	101	(1)
Spousal IRA	102	(1)
Participation in Qualified Plan	102	(1)
Losses	102	(1)
Definition---Loss	102	(1)
Three Types of Deductible Losses	102	(1)
Trade or Business Losses	102	(1)
Investment Losses	102	(1)
Personal Casualty Losses	102	(1)
Interest on Education Loans	103	(1)
General Rule	103	(1)
Definitional Issues	103	(1)
Qualified Education Loan	103	(1)
Eligible Student	103	(1)
Qualified Higher Education Expenses	103	(1)
MAGI	103	(1)
Special Rule---MAGI Limitation	103	(1)
Related Material---Coordination with Other Education Provisions	104	(1)
Summary	104	(1)
Qualified Education Expenses	104	(1)
General Rule	104	(1)
Definitional Issues	104	(1)
Qualified Education Expenses	104	(1)
Adjusted Gross Income	105	(1)
Related Material---Coordination with Other Educational Incentives	105	(1)
Summary	105	(1)
Certain Contributions to Medical Accounts	105	(1)
General Rule	105	(1)
Definitional Issues	105	(1)
Eligible Individual	105	(1)
Qualifying Account	105	(1)
Qualified Medical Expenses	106	(1)
Special Rules and Exceptions	106	(1)
Monthly Determination	106	(1)
Excise Tax	106	(1)
Related Material	106	(1)
Distributions Excluded from Gross Income	106	(1)
Amounts Grow Tax-Free within HSA Account	106	(1)
Exclusion or Deduction, Not Both	106	(1)
Coordination with IRC §213	106	(1)
Summary	106	(1)
Costs Incurred in Civil Rights Actions	106	(1)
The Choice: Standard or Itemized Deduction	107	(1)
The Standard Deduction	107	(1)
Basic Amount	107	(1)
Additional Amounts	107	(1)
The Itemized Deduction	107	(1)
Limitation on Itemized Deductions	107	(1)
Reduction	107	(1)
Applicable Amount	107	(1)
Certain Deductions Not Limited	107	(1)
Phase-Out Repeal Scheduled	108	(1)
Interest---§163	108	(4)
In General	108	(1)
No Deduction for Personal Interest	108	(1)
Investment Interest---§163(d)	108	(1)
General Rule	108	(1)
Definitional Issues	108	(1)
Related Material	109	(1)
Summary	109	(1)
Home Mortgage Interest---§163(h)(3)	109	(1)
General Rule	109	(1)
Definitional Issues	109	(1)
Special Rules and Exceptions	110	(1)
Related Material	111	(1)
Summary	111	(1)
Taxes---§164	112	(1)
Casualty Losses---§165(c)(3)	112	(2)
General Rule	112	(1)
More Gains Than Losses	113	(1)
More Losses Than Gains	113	(1)
Definitional Issues: Casualty Loss	114	(1)
Cat Owners, Beware! Dyer v. Commissioner	114	(1)
Suddenness Requirement	114	(1)
Theft---Mary Frances Allen	114	(1)
Corporate Wrongdoing	114	(1)
Related Material	114	(1)
Casualty Gain Deferral	114	(1)
Capital Gains and Losses	114	(1)
Summary	114	(1)
Medical Expenses---§213	114	(4)
General Rule	114	(1)
Definitional Issues---Medical Expenses	115	(1)
Personal versus Medical---Ochs v. Commissioner	115	(1)
Cosmetic Surgery	115	(1)
Long-Term Care Insurance	115	(1)
Capital Expenditures	116	(1)
Special Rules and Exceptions	116	(1)
Insurance	116	(1)
Child of Divorced Parents	116	(2)
Related Material	118	(1)
Health Insurance Premiums and Proceeds	118	(1)
Personal Injury Damages	118	(1)
Health Savings Accounts	118	(1)
Charitable Contributions---§170	118	(2)
General Rule	118	(1)
Definitional Issues---Charitable Contribution	118	(1)
Charitable Organization	118	(1)
