CPA Self Study -Self Study CPE for CPAs



166243082359500Guide to Federal Corporate & Individual TaxationBy Danny C. SantucciLearning Assignments & ObjectivesAs a result of studying each assignment, you should be able to meet the objectives listed below each assignment.ASSIGNMENTSUBJECT Chapter 1Individual Tax ElementsAt the start of Chapter 1, participants should identify the following topics for study:* Tax rates and tables* Filing status* Gross income* Dividends and distributions* Discharge of debt income* Exclusions from income* Nonbusiness and personal deductions* Education and medical expenses* Casualty and theft losses* Tax creditsLearning ObjectivesAfter reading Chapter 1, participants will be able to:1. Identify federal revenue tax sources noting how gross income is reduced by certain credits, exclusions, and deductions, recognize current schedules, tables, and statutory amounts, and select withholding and/or estimated tax responsibility.2. Specify the various filing statuses and their filing requirements noting the advantages and disadvantages of each.3. Determine what constitutes gross income under §61 noting the tax treatment of compensation, fringe benefits, rental income, Social Security benefits, alimony, prizes and awards, identify dividend and distribution types and their tax differences, and specify how debt discharge can result in taxable income.4. Identify the mechanics of income exclusions such as education-related exclusions, gift and inheritance exclusions, insurance, personal injury awards, interest on state and local obligations, and the foreign earned income exclusion. 5. Recognize income tax deductions and their use to reduce tax liability by:a. Identifying personal, spousal and dependency exemptions and reporting requirements including pre-2005 dependency rules;b. Specifying the five fundamental categories of interest expense noting whether they are deductible;c. Recognizing which education expenses are deductible and nondeductible;d. Determining what constitutes Medicare and whether medical care expenses including medical insurance premiums, costs for meals and lodging, transportation expenses, expenditures for making permanent improvements to a home and lifetime care advance payments are deductible or nondeductible;e. Specifying variables that impact the deductibility of charitable contributions, identifying qualified organizations and limitations for these purposes, and identifying the types of contributions that can be made, their tax treatment, and substantiation requirements;f. Identifying the taxes that individuals may deduct under §164 and specifying the differences between casualty and theft noting the rules for taking a deduction for all or part of each loss;g. Specifying deductions that are subject to the 2% of AGI limitation, deductions not subject to the 2% limit, and nondeductible expenses; andh. Determining whether a taxpayer meets distance and time tests for deductible moving expenses under §217.6. Determine distinctions among several types of tax credits identifying the eligibility requirements and changes created by recent tax legislation to individual tax returns.ASSIGNMENTSUBJECT Chapter 2Property Transfers & Retirement PlansAt the start of Chapter 2, participants should identify the following topics for study:* Capital gains & losses* Installment sales* Repossession* Involuntary conversions* At-risk rules* Like-kind exchanges* Qualified deferred compensation* Basic requirements of a qualified pension plan* Basic types of corporate plans* IRAs and SIMPLE plansLearning ObjectivesAfter reading Chapter 2, participants will be able to:1. Specify the differences among property sales, exchanges of property and sales of easements, and determine capital gain and ordinary income tax treatment in property sales.2. Identify the application elements of the §121 home sale exclusion noting associated safe harbor regulations.3. Recognize the importance of the installment method and §453 requirements, and specify the §453 basic terminology.4. Identify the variables that determine which §1038 rules apply noting distinctions among the rules, calculations, and effects of repossessions of personal property and repossessions of real property, and recognize when a bad debt deduction may be taken on a repossession.5. Specify the tax treatment of a §1033 involuntary conversion by: a. Determining related terminology and the tax consequences of receiving a condemnation award or severance damages;b. Identifying gain or loss from condemnations noting the reporting of payments associated with involuntary conversions; andc. Determining whether clients can postpone gain on condemned, damaged, destroyed, or stolen property and specifying the related party rule.6. Recognize the scope of the §465 at-risk rules and their effect on property depreciation, and identify the requirements, mechanics, and types of §1031 like-kind exchange.7. Identify qualified deferred compensation plans and nonqualified plans by:a. Determining the major benefit of the qualified deferred plans and the calculation basis of benefits and contributions; andb. Recognizing the current and deferred advantages and the disadvantages of corporate plans noting fiduciary responsibilities and prohibited transactions.8. Identify the requirements of the basic forms of qualified pension plans permitting clients to compare and contrast such plans.9. Determine the distinctions between defined contribution and defined benefit plans, specify the types of defined contribution plans, and identify their effect on retirement benefits.10. Identify how self-employed plans differ from qualified plans for other business types and owners, and specify the requirements of IRAs and the special requirements of Roth IRAs. 11. Determine what constitutes SEPs and SIMPLEs noting the mechanics and eligibility requirements of each type of plan.ASSIGNMENTSUBJECT Chapter 3Losses, AMT & ComplianceAt the start of Chapter 3, participants should identify the following topics for study:* Passive loss rules* Suspension of disallowed losses under §469* Computing the alternative minimum tax* Minimum AMT tax credit* Reporting compliance rules and provisions* Accuracy related penalties* Information reporting penalty final regulations* Penalty for unrealistic position* Statute of limitations for assessments* Examination of returnsLearning ObjectivesAfter reading Chapter 3, participants will be able to:1. Identify basic income types and the “buckets” of income and loss under §469 that can influence what can be deducted, determine the suspension of disallowed passive losses, and recognize the special rules for transfers deemed not to be fully taxable dispositions.2. Specify differences between the regular and alternative minimum tax noting the application tax preferences and adjustments, and determine the life of assets under ADS, alternative minimum taxable income, passive losses under the AMT, and what constitutes ACE.3. Identify the reporting requirements for real estate transactions, independent contractors, and cash reporting.4. Recognize types of accuracy related and unrealistic position penalties, and specify the IRS's examination of returns policy and assessment process including applicable statute of limitations.ASSIGNMENTSUBJECT Chapter 4Business Forms & CharacteristicsAt the start of Chapter 4, participants should identify the following topics for study:* Sole proprietorships* Partnerships* Estates & trusts* Unincorporated associations* Corporation defined* Subchapter S corporations* Ordinary “C” corporations* Personal service corporations* Corporate tax rates* Alternative minimum taxLearning ObjectivesAfter reading Chapter 4, participants will be able to:1. Specify the advantages and disadvantages of sole proprietorships including self-employed taxes and payment requirements and identify the characterization of sole proprietorship assets upon disposition.2. Recognize partnerships identifying the advantages and disadvantages, recall partnerships taxation particularly the application of the passive loss (§469) and at-risk rules (§465), and choose correct partnership income or loss reporting noting husband and wife partnerships and limited partnerships. 3. Identify the reporting requirements of estates, trusts and unincorporated associations, determine what constitutes a “corporation” from a subchapter S or regular corporation, specify the characteristics of a personal service corporation noting the alternative minimum tax for such corporations, and identify preferences and adjustments that apply to different types of taxpayers.ASSIGNMENTSUBJECT Chapter 5Corporate Formation & CapitalizationAt the start of Chapter 5, participants should identify the following topics for study:* Incorporation* Start-up & organizational expenses* Tax recognition of the corporate entity* Capital gains & losses* Dividends received deduction* Charitable contributions* Accumulated earnings tax trap* Accounting periods & methods* Inventories* Multiple corporationsLearning ObjectivesAfter reading Chapter 5, participants will be able to:1. Identify the transfer of money, property or both by prospective shareholders and the basic requirements associated with §351.2. Recognize the requirements of §1244 and the small business stock exclusion, determine the differences between start-up and organizational expenses and, identify the elements of corporate tax recognition including the dangers of corporate ownership and capital gains and losses noting dividends received treatment.3. Specify the requirements for corporate charitable contributions, identify former §341 collapsible corporations, and determine how to avoid §541 status particularly as to personal service contracts. 