Concepts in Federal Taxation 2005

by Murphy, Kevin E.; Higgins, Mark

• ISBN13: 9780324223446
• ISBN10: 0324223447
• Edition: 12th
• Format: Hardcover
• Copyright: 2004-04-13
• Publisher: South-Western College/West

Summary

Concepts in Federal Taxation is designed for a more conceptual, less detailed approach to federal taxation of individuals and corporations in an introductory taxation course. This conceptual approach presents taxation as a small number of unifying concepts, stressing the overriding principles that apply to all specific tax rules and regulations. Concepts in Federal Taxation offers an excellent balance between tax concepts and the Internal Revenue Code and regulations, preparing users for a future in the business environment.

Table of Contents

Preface	xv
Introduction	xxv
Why Study Federal Income Taxation?	xxv
Significance of Tax Costs	xxvi
Conservation of Wealth	xxvii
Taxes Influence Routine Decisions	xxviii
Self-Protection	xxix
PART I Conceptual Foundations of the Tax Law	1	(78)
Federal Income Taxation---An Overview	2	(41)
Introduction	3	(1)
Definition and Evaluation of a Tax	3	(7)
Definition of a Tax	3	(1)
Standards for Evaluating a Tax	4	(2)
Tax Rates and Structures	6	(4)
Major Types of U.S. Taxes	10	(5)
Income Taxes	10	(1)
Employment Taxes	11	(1)
Sales Tax	12	(1)
Property Taxes	13	(1)
Other Taxes	13	(2)
Sources of Federal Income Tax Law	15	(1)
Federal Income Tax Terminology	16	(5)
Income	16	(1)
Deductions	17	(1)
Income Tax Rates	18	(1)
Tax Prepayments	18	(2)
Tax Credits	20	(1)
Filing Returns	20	(1)
The Audit and Appeal Process within the IRS	21	(2)
Tax Return Selection Processes	21	(1)
Types of Examinations	22	(1)
Settlement Procedures	22	(1)
Administrative Appeals	22	(1)
Individual Income Tax Calculation	23	(3)
Deductions for Adjusted Gross Income	23	(1)
Deductions from Adjusted Gross Income	24	(1)
Personal and Dependency Exemptions	25	(1)
Tax Planning	26	(5)
Mechanics of Tax Planning	26	(4)
Tax Evasion and Tax Avoidance	30	(1)
Ethical Considerations in Tax Practice	31	(2)
Summary	33	(1)
Key Terms	33	(1)
Primary Tax Law Sources	34	(1)
Discussion Questions	35	(1)
Problems	36	(4)
Issue Identification Problems	40	(1)
Technology Applications	41	(1)
Discussion Cases	41	(1)
Tax Planning Cases	42	(1)
Ethics Discussion Case	42	(1)
Income Tax Concepts	43	(36)
Introduction	44	(1)
General Concepts	45	(3)
Ability-to-Pay Concept	45	(1)
Administrative Convenience Concept	46	(1)
Arm's-Length Transaction Concept	46	(2)
Pay-as-You-Go Concept	48	(1)
Accounting Concepts	48	(6)
Entity Concept	48	(3)
Annual Accounting Period Concept	51	(3)
Income Concepts	54	(6)
All-Inclusive Income Concept	54	(1)
Legislative Grace Concept	55	(1)
Capital Recovery Concept	56	(1)
Realization Concept	56	(2)
Wherewithal-to-Pay Concept	58	(2)
Deduction Concepts	60	(5)
Legislative Grace Concept	60	(1)
Business Purpose Concept	60	(2)
Capital Recovery Concept	62	(3)
Summary	65	(1)
Key Terms	65	(1)
Primary Tax Law Sources	66	(1)
Discussion Questions	67	(1)
Problems	68	(7)
Issue Identification Problems	75	(1)
Technology Applications	76	(1)
Discussion Cases	77	(1)
Tax Planning Case	77	(1)
Ethics Discussion Case	78	(1)
PART II GROSS INCOME	79	(88)
Income Sources	80	(50)
Introduction	81	(1)
What Constitutes Income	81	(4)
Income Is Derived from Labor and Capital	82	(1)
Income as an Increase in Wealth	83	(1)
What Constitutes Income: Current View	84	(1)
Common Income Sources	85	(16)
Earned Income	85	(2)
Unearned Income	87	(4)
Transfers from Others	91	(5)
Imputed Income	96	(5)
Capital Gains and Losses--an Introduction	101	(7)