Private Benefit---Ottawa Silica Co. v. United States	118	(1)
Development---Hernandez v. Commissioner	119	(1)
Special Rules and Exceptions	119	(1)
Amount	119	(1)
Limitation for Individuals	119	(1)
Related Material	120	(1)
Business Expenses	120	(1)
Tax-Exempt Organizations	120	(1)
Summary	120	(1)
Miscellaneous Expenses---2% Floor	120	(1)
Employee Business Expenses	120	(1)
Employees Have a ``Trade or Business''	120	(1)
Allocation to the Right Activity	120	(1)
Common Nonreimbursed Employee Business Expenses	121	(1)
Investment Expenses---§212	121	(1)
Personal Exemption---§151	121	(1)
Policy	121	(1)
How Much?	121	(1)
Basic Amount	121	(1)
Phase-Out	121	(1)
Repeal of Phase---Out Scheduled	122	(1)
Dependents---Definition	122	(1)
Qualifying Children	122	(1)
Qualifying Relatives	122	(1)
Ineligible Individuals	122	(1)
Divorced Parents	122	(1)
Where Are We Going?	122	(7)
Quiz Yourself on Personal Deductions	123	(3)
Exam Tips on Personal Deductions	126	(3)
Business and Investment Deductions
Where Are We?	129	(1)
Trade or Business Expenses---§162	130	(3)
General Rule	130	(1)
Definitional Issues	130	(1)
Ordinary	130	(1)
Necessary	131	(1)
Expense	131	(1)
Carrying On	131	(1)
Trade or Business	132	(1)
Special Rules and Exceptions	132	(1)
Traveling Expenses	132	(1)
Public Policy	132	(1)
Related Material	133	(1)
Hobby Losses	133	(1)
Capital Recovery	133	(1)
Section 280E	133	(1)
Summary	133	(1)
Capital Recovery for Business Assets	133	(10)
Capital Recovery---In General	133	(1)
Matching Principle	134	(1)
Depreciable Assets	134	(1)
Definition---Capital Expenditure	134	(1)
Acquiring Assets	134	(1)
Future Benefits Test---Indopco, Inc. v. Commissioner	135	(1)
Education for New Trade or Business	136	(1)
Capital Recovery	136	(1)
Constitutional Issue?	136	(1)
Timing---Statutory Issue	136	(1)
Modified Accelerated Cost Recovery System (MACRS) Deduction for Tangible Business Assets	137	(1)
Dual Function of MACRS Deduction	137	(1)
Calculation of MACRS	137	(3)
Amortization of §197 Intangibles	140	(1)
General Rule	141	(1)
Definitional Issues	141	(1)
Special Rules and Exceptions	142	(1)
Related Material	142	(1)
Section 179 Election	142	(1)
Capital Recovery---Summary	143	(1)
Other Deductions	143	(2)
Interests	143	(1)
Taxes	143	(1)
Deductible Taxes	143	(1)
Foreign Tax Credit	144	(1)
Losses	144	(1)
Business Bad Debts	144	(1)
General Rule	144	(1)
Definitional Issues	144	(1)
Charitable Contributions	145	(1)
Standard Mileage Rate	145	(1)
Rental and Royalty Activities	145	(1)
Special Rules for Losses	145	(1)
Where Are We Going?	146	(5)
Quiz Yourself on Business Deductions	146	(3)
Exam Tips on Business Deductions	149	(2)
Mixed Business and Personal Expenses
Where Are We?	151	(1)
Origin Test	152	(1)
United States v. Gilmore	152	(1)
Relation to ``Ordinary and Necessary''	152	(1)
Hobby Losses---§183	152	(3)
Policy	152	(1)
Statutory Analysis	153	(1)
General Rule	153	(1)
Definitional Issue---Activity Engaged in for Profit	153	(1)
Special Rules and Exceptions---Presumption	154	(1)
Related Material	155	(1)
Summary	155	(1)
Section 274 Restrictions	155	(4)
General Approach	155	(1)