4. Identify §531 status and determine accounting periods and methods available to corporations.5. Specify methods for identifying inventory items including common methods of valuing inventory and, identify multiple corporation tax advantages, and the tax consequences of corporate liquidations and distributions.ASSIGNMENTSUBJECT Chapter 6Corporate Principals & EmployeesAt the start of Chapter 6, participants should identify the following topics for study:* Payroll taxes* FICA & FUTA* Employee labor laws* Employee v. contractor status* Unreasonable compensation* Income splitting* Buy sell agreements* Entity & cross purchase agreements* Sole shareholder planning* RecapitalizationLearning ObjectivesAfter reading Chapter 6, participants will be able to:1. Determine payroll taxes noting the uses of Form 941, Form W-4, Form W-2, and Form W-3, specify the application of FICA and FUTA taxes and how to report them, and identify major employee labor laws.2. Recognize common-law rules used to determine employee status for FICA and federal income tax withholding, specify the dangers of unreasonable compensation noting how to avoid them, and determine how a corporation can be a valuable income-splitting device.3. Identify a buy-sell agreement distinguishing an entity purchase from a cross purchase agreement and recognize business recapitalizations and their potential uses.ASSIGNMENTSUBJECT Chapter 7Basic Fringe BenefitsAt the start of Chapter 7, participants should identify the following topics for study:* Statutory v. nonstatutory benefits* No-additional-cost services & qualified employee discounts* Working condition fringes* Employee achievement awards* Dependent care assistance* Cafeteria plans* Self-insured medical reimbursement plans* Employer provided automobile* Interest-free & below-market loans* Fringe benefit plans for S corporationsLearning ObjectivesAfter reading Chapter 7, participants will be able to:1. Identify basic fringe benefit planning by determining “income” under §61 and specifying the differences between former nonstatutory and current statutory fringe benefits.2. Determine “no-additional-cost services” and identify what property or services are excludable from income as qualified employee discounts under §132(c), specify exceptions to working condition fringes and de minimis fringes, recognize a §74 “employee achievement award,” and cite the §79 group term life insurance rules.3. Recognize the requirements and limits of §129 dependent care assistance, identify §125 “cafeteria plans” noting how they function, specify the §119 meals and lodging exclusion, cite the mechanics of §105 self-insured medical reimbursement plans, and determine the requirements and limits of §127 programs.4. Identify employer-provided automobiles valuation methods, determine what constitutes interest-free and below-market loans, specify the requirements and limitations of fringe benefits under §§217, 132, 67 212, 132(h)(5) and 280A, cite S corporation fringe benefits, and specify ERISA compliance requirements.ASSIGNMENTSUBJECT Chapter 8Business EntertainmentAt the start of Chapter 8, participants should identify the following topics for study:* Tests for entertainment expenses* Statutory exceptions* Quiet business meals & drinks* Ticket purchases* Percentage reduction for meals & entertainment* Entertainment facilities* Substantiation & record keeping* Employee expense reimbursement & reporting* Self-employed persons* EmployersLearning ObjectivesAfter reading Chapter 8, participants will be able to:1. Recognize the key tax terms “entertainment”, “lavish” and “extravagant” and, identify the required §162 & §274 tests noting the importance of statutory exceptions.2. Determine the treatment of ticket purchases including the percentage reduction restriction for meals and entertainment, specify the application of the 2% deduction limit particularly as to business entertainment deductions and determine an “entertainment facility” noting deductible costs.3. Identify substantiation, recordkeeping, reimbursement, and reporting requirements noting variations in methods and determine how to itemize non-reimbursed employee expenses and specify the special reporting rules for self-employed persons and employers.ASSIGNMENTSUBJECT Chapter 9InsuranceAt the start of Chapter 9, participants should identify the following topics for study:* Company paid insurance* Group term life insurance* Regulations* Retired lives reserve* Split dollar life insurance* Medical & dental insurance* Interest limitation on policy loans* Key person life insurance* COBRA* VEBAs - §501(c)(9) TrustsLearning ObjectivesAfter reading Chapter 9, participants will be able to:1. Recognize the importance and variety of business insurance by:a. Identifying the popularity and application of business life insurance plans noting common coverage and premiums;b. Determining corporate uses for life insurance including estate, travel and accident uses and specifying the tax treatment, reporting requirements, and discrimination rules for business insurance particularly the §79 requirements for group insurance;c. Identifying the benefit of not needing a medical examination as a prerequisite to purchasing a plan;d. Recognizing retired lives reserve and split-dollar life insurance noting their mechanics, taxation regulation, and advantages and disadvantages;e. Specifying the mechanics of employer paid health, medical and disability income insurance including the impact of medical examination requirements.2. Identify the impact of the disallowance of the interest deduction on purchasers and the insurance industry noting the §264 interest limitation on policy loans, specify the benefit of corporate key person life insurance, cite the requirements of COBRA, and determine what constitutes a Voluntary Employee Benefit Association under §501(c)(9).ASSIGNMENTSUBJECT Chapter 10Nonqualified Deferred CompensationAt the start of Chapter 10, participants should identify the following topics for study:* Postponement of income* Purposes & benefits* Constructive receipt* Economic benefit* Funded company account plan* Segregated asset plan* Tax consequences* Accounting* Estate planning considerations* Withholding, Social Security & IRAsLearning ObjectivesAfter reading Chapter 10, participants will be able to:1. Recognize the postponement of income with a nonqualified plan by:a. Identifying nonqualified plan advantages including ways to design the plans and specifying the IRS’s position on such arrangements noting the impact of constructive receipt and economic benefit concepts;b. Specifying deferred compensation patterns set forth in R.R. 60-31 noting the taxability of each; andc. Determining unfunded and funded plans noting the use of company assets or bookkeeping accounts to avoid employee taxation.2. Identify the set up of a segregated asset plan where the account is not subject to the claims of the employer’s creditors and still avoids employee taxation and specify the tax consequences of establishing a nonqualified plan.ASSIGNMENTSUBJECT Chapter 11S CorporationsAt the start of Chapter 11, participants should identify the following topics for study:* Advantages & disadvantages* S corporation status* Termination* Income & expense* Built-in gain* Passive income* Basis of stocks & debts* Distributions* Form 1120S* Fringe benefitsLearning ObjectivesAfter reading Chapter 11, participants will be able to:1. Determine what constitutes a S corporation and specify the advantages and list disadvantages associated with them.2. Identify variables that impact whether a business can choose S corporation status.3. Cite ways an S corporation may be terminated noting related procedures to be followed. 4. Recognize the taxation and fringe benefits of S corporations as compared to other entity formats by:a. Determining the tax treatment of S corporation income and expenses, pass-through items, built-in gain, passive income, tax preference items, LIFO recapture tax and capital gains tax and their impact on the taxation of S corporations; andb. Identifying the benefits available to other entity formats, determining S corporation owner compensation and distribution options noting reasonable compensation requirements, related party rules, S corporation distribution taxation, tax year choices, fringe benefits, and specifying when the Form 1120S must be filed.ASSIGNMENTSUBJECT Chapter 12Business Dispositions & ReorganizationsAt the start of Chapter 12, participants should identify the following topics for study:* Starting a new business* Buying an existing business* Type 1 reorganization* Type 2 reorganization* Type 3 reorganization* Type 4 reorganization* Type 5 reorganization* Type 6 reorganization* Type 7 reorganization* Carryover of corporate tax attributesLearning ObjectivesAfter reading Chapter 12, participants will be able to:1. Recognize various business disposition and reorganization possibilities by:a. Determining how organizational costs, start-up costs and syndication costs are incurred and specifying what expenditures they include and how they are treated;b. Identifying advantages of purchasing an existing business over starting a new business, citing ways to find a business that is for sale, and specifying the tax considerations of such an acquisition;c. Specifying a reorganization under §368(a)(1) noting the types of transactions that qualify as non-taxable reorganizations; andd. Identifying the factors that determine the corporate tax attributes of an acquired corporation that carry over to the acquiring or successor corporation.Table of Contents TOC \o "3-7" \h \z \t "Heading 2,2,Chapter Title,1,Major Heading,2" Chapter 1- Individual Tax Elements – Section 1 PAGEREF _Toc427621461 \h 1-1Federal Income Taxes: A Description PAGEREF _Toc427621462 \h 1-2Rates, Tables, & Statutory Amounts PAGEREF _Toc427621463 \h 1-4Income Tax Rates - §1 PAGEREF _Toc427621464 \h 1-4Marriage Penalty PAGEREF _Toc427621465 \h 1-5Standard Deduction - §63 PAGEREF _Toc427621466 \h 1-6Dependent Limit - §63(c)(5) PAGEREF _Toc427621467 \h 1-6Personal Exemptions & Phaseout (Expired & Reinstated) - §151 PAGEREF _Toc427621468 \h 1-6Limitation on Itemized Deductions (Expired & Reinstated) - §68 PAGEREF _Toc427621469 \h 1-7Earned Income Tax Credit - §32 PAGEREF _Toc427621470 \h 1-8Disqualified Income PAGEREF _Toc427621471 \h 1-8Means-Tested Programs PAGEREF _Toc427621472 \h 1-8Social Security & Self-Employment Earnings Base PAGEREF _Toc427621473 \h 1-9Standard Mileage Rate PAGEREF _Toc427621474 \h 1-9Qualified Transportation Fringes PAGEREF _Toc427621475 \h 1-9Passenger Automobile Depreciation Limits (“CAPS”) PAGEREF _Toc427621476 \h 1-10Expensing Deduction - §179 PAGEREF _Toc427621477 \h 1-10Self-Employed Health Insurance Deduction PAGEREF _Toc427621478 \h 1-10Corporate Income Tax Rates PAGEREF _Toc427621479 \h 1-10Chapter 1- Individual Tax Elements – Section 2 PAGEREF _Toc427621480 \h 1-12Withholding & Estimated Tax PAGEREF _Toc427621481 \h 1-12Estimated Tax - §6654 PAGEREF _Toc427621482 \h 1-12Social Security, Medicare & FUTA (or Payroll) Taxes PAGEREF _Toc427621483 \h 1-13FICA - §3111 & §3121 PAGEREF _Toc427621484 \h 1-13Temporary Employee OASDI Cut PAGEREF _Toc427621485 \h 1-14SECA - §1401 PAGEREF _Toc427621486 \h 1-14Temporary Sole Employer OASDI Cut PAGEREF _Toc427621487 \h 1-14Wage Base PAGEREF _Toc427621488 \h 1-14Additional Hospital Insurance Tax On Certain High-Income Individuals PAGEREF _Toc427621489 \h 1-14Final Regulations – TD 9645 PAGEREF _Toc427621490 \h 1-15FUTA - §3301 & §3306 PAGEREF _Toc427621491 \h 1-15Filing Status PAGEREF _Toc427621492 \h 1-15Marital Status PAGEREF _Toc427621493 \h 1-16Single Taxpayers PAGEREF _Toc427621494 \h 1-16Divorced Persons PAGEREF _Toc427621495 \h 1-16Sham Divorce PAGEREF _Toc427621496 \h 1-16Annulled Marriages PAGEREF _Toc427621497 \h 1-16Married Taxpayers PAGEREF _Toc427621498 \h 1-16Same-Sex Marriage PAGEREF _Toc427621499 \h 1-17Marriage Penalty PAGEREF _Toc427621500 \h 1-17Spouse’s Death PAGEREF _Toc427621501 \h 1-17Married Persons Living Apart PAGEREF _Toc427621502 \h 1-18Filing Jointly PAGEREF _Toc427621503 \h 1-18Joint Liability PAGEREF _Toc427621504 \h 1-18Innocent Spouse Exception PAGEREF _Toc427621505 \h 1-18Nonresident Alien PAGEREF _Toc427621506 \h 1-21Filing Separately PAGEREF _Toc427621507 \h 1-21Special Rules PAGEREF _Toc427621508 \h 1-22Joint Return after Separate Returns PAGEREF _Toc427621509 \h 1-22Separate Returns after Joint Return PAGEREF _Toc427621510 \h 1-22Exception PAGEREF _Toc427621511 \h 1-23Chapter 1- Individual Tax Elements – Section 3 PAGEREF _Toc427621512 \h 1-26Head of Household PAGEREF _Toc427621513 \h 1-26Advantages PAGEREF _Toc427621514 \h 1-26Requirements of §2(b) PAGEREF _Toc427621515 \h 1-26Considered Unmarried PAGEREF _Toc427621516 \h 1-27Keeping Up a Home PAGEREF _Toc427621517 \h 1-27Qualifying Person PAGEREF _Toc427621518 \h 1-27Summary PAGEREF _Toc427621519 \h 1-28Qualifying Widow(er) With Dependent Child PAGEREF _Toc427621520 \h 1-28Gross Income PAGEREF _Toc427621521 \h 1-29Compensation PAGEREF _Toc427621522 \h 1-30Fringe Benefits PAGEREF _Toc427621523 \h 1-30Rental Income PAGEREF _Toc427621524 \h 1-30Advance Rent PAGEREF _Toc427621525 \h 1-30Security Deposits PAGEREF _Toc427621526 \h 1-30Payment for Canceling a Lease PAGEREF _Toc427621527 \h 1-31Social Security Benefits PAGEREF _Toc427621528 \h 1-31Taxability of Benefits PAGEREF _Toc427621529 \h 1-31Chapter 1- Individual Tax Elements – Section 4 PAGEREF _Toc427621530 \h 1-35Alimony & Spousal Support PAGEREF _Toc427621531 \h 1-35Requirements PAGEREF _Toc427621532 \h 1-35Recapture PAGEREF _Toc427621533 \h 1-35Child Support PAGEREF _Toc427621534 \h 1-36Prizes & Awards - §74 & §274 PAGEREF _Toc427621535 \h 1-36Dividends & Distributions PAGEREF _Toc427621536 \h 1-36Ordinary Dividends PAGEREF _Toc427621537 \h 1-36Money Market Funds PAGEREF _Toc427621538 \h 1-37Dividends on Capital Stock PAGEREF _Toc427621539 \h 1-37Dividends Used to Buy More Stock PAGEREF _Toc427621540 \h 1-37Qualified Dividends PAGEREF _Toc427621541 \h 1-37Capital Gain Distributions PAGEREF _Toc427621542 \h 1-38Undistributed Capital Gains PAGEREF _Toc427621543 \h 1-38Form 2439 PAGEREF _Toc427621544 \h 1-38Basis Adjustment PAGEREF _Toc427621545 \h 1-38Real Estate Investment Trusts (REITs) PAGEREF _Toc427621546 \h 1-38Nontaxable Distributions PAGEREF _Toc427621547 \h 1-38Return of Capital PAGEREF _Toc427621548 \h 1-39Basis Adjustment PAGEREF _Toc427621549 \h 1-39Liquidating Distributions PAGEREF _Toc427621550 \h 1-39Distributions of Stock and Stock Rights PAGEREF _Toc427621551 \h 1-40Taxable Stock Dividends and Stock Rights PAGEREF _Toc427621552 \h 1-40Discharge of Debt Income PAGEREF _Toc427621553 \h 1-40Exceptions from Income Inclusion PAGEREF _Toc427621554 \h 1-40Reduction of Tax Attributes PAGEREF _Toc427621555 \h 1-41Order of Reductions PAGEREF _Toc427621556 \h 1-41Foreclosure PAGEREF _Toc427621557 \h 1-42Nonrecourse Indebtedness PAGEREF _Toc427621558 \h 1-42Recourse Indebtedness PAGEREF _Toc427621559 \h 1-43Mortgage Relief Act of 2007 PAGEREF _Toc427621560 \h 1-44Principal Residence PAGEREF _Toc427621561 \h 1-44Qualified Principal Residence Indebtedness PAGEREF _Toc427621562 \h 1-44Acquisition Indebtedness PAGEREF _Toc427621563 \h 1-44American Recovery & Reinvestment Act of 2009 Deferral - Expired PAGEREF _Toc427621564 \h 1-44Bartering PAGEREF _Toc427621565 \h 1-45Barter Exchange PAGEREF _Toc427621566 \h 1-46Backup Withholding PAGEREF _Toc427621567 \h 1-46Recoveries PAGEREF _Toc427621568 \h 1-46Itemized Deduction Recoveries PAGEREF _Toc427621569 \h 1-48Recovery Limited to Deduction PAGEREF _Toc427621570 \h 1-48Recoveries Included in Income PAGEREF _Toc427621571 \h 1-49Non-Itemized Deduction Recoveries PAGEREF _Toc427621572 \h 1-49Amounts Recovered for Credits PAGEREF _Toc427621573 \h 1-49Tax Benefit Rule PAGEREF _Toc427621574 \h 1-49Chapter 1- Individual Tax Elements – Section 5 PAGEREF _Toc427621575 \h 1-51Income Earned by Children - §73 PAGEREF _Toc427621576 \h 1-51“Kiddie” Tax on Unearned (Investment) Income - §1(g)(1) [Form 8615] PAGEREF _Toc427621577 \h 1-51Application, Threshold & Impact PAGEREF _Toc427621578 \h 1-51Definitions PAGEREF _Toc427621579 \h 1-52AMT Exemption for Children - §59(j) PAGEREF _Toc427621580 \h 1-53Election to Report on Parents’ Return - §1(g)(7)(A) [Form 8814] PAGEREF _Toc427621581 \h 1-53Election Situations PAGEREF _Toc427621582 \h 1-54Exclusions from Income PAGEREF _Toc427621583 \h 1-56Educational Savings Bonds - §135 PAGEREF _Toc427621584 \h 1-56Income Exclusion PAGEREF _Toc427621585 \h 1-56Limitation PAGEREF _Toc427621586 \h 1-56MAGI PAGEREF _Toc427621587 \h 1-57Notice 90-7 PAGEREF _Toc427621588 \h 1-57Education Expenses PAGEREF _Toc427621589 \h 1-57Excludable Interest PAGEREF _Toc427621590 \h 1-57Forms 8818 & 8815 PAGEREF _Toc427621591 \h 1-57Scholarships & Fellowships - §117 PAGEREF _Toc427621592 \h 1-57Definitions PAGEREF _Toc427621593 \h 1-58Scholarship Prizes PAGEREF _Toc427621594 \h 1-58Education Expenses PAGEREF _Toc427621595 \h 1-58Education Assistance Programs - §127 PAGEREF _Toc427621596 \h 1-58Employer Educational Trusts - §83 PAGEREF _Toc427621597 \h 1-58Qualified Tuition Programs (QTP) - §529 PAGEREF _Toc427621598 \h 1-59Gift & Inheritance Exclusion PAGEREF _Toc427621599 \h 1-59Subsequent Income PAGEREF _Toc427621600 \h 1-59Divorce PAGEREF _Toc427621601 \h 1-59Business Gifts PAGEREF _Toc427621602 \h 1-59Employees PAGEREF _Toc427621603 \h 1-60Insurance PAGEREF _Toc427621604 \h 1-60Exceptions PAGEREF _Toc427621605 \h 1-60Purchase for Value PAGEREF _Toc427621606 \h 1-60Installment Payments PAGEREF _Toc427621607 \h 1-60Specified Number of Installments PAGEREF _Toc427621608 \h 1-61Specified Amount Payable PAGEREF _Toc427621609 \h 1-61Installments for Life PAGEREF _Toc427621610 \h 1-61Chapter 1- Individual Tax Elements – Section 6 PAGEREF _Toc427621611 \h 1-63Personal Injury Awards - §104 PAGEREF _Toc427621612 \h 1-63Personal Injury PAGEREF _Toc427621613 \h 1-63Emotional Distress PAGEREF _Toc427621614 \h 1-63Punitive Damages PAGEREF _Toc427621615 \h 1-63Tax Benefit Rule - §111 PAGEREF _Toc427621616 \h 1-63Interest State & Local Obligations - §103 PAGEREF _Toc427621617 \h 1-63Foreign Earned Income Exclusion - §911 PAGEREF _Toc427621618 \h 1-64Nonbusiness & Personal Deductions PAGEREF _Toc427621619 \h 1-64Itemized Deductions PAGEREF _Toc427621620 \h 1-65Limitation on Itemized Deductions - §68 PAGEREF _Toc427621621 \h 1-65Personal & Dependency Exemptions PAGEREF _Toc427621622 \h 1-66Personal Exemptions PAGEREF _Toc427621623 \h 1-66Dependency Exemptions PAGEREF _Toc427621624 \h 1-66Before 2005 PAGEREF _Toc427621625 \h 1-66After 2004 PAGEREF _Toc427621626 \h 1-67Residency Test PAGEREF _Toc427621627 \h 1-67Citizenship PAGEREF _Toc427621628 \h 1-67Relationship Test PAGEREF _Toc427621629 \h 1-67Age Test PAGEREF _Toc427621630 \h 1-68Joint Return Prohibition PAGEREF _Toc427621631 \h 1-68Exception PAGEREF _Toc427621632 \h 1-68Phaseout of Exemptions PAGEREF _Toc427621633 \h 1-68Interest Expense - §163 PAGEREF _Toc427621634 \h 1-69Personal Interest - §163(h)(1) PAGEREF _Toc427621635 \h 1-70Definition PAGEREF _Toc427621636 \h 1-70Deductibility PAGEREF _Toc427621637 \h 1-70Investment Interest Expense - §163(d) PAGEREF _Toc427621638 \h 1-70Definitions PAGEREF _Toc427621639 \h 1-70Net Investment Income Limitation PAGEREF _Toc427621640 \h 1-71Qualified Residence Interest - §163(h)(3) [Form 8598] PAGEREF _Toc427621641 \h 1-71Definitions PAGEREF _Toc427621642 \h 1-71Limitations PAGEREF _Toc427621643 \h 1-72Acquisition Indebtedness PAGEREF _Toc427621644 \h 1-72Home Equity Indebtedness PAGEREF _Toc427621645 \h 1-73Refinancing PAGEREF _Toc427621646 \h 1-73Home Improvements PAGEREF _Toc427621647 \h 1-73Timing PAGEREF _Toc427621648 \h 1-74Alternative Minimum Tax Co-ordination PAGEREF _Toc427621649 \h 1-74Chapter 1- Individual Tax Elements – Section 7 PAGEREF _Toc427621650 \h 1-77Points PAGEREF _Toc427621651 \h 1-77Home Purchase & Improvement Exception PAGEREF _Toc427621652 \h 1-77Refinancing PAGEREF _Toc427621653 \h 1-78Huntsman Case PAGEREF _Toc427621654 \h 1-78Mortgage Interest Statement - R.P. 92-11 PAGEREF _Toc427621655 \h 1-78Allocation of Interest Expense PAGEREF _Toc427621656 \h 1-79Education Expenses PAGEREF _Toc427621657 \h 1-82Educational Transportation PAGEREF _Toc427621658 \h 1-86Educational Travel PAGEREF _Toc427621659 \h 1-86Meal Expenses PAGEREF _Toc427621660 \h 1-87Investment Seminars PAGEREF _Toc427621661 \h 1-87Higher Education Expense Deduction - §222 PAGEREF _Toc427621662 \h 1-88Dollar Limitation & Phase Out PAGEREF _Toc427621663 \h 1-88Educator Expenses - §62 PAGEREF _Toc427621664 \h 1-88Medical Expense Deductions - §213 [Schedule A] PAGEREF _Toc427621665 \h 1-89Items Deductible PAGEREF _Toc427621666 \h 1-89Items Not Deductible PAGEREF _Toc427621667 \h 1-89Medical Insurance Premiums PAGEREF _Toc427621668 \h 1-90Medicare A PAGEREF _Toc427621669 \h 1-90Medicare B PAGEREF _Toc427621670 \h 1-90Prepaid Insurance Premiums PAGEREF _Toc427621671 \h 1-90Meals & Lodging PAGEREF _Toc427621672 \h 1-91Expenses of Transportation PAGEREF _Toc427621673 \h 1-91Permanent Improvements PAGEREF _Toc427621674 \h 1-91Spouses, Dependents & Others PAGEREF _Toc427621675 \h 1-92Reimbursement of Expenses PAGEREF _Toc427621676 \h 1-92Long-Term Care Provisions PAGEREF _Toc427621677 \h 1-92Long-Term Care Payments - §7702B(d)(4) PAGEREF _Toc427621678 \h 1-92Long-Term Care Premiums - §213(d)(10) PAGEREF _Toc427621679 \h 1-93IRA Withdrawals for Certain Medical Expenses PAGEREF _Toc427621680 \h 1-93Charitable Contributions - §170 [Schedule A] PAGEREF _Toc427621681 \h 1-93Requirements for Deductibility PAGEREF _Toc427621682 \h 1-94Qualified Organizations PAGEREF _Toc427621683 \h 1-94Limitations on Contributions PAGEREF _Toc427621684 \h 1-94Five-year Carryover PAGEREF _Toc427621685 \h 1-95Contributions of Cash PAGEREF _Toc427621686 \h 1-95Benefits Received PAGEREF _Toc427621687 \h 1-95Benefit Performances PAGEREF _Toc427621688 \h 1-95Athletic Events PAGEREF _Toc427621689 \h 1-96Raffle Tickets, Bingo, Etc. PAGEREF _Toc427621690 \h 1-96Dues, Fees, or Assessments PAGEREF _Toc427621691 \h 1-96Contribution of Property PAGEREF _Toc427621692 \h 1-96Clothing & Household Goods PAGEREF _Toc427621693 \h 1-96Ordinary Income or Short-Term Capital Gain Type Property PAGEREF _Toc427621694 \h 1-97Exception PAGEREF _Toc427621695 \h 1-97Capital Gain Type Property PAGEREF _Toc427621696 \h 1-97Exceptions PAGEREF _Toc427621697 \h 1-97Conservation Easements PAGEREF _Toc427621698 \h 1-98Loss Type Property PAGEREF _Toc427621699 \h 1-99Vehicle