Capital Gain-and-Loss Netting Procedure	102	(2)
Tax Treatment of Capital Gains	104	(2)
Tax Treatment of Dividends	106	(1)
Tax Treatment of Capital Losses	107	(1)
Capital Gains and Losses of Conduit Entities	108	(1)
Effect of Accounting Method	108	(5)
Cash Method	109	(1)
Accrual Method	110	(2)
Hybrid Method	112	(1)
Exceptions Applicable to All Methods	112	(1)
Summary	113	(1)
Key Terms	113	(1)
Primary Tax Law Sources	114	(2)
Discussion Questions	116	(1)
Problems	117	(9)
Issue Identification Problems	126	(1)
Technology Applications	127	(1)
Discussion Cases	128	(1)
Tax Planning Cases	128	(1)
Ethics Discussion Case	129	(1)
Income Exclusions	130	(37)
Introduction	131	(1)
Donative Items	132	(4)
Gifts	132	(1)
Inheritances	133	(1)
Life Insurance Proceeds	134	(1)
Scholarships	135	(1)
Employment-Related Exclusions	136	(8)
Foreign-Earned Income	136	(1)
Payments Made on Behalf of an Employee	137	(5)
Employer Benefit Plans	142	(2)
Returns of Human Capital	144	(3)
Workers' Compensation	144	(1)
Damage Payments for Personal Physical Injury or Physical Sickness	145	(1)
Payments from Health and Accident Policies	145	(2)
Investment-Related Exclusions	147	(4)
Municipal Bond Interest	147	(1)
Stock Dividends	148	(1)
Discharge of Indebtedness	149	(1)
Improvements by a Lessee	150	(1)
Summary	151	(1)
Key Terms	151	(1)
Primary Tax Law Sources	152	(2)
Discussion Questions	154	(1)
Problems	154	(7)
Issue Identification Problems	161	(1)
Technology Applications	162	(1)
Integrative Problems	163	(2)
Discussion Cases	165	(1)
Tax Planning Cases	165	(1)
Ethics Discussion Case	166	(1)
PART III Deductions	167	(204)
Introduction to Business Expenses	168	(51)
Introduction	169	(2)
Reporting Deductions	171	(3)
Conduit Entity Reporting	173	(1)
Classification of Deductions	174	(7)
Profit-Motivated Expenditures	174	(1)
Trade or Business or Production-of-Income Expenses?	175	(3)
Rental Activity	178	(1)
Personal Expenditures	179	(1)
Mixed Business and Personal Expenditures	179	(2)
Tests for Deductibility	181	(7)
Ordinary, Necessary, and Reasonable in Amount	181	(2)
Not a Personal Expense	183	(1)
Not a Capital Expenditure	183	(2)
Not Frustrate Public Policy	185	(2)
Not Related to Tax-Exempt Income	187	(1)
Expenditure Must Be for Taxpayer's Benefit	188	(1)
Limited Mixed-Use Expenses	188	(6)
Hobby Expenses	188	(2)
Vocation Home Expenses	190	(2)
Home Office Expenses	192	(2)
Timing of Deductions---Effect of Accounting Method	194	(7)
Cash Method	194	(2)
Accrual Method	196	(3)
Related Party Accrued Expenses	199	(1)
Financial and Taxable Income Differences	200	(1)
Summary	201	(1)
Key Terms	202	(1)
Primary Tax Law Sources	202	(2)
Discussion Questions	204	(1)
Problems	205	(8)
Issue Identification Problems	213	(1)
Technology Applications	214	(2)
Comprehensive Problem	216	(1)
Discussion Cases	217	(1)
Tax Planning Cases	218	(1)
Ethics Discussion Case	218	(1)
Business Expenses	219	(50)
Introduction	220	(1)
Business Expenses	221	(16)
Entertainment, Auto, Travel, Gift, and Education Expenses	221	(9)
Compensation of Employees	230	(1)
Bad Debts	231	(2)
Other Business Expenses	233	(4)
Individual Deductions for Adjusted Gross Income	237	(12)
Reimbursed Employee Business Expenses	238	(2)
Deductions for Self-Employed Taxpayers	240	(1)
Retirement Plan Contribution Deductions	241	(5)
Deduction for Higher Education Expenses	246	(1)
Interest on Education Loans	246	(2)
Moving Expenses	248	(1)
Summary	249	(1)
Key Terms	250	(1)
Primary Tax Law Sources	250	(2)
Discussion Questions	252	(1)
Problems	253	(9)
Issue Identification Problems	262	(1)
Technology Applications	263	(2)
Integrative Problem	265	(2)