Meals and Entertainment Expenses	155	(1)
General Requirements	156	(1)
Business Connection Tests	156	(2)
Business Gifts	158	(1)
Foreign Travel	158	(1)
General Approach	158	(1)
Conventions	158	(1)
Substantiation Requirements	159	(1)
Home Offices and Vacation Homes---§280A	159	(6)
General Approach	159	(1)
Statutory Analysis---§280A	159	(1)
General Rule	159	(2)
Definitional Issues	161	(3)
Special Rules and Exceptions: 15-Day Rental Rule	164	(1)
Related Material	164	(1)
Summary	164	(1)
``Luxury'' Automobiles and Listed Property---§280F	165	(5)
Policy	165	(1)
Statutory Analysis---§280F	165	(1)
General Rules	165	(2)
Definitional Issues	167	(1)
Special Rules and Exceptions	168	(1)
Related Material	169	(1)
Summary	169	(1)
Gambling Losses	170	(1)
Where Are We Going?	170	(7)
Quiz Yourself on Mixed Business and Personal Expenses	170	(5)
Exam Tips on Mixed Business and Personal Expenses	175	(2)
Transactions in Property
Where Are We?	177	(1)
An Approach to Property Transactions	177	(2)
Step 1. Identify Transactions in Property	178	(1)
Step 2. Identify Realization Events	178	(1)
Step 3. Compute Realized Gain or Loss	178	(1)
Step 4. Compute Recognized Gain or Loss	178	(1)
Step 5. Determine the Basis of Any Property the Taxpayer Receives in the Transaction	179	(1)
Step 6. Character	179	(1)
Statutory Analysis---§1001	179	(8)
General Rule	179	(1)
Definitional Issues	179	(1)
Property	179	(1)
Sale or Exchange	179	(2)
Computation of Realized Gain or Loss	181	(5)
Recognition	186	(1)
Special Rules and Exceptions---Part Gift/Part Sale Transaction	187	(1)
Related Material	187	(1)
Nonrecognition Provisions	187	(1)
Timing Issues	187	(1)
Character of Gain or Loss	187	(1)
Summary	187	(1)
Transfers of Encumbered Property	187	(11)
A Few Terms of Art	187	(1)
Liabilities Incurred to Purchase Property	187	(1)
Recourse Mortgage	188	(1)
Nonrecourse Mortgage	189	(1)
Assumption of Debt	189	(1)
Transfer ``Subject to Debt''	189	(1)
The Typical Transaction---Sale of Property and Satisfaction of Debt	189	(1)
Seller's Tax Consequences	190	(1)
Buyer's Tax Consequences	190	(1)
Lender's Tax Consequences	190	(1)
The Assumption Transaction---Buyer Assumes the Mortgage (Or Takes the Property Subject to the Mortgage)	191	(1)
The Transaction	191	(1)
Tax Effects	191	(1)
Mortgage Amount Less than Fair Market Value	191	(1)
Nonrecourse Mortgage Exceeds Fair Market Value of Property	192	(2)
Recourse Mortgage Exceeds Fair Market Value of Property	194	(4)
Where Are We Going?	198	(3)
Quiz Yourself on Transactions in Property	198	(2)
Exam Tips on Transactions in Property	200	(1)
Nonrecognition Transactions
Where Are We?	201	(1)
An Approach to the Nonrecognition Provisions	202	(1)
An Approach	202	(1)
Figure 10A---Six-Step Approach	202	(1)
Step 1. Identify a Transaction in Property	202	(1)
Step 2. Identify a Realization Event	202	(1)
Step 3. Calculate Realized Gain or Loss	202	(1)
Step 4. Calculate Recognized Gain or Loss	202	(1)
Step 5. Determine the Basis of Property Received in the Transaction	203	(1)
Step 6. Determine the Character of Any Gain or Loss Recognized	203	(1)
Like-Kind Exchanges---§1031	203	(16)