Donations PAGEREF _Toc427621700 \h 1-99Fractional Interests PAGEREF _Toc427621701 \h 1-99Other Types of Contributions PAGEREF _Toc427621702 \h 1-100Charitable Distributions from IRAs - §408 PAGEREF _Toc427621703 \h 1-100Substantiation PAGEREF _Toc427621704 \h 1-100Cash Contributions PAGEREF _Toc427621705 \h 1-100Contributions Less Than $250 PAGEREF _Toc427621706 \h 1-101Contributions of $250 or More PAGEREF _Toc427621707 \h 1-101Payroll Deduction Records PAGEREF _Toc427621708 \h 1-102Noncash Contributions PAGEREF _Toc427621709 \h 1-102Deductions of Less Than $250 PAGEREF _Toc427621710 \h 1-102Additional Records PAGEREF _Toc427621711 \h 1-102Deductions of At Least $250 But Not More Than $500 PAGEREF _Toc427621712 \h 1-103Deductions Over $500 But Not Over $5,000 PAGEREF _Toc427621713 \h 1-104Deductions over $5,000 PAGEREF _Toc427621714 \h 1-104Contributions over $75 Made Partly for Goods or Services PAGEREF _Toc427621715 \h 1-104Deduction for Taxes - §164 [Schedule A] PAGEREF _Toc427621716 \h 1-105Income Taxes PAGEREF _Toc427621717 \h 1-105Real Property Tax PAGEREF _Toc427621718 \h 1-105Accrual Method Taxpayers PAGEREF _Toc427621719 \h 1-106Standard Deduction for Real Property Taxes (Expired) - §63(c)(1) PAGEREF _Toc427621720 \h 1-106State & Local Sales Tax Deduction - §164 PAGEREF _Toc427621721 \h 1-106Sales Tax Deduction for Qualified Vehicles (Expired) - §164 PAGEREF _Toc427621722 \h 1-106Personal Property Tax PAGEREF _Toc427621723 \h 1-107Other Deductible Taxes PAGEREF _Toc427621724 \h 1-108Examples of Non-Deductible Taxes PAGEREF _Toc427621725 \h 1-108Chapter 1- Individual Tax Elements – Section 8 PAGEREF _Toc427621726 \h 1-112Casualty & Theft Losses - §165 [Schedule A] PAGEREF _Toc427621727 \h 1-112Definitions PAGEREF _Toc427621728 \h 1-112Proof of Loss PAGEREF _Toc427621729 \h 1-112Amount of Loss PAGEREF _Toc427621730 \h 1-112Insurance & Other Reimbursements PAGEREF _Toc427621731 \h 1-112Limitations PAGEREF _Toc427621732 \h 1-113Allocation for Mixed Use Property PAGEREF _Toc427621733 \h 1-114Standard Deduction for Disaster Losses (Expired) – §63(c) PAGEREF _Toc427621734 \h 1-114Miscellaneous Deductions - §67 [Schedule A] PAGEREF _Toc427621735 \h 1-114Deductions - Subject to 2% Limit PAGEREF _Toc427621736 \h 1-114Deductions Not Subject To 2% Limit PAGEREF _Toc427621737 \h 1-115Nondeductible Expenses PAGEREF _Toc427621738 \h 1-115Moving Expenses - §217 PAGEREF _Toc427621739 \h 1-115Distance Test PAGEREF _Toc427621740 \h 1-116Time Test PAGEREF _Toc427621741 \h 1-117Time Test for Employees PAGEREF _Toc427621742 \h 1-117Time Test for Self-employment PAGEREF _Toc427621743 \h 1-117Deductible Expenses PAGEREF _Toc427621744 \h 1-117Travel Expenses PAGEREF _Toc427621745 \h 1-118Travel by Car PAGEREF _Toc427621746 \h 1-118Location of Move PAGEREF _Toc427621747 \h 1-118Reporting PAGEREF _Toc427621748 \h 1-119Reimbursements PAGEREF _Toc427621749 \h 1-119Credits PAGEREF _Toc427621750 \h 1-119Dependent Care Tax Credit - §21 [Form 2441] PAGEREF _Toc427621751 \h 1-119Eligibility PAGEREF _Toc427621752 \h 1-120Employment Related Expenses PAGEREF _Toc427621753 \h 1-120Qualifying Out-of-the-home Expenses PAGEREF _Toc427621754 \h 1-120Payments to Relatives PAGEREF _Toc427621755 \h 1-120Allowable Amount PAGEREF _Toc427621756 \h 1-120Dependent Care Assistance - §129 PAGEREF _Toc427621757 \h 1-121Reporting PAGEREF _Toc427621758 \h 1-121Earned Income Credit - §32 [Form 1040] PAGEREF _Toc427621759 \h 1-121Persons with One or More Qualifying Children PAGEREF _Toc427621760 \h 1-122Persons without a Qualifying Child PAGEREF _Toc427621761 \h 1-122Computation PAGEREF _Toc427621762 \h 1-123Phaseout PAGEREF _Toc427621763 \h 1-123Advance Payment of Earned Income Credit (Expired) - §3507(b)(2) PAGEREF _Toc427621764 \h 1-124Chapter 1- Individual Tax Elements – Section 9 PAGEREF _Toc427621765 \h 1-126Adoption Credit - §23 & §137 PAGEREF _Toc427621766 \h 1-126Qualified Adoption Expenses PAGEREF _Toc427621767 \h 1-126Exclusion from Income for Employer Reimbursements - §137 PAGEREF _Toc427621768 \h 1-126Child Tax Credit - §24 PAGEREF _Toc427621769 \h 1-127Credit Amount PAGEREF _Toc427621770 \h 1-127Qualifying Child PAGEREF _Toc427621771 \h 1-127Phase out PAGEREF _Toc427621772 \h 1-127Refundable Child Care Credit Amount PAGEREF _Toc427621773 \h 1-127AMT & Child Tax Credit PAGEREF _Toc427621774 \h 1-128Hope & Lifetime Learning Credits - §25A PAGEREF _Toc427621775 \h 1-128Lifetime Learning Credit PAGEREF _Toc427621776 \h 1-128Phase Out PAGEREF _Toc427621777 \h 1-128Hope (American Opportunity) Credit PAGEREF _Toc427621778 \h 1-128Phase Out PAGEREF _Toc427621779 \h 1-129Refundable PAGEREF _Toc427621780 \h 1-129Ministers & Military - §107 PAGEREF _Toc427621781 \h 1-129Clergy PAGEREF _Toc427621782 \h 1-129Rental Value of a Home PAGEREF _Toc427621783 \h 1-129Members of Religious Orders PAGEREF _Toc427621784 \h 1-130Military & Veterans PAGEREF _Toc427621785 \h 1-130Wages - §61 PAGEREF _Toc427621786 \h 1-130Nontaxable Income - §134 PAGEREF _Toc427621787 \h 1-131Veterans’ Benefits - §134 PAGEREF _Toc427621788 \h 1-132Chapter 2- Property Transfers & Retirement Plans – Section 10 PAGEREF _Toc427621789 \h 2-1Sales & Exchanges of Property PAGEREF _Toc427621790 \h 2-2Sale or Lease PAGEREF _Toc427621791 \h 2-2Easements PAGEREF _Toc427621792 \h 2-2Capital Gains & Losses PAGEREF _Toc427621793 \h 2-3Capital Assets - §1221 PAGEREF _Toc427621794 \h 2-3Capital Gains & Qualified Dividends Rate – §1(h) PAGEREF _Toc427621795 \h 2-3Holding Periods - (§1222 & §1223) PAGEREF _Toc427621796 \h 2-4Capital Losses - §1211 PAGEREF _Toc427621797 \h 2-5Business Property PAGEREF _Toc427621798 \h 2-5Basis of Property PAGEREF _Toc427621799 \h 2-5Basis Adjustments PAGEREF _Toc427621800 \h 2-6Property Received as a Gift PAGEREF _Toc427621801 \h 2-6Property Received by Inheritance PAGEREF _Toc427621802 \h 2-6Changes in Property Usage PAGEREF _Toc427621803 \h 2-6Stocks & Bonds PAGEREF _Toc427621804 \h 2-7Chapter 2- Property Transfers & Retirement Plans – Section 11 PAGEREF _Toc427621805 \h 2-10Sale of Personal Residence - §121 PAGEREF _Toc427621806 \h 2-10Two-Year Ownership & Use Requirements PAGEREF _Toc427621807 \h 2-10Tacking of Prior Holding Period PAGEREF _Toc427621808 \h 2-11Prorata Exception PAGEREF _Toc427621809 \h 2-11Limitations on Exclusion PAGEREF _Toc427621810 \h 2-11Reduced Home Sale Exclusion for Periods of Nonqualified Use PAGEREF _Toc427621811 \h 2-12Computation PAGEREF _Toc427621812 \h 2-12Nonqualified Use PAGEREF _Toc427621813 \h 2-12Post-May 6, 1997 Depreciation PAGEREF _Toc427621814 \h 2-12Surviving Spouse Home Sale Exclusion PAGEREF _Toc427621815 \h 2-13Installment Sales - §453 PAGEREF _Toc427621816 \h 2-13General Rules PAGEREF _Toc427621817 \h 2-13Dealer Sales PAGEREF _Toc427621818 \h 2-15Unstated Interest PAGEREF _Toc427621819 \h 2-15Related Parties - §453(e) PAGEREF _Toc427621820 \h 2-15Disposition of Installment Notes - §453B PAGEREF _Toc427621821 \h 2-16Determining Installment Income PAGEREF _Toc427621822 \h 2-16Pledge Rule PAGEREF _Toc427621823 \h 2-18Escrow Account PAGEREF _Toc427621824 \h 2-18Depreciation Recapture PAGEREF _Toc427621825 \h 2-18Like Kind Exchange PAGEREF _Toc427621826 \h 2-18Chapter 2- Property Transfers & Retirement Plans – Section 12 PAGEREF _Toc427621827 \h 2-21Repossessions - §1038 PAGEREF _Toc427621828 \h 2-21Personal Property PAGEREF _Toc427621829 \h 2-21Non- Installment Method Sales PAGEREF _Toc427621830 \h 2-22Basis of Installment Obligation PAGEREF _Toc427621831 \h 2-22Gain or Loss on Repossession PAGEREF _Toc427621832 \h 2-22Installment Method Sales PAGEREF _Toc427621833 \h 2-22Basis of Installment Obligation PAGEREF _Toc427621834 \h 2-22Gain or Loss on Repossession PAGEREF _Toc427621835 \h 2-22Basis of Repossessed Personal Property PAGEREF _Toc427621836 \h 2-24Bad Debt PAGEREF _Toc427621837 \h 2-24Real Property PAGEREF _Toc427621838 \h 2-24Conditions PAGEREF _Toc427621839 \h 2-24Figuring Gain on Repossession PAGEREF _Toc427621840 \h 2-25Limit on Taxable Gain PAGEREF _Toc427621841 \h 2-25Repossession Costs PAGEREF _Toc427621842 \h 2-25Indefinite Selling Price PAGEREF _Toc427621843 \h 2-27Character of Gain PAGEREF _Toc427621844 \h 2-27Basis of Repossessed Real Property PAGEREF _Toc427621845 \h 2-27Holding Period for Resales PAGEREF _Toc427621846 \h 2-28Bad Debt PAGEREF _Toc427621847 \h 2-28Seller’s Former Home Exception PAGEREF _Toc427621848 \h 2-29Chapter 2- Property Transfers & Retirement Plans – Section 13 PAGEREF _Toc427621849 \h 2-34Involuntary Conversions - §1033 PAGEREF _Toc427621850 \h 2-34Condemnations PAGEREF _Toc427621851 \h 2-34Threat of Condemnation PAGEREF _Toc427621852 \h 2-34Reports of Condemnation PAGEREF _Toc427621853 \h 2-35Property Voluntarily Sold PAGEREF _Toc427621854 \h 2-35Easements PAGEREF _Toc427621855 \h 2-35Condemnation Award PAGEREF _Toc427621856 \h 2-36Amounts Withheld From Award PAGEREF _Toc427621857 \h 2-36Net Condemnation Award PAGEREF _Toc427621858 \h 2-36Interest on Award PAGEREF _Toc427621859 \h 2-36Payments to Relocate PAGEREF _Toc427621860 \h 2-37Severance Damages PAGEREF _Toc427621861 \h 2-37Treatment of Severance Damages PAGEREF _Toc427621862 \h 2-37Expenses of Obtaining an Award PAGEREF _Toc427621863 \h 2-38Special Assessment Withheld from Award PAGEREF _Toc427621864 \h 2-38Severance Damages Included in Award PAGEREF _Toc427621865 \h 2-39Gain or Loss from Condemnations PAGEREF _Toc427621866 \h 2-39How to Figure Gain or Loss PAGEREF _Toc427621867 \h 2-39Part Business or Part Rental PAGEREF _Toc427621868 \h 2-40Postponement of Gain PAGEREF _Toc427621869 \h 2-40Choosing to Postpone Gain PAGEREF _Toc427621870 \h 2-40Cost Test PAGEREF _Toc427621871 \h 2-40Replacement Period PAGEREF _Toc427621872 \h 2-40Condemnation PAGEREF _Toc427621873 \h 2-40Replacement Property Acquired Before the Condemnation PAGEREF _Toc427621874 \h 2-41Extension PAGEREF _Toc427621875 \h 2-41Time for assessing a deficiency PAGEREF _Toc427621876 \h 2-42Chapter 2- Property Transfers & Retirement Plans – Section 14 PAGEREF _Toc427621877 \h 2-44At Risk Limits for Real Estate - §465 PAGEREF _Toc427621878 \h 2-44Amount At Risk PAGEREF _Toc427621879 \h 2-44Qualified Nonrecourse Financing PAGEREF _Toc427621880 \h 2-44Section 1031 Like Kind Exchanges PAGEREF _Toc427621881 \h 2-45Statutory Requirements & Definitions PAGEREF _Toc427621882 \h 2-45Qualified Transaction - Exchanges v. Sales PAGEREF _Toc427621883 \h 2-46Held for Productive Use or investment PAGEREF _Toc427621884 \h 2-46Investment Purpose PAGEREF _Toc427621885 \h 2-46Statutory Exclusions from §1031 PAGEREF _Toc427621886 \h 2-46Like Kind Property PAGEREF _Toc427621887 \h 2-47Nature or Quality of Property PAGEREF _Toc427621888 \h 2-47Real v. Personal Property PAGEREF _Toc427621889 \h 2-47The Concept of “Boot” PAGEREF _Toc427621890 \h 2-47Realized Gain PAGEREF _Toc427621891 \h 2-48Recognized Gain PAGEREF _Toc427621892 \h 2-48Limitation on Recognition of Gain under §1031 PAGEREF _Toc427621893 \h 2-48The Definition of “Boot” PAGEREF _Toc427621894 \h 2-48The Rules of “Boot” PAGEREF _Toc427621895 \h 2-48Property Boot PAGEREF _Toc427621896 \h 2-49Mortgage Boot PAGEREF _Toc427621897 \h 2-49Netting “Boot” - The Rules of Offset PAGEREF _Toc427621898 \h 2-49Property Boot Given Offsets Any Boot Received PAGEREF _Toc427621899 \h 2-49Mortgage Boot Given Offsets Mortgage Boot Received PAGEREF _Toc427621900 \h 2-49Mortgage Boot Given Does Not Offset Property Boot Received PAGEREF _Toc427621901 \h 2-50Revenue Ruling 72-456 & Commissions PAGEREF _Toc427621902 \h 2-50Gain or Loss on Boot PAGEREF _Toc427621903 \h 2-50Basis on Tax-Deferred Exchange PAGEREF _Toc427621904 \h 2-50Allocation of Basis PAGEREF _Toc427621905 \h 2-50Installment Reporting of Boot PAGEREF _Toc427621906 \h 2-51Exchanges Between Related Parties PAGEREF _Toc427621907 \h 2-51Reporting an Exchange PAGEREF _Toc427621908 \h 2-51Types of Exchanges PAGEREF _Toc427621909 \h 2-51Two-Party Exchanges PAGEREF _Toc427621910 \h 2-52Three-Party “Alderson” Exchange PAGEREF _Toc427621911 \h 2-53Three-Party “Baird Publishing” Exchange PAGEREF _Toc427621912 \h 2-54Delayed Exchanges PAGEREF _Toc427621913 \h 2-5445-Day Rule PAGEREF _Toc427621914 \h 2-55Method of Identification PAGEREF _Toc427621915 \h 2-55180-Day Rule PAGEREF _Toc427621916 \h 2-55Final Regulations for Delayed (Deferred) Exchanges PAGEREF _Toc427621917 \h 2-55Deferred (Delayed) Exchange Definition PAGEREF _Toc427621918 \h 2-57Identification Requirements PAGEREF _Toc427621919 \h 2-57Identification & Exchange Periods PAGEREF _Toc427621920 \h 2-57Method of Identification PAGEREF _Toc427621921 \h 2-57Property Description PAGEREF _Toc427621922 \h 2-58Revocation PAGEREF _Toc427621923 \h 2-58Substantial Receipt PAGEREF _Toc427621924 \h 2-58Multiple Replacement Properties PAGEREF _Toc427621925 \h 2-58Actual & Constructive Receipt Rule PAGEREF _Toc427621926 \h 2-59Four Safe Harbors PAGEREF _Toc427621927 \h 2-59Safe Harbor #1 - Security PAGEREF _Toc427621928 \h 2-59Safe Harbor #2 - Escrow Accounts & Trusts PAGEREF _Toc427621929 \h 2-59Safe Harbor #3 - Qualified Intermediary PAGEREF _Toc427621930 \h 2-60Safe Harbor #4 - Interest PAGEREF _Toc427621931 \h 2-61Exchanges of Partnership Interests PAGEREF _Toc427621932 \h 2-61Chapter 2- Property Transfers & Retirement Plans – Section 15 PAGEREF _Toc427621933 \h 2-65Retirement Plans PAGEREF _Toc427621934 \h 2-65Qualified Deferred Compensation PAGEREF _Toc427621935 \h 2-65Qualified v. Nonqualified Plans PAGEREF _Toc427621936 \h 2-65Major Benefit PAGEREF _Toc427621937 \h 2-67Current Deduction PAGEREF _Toc427621938 \h 2-67Timing of Deductions PAGEREF _Toc427621939 \h 2-67Part of Total Compensation PAGEREF _Toc427621940 \h 2-67Compensation Base PAGEREF _Toc427621941 \h 2-67Salary Reduction Amounts PAGEREF _Toc427621942 \h 2-68Benefit Planning PAGEREF _Toc427621943 \h 2-68Pension Protection Act of 2006 PAGEREF _Toc427621944 \h 2-69Corporate Plans PAGEREF _Toc427621945 \h 2-69Advantages PAGEREF _Toc427621946 \h 2-69Current PAGEREF _Toc427621947 \h 2-70Deferred PAGEREF _Toc427621948 \h 2-70Disadvantages PAGEREF _Toc427621949 \h 2-70Employee Costs PAGEREF _Toc427621950 \h 2-70Comparison with IRAs & Keoghs PAGEREF _Toc427621951 \h 2-70Basic ERISA Provisions PAGEREF _Toc427621952 \h 2-70ERISA Reporting Requirements PAGEREF _Toc427621953 \h 2-71Fiduciary Responsibilities PAGEREF _Toc427621954 \h 2-71Bonding Requirement PAGEREF _Toc427621955 \h 2-72Prohibited Transactions PAGEREF _Toc427621956 \h 2-72Additional Restrictions PAGEREF _Toc427621957 \h 2-72Fiduciary Exceptions PAGEREF _Toc427621958 \h 2-72Loans PAGEREF _Toc427621959 \h 2-73Employer Securities PAGEREF _Toc427621960 \h 2-73Excise Penalty Tax PAGEREF _Toc427621961 \h 2-74PBGC Insurance PAGEREF _Toc427621962 \h 2-74Sixty-Month Requirement PAGEREF _Toc427621963 \h 2-74Recovery Against Employer PAGEREF _Toc427621964 \h 2-74Termination Proceedings PAGEREF _Toc427621965 \h 2-75Plans Exempt from PBGC Coverage PAGEREF _Toc427621966 \h 2-75Basic Requirements of a Qualified Pension Plan PAGEREF _Toc427621967 \h 2-76Written Plan PAGEREF _Toc427621968 \h 2-76Communication PAGEREF _Toc427621969 \h 2-76Trust PAGEREF _Toc427621970 \h 2-76Requirements PAGEREF _Toc427621971 \h 2-76Permanency PAGEREF _Toc427621972 \h 2-77Exclusive Benefit of Employees PAGEREF _Toc427621973 \h 2-77Highly Compensated Employees PAGEREF _Toc427621974 \h 2-77Reversion of Trust Assets to Employer PAGEREF _Toc427621975 \h 2-77Participation & Coverage PAGEREF _Toc427621976 \h 2-78Age & Service PAGEREF _Toc427621977 \h 2-78Coverage PAGEREF _Toc427621978 \h 2-79Percentage Test PAGEREF _Toc427621979 \h 2-79Ratio Test PAGEREF _Toc427621980 \h 2-79Average Benefits Test PAGEREF _Toc427621981 \h 2-79Numerical Coverage PAGEREF _Toc427621982 \h 2-80Related Employers PAGEREF _Toc427621983 \h 2-80Chapter 2- Property Transfers & Retirement Plans – Section 16 PAGEREF _Toc427621984 \h 2-83Vesting PAGEREF _Toc427621985 \h 2-83Full & Immediate Vesting PAGEREF _Toc427621986 \h 2-83Minimum Vesting PAGEREF _Toc427621987 \h 2-83Diversification Rights PAGEREF _Toc427621988 \h 2-85Nondiscrimination Compliance PAGEREF _Toc427621989 \h 2-85Contribution & Benefit Limits PAGEREF _Toc427621990 \h 2-85Defined Benefit Plans (Annual Benefits Limitation) - §415 PAGEREF _Toc427621991 \h 2-85Defined Contribution Plans (Annual Addition Limitation) - §415 PAGEREF _Toc427621992 \h 2-86Limits on Deductible Contributions - §404 PAGEREF _Toc427621993 \h 2-86Assignment & Alienation PAGEREF _Toc427621994 \h 2-87Miscellaneous Requirements PAGEREF _Toc427621995 \h 2-88Basic Types of Corporate Plans PAGEREF _Toc427621996 \h 2-88Defined Benefit PAGEREF _Toc427621997 \h 2-88Mechanics PAGEREF _Toc427621998 \h 2-88Defined Benefit Pension PAGEREF _Toc427621999 \h 2-89Defined Contribution PAGEREF _Toc427622000 \h 2-89Mechanics PAGEREF _Toc427622001 \h 2-89Discretion PAGEREF _Toc427622002 \h 2-89Favorable Circumstances PAGEREF _Toc427622003 \h 2-89Types of Defined Contribution Plans PAGEREF _Toc427622004 \h 2-90Profit Sharing PAGEREF _Toc427622005 \h 2-90Requirements for a Qualified Profit Sharing Plan PAGEREF _Toc427622006 \h 2-90Written Plan PAGEREF _Toc427622007 \h 2-90Eligibility PAGEREF _Toc427622008 \h 2-90Deductible Contribution Limit PAGEREF _Toc427622009 \h 2-91Substantial & Recurrent Rule PAGEREF _Toc427622010 \h 2-91Money Purchase Pension PAGEREF _Toc427622011 \h 2-91Cafeteria Compensation Plan PAGEREF _Toc427622012 \h 2-93Thrift Plan PAGEREF _Toc427622013 \h 2-93Section 401(k) Plans PAGEREF _Toc427622014 \h 2-94Death Benefits PAGEREF _Toc427622015 \h 2-95Defined Benefit Plans PAGEREF _Toc427622016 \h 2-96Money Purchase Pension & Target Benefit Plans PAGEREF _Toc427622017 \h 2-96Employee Contributions PAGEREF _Toc427622018 \h 2-96Non-Deductible PAGEREF _Toc427622019 \h 2-96Life Insurance in the Qualified Plan PAGEREF _Toc427622020 \h 2-97Return PAGEREF _Toc427622021 \h 2-97Universal Life PAGEREF _Toc427622022 \h 2-97Compare PAGEREF _Toc427622023 \h 2-97Plan Terminations & Corporate Liquidations PAGEREF _Toc427622024 \h 2-9710-Year Rule PAGEREF _Toc427622025 \h 2-98Lump-Sum Distributions PAGEREF _Toc427622026 \h 2-98Asset Dispositions PAGEREF _Toc427622027 \h 2-98IRA Limitations PAGEREF _Toc427622028 \h 2-99Chapter 2- Property Transfers & Retirement Plans – Section 17 PAGEREF _Toc427622029 \h 2-102Self-Employed Plans - Keogh PAGEREF _Toc427622030 \h 2-102Contribution Timing PAGEREF _Toc427622031 \h 2-102Controlled Business PAGEREF _Toc427622032 \h 2-102General Limitations PAGEREF _Toc427622033 \h 2-103Effect of Incorporation PAGEREF _Toc427622034 \h 2-103Mechanics PAGEREF _Toc427622035 \h 2-104Parity with Corporate Plans PAGEREF _Toc427622036 \h 2-105Figuring Retirement Plan Deductions For Self-Employed PAGEREF _Toc427622037 \h 2-105Self-Employed Rate PAGEREF _Toc427622038 \h 2-105Determining the Deduction PAGEREF _Toc427622039 \h 2-106Individual Plans - IRA’s PAGEREF _Toc427622040 \h 2-107Deemed IRA PAGEREF _Toc427622041 \h 2-107Mechanics PAGEREF _Toc427622042 \h 2-107Phase-out PAGEREF _Toc427622043 \h 2-107Special Spousal Participation Rule - §219(g)(1) PAGEREF _Toc427622044 \h 2-108Spousal IRA PAGEREF _Toc427622045 \h 2-109Eligibility PAGEREF _Toc427622046 \h 2-110Contributions & Deductions PAGEREF _Toc427622047 \h 2-110Employer Contributions PAGEREF _Toc427622048 \h 2-110Retirement Vehicles PAGEREF _Toc427622049 \h 2-110Distribution & Settlement Options PAGEREF _Toc427622050 \h 2-111Life Annuity Exemption PAGEREF _Toc427622051 \h 2-111Minimum Distributions PAGEREF _Toc427622052 \h 2-111Required Minimum Distribution PAGEREF _Toc427622053 \h 2-112Definitions PAGEREF _Toc427622054 \h 2-112Distributions during Owner’s Lifetime & Year of Death after RBD PAGEREF _Toc427622055 \h 2-113Sole Beneficiary Spouse Who Is More Than 10 Years Younger PAGEREF _Toc427622056 \h 2-114Distributions after Owner’s Death PAGEREF _Toc427622057 \h 2-114Inherited IRAs PAGEREF _Toc427622058 \h 2-117Estate Tax Deduction PAGEREF _Toc427622059 \h 2-117Charitable Distributions from IRAs - §408 PAGEREF _Toc427622060 \h 2-117Post-Retirement Tax Treatment of IRA Distributions PAGEREF _Toc427622061 \h 2-118Income In Respect of a Decedent PAGEREF _Toc427622062 \h 2-118Estate Tax Consequences PAGEREF _Toc427622063 \h 2-118Losses on IRA Investments PAGEREF _Toc427622064 \h 2-118Prohibited Transactions PAGEREF _Toc427622065 \h 2-119Effect of Disqualification PAGEREF _Toc427622066 \h 2-119Penalties PAGEREF _Toc427622067 \h 2-119Borrowing on an Annuity Contract PAGEREF _Toc427622068 \h 2-120Tax-Free Rollovers PAGEREF _Toc427622069 \h 2-120Rollover from One IRA to Another PAGEREF _Toc427622070 \h 2-120Waiting Period between Rollovers PAGEREF _Toc427622071 \h 2-121Partial Rollovers PAGEREF _Toc427622072 \h 2-121Rollovers from Traditional IRAs into Qualified Plans PAGEREF _Toc427622073 \h 2-121Rollovers of Distributions from Employer Plans PAGEREF _Toc427622074 \h 2-121Withholding Requirement PAGEREF _Toc427622075 \h 2-121Waiting Period between Rollovers PAGEREF _Toc427622076 \h 2-122Conduit IRAs PAGEREF _Toc427622077 \h 2-122Keogh Rollovers PAGEREF _Toc427622078 \h 2-122Direct Rollovers from Retirement Plans to Roth IRAs PAGEREF _Toc427622079 \h 2-122Rollovers of §457 Plans into Traditional IRAs PAGEREF _Toc427622080 \h 2-123Rollovers of Traditional IRAs into §457 Plans PAGEREF _Toc427622081 \h 2-123Rollovers of Traditional IRAs into §403(B) Plans PAGEREF _Toc427622082 \h 2-123Rollovers from SIMPLE IRAs PAGEREF _Toc427622083 \h 2-124Nonspouse Rollovers PAGEREF _Toc427622084 \h 2-124Roth IRA - §408A PAGEREF _Toc427622085 \h 2-126Eligibility PAGEREF _Toc427622086 \h 2-126Contribution Limitation