Discussion Cases	267	(1)
Tax Planning Cases	267	(1)
Ethics Discussion Case	268	(1)
Losses---Deductions and Limitations	269	(43)
Introduction	270	(1)
Annual Losses	271	(1)
Net Operating Losses	272	(2)
Tax-Shelter Losses: An Overview	274	(13)
The At-Risk Rules	275	(3)
Passive Activity Losses	278	(9)
Transaction Losses	287	(10)
Trade or Business Losses	289	(2)
Investment-Related Losses	291	(6)
Summary	297	(1)
Key Terms	298	(1)
Primary Tax Law Sources	298	(1)
Discussion Questions	299	(1)
Problems	300	(8)
Issue Identification Problems	308	(1)
Technology Applications	309	(1)
Comprehensive Problem	310	(1)
Discussion Cases	310	(1)
Tax Planning Cases	311	(1)
Ethics Discussion Case	311	(1)
Taxation of Individuals	312	(59)
Introduction	313	(1)
Personal and Dependency Exemptions	314	(2)
Dependency Requirements	314	(2)
Filing Status	316	(3)
Married, Filing Jointly	317	(1)
Married, Filing Separately	317	(1)
Single	317	(1)
Head of Household	318	(1)
Deductions from Adjusted Gross Income	319	(10)
Standard Deduction	319	(1)
Itemized Deductions	320	(9)
Itemized Deductions and Exemptions---Reductions by High-Income Taxpayers	329	(2)
Exemption and Standard Deduction Restrictions on Dependents	331	(1)
Calculating Tax Liability	332	(8)
Tax on Unearned Income of a Minor Child	332	(1)
Income Tax Credits	333	(7)
Filing Requirements	340	(1)
Summary	341	(1)
Key Terms	341	(1)
Primary Tax Law Sources	341	(1)
Discussion Questions	342	(1)
Problems	343	(8)
Issue Identification Problems	351	(1)
Technology Applications	352	(2)
Integrative Problems	354	(4)
Discussion Cases	358	(1)
Tax Planning Cases	358	(1)
Ethics Discussion Case	359	(2)
Appendix to Chapter 8	360	(1)
Schedule EIC (Earned Income Credit)	361	(5)
2003 Earned Income Credit Table	366	(5)
PART IV Property Transactions	371	(176)
Acquisitions of Property	372	(40)
Introduction	373	(1)
Classes of Property	374	(1)
The Property Investment Cycle	375	(7)
Adjusted Basis	376	(3)
Basis in Conduit Entities	379	(1)
Property Dispositions	380	(2)
Initial Basis	382	(1)
Purchase of Assets	382	(5)
Determining the Amount Invested	382	(2)
Basis of a Bargain Purchase	384	(1)
Purchase of Multiple Assets	384	(1)
Purchase of a Business	385	(2)
Constructed Assets	387	(1)
Specially Valued Property Acquisitions	387	(1)
Basis of Property Acquired by Gift	387	(3)
General Rule for Gift Basis	388	(1)
Split Basis Rule for Loss Property	389	(1)
Holding Period	390	(1)
Basis of Property Acquired by Inheritance	390	(2)
Primary Valuation Date	390	(1)
Alternate Valuation Date	390	(1)
Distribution Date	391	(1)
Other Considerations	391	(1)
Personal Use Property Converted to Business Use	392	(2)
General Rule for Basis	392	(1)
Split Basis Rule	393	(1)
Basis in Securities	394	(3)
Stock Dividends	394	(1)
Wash Sale Stock Basis	395	(2)
Summary	397	(2)
Key Terms	399	(1)
Primary Tax Law Sources	399	(1)
Discussion Questions	400	(1)
Problems	400	(7)
Issue Identification Problems	407	(1)
Technology Applications	408	(1)
Integrative Problem	409	(1)
Discussion Cases	409	(1)
Tax Planning Cases	410	(1)
Ethics Discussion Case	411	(1)
Cost Recovery on Property: Depreciation, Depletion, and Amortization	412	(55)
Introduction	413	(2)
Capital Recovery from Depreciation or Cost Recovery	415	(2)
Section 179 Election to Expense Assets	417	(3)
Qualified Taxpayers	417	(1)
Qualified Property	417	(1)
Limitations on Deduction	417	(3)
Additional First-Year Depreciation	420	(1)
Modified Accelerated Cost Recovery System (MACRS)	421	(15)
Property Subject to MACRS	422	(1)
Basis Subject to Cost Recovery	423	(1)
MACRS Recovery Period	423	(2)