Recognizing This Type of Transaction	203	(1)
Policy	203	(1)
No Change in Investment	203	(1)
Liquidity	203	(1)
Fighting ``Lock-In''	203	(1)
Section 1031 Statutory Analysis---General Rule	203	(1)
Domain	203	(1)
Effect	204	(3)
Definitional Issues	207	(1)
Exchange	207	(1)
Sale/Leaseback	207	(2)
Like Kind	209	(1)
Special Rules and Exceptions	210	(1)
Deferred and Three-Party (Starker) Exchanges	210	(2)
Effect of Mortgages	212	(6)
Related Material	218	(1)
Personal Use	218	(1)
Sale of Principal Residence	218	(1)
Character of Gain	218	(1)
Installment Payment of Boot	218	(1)
Summary	218	(1)
Involuntary Conversions---§1033	219	(5)
Recognizing This Type of Transaction	219	(1)
Policy	219	(1)
Same Investment	219	(1)
``Yes, There is a Penalty for Piling On''	220	(1)
Section 1033 Statutory Analysis---General Rule	220	(1)
Domain	220	(1)
Effect	220	(1)
Definitional Issues	221	(1)
Involuntary Conversion	221	(1)
Similar or Related in Service or Use	221	(1)
Statutory Replacement Period	222	(1)
Special Rules and Exceptions	222	(1)
Definition---Presidentially Declared Disaster	222	(1)
Presidentially Declared Disasters---Principal Residence	223	(1)
Presidentially Declared Disasters---Trade or Business and Investment Property	223	(1)
Related Material	223	(1)
Loss	223	(1)
Section 121 Exclusion	223	(1)
Character	223	(1)
Summary	223	(1)
Spousal and Divorce Transfers---§1041	224	(3)
Recognizing This Type of Transaction	224	(1)
Policy	224	(1)
Prior Law: Divorces as Taxable Events	224	(1)
1984 Change	225	(1)
Section 1041 Statutory Analysis---General Rule	225	(1)
Domain	225	(1)
Effect	225	(1)
Definitional Issues	225	(1)
Spouses	225	(1)
Incident to a Divorce	225	(1)
Indirect Transfers	226	(1)
Special Rules and Exceptions---Nonresident Alien Transferors	226	(1)
Related Material	226	(1)
Alimony	226	(1)
Child Support	226	(1)
Summary	227	(1)
Other Nonrecognition Provisions	227	(3)
Transfers to Partnerships and Limited Liability Companies	227	(1)
Basis of Partnership Interest	227	(1)
Partnership's Basis in Property	227	(1)
Related Material	228	(1)
Transfers to Corporations	228	(1)
Boot	228	(1)
Services Are Not Property	228	(1)
Basis	229	(1)
Corporate Issuance of Stock	229	(1)
Corporate Basis	229	(1)
Exchange of Stock in Same Corporation	229	(1)
Exchange of Life Insurance Policies	229	(1)
Exchange of Small Business Stock	229	(1)
Where Are We Going?	230	(6)
Quiz Yourself on Nonrecognition Transactions	230	(3)
Exam Tips on Nonrecognition Transactions	233	(3)
Timing of Income and Expenses
Where Are We?	236	(1)
The Annual Accounting Concept	236	(7)
Taxable Years	236	(1)
Calendar Year	236	(1)
Fiscal Year	236	(1)
Why Annual Accounting?	236	(1)
Difficulties with Annual Accounting	237	(1)
The Problems	237	(1)
Transactional Accounting	237	(1)
Net Operating Loss (NOL) Deduction	237	(1)
Definition---Net Operating Loss	237	(1)
Carryover	238	(1)
Claim of Right Doctrine	239	(1)
Recognizing This Type of Transaction	239	(1)
The Problem	239	(1)
Claim of Right Doctrine	239	(1)
Examples	239	(1)
Legislative Response---§1341	240	(1)
Tax Benefit Rule	240	(1)
Recognizing This Type of Transaction	240	(1)
The Problem	240	(1)
Judicial Development of Tax Benefit Rule	240	(1)
Statutory Analysis---§111	241	(2)
Methods of Accounting	243	(6)
Functions of a Method of Accounting	243	(1)
The Cash Receipts and Disbursements Method	243	(1)
Income---Actual Receipt	243	(1)
Income---Constructive Receipt	244	(1)
Deductions	245	(1)
Restrictions on the Cash Method	245	(1)
The Accrual Method	245	(1)
The Deposit Doctrine	246	(1)
Income---Accrual Method	246	(2)
Deductions---Accrual Method	248	(1)
Accounting for Inventories	249	(3)
Requirement for Inventory Accounting	250	(1)
General Approach---Cost of Goods Sold	250	(1)
What Must Be Included in the Cost of Inventory?	250	(1)
Finished and Partly Finished Goods	250	(1)
Uniform Capitalization Rules	250	(1)
Identifying Inventory---FIFO and LIFO	251	(1)
FIFO	251	(1)
LIFO	251	(1)
Valuing Inventory	252	(1)
Relationship to Capital Recovery	252	(1)
Installment Method of Reporting Income	252	(8)
Recognizing This Type of Transaction	252	(1)
The Installment Method Approach	252	(1)
Interest	252	(1)
Principal	252	(1)
Statutory Analysis---§453	253	(1)
General Rule	253	(1)
Definitional Issues	253	(2)
Special Rules and Exceptions	255	(1)
Related Material	256	(1)
Summary and Examples	257	(3)
Restricted Property---§83	260	(3)
Recognizing This Type of Transaction	260	(1)
Whether, When, and How Much	260	(1)
Statutory Analysis---§83	260	(1)
General Rule	260	(1)
Definitional Issues	260	(2)
Special Rules and Exceptions	262	(1)
Related Material	262	(1)
Summary	263	(1)
Special Restrictions on Loss Deductions	263	(2)
Passive Loss Restrictions---§469	263	(1)
Identifying Passive Activities	263	(1)
Material Participation	264	(1)
Deduction of Passive Losses	264	(1)
Suspended Passive Losses	264	(1)
At Risk Limitations---§465	264	(1)
Where Are We Going?	265	(5)
Quiz Yourself on Timing of Income and Expenses	265	(2)
Exam Tips on Timing of Income and Expenses	267	(3)
Character of Income and Loss
Where Are We?	270	(1)
Who Cares? The Capital/Ordinary Distinction	270	(2)
Income---Preferential Tax Rates	270	(1)
Deductions---Limitations on Deduction of Capital Loss	270	(1)
Corporations	270	(1)
Individuals	270	(1)
Charitable Deduction Limitations	271	(1)
Taxpayer Preference---Capital Gain/Ordinary Loss	271	(1)
Policy	271	(1)
Rationales for Capital Gains Preference	271	(1)
Rationale for Limitation on Capital Loss	272	(1)
Definitions	272	(1)
Ordinary Income	272	(1)
Ordinary Loss	272	(1)
Capital Asset	272	(1)
Capital Gain Net Income	272	(1)
Net Capital Gain	272	(1)
Net Capital Loss	272	(1)
Section 1231 Gain or Loss	272	(1)
An Approach to Characterizing Gain or Loss as Capital or Ordinary	272	(11)
An Approach to Characterization Problems	272	(1)
Recognized Gain and Loss	273	(1)
Sale or Exchange Requirement	274	(1)
Judicial Definition of Sale or Exchange	274	(2)
Deemed Sales by Statute	276	(1)
Capital Asset Requirement	276	(1)
Property versus Income	276	(1)
Excluded Categories of Property	277	(2)
``Related to'' the Trade or Business	279	(2)
Special Recharacterization Provisions---Recapture and Small Business Stock	281	(1)
Recapture---General Approach	281	(1)