MACRS Conventions	425	(4)
Depreciation Method Alternatives	429	(2)
Using MACRS Percentage Tables	431	(2)
MACRS Straight-Line Election	433	(1)
Alternative Depreciation System (ADS)	433	(1)
Limitations on Listed Property	434	(2)
Depletion	436	(2)
Depletion Methods	436	(1)
Cost Depletion	437	(1)
Percentage Depletion	438	(1)
Intangible Assets	438	(2)
Summary	440	(2)
Key Terms	442	(1)
Primary Tax Law Sources	442	(1)
Discussion Questions	443	(1)
Problems	444	(5)
Issue Identification Problems	449	(1)
Technology Applications	449	(1)
Integrative Problems	450	(1)
Discussion Cases	451	(1)
Tax Planning Cases	451	(1)
Ethics Discussion Case	452	(1)
Appendix to Chapter 10 MACRS Class Lives and MACRS Depreciation Schedules	453	(1)
Rev. Proc. 87-56	453	(14)
Section 1. Purpose	453	(1)
Section 2. General Rules of Application	453	(1)
Section 5. Tables of Class Lives and Recovery Periods	454	(13)
Property Dispositions	467	(42)
Introduction	468	(2)
Realized Gain or Loss	470	(3)
Amount Realized	470	(2)
Effect of Debt Assumptions	472	(1)
Character of Gain or Loss	473	(1)
Capital Gains and Losses	473	(11)
Capital Asset Definition	474	(1)
Long-Term versus Short-Term Classification	474	(1)
Capital Gain-and-Loss Netting Procedure	475	(6)
Capital Gains and Losses---Planning Strategies	481	(3)
Section 1231 Gains and Losses	484	(3)
Definition of Section 1231 Property	484	(1)
Section 1231 Netting Procedure	484	(3)
Depreciation Recapture	487	(6)
Section 1245 Recapture Rule	488	(1)
Section 1250 Recapture Rule	489	(1)
Section 1245 and Section 1250 Properties	490	(1)
Unrecaptured Section 1250 Gain	491	(2)
Summary	493	(1)
Key Terms	494	(1)
Primary Tax Law Sources	494	(1)
Discussion Questions	495	(1)
Problems	496	(7)
Issue Identification Problems	503	(1)
Technology Applications	504	(2)
Comprehensive Problems	506	(1)
Discussion Cases	506	(1)
Tax Planning Cases	507	(1)
Ethics Discussion Case	508	(1)
Nonrecognition Transactions	509	(38)
Introduction	510	(1)
Rationale for Nonrecognition	510	(1)
Commonalities of Nonrecognition Transactions	511	(4)
Like-Kind Exchanges	515	(10)
Exchange Requirement	515	(1)
Like-Kind Property Requirements	516	(3)
Effect of Boot	519	(4)
Related Party Exchanges	523	(1)
Carryover of Tax Attributes	524	(1)
Involuntary Conversions	525	(3)
Treatment of Involuntary Conversion Gains and Losses	525	(2)
Qualified Replacement Property	527	(1)
Sale of a Principal Residence	528	(3)
Requirements for Exclusion	529	(2)
Summary	531	(1)
Key Terms	532	(1)
Primary Tax Law Sources	533	(1)
Discussion Questions	533	(1)
Problems	534	(5)
Issue Identification Problems	539	(1)
Technology Applications	540	(1)
Comprehensive Problem	541	(1)
Discussion Cases	541	(1)
Tax Planning Cases	542	(1)
Ethics Discussion Case	542	(5)
Appendix to Chapter 12 Selected SIC Product Classes	543	(4)
PART V Income Tax Entities	547	(144)
Choice of Business Entity---General Tax and Nontax Factors/Formation	548	(43)
Introduction	549	(1)
Nontax Factors	550	(7)
Sole Proprietorship	551	(1)
Partnership	551	(1)
Corporation	552	(1)
S Corporation	553	(1)
Limited Liability Company	554	(1)
Limited Liability Partnership	555	(1)
Planning Commentary	556	(1)
General Income Tax Factors	557	(11)
Incidence of Income Taxation	557	(3)
Double Taxation	560	(1)
Employee versus Owner	561	(2)
Fringe Benefits	563	(2)
Social Security Taxes	565	(2)
Planning Commentary	567	(1)
Formation	568	(12)
Transfers to an Entity	568	(2)
Basis Considerations	570	(4)
Organizational Costs	574	(1)
Accounting Periods	575	(2)
Accounting Methods	577	(2)
Planning Commentary	579	(1)
Summary	580	(1)
Key Terms	581	(1)