Sale of Depreciable Property to Related Person---§1239	282	(1)
Small Business Stock---§1244	282	(1)
Section 1231---Real and Depreciable Property Used in a Trade or Business	283	(3)
Policy	283	(1)
General Approach---§1231 Gains and Losses	283	(1)
Statutory Analysis---§1231	284	(1)
General Rule	284	(1)
Definitional Issues	284	(1)
Special Rules and Exceptions	285	(1)
Related Material	286	(1)
Summary	286	(1)
Calculating Net Capital Gain and Net Capital Loss	286	(7)
An Approach---Overview	286	(2)
Step 1: Categorize Capital Gains and Losses	288	(1)
Overview	288	(1)
Holding Period	288	(1)
Types of Long-Term Gain or Loss	289	(2)
Step 2: Netting Within Each Category	291	(1)
Step 3: Apply Net Losses Against Net Gains in Other Categories	291	(1)
Overview	291	(1)
Apply (Long-Term) Net 28% Capital Loss to Other Categories	291	(1)
Apply (Long-Term) Net 15/5% Capital Loss to Other Categories	291	(1)
Apply Short-Term Capital Loss to Other Categories	292	(1)
Wait! What About Net 25% Gain?	292	(1)
Step 4: Apply the Right Tax Rate (Or Claim the Right Deduction)	292	(1)
Overview	292	(1)
Tax Rates for Net Gain---In General	292	(1)
Deduction for Capital Losses	292	(1)
A Comprehensive Example	293	(1)
Where Are We Going?	293	(6)
Quiz Yourself on Character of Income and Loss	293	(4)
Exam Tips on Character of Income and Loss	297	(2)
Tax Rates and Credits
Where Are We?	299	(1)
Tax Rates	299	(4)
Policy	299	(1)
Progressive Tax Rates	299	(1)
Flat Tax Rates	300	(1)
Regressive Tax Rates	300	(1)
Current Tax Rates on Ordinary Income	300	(1)
Marginal Rates	300	(1)
Effective Rate Higher---Phase-Outs	300	(1)
Inflation Adjustments	300	(1)
Single Taxpayers---2005 Rates	300	(1)
Married Couples Filing Jointly---2005 Rates	301	(1)
Married Filing Separately	301	(1)
Surviving Spouses	301	(1)
Heads of Households	301	(1)
Children	301	(1)
Entities	301	(1)
Tax Rates on Capital Gains	302	(1)
Maximum Tax Rates	302	(1)
Coordination with Ordinary Income Rates	302	(1)
Qualified Dividend Income	302	(1)
The Alternative Minimum Tax	303	(3)
Overview	303	(1)
Alternative Minimum Taxable Income (AMTI)	303	(1)
Add Some Items that Were Excluded from Gross Income	303	(1)
Add Some Items that Were Deducted from Gross Income	303	(1)
AMT Tax Rates	304	(1)
Exemption Amount	304	(1)
Relatively Low Amounts	304	(1)
Phase-Outs	305	(1)
Minimum Tax Credit	305	(1)
Comprehensive Example	305	(1)
Tax Credits---In General	306	(1)
Compare---Deductions	306	(1)
Why a Credit? The Upside-Down Subsidy Problem	306	(1)
Refundable/Nonrefundable	306	(1)
Credit for Tax Withheld	306	(1)
Dependent Care Credit	307	(2)
General Rule	307	(1)
Definitional Issues	307	(1)
Qualifying Individual	307	(1)
Applicable Percentage	307	(1)
Employment-Related Expenses	307	(1)
Special Rules and Exceptions	308	(1)
Mandatory Joint Return	308	(1)
Caregiver Information	308	(1)
Related Material---Dependent Care Assistance	308	(1)
Summary	308	(1)
Earned Income Tax Credit	309	(2)
General Rule	309	(1)
Definitional Issues	310	(1)
Eligible Individual	310	(1)
Qualifying Child	310	(1)
Credit Percentage	310	(1)
Earned Income Amount	310	(1)
Percentages and Amounts	310	(1)
Special Rules and Exceptions	311	(1)
Disqualified Income Limitation	311	(1)
Mandatory Joint Return	311	(1)
Anti-Abuse Provisions	311	(1)
Related Material	311	(1)
Summary	311	(1)
Education Credits	311	(2)
In General	311	(1)
HOPE Scholarship Credit	311	(1)
Overview	311	(1)
Application	311	(1)
Eligibility	311	(1)
Lifetime Learning Credit	311	(1)
In General	311	(1)
Duration	312	(1)
Application	312	(1)
Phase-Outs Applicable to Both Credits	312	(1)
In General	312	(1)
Modified AGI	312	(1)
Phase-Out Amounts	312	(1)
Reduced Credit	312	(1)
Coordination of the Credits	312	(1)
No Double Credits for the Same Student	312	(1)
Allocation to HOPE Credit	312	(1)
Other Credits	313	(1)
Child Tax Credit	313	(1)
Blind/Elderly/Disabled Tax Credit	313	(1)
Foreign Tax Credit	313	(1)
Certain Energy and Research-Related Credits	313	(1)
Low-Income Housing Credit	314	(1)
Adoption Expense Credit	314	(1)
Qualified Adoption Expenses	314	(1)
When Claimed	314	(1)
Phase-Out	314	(1)
Where Are We Going?	314	(7)
Quiz Yourself on Tax Rates and Credits	314	(4)
Exam Tips on Tax Rates and Credits	318	(3)
Identifying the Taxpayer
Where Are We?	321	(1)
``Persons'' Subject to Tax	321	(1)
Adult Individuals	321	(1)
Single Individuals	322	(1)
Married Couples	322	(1)
Children	322	(1)
Child's Services Income	322	(1)
Kiddie Tax	322	(1)
Entities	322	(1)
Assignment of Income	322	(6)
Definition	322	(1)
Why Assign Income?	322	(1)
Policy---Protection of Integrity of Progressive Rates	323	(1)
Assignment of Income from Services	323	(1)
Diversion by Agreement	323	(1)
A Contrast---Diversion by Operation of Law	324	(1)
Income from Property	324	(1)
Rule	324	(1)
Blair v. Commissioner	325	(1)
Helvering v. Horst	325	(1)
Qualified Dividend Income	326	(1)
What's Good for the Goose	326	(1)
Transformation of Services into Property	326	(1)
Rule	326	(1)
Commissions---Helvering v. Eubank	326	(1)
Patents---Heim v. Fitzpatrick	327	(1)
What About Transfers of Property?	327	(1)
Does the Doctrine Apply?	327	(1)
Salvatore v. Commissioner	327	(1)
Choses in Action	328	(1)
Contingent Fee Awards---Banks v. Commissioner,___U.S.___(2005)	328	(1)
What's the Problem?	328	(1)
Statutory Response	328	(1)
Statutory Responses to Assignment of Income and Related Problems	328	(1)
Section 1(g)---``The Kiddie Tax''	328	(1)
Tax at Parents' Rate	328	(1)
Only Certain Income	328	(1)
Reallocation of Income and Deductions---§482	329	(1)
Where Are We Going?	329	(4)
Quiz Yourself on Identifying the Taxpayer	329	(3)
Exam Tips on Assignment of Income	332	(1)
Time Value of Money: Principles and Applications
Where Are We?	333	(1)
Time Value of Money Principles---The Basics	333	(5)
In General	333	(1)
Interest	334	(1)
Simple Interest	334	(1)
Compound Interest	334	(1)
Market Rate of Interest	334	(1)
Future Value of a Stated Sum	334	(1)
Present Value	335	(1)
Using Present Value Tables	336	(1)
Future Value	336	(1)
Present Value	336	(1)
Other Formulas	336	(1)
Code's Use of Time Value of Money Principles	336	(1)
Federal Rates	336	(1)
Tax Over- and Underpayments	336	(1)
Loan Transactions	337	(1)
Original Issue Discount (OID)	338	(3)
Policy	338	(1)