Primary Tax Law Sources	581	(1)
Discussion Questions	582	(2)
Problems	584	(4)
Issue Identification Problems	588	(1)
Technology Applications	589	(1)
Discussion Cases	589	(1)
Tax Planning Cases	590	(1)
Ethics Discussion Case	590	(1)
Choice of Business Entity---Operations and Distributions	591	(44)
Introduction	592	(1)
Operations	592	(19)
Sole Proprietorship	592	(2)
Partnership	594	(6)
Corporation	600	(6)
S Corporation	606	(3)
Planning Commentary	609	(2)
Entity Distributions	611	(9)
Sole Proprietorship	611	(1)
Partnership	612	(2)
Corporation	614	(2)
S Corporation	616	(1)
Planning Commentary	617	(3)
Tax Planning	620	(4)
Income Splitting	620	(1)
Children as Employees	621	(1)
Family Entities	622	(1)
Planning Commentary	623	(1)
Summary	624	(1)
Key Terms	625	(1)
Primary Tax Law Sources	625	(1)
Discussion Questions	626	(1)
Problems	626	(5)
Issue Identification Problems	631	(1)
Technology Applications	632	(1)
Discussion Cases	633	(1)
Tax Planning Cases	633	(1)
Ethics Discussion Case	634	(1)
Choice of Business Entity---Other Considerations	635	(56)
Introduction	636	(1)
Compensation Plans	636	(22)
Qualified and Nonqualified Pension Plans	637	(3)
Other Pension Plans	640	(5)
Distributions	645	(2)
Penalties	647	(2)
Planning Commentary	649	(1)
Stock Options	649	(7)
Reasonableness of Compensation	656	(1)
Planning Commentary	657	(1)
Other Tax Liability Considerations	658	(13)
Income Tax Credits	658	(4)
The Alternative Minimum Tax	662	(1)
Basic Alternative Minimum Tax Computation	663	(8)
Planning Commentary	671	(1)
International Tax Aspects	671	(6)
Taxpayers Subject to U.S. Taxation	671	(1)
Tax Treaties	672	(1)
Organizational Structure of Foreign Operations	672	(4)
Taxation of Nonresident Aliens and Foreign Corporations	676	(1)
Summary	677	(2)
Key Terms	679	(1)
Primary Tax Law Sources	679	(2)
Discussion Questions	681	(1)
Problems	682	(6)
Issue Identification Problems	688	(1)
Technology Applications	688	(1)
Discussion Cases	689	(1)
Tax Planning Cases	689	(1)
Ethics Discussion Case	690	(1)
PART VI Tax Research	691	(1)
Tax Research	692	(1)
Introduction	693	(1)
Primary Sources of Federal Income Tax Law	693	(11)
Legislative Sources	693	(5)
Administrative Sources	698	(2)
Judicial Sources	700	(2)
Citations to Primary Authorities	702	(2)
Secondary Sources of Federal Income Tax Law	704	(3)
Tax Services	704	(1)
Computer-Assisted Tax Research	705	(1)
Citators	706	(1)
Tax Periodicals	707	(1)
Tax Research	707	(3)
Tax Compliance versus Tax Planning	707	(1)
Step 1: Establish the Facts and Determine the Issues	707	(1)
Step 2: Locate the Relevant Authorities	708	(1)
Step 3: Assess the Importance of the Authorities	708	(1)
Step 4: Reach Conclusions, Make Recommendations, and Communicate the Results	709	(1)
Comprehensive Research Example	710	(2)
Step 1: Establish the Facts and Determine the Issues	710	(1)
Step 2: Locate the Relevant Authorities	710	(1)
Step 3: Assess the Importance of the Authorities	710	(2)
Step 4: Reach Conclusions, Make Recommendations, and Communicate the Results	712	(1)
Research Memorandum	712	(1)
Facts:	713	(1)
Issues:	713	(1)
Conclusions:	713	(1)
Reasoning:	713	(1)
Summary	713	(1)
Key Terms	714	(1)
Primary Tax Law Sources	714	(1)
Discussion Questions	715	(1)
Problems	716	(1)
Research Cases	717	(1)
Income Cases	717	(1)
Deduction Cases	718	(2)
Loss Cases	720	(2)
Entity Cases	722	(1)
Property Cases	723	(1)
Accounting Methods/Procedure Cases	724
Appendix A: Tax Return Problem	1	(1)
Appendix B: Tax Rate Schedules and Tax Tables	1	(1)
Appendix C: Tax Forms	1	(1)
Appendix D: Statements on Standards for Tax Services	1	(1)
Glossary	1	(1)
Index	1