Original Issue Discount---Statutory Analysis	338	(1)
General Rule	338	(1)
Definitions	339	(1)
Special Rules and Exceptions	340	(1)
Related Material	340	(1)
Summary	341	(1)
Imputed Interest---§483	341	(2)
Policy	341	(1)
Statutory Analysis---§483	342	(1)
General Rule	342	(1)
Definitional Issue---Total Unstated Interest	342	(1)
Special Rules and Exceptions	342	(1)
Related Material	343	(1)
Summary	343	(1)
Below-Market Loans---§7872	343	(4)
Policy	343	(1)
Statutory Analysis---§7872	344	(1)
General Rule	344	(1)
Definitional Issues	344	(2)
Special Rules and Exceptions	346	(1)
Related Material	346	(1)
Summary	346	(1)
The Basic Tax Strategies---Deferral of Income and Acceleration of Deductions	347	(5)
In General	347	(1)
Achieving Tax Savings	347	(1)
Income Deferral Strategies	347	(1)
Method of Accounting	347	(1)
Realization Principle	348	(1)
Nonrecognition Provisions	348	(1)
Retirement Planning	348	(1)
Saving for College	348	(2)
Acceleration of Deduction Strategies	350	(1)
Method of Accounting	350	(1)
Capital Recovery	351	(1)
Loss Limitations	351	(1)
A Note on Tax Shelters	352	(1)
Where Are We Going?	352	(5)
Quiz Yourself on Time Value of Money	352	(3)
Exam Tips on Time Value of Money	355	(2)
Recognizing Related Tax Statutes: A Transactional Approach to Tax
Where Are We?	357	(1)
A Problem-Solving Approach to Tax	357	(6)
The Study Tax First! Approach	358	(1)
What Does It Mean?	358	(1)
Relationship to IRAC	358	(1)
Taking Tax Exams	359	(1)
Step 1. Study the Transaction	359	(1)
Step 2. What Is the Tax Problem?	359	(1)
Reactive Problems	359	(1)
Proactive (Planning) Problems	359	(1)
Step 2. First! Analysis---Facts, Issues, Rules, So What?, and Taxpayer Advice	359	(1)
Facts---What Is It?	360	(1)
Issues	361	(1)
Rules---What Tax Concepts and Code Provisions Apply?	362	(1)
So What? Applying the Rules	362	(1)
Taxpayer Advice	362	(1)
Applying the Study Tax First! Approach to Common Types of Transactions	363	(20)
Compensation Transactions	363	(1)
Facts---Recognizing This Type of Transaction	364	(1)
Issues---Summary	364	(1)
Tax Consequences to Payor	364	(2)
Tax Consequences to Service Provider	366	(1)
Transactions in Property	367	(1)
Facts---Recognizing This Type of Transaction	367	(1)
Issues---Summary	367	(1)
Tax Consequences to Seller	368	(1)
Tax Consequences to Buyer	369	(1)
Personal Expenditure Transactions	370	(1)
Facts---Recognizing This Type of Transaction	370	(1)
Issues---Summary	371	(1)
A Special Kind of Personal Expenditure---Education Savings and Expenditures	372	(1)
In General	372	(1)
Summary of Education Benefits	372	(1)
Income Limitations	373	(1)
Which Sections Apply?	374	(2)
Business Transactions	376	(1)
Facts---Recognizing This Type of Transaction	376	(1)
Issues---Summary	376	(2)
Intrafamilial Transfers	378	(1)
Facts---Recognizing This Type of Transaction	378	(1)
Issues---Summary	378	(1)
Advice	379	(1)
Exam Tips on Recognizing Related Tax Statutes	380	(3)
Essay Exam Questions	383	(4)
Essay Exam Answers	387	(10)
Table of Cases	397	(2)
Table of Statutes	399	(2)
Table of Internal Revenue Code Provisions	401	(10)
Table of Treasury Regulations	411	(2)
Index	413