PAGEREF _Toc427622087 \h 2-126Roth IRAs Only PAGEREF _Toc427622088 \h 2-126Roth IRAs & Traditional IRAs PAGEREF _Toc427622089 \h 2-127Conversions PAGEREF _Toc427622090 \h 2-128AGI Limit Exception Repealed PAGEREF _Toc427622091 \h 2-129Recharacterizations PAGEREF _Toc427622092 \h 2-129Reconversions PAGEREF _Toc427622093 \h 2-129Taxation of Distributions PAGEREF _Toc427622094 \h 2-130No Required Minimum Distributions PAGEREF _Toc427622095 \h 2-130Simplified Employee Pension Plans (SEPs) PAGEREF _Toc427622096 \h 2-130Contribution Limits & Taxation PAGEREF _Toc427622097 \h 2-133SIMPLE Plans PAGEREF _Toc427622098 \h 2-133SIMPLE IRA Plan PAGEREF _Toc427622099 \h 2-134Employee Limit PAGEREF _Toc427622100 \h 2-134Other Qualified Plan PAGEREF _Toc427622101 \h 2-134Set up PAGEREF _Toc427622102 \h 2-134Contribution Limits PAGEREF _Toc427622103 \h 2-135Salary Reduction Contributions PAGEREF _Toc427622104 \h 2-135Employer Matching Contributions PAGEREF _Toc427622105 \h 2-135Deduction of Contributions PAGEREF _Toc427622106 \h 2-136Distributions PAGEREF _Toc427622107 \h 2-136SIMPLE §401(k) Plan PAGEREF _Toc427622108 \h 2-136Chapter 3 - Losses, AMT & Compliance – Section 18 PAGEREF _Toc427622109 \h 3-1Passive Losses PAGEREF _Toc427622110 \h 3-2Prior Law PAGEREF _Toc427622111 \h 3-2Passive Loss Rules PAGEREF _Toc427622112 \h 3-4Application PAGEREF _Toc427622113 \h 3-4Active Losses PAGEREF _Toc427622114 \h 3-4Credits PAGEREF _Toc427622115 \h 3-5Calculating Passive Loss PAGEREF _Toc427622116 \h 3-5Categories of Income & Loss PAGEREF _Toc427622117 \h 3-5Passive PAGEREF _Toc427622118 \h 3-5Portfolio PAGEREF _Toc427622119 \h 3-6Material Participation PAGEREF _Toc427622120 \h 3-7Self-Charged Interest Regulations PAGEREF _Toc427622121 \h 3-7Passive Deduction - Portfolio Income PAGEREF _Toc427622122 \h 3-7Regulations PAGEREF _Toc427622123 \h 3-7Suspension of Disallowed Losses PAGEREF _Toc427622124 \h 3-11Fully Taxable Disposition PAGEREF _Toc427622125 \h 3-11Abandonment & Worthlessness PAGEREF _Toc427622126 \h 3-11Related Party Transactions PAGEREF _Toc427622127 \h 3-11Credits PAGEREF _Toc427622128 \h 3-12Disallowance PAGEREF _Toc427622129 \h 3-12Increase Basis Election PAGEREF _Toc427622130 \h 3-12Entire Interest PAGEREF _Toc427622131 \h 3-12Partnership PAGEREF _Toc427622132 \h 3-12Grantor Trust PAGEREF _Toc427622133 \h 3-12Other Transfers PAGEREF _Toc427622134 \h 3-13Transfer By Reason Of Death - §469(g)(2) PAGEREF _Toc427622135 \h 3-13Transfer by Gift - §469(j)(6) PAGEREF _Toc427622136 \h 3-13Installment Sale - §469(g)(3) PAGEREF _Toc427622137 \h 3-13Activity No Longer Treated As Passive Activity - §469(f)(1) PAGEREF _Toc427622138 \h 3-14Closely Held To Nonclosely Held Corporation- §469(f)(2) PAGEREF _Toc427622139 \h 3-14Nontaxable Transfer PAGEREF _Toc427622140 \h 3-15Ordering of Losses PAGEREF _Toc427622141 \h 3-15Capital Loss Limitation PAGEREF _Toc427622142 \h 3-16Carryforwards PAGEREF _Toc427622143 \h 3-16Allocation of Suspended Losses PAGEREF _Toc427622144 \h 3-17Taxpayers Affected PAGEREF _Toc427622145 \h 3-17Noncorporate Taxpayers PAGEREF _Toc427622146 \h 3-17Regular Closely Held Corporations PAGEREF _Toc427622147 \h 3-17Personal Service Corporations PAGEREF _Toc427622148 \h 3-17Definition PAGEREF _Toc427622149 \h 3-17Real Estate Professionals PAGEREF _Toc427622150 \h 3-18Chapter 3 - Losses, AMT & Compliance – Section 19 PAGEREF _Toc427622151 \h 3-21Activities PAGEREF _Toc427622152 \h 3-21Facts & Circumstances Test PAGEREF _Toc427622153 \h 3-21Relevant Factors PAGEREF _Toc427622154 \h 3-21Rental Activities PAGEREF _Toc427622155 \h 3-22Limited Partnership Activities PAGEREF _Toc427622156 \h 3-23Partnership & S Corporation Activities PAGEREF _Toc427622157 \h 3-23Consistency PAGEREF _Toc427622158 \h 3-23Regrouping PAGEREF _Toc427622159 \h 3-23Partial Dispositions PAGEREF _Toc427622160 \h 3-24Alternative Minimum Tax - §55 PAGEREF _Toc427622161 \h 3-24Computation PAGEREF _Toc427622162 \h 3-25Exemption Amount - §55(d) PAGEREF _Toc427622163 \h 3-26AMT Exemption Phaseout PAGEREF _Toc427622164 \h 3-26Regular Tax Deduction - §55(c) PAGEREF _Toc427622165 \h 3-26Tax Preferences & Adjustments PAGEREF _Toc427622166 \h 3-27Preferences & Adjustments for All Taxpayers PAGEREF _Toc427622167 \h 3-27Preferences & Adjustments for Noncorporate Taxpayers Only PAGEREF _Toc427622168 \h 3-27Preferences & Adjustments for Corporations Only PAGEREF _Toc427622169 \h 3-28Adjustments - §56 PAGEREF _Toc427622170 \h 3-28Itemized Deductions PAGEREF _Toc427622171 \h 3-28Standard Deduction PAGEREF _Toc427622172 \h 3-28Medical Expenses PAGEREF _Toc427622173 \h 3-28Taxes PAGEREF _Toc427622174 \h 3-28Interest PAGEREF _Toc427622175 \h 3-29Personal Exemptions PAGEREF _Toc427622176 \h 3-29Depreciation PAGEREF _Toc427622177 \h 3-29Alternative Depreciation System (ADS) PAGEREF _Toc427622178 \h 3-30ADS Recovery Periods PAGEREF _Toc427622179 \h 3-30Asset Placed in Service After 1998 PAGEREF _Toc427622180 \h 3-31Mining Exploration and Development Costs PAGEREF _Toc427622181 \h 3-31Basis PAGEREF _Toc427622182 \h 3-32Election PAGEREF _Toc427622183 \h 3-32Long-Term Contracts PAGEREF _Toc427622184 \h 3-32Home Construction Contracts PAGEREF _Toc427622185 \h 3-32Pollution Control Facilities PAGEREF _Toc427622186 \h 3-32Installment Sales PAGEREF _Toc427622187 \h 3-33Circulation Expenditures PAGEREF _Toc427622188 \h 3-33Incentive Stock Options PAGEREF _Toc427622189 \h 3-33Credit for Prior Year Minimum Tax & ISOs PAGEREF _Toc427622190 \h 3-33Research & Experimental Expenditures PAGEREF _Toc427622191 \h 3-34Passive Farm Losses PAGEREF _Toc427622192 \h 3-34Definition PAGEREF _Toc427622193 \h 3-34Loss Disallowance PAGEREF _Toc427622194 \h 3-34Allocation PAGEREF _Toc427622195 \h 3-35Same Activity Suspension PAGEREF _Toc427622196 \h 3-35Passive Activity Losses PAGEREF _Toc427622197 \h 3-35Business Untaxed Reported Profits (Pre-1990) PAGEREF _Toc427622198 \h 3-37ACE Adjustment (Post-1989) PAGEREF _Toc427622199 \h 3-37Adjusted Current Earnings Regulations PAGEREF _Toc427622200 \h 3-39Tax Preferences - §57 PAGEREF _Toc427622201 \h 3-40Depletion PAGEREF _Toc427622202 \h 3-40Intangible Drilling Costs PAGEREF _Toc427622203 \h 3-40Excess Drilling Costs PAGEREF _Toc427622204 \h 3-40Accelerated Depreciation PAGEREF _Toc427622205 \h 3-41Real Property PAGEREF _Toc427622206 \h 3-41Personal Property PAGEREF _Toc427622207 \h 3-41Private Activity Bond Interest PAGEREF _Toc427622208 \h 3-41Alternative Tax NOL Deduction PAGEREF _Toc427622209 \h 3-42Carrybacks & Carryovers PAGEREF _Toc427622210 \h 3-42Alternative Minimum Foreign Tax Credit PAGEREF _Toc427622211 \h 3-42Foreign Tax Credit Carryback or Carryover PAGEREF _Toc427622212 \h 3-43Tentative Minimum Tax PAGEREF _Toc427622213 \h 3-43Minimum Tax Credit PAGEREF _Toc427622214 \h 3-43Regular Income Tax Reduced PAGEREF _Toc427622215 \h 3-43Carryforward of Credit PAGEREF _Toc427622216 \h 3-43Other Credits PAGEREF _Toc427622217 \h 3-44Chapter 3 - Losses, AMT & Compliance – Section 20 PAGEREF _Toc427622218 \h 3-47Compliance PAGEREF _Toc427622219 \h 3-47Reporting Requirements PAGEREF _Toc427622220 \h 3-47Real Estate Transactions [Form - 1099S] PAGEREF _Toc427622221 \h 3-47Independent Contractors PAGEREF _Toc427622222 \h 3-48Cash Reporting [Form 8300] PAGEREF _Toc427622223 \h 3-50Exceptions PAGEREF _Toc427622224 \h 3-51Recipient’s Knowledge PAGEREF _Toc427622225 \h 3-51Cash Reporting Rules - Attorneys PAGEREF _Toc427622226 \h 3-51Sale of Certain Partnership Interests (Form 8308) PAGEREF _Toc427622227 \h 3-52Tax Shelter Registration Number [Form 8271] PAGEREF _Toc427622228 \h 3-52Asset Acquisition Statement [Form 8594] PAGEREF _Toc427622229 \h 3-52Chapter 3 - Losses, AMT & Compliance – Section 21 PAGEREF _Toc427622230 \h 3-55Accuracy-Related Penalties PAGEREF _Toc427622231 \h 3-55Negligence PAGEREF _Toc427622232 \h 3-55Substantial Understatement of Income Tax PAGEREF _Toc427622233 \h 3-55Penalty on Carryover Year Return PAGEREF _Toc427622234 \h 3-56Substantial Valuation Overstatements PAGEREF _Toc427622235 \h 3-56Substantial Estate & Gift Tax Valuation Understatements PAGEREF _Toc427622236 \h 3-57Final Regulations PAGEREF _Toc427622237 \h 3-57Negligence or Disregard of Rules PAGEREF _Toc427622238 \h 3-57Substantial Understatement Penalty PAGEREF _Toc427622239 \h 3-58Adequate Disclosure PAGEREF _Toc427622240 \h 3-59Information Reporting Penalty Final Regulations PAGEREF _Toc427622241 \h 3-59Penalty for Unrealistic Position PAGEREF _Toc427622242 \h 3-61Realistic Possibility Standard PAGEREF _Toc427622243 \h 3-62Adequate Disclosure PAGEREF _Toc427622244 \h 3-63Form 8275-R PAGEREF _Toc427622245 \h 3-63Statute of Limitations for Assessments PAGEREF _Toc427622246 \h 3-64Three Year Assessment Periods PAGEREF _Toc427622247 \h 3-64Six Year Assessment Period PAGEREF _Toc427622248 \h 3-64No Statute Of Limitations PAGEREF _Toc427622249 \h 3-64Extension of Statute Of Limitations PAGEREF _Toc427622250 \h 3-64Examination of Returns PAGEREF _Toc427622251 \h 3-64How Returns Are Selected PAGEREF _Toc427622252 \h 3-64Arranging the Examination PAGEREF _Toc427622253 \h 3-65Transfers PAGEREF _Toc427622254 \h 3-65Representation PAGEREF _Toc427622255 \h 3-65Recordings PAGEREF _Toc427622256 \h 3-65Repeat Examinations PAGEREF _Toc427622257 \h 3-65Changes to Return PAGEREF _Toc427622258 \h 3-66Appealing Examination Findings PAGEREF _Toc427622259 \h 3-66Appeals Office PAGEREF _Toc427622260 \h 3-66Appeals to the Courts PAGEREF _Toc427622261 \h 3-66Court Decisions PAGEREF _Toc427622262 \h 3-67Recovering Litigation Expenses PAGEREF _Toc427622263 \h 3-67Other Remedies PAGEREF _Toc427622264 \h 3-67Claims for Refund PAGEREF _Toc427622265 \h 3-67Cancellation of Penalties PAGEREF _Toc427622266 \h 3-67Reduction of Interest PAGEREF _Toc427622267 \h 3-67Chapter 4 - Business Forms & Characteristics – Section 22 PAGEREF _Toc427622268 \h 4-69Sole Proprietorships PAGEREF _Toc427622269 \h 4-1Advantages PAGEREF _Toc427622270 \h 4-2Disadvantages PAGEREF _Toc427622271 \h 4-2Self-Employment Taxes PAGEREF _Toc427622272 \h 4-2Incorporation PAGEREF _Toc427622273 \h 4-3“S” Solution PAGEREF _Toc427622274 \h 4-3Estimated Tax Payments PAGEREF _Toc427622275 \h 4-3Partnerships PAGEREF _Toc427622276 \h 4-4Conduit Entity PAGEREF _Toc427622277 \h 4-4Advantages PAGEREF _Toc427622278 \h 4-4Disadvantages PAGEREF _Toc427622279 \h 4-5Husband-Wife Partnerships PAGEREF _Toc427622280 \h 4-5General Tax Aspects PAGEREF _Toc427622281 \h 4-5Limited Partnerships PAGEREF _Toc427622282 \h 4-6Passive Presumption PAGEREF _Toc427622283 \h 4-6At Risk Rules - §465 PAGEREF _Toc427622284 \h 4-6Financing PAGEREF _Toc427622285 \h 4-7Chapter 4 - Business Forms & Characteristics – Section 23 PAGEREF _Toc427622286 \h 4-10Passive Loss Limitations - §469 PAGEREF _Toc427622287 \h 4-10Active/Passive Determination PAGEREF _Toc427622288 \h 4-12Triggering Suspended Losses PAGEREF _Toc427622289 \h 4-12Limited Liability Companies PAGEREF _Toc427622290 \h 4-12Estates & Trusts PAGEREF _Toc427622291 \h 4-12Income Distribution PAGEREF _Toc427622292 \h 4-13Business Trusts PAGEREF _Toc427622293 \h 4-13Unincorporated Associations PAGEREF _Toc427622294 \h 4-13Corporate Treatment PAGEREF _Toc427622295 \h 4-14Corporation Defined PAGEREF _Toc427622296 \h 4-14Effect of State Laws PAGEREF _Toc427622297 \h 4-15Corporate Characteristics PAGEREF _Toc427622298 \h 4-15Partnership Determinations PAGEREF _Toc427622299 \h 4-15Trust Determinations PAGEREF _Toc427622300 \h 4-15Professional Associations PAGEREF _Toc427622301 \h 4-16Check-The-Box Regulations PAGEREF _Toc427622302 \h 4-16Subchapter S Corporations PAGEREF _Toc427622303 \h 4-17Ordinary “C” Corporations PAGEREF _Toc427622304 \h 4-18Advantages PAGEREF _Toc427622305 \h 4-18Disadvantages PAGEREF _Toc427622306 \h 4-19Personal Service Corporations PAGEREF _Toc427622307 \h 4-19Testing Period PAGEREF _Toc427622308 \h 4-19Personal Services PAGEREF _Toc427622309 \h 4-20Principal Activity PAGEREF _Toc427622310 \h 4-20Employee-Owner PAGEREF _Toc427622311 \h 4-20Independent Contractor PAGEREF _Toc427622312 \h 4-20Passive Loss Limitations PAGEREF _Toc427622313 \h 4-21Qualified Personal Service Corporation PAGEREF _Toc427622314 \h 4-21Federal Corporate Income Taxation Overview PAGEREF _Toc427622315 \h 4-22Corporate Tax Rates PAGEREF _Toc427622316 \h 4-22Tax Tables PAGEREF _Toc427622317 \h 4-22Old Law PAGEREF _Toc427622318 \h 4-23Surtax PAGEREF _Toc427622319 \h 4-23Reform Act of 1986 PAGEREF _Toc427622320 \h 4-23Phantom Bracket PAGEREF _Toc427622321 \h 4-23Current Rates PAGEREF _Toc427622322 \h 4-23Tax Return & Filing PAGEREF _Toc427622323 \h 4-24Alternative Minimum Tax PAGEREF _Toc427622324 \h 4-24Computation PAGEREF _Toc427622325 \h 4-24Regular Tax Deduction - §55(c) PAGEREF _Toc427622326 \h 4-25Tax Preferences & Adjustments PAGEREF _Toc427622327 \h 4-25Preferences & Adjustments for All Taxpayers PAGEREF _Toc427622328 \h 4-25Preferences & Adjustments for Noncorporate Taxpayers & Some Corporations PAGEREF _Toc427622329 \h 4-26Preferences & Adjustments for Corporations Only PAGEREF _Toc427622330 \h 4-26Adjustments - §56 PAGEREF _Toc427622331 \h 4-26Business Untaxed Reported Profits (Pre-1990) PAGEREF _Toc427622332 \h 4-26ACE Adjustment (Post-1989) PAGEREF _Toc427622333 \h 4-27Small Businesses AMT Exclusion PAGEREF _Toc427622334 \h 4-30Small Business Corporation PAGEREF _Toc427622335 \h 4-30Transition Rule PAGEREF _Toc427622336 \h 4-30Chapter 5 - Corporate Formation & Capitalization – Section 24 PAGEREF _Toc427622337 \h 5-32Incorporation - §351 PAGEREF _Toc427622338 \h 5-1Basic Requirements PAGEREF _Toc427622339 \h 5-1Corporate Nonrecognition PAGEREF _Toc427622340 \h 5-1Property PAGEREF _Toc427622341 \h 5-3Stock Solely For Services PAGEREF _Toc427622342 \h 5-3Impact on Recipient PAGEREF _Toc427622343 \h 5-3Impact on Other Shareholders PAGEREF _Toc427622344 \h 5-3Stock for Debt PAGEREF _Toc427622345 \h 5-3Stock PAGEREF _Toc427622346 \h 5-4Notes PAGEREF _Toc427622347 \h 5-4Control PAGEREF _Toc427622348 \h 5-4Property Basis PAGEREF _Toc427622349 \h 5-4Stock Basis PAGEREF _Toc427622350 \h 5-4Liabilities PAGEREF _Toc427622351 \h 5-5Miscellaneous Trade & Technical Corrections Act - §351 PAGEREF _Toc427622352 \h 5-5Recourse Liability PAGEREF _Toc427622353 \h 5-5Nonrecourse Liability PAGEREF _Toc427622354 \h 5-6Basis PAGEREF _Toc427622355 \h 5-6Incorporation of a Partnership PAGEREF _Toc427622356 \h 5-6Alternative #1 PAGEREF _Toc427622357 \h 5-6Alternative #2 PAGEREF _Toc427622358 \h 5-6Alternative #3 PAGEREF _Toc427622359 \h 5-7Tax Consequences - Alternative #1 PAGEREF _Toc427622360 \h 5-7Tax Consequences - Alternative #2 PAGEREF _Toc427622361 \h 5-8Tax Consequences - Alternative #3 PAGEREF _Toc427622362 \h 5-8Accounts Receivable PAGEREF _Toc427622363 \h 5-10Continuing Partnership PAGEREF _Toc427622364 \h 5-10Chapter 5 - Corporate Formation & Capitalization – Section 25 PAGEREF _Toc427622365 \h 5-13Section 1244 Stock PAGEREF _Toc427622366 \h 5-13Maximum Ordinary Loss PAGEREF _Toc427622367 \h 5-13Original Issuance PAGEREF _Toc427622368 \h 5-13Distributed Stock PAGEREF _Toc427622369 \h 5-13General Requirements PAGEREF _Toc427622370 \h 5-14Start-Up Expenses PAGEREF _Toc427622371 \h 5-14Covered Expenses PAGEREF _Toc427622372 \h 5-15Amortization PAGEREF _Toc427622373 \h 5-15Organizational Expenses PAGEREF _Toc427622374 \h 5-15Definition PAGEREF _Toc427622375 \h 5-16Stock Issuance & Syndication Expenses PAGEREF _Toc427622376 \h 5-16Amortization PAGEREF _Toc427622377 \h 5-16Start of Business PAGEREF _Toc427622378 \h 5-16Tax Recognition of the Corporate Entity PAGEREF _Toc427622379 \h 5-17Tax Criteria PAGEREF _Toc427622380 \h 5-17Nominee & Agency Corporations PAGEREF _Toc427622381 \h 5-17Having Income Attributed to the Corporation PAGEREF _Toc427622382 \h 5-17Section 482 Reallocation PAGEREF _Toc427622383 \h 5-17Corporation & Shareholder PAGEREF _Toc427622384 \h 5-18Goodwill PAGEREF _Toc427622385 \h 5-18Interest Free Loans PAGEREF _Toc427622386 \h 5-18Section 269A PAGEREF _Toc427622387 \h 5-18Capital Gains & Losses PAGEREF _Toc427622388 \h 5-19Net Capital Loss Carryovers & Carrybacks - §1212 PAGEREF _Toc427622389 \h 5-19S Corporation Status PAGEREF _Toc427622390 \h 5-20Asset Types PAGEREF _Toc427622391 \h 5-20Five-Step Characterization Process PAGEREF _Toc427622392 \h 5-20Netting Capital Gains PAGEREF _Toc427622393 \h 5-20Netting Section 1231 Gains (Losses) PAGEREF _Toc427622394 \h 5-21Character of Section 1231 Gains (Losses) PAGEREF _Toc427622395 \h 5-215 Year Averaging PAGEREF _Toc427622396 \h 5-21NOL Carryback & Carryover PAGEREF _Toc427622397 \h 5-21Temporary Extension of Carryback Period PAGEREF _Toc427622398 \h 5-22Loss Computation PAGEREF _Toc427622399 \h 5-22Deduction Computation PAGEREF _Toc427622400 \h 5-23Dividends Received Deduction PAGEREF _Toc427622401 \h 5-23Dividends from Domestic Corporations PAGEREF _Toc427622402 \h 5-2380% Exception PAGEREF _Toc427622403 \h 5-23Ownership PAGEREF _Toc427622404 \h 5-23Limitation PAGEREF _Toc427622405 \h 5-24Denial of Deduction PAGEREF _Toc427622406 \h 5-24Debt-Financed Portfolio Stock PAGEREF _Toc427622407 \h 5-24Property Dividends PAGEREF _Toc427622408 \h 5-24Change to Holding Period PAGEREF _Toc427622409 \h 5-25Chapter 5 - Corporate Formation & Capitalization – Section 26 PAGEREF _Toc427622410 \h 5-27Charitable Contributions PAGEREF _Toc427622411 \h 5-27Timing of Deduction PAGEREF _Toc427622412 \h 5-27Limitation PAGEREF _Toc427622413 \h 5-27Carryover of Excess Contribution PAGEREF _Toc427622414 \h 5-28Charitable Contributions of Computer Equipment - Expired PAGEREF _Toc427622415 \h 5-28Collapsible Corporations - §341 (Repealed) PAGEREF _Toc427622416 \h 5-28Definition PAGEREF _Toc427622417 \h 5-28Presumption PAGEREF _Toc427622418 \h 5-29Covered Transactions PAGEREF _Toc427622419 \h 5-29Personal Holding Companies - §541 PAGEREF _Toc427622420 \h 5-29Penalty Tax PAGEREF _Toc427622421 \h 5-30Professional Corporations PAGEREF _Toc427622422 \h 5-30Named Professionals PAGEREF _Toc427622423 \h 5-30Avoidance of PHC Status PAGEREF _Toc427622424 \h 5-30Accumulated Earnings Tax Trap - §531 PAGEREF _Toc427622425 \h 5-31Imposition of Penalty Tax PAGEREF _Toc427622426 \h 5-31Computation PAGEREF _Toc427622427 \h 5-31Accumulated Earnings Credit PAGEREF _Toc427622428 \h 5-32Application of Credit to Controlled Groups PAGEREF _Toc427622429 \h 5-32Reasonable Accumulations PAGEREF _Toc427622430 \h 5-32Working Capital PAGEREF _Toc427622431 \h 5-32Service Corporations PAGEREF _Toc427622432 \h 5-33Minority Stock Redemptions PAGEREF _Toc427622433 \h 5-33Majority Stock Redemptions PAGEREF _Toc427622434 \h 5-33Stockholder Harmony PAGEREF _Toc427622435 \h 5-33Tax Exempt Income PAGEREF _Toc427622436 \h 5-34Chapter 5 - Corporate Formation & Capitalization – Section 27 PAGEREF _Toc427622437 \h 5-36Accounting Periods & Methods PAGEREF _Toc427622438 \h 5-36Accounting Periods PAGEREF _Toc427622439 \h 5-36Section 444 Election PAGEREF _Toc427622440 \h 5-36Business Purpose Tax Year PAGEREF _Toc427622441 \h 5-3725% Test PAGEREF _Toc427622442 \h 5-37Length of Accounting Period PAGEREF _Toc427622443 \h 5-38Short Tax Year PAGEREF _Toc427622444 \h 5-38Not in Existence Entire Year PAGEREF _Toc427622445 \h 5-38Change in Accounting Period PAGEREF _Toc427622446 \h 5-39Election of Accounting Period PAGEREF _Toc427622447 \h 5-39Changing Accounting Periods PAGEREF _Toc427622448 \h 5-39Changes Without IRS Consent PAGEREF _Toc427622449 \h 5-39Accounting Methods PAGEREF _Toc427622450 \h 5-40Methods Available PAGEREF _Toc427622451 \h 5-40Cash Method PAGEREF _Toc427622452 \h 5-40Limitation PAGEREF _Toc427622453 \h 5-40R.P. 2011-14 PAGEREF _Toc427622454 \h 5-41Accrual Method PAGEREF _Toc427622455 \h 5-41Economic Performance Rule PAGEREF _Toc427622456 \h 5-41Special Methods PAGEREF _Toc427622457 \h 5-42Combination (Hybrid) Method PAGEREF _Toc427622458 \h 5-42Changing the Accounting Method PAGEREF _Toc427622459 \h 5-42Inventories PAGEREF _Toc427622460 \h 5-43Identification Methods PAGEREF _Toc427622461 \h 5-43Specific Identification Method PAGEREF _Toc427622462 \h 5-43FIFO Method PAGEREF _Toc427622463 \h 5-43LIFO Method PAGEREF _Toc427622464 \h 5-43Valuation Methods PAGEREF _Toc427622465 \h 5-44Cost Method PAGEREF _Toc427622466 \h 5-44Uniform Capitalization Rules - §263A PAGEREF _Toc427622467 \h 5-45Lower of Cost or Market Method PAGEREF _Toc427622468 \h 5-45Multiple Corporations PAGEREF _Toc427622469 \h 5-45Controlled Group Restrictions PAGEREF _Toc427622470 \h 5-46Definition PAGEREF _Toc427622471 \h 5-46Parent-Subsidiary Groups PAGEREF _Toc427622472 \h 5-46Brother-Sister Groups PAGEREF _Toc427622473 \h 5-47Consolidated Returns PAGEREF _Toc427622474 \h 5-47Definition PAGEREF _Toc427622475 \h 5-47Corporate Liquidations & Distributions PAGEREF _Toc427622476 \h 5-47The Old General Utilities Doctrine PAGEREF _Toc427622477 \h 5-48Loss Limitations PAGEREF _Toc427622478 \h 5-48Chapter 6 - Corporate Principals & Employees – Section 28 PAGEREF _Toc427622479 \h 6-1Employee Status of Active Shareholders PAGEREF _Toc427622480 \h 6-2Payroll Taxes PAGEREF _Toc427622481 \h 6-2Form 941 PAGEREF _Toc427622482 \h 6-2Deposit Rules PAGEREF _Toc427622483 \h 6-3Lookback Period PAGEREF _Toc427622484 \h 6-3Monthly Depositor PAGEREF _Toc427622485 \h 6-3Semi-Weekly Depositor PAGEREF _Toc427622486 \h 6-3One-Day Rule PAGEREF _Toc427622487 \h 6-4De Minimis Rule PAGEREF _Toc427622488 \h 6-4Form W-4 PAGEREF _Toc427622489 \h 6-6Whistle-Blowing PAGEREF _Toc427622490 \h 6-6Form W-2 PAGEREF _Toc427622491 \h 6-6Form W-3 PAGEREF _Toc427622492 \h 6-7Social Security’s Payroll Tax or FICA - §3111 & §3121 PAGEREF _Toc427622493 \h 6-7Rates PAGEREF _Toc427622494 \h 6-8Deduction PAGEREF _Toc427622495 \h 6-8Federal Unemployment (FUTA) Tax - §3302 PAGEREF _Toc427622496 \h 6-8Form 940 PAGEREF _Toc427622497 \h 6-9Employee Labor Laws PAGEREF _Toc427622498 \h 6-9Minimum Wage Requirement PAGEREF _Toc427622499 \h 6-9Overtime PAGEREF _Toc427622500 \h 6-9Fair Employment Laws PAGEREF _Toc427622501 \h 6-10Child Labor Laws PAGEREF _Toc427622502 \h 6-10Immigration Law PAGEREF _Toc427622503 \h 6-10Workers’ Compensation Insurance PAGEREF _Toc427622504 \h 6-10State Disability Insurance (SDI) PAGEREF _Toc427622505 \h 6-10OSHA PAGEREF _Toc427622506 \h 6-10Employee vs. Contractor Status PAGEREF _Toc427622507 \h 6-11Factors PAGEREF _Toc427622508 \h 6-11Unreasonable Compensation PAGEREF _Toc427622509 \h 6-13Overall Limitation PAGEREF _Toc427622510 \h 6-13Allowance of Deduction PAGEREF _Toc427622511 \h 6-13Limitation on Accrual Deduction PAGEREF _Toc427622512 \h 6-13Employment Contracts PAGEREF _Toc427622513 \h 6-13Scope of Examination PAGEREF _Toc427622514 \h 6-13Factors PAGEREF _Toc427622515 \h 6-14Employee’s Qualifications PAGEREF _Toc427622516 \h 6-14Size of the Business PAGEREF _Toc427622517 \h 6-14Employee’s Compensation History PAGEREF _Toc427622518 \h 6-14Unreasonably Low Salaries PAGEREF _Toc427622519 \h 6-14Services Performed by the Employee PAGEREF _Toc427622520 \h 6-14Past Service PAGEREF _Toc427622521 \h 6-15Reasonable Dividends PAGEREF _Toc427622522 \h 6-15Bonuses as Constituting Dividends PAGEREF _Toc427622523 \h 6-15Payback Agreements PAGEREF _Toc427622524 \h 6-15Miscellaneous Factors PAGEREF _Toc427622525 \h 6-16Income Splitting PAGEREF _Toc427622526 \h 6-16Gift & Redemption PAGEREF _Toc427622527 \h 6-16Hire the Kids PAGEREF _Toc427622528 \h 6-16Chapter 6 - Corporate Principals & Employees – Section 29 PAGEREF _Toc427622529 \h 6-18Buy Sell Agreements PAGEREF _Toc427622530 \h 6-18Definition PAGEREF _Toc427622531 \h 6-18Professional Corporations PAGEREF _Toc427622532 \h 6-18Marketability Problems PAGEREF _Toc427622533 \h 6-18Controlled Disposition PAGEREF _Toc427622534 \h 6-19Entity & Cross Purchase Agreements PAGEREF _Toc427622535 \h 6-19Stepped-Up Basis PAGEREF _Toc427622536 \h 6-19Resulting Equity Ownership PAGEREF _Toc427622537 \h 6-19Attribution & Constructive Ownership Rules PAGEREF _Toc427622538 \h 6-19Estate Tax Valuation PAGEREF _Toc427622539 \h 6-20Using the Buy Sell Agreement to Set Value PAGEREF _Toc427622540 \h 6-22Section 2703 Restrictions PAGEREF _Toc427622541 \h 6-22Exceptions to §2703 PAGEREF _Toc427622542 \h 6-22Arm’s Length Bargain PAGEREF _Toc427622543 \h 6-23Enforcement of Contract Price PAGEREF _Toc427622544 \h 6-23Joint Ownership PAGEREF _Toc427622545 \h 6-23Funding the Buy-Sell Agreement PAGEREF _Toc427622546 \h 6-23Term vs. Whole Life PAGEREF _Toc427622547 \h 6-24Policy Ownership PAGEREF _Toc427622548 \h 6-24Premium Payment PAGEREF _Toc427622549 \h 6-24Purchase Price PAGEREF _Toc427622550 \h 6-24S Corporations PAGEREF _Toc427622551 \h 6-25Sole Shareholder Planning PAGEREF _Toc427622552 \h 6-25Complete Liquidations PAGEREF _Toc427622553 \h 6-25Alternative Dispositions PAGEREF _Toc427622554 \h 6-26Use of Life Insurance PAGEREF _Toc427622555 \h 6-26Estate Valuation PAGEREF _Toc427622556 \h 6-26One-Way Buy-Outs PAGEREF _Toc427622557 \h 6-26Recapitalization PAGEREF _Toc427622558 \h 6-27In General PAGEREF _Toc427622559 \h 6-27Valuation of Stock PAGEREF _Toc427622560 \h 6-27Estate Freeze Provisions PAGEREF _Toc427622561 \h 6-27Stock Dividends PAGEREF _Toc427622562 \h 6-28Section 306 Tainted Stocks PAGEREF _Toc427622563 \h 6-28§306 Exceptions PAGEREF _Toc427622564 \h 6-28Chapter 7 - Basic Fringe Benefits - Section 30 PAGEREF _Toc427622565 \h 7-1Concept PAGEREF _Toc427622566 \h 7-2Definition of Income - §61 PAGEREF _Toc427622567 \h 7-2Deductions without Taxable Income PAGEREF _Toc427622568 \h 7-2Types of Benefits PAGEREF _Toc427622569 \h 7-2Old Dichotomy - Statutory v. Nonstatutory PAGEREF _Toc427622570 \h 7-2Fringe Benefit Provisions PAGEREF _Toc427622571 \h 7-2TRA ‘84 - §132 PAGEREF _Toc427622572 \h 7-2Discrimination PAGEREF _Toc427622573 \h 7-3Only Statutory Benefits PAGEREF _Toc427622574 \h 7-3No-Additional-Cost Services - §132(b) PAGEREF _Toc427622575 \h 7-3Covered Employees PAGEREF _Toc427622576 \h 7-3Line of Business Requirement PAGEREF _Toc427622577 \h 7-4Definition PAGEREF _Toc427622578 \h 7-4Qualified Employee Discounts - §132(c) PAGEREF _Toc427622579 \h 7-4Manner of Discount PAGEREF _Toc427622580 \h 7-4Real Estate & Investment Property Exclusion PAGEREF _Toc427622581 \h 7-4Amount of Discount PAGEREF _Toc427622582 \h 7-5Working Condition Fringes - §132(d) PAGEREF _Toc427622583 \h 7-5Covered Employees PAGEREF _Toc427622584 \h 7-5Exceptions PAGEREF _Toc427622585 \h 7-5Substantiation PAGEREF _Toc427622586 \h 7-6De Minimis Fringes - §132(e) PAGEREF _Toc427622587 \h 7-6Subsidized Eating Facilities PAGEREF _Toc427622588 \h 7-6Employee Achievement Awards - §74(c) & §274(j) PAGEREF _Toc427622589 \h 7-6Exclusion PAGEREF _Toc427622590 \h 7-6Definition of Employee Achievement Awards PAGEREF _Toc427622591 \h 7-7Qualified Plan Award PAGEREF _Toc427622592 \h 7-7Employer Deduction Limits PAGEREF _Toc427622593 \h 7-8Aggregation Limit PAGEREF _Toc427622594 \h 7-8Special Partnership Rule PAGEREF _Toc427622595 \h 7-8Employee Impact PAGEREF _Toc427622596 \h 7-8Group Term Life Insurance - §79 PAGEREF _Toc427622597 \h 7-8Chapter 7 - Basic Fringe Benefits - Section 31 PAGEREF _Toc427622598 \h 7-10Dependent Care Assistance - §129 PAGEREF _Toc427622599 \h 7-10Amount of Assistance PAGEREF _Toc427622600 \h 7-10Requirements PAGEREF _Toc427622601 \h 7-10Conflict with Dependent Care PAGEREF _Toc427622602 \h 7-11Cafeteria Plans - §125 PAGEREF _Toc427622603 \h 7-11Definition PAGEREF _Toc427622604 \h 7-11Qualified Benefits PAGEREF _Toc427622605 \h 7-11Non-Qualified Benefits PAGEREF _Toc427622606 \h 7-11Controlled Group Rules PAGEREF _Toc427622607 \h 7-12Salary Reduction Plans PAGEREF _Toc427622608 \h 7-12Nondiscrimination PAGEREF _Toc427622609 \h 7-12Meals & Lodging - §119 PAGEREF _Toc427622610 \h 7-12Income Exclusion PAGEREF _Toc427622611 \h 7-12Convenience of Employer PAGEREF _Toc427622612 \h 7-13Self-Insured Medical Reimbursement Plans - §105 PAGEREF _Toc427622613 \h 7-13Allowable Expenses PAGEREF _Toc427622614 \h 7-13Requirements PAGEREF _Toc427622615 \h 7-13Benefits PAGEREF _Toc427622616 \h 7-13Exposure PAGEREF _Toc427622617 \h 7-14Employee Educational Assistance Programs - §127 PAGEREF _Toc427622618 \h 7-14Employer Provided Automobile - §61 & §132 PAGEREF _Toc427622619 \h 7-14General Valuation Method PAGEREF _Toc427622620 \h 7-14Annual Lease Value Method PAGEREF _Toc427622621 \h 7-14Computation PAGEREF _Toc427622622 \h 7-16Cents Per Mile Method PAGEREF _Toc427622623 \h 7-16Commuting Value Method PAGEREF _Toc427622624 \h 7-16Interest Free & Below-Market Loans - §7872 PAGEREF _Toc427622625 \h 7-16Permissible Discrimination PAGEREF _Toc427622626 \h 7-17Employee Needs PAGEREF _Toc427622627 \h 7-17Imputed Interest PAGEREF _Toc427622628 \h 7-17Types of Loans PAGEREF _Toc427622629 \h 7-18Demand Loans PAGEREF _Toc427622630 \h 7-18Term Loans PAGEREF _Toc427622631 \h 7-18Application of §7872 and Rate Determinations PAGEREF _Toc427622632 \h 7-18Summary PAGEREF _Toc427622633 \h 7-19Moving Expenses - §217 PAGEREF _Toc427622634 \h 7-19Employer-Provided Retirement Advice & Planning - §132 PAGEREF _Toc427622635 \h 7-19Financial Planning - §67 & §212 PAGEREF _Toc427622636 \h 7-19Popularity PAGEREF _Toc427622637 \h 7-20Taxation PAGEREF _Toc427622638 \h 7-20Tax Planning - §67 & §212 PAGEREF _Toc427622639 \h 7-20Taxation PAGEREF _Toc427622640 \h 7-20Estate Planning - §67 & §212 PAGEREF _Toc427622641 \h 7-21Death Benefit Payment - §101(b) Repealed PAGEREF _Toc427622642 \h 7-21Physical Fitness Programs - §132(h)(5) PAGEREF _Toc427622643 \h 7-21Home Office - §280A PAGEREF _Toc427622644 \h 7-21Carryforward PAGEREF _Toc427622645 \h 7-21Renting Space to Employer PAGEREF _Toc427622646 \h 7-22Fringe Benefit Plans for S Corporations PAGEREF _Toc427622647 \h 7-22Insurance PAGEREF _Toc427622648 \h 7-22Basis PAGEREF _Toc427622649 \h 7-22Permanent Policies PAGEREF _Toc427622650 \h 7-22Effect of Premium Payment PAGEREF _Toc427622651 \h 7-23Key Employee Insurance PAGEREF _Toc427622652 \h 7-23Medical Insurance PAGEREF _Toc427622653 \h 7-23Retirement Plans PAGEREF _Toc427622654 \h 7-23Summary PAGEREF _Toc427622655 \h 7-23ERISA Compliance PAGEREF _Toc427622656 \h 7-23Welfare Plans PAGEREF _Toc427622657 \h 7-24Additional Requirements PAGEREF _Toc427622658 \h 7-24Chapter 8 - Business Entertainment - Section 32 PAGEREF _Toc427622659 \h 8-1Definition PAGEREF _Toc427622660 \h 8-2Lavish or Extravagant Restriction PAGEREF _Toc427622661 \h 8-2Ordinary & Necessary Requirement PAGEREF _Toc427622662 \h 8-2Directly Related Test PAGEREF _Toc427622663 \h 8-5Clear Business Setting Presumption PAGEREF _Toc427622664 \h 8-5Associated Test PAGEREF _Toc427622665 \h 8-5Substantial Business Discussion PAGEREF _Toc427622666 \h 8-6Timing PAGEREF _Toc427622667 \h 8-6Conventions PAGEREF _Toc427622668 \h 8-6Statutory Exceptions PAGEREF _Toc427622669 \h 8-6Food and Beverages for Employees PAGEREF _Toc427622670 \h 8-6Expenses Treated as Compensation PAGEREF _Toc427622671 \h 8-6Reimbursed Expenses PAGEREF _Toc427622672 \h 8-7Recreational Expenses for Employees PAGEREF _Toc427622673 \h 8-7Employee, Stockholder and Business Meetings PAGEREF _Toc427622674 \h 8-7Trade Association Meetings PAGEREF _Toc427622675 \h 8-7Items Available to Public PAGEREF _Toc427622676 \h 8-7Entertainment Sold to Customers PAGEREF _Toc427622677 \h 8-7Expenses Includible in Income of Non-employees PAGEREF _Toc427622678 \h 8-7Quiet Business Meals & Drinks PAGEREF _Toc427622679 \h 8-8Taxpayer's (or Employee) Presence PAGEREF _Toc427622680 \h 8-8Section 212 Meals Not Deductible PAGEREF _Toc427622681 \h 8-8Home Entertainment PAGEREF _Toc427622682 \h 8-8Ticket Purchases PAGEREF _Toc427622683 \h 8-8Exception for Charitable Sports Events PAGEREF _Toc427622684 \h 8-8Special Limitation for Skyboxes PAGEREF _Toc427622685 \h 8-9Percentage Reduction for Meals & Entertainment PAGEREF _Toc427622686 \h 8-9Related Expenses PAGEREF _Toc427622687 \h 8-9Application of Reduction Rule PAGEREF _Toc427622688 \h 8-9Exceptions PAGEREF _Toc427622689 \h 8-102% Floor on Employee Business Expenses PAGEREF _Toc427622690 \h 8-10Miscellaneous Itemized Deductions PAGEREF _Toc427622691 \h 8-10Entertainment Facilities PAGEREF _Toc427622692 \h 8-11Exceptions PAGEREF _Toc427622693 \h 8-11Covered Expenses PAGEREF _Toc427622694 \h 8-12Club Dues PAGEREF _Toc427622695 \h 8-12OBRA '93 PAGEREF _Toc427622696 \h 8-13Sales Incentive Awards PAGEREF _Toc427622697 \h 8-13Chapter 8 - Business Entertainment - Section 33 PAGEREF _Toc427622698 \h 8-15Substantiation & Record Keeping PAGEREF _Toc427622699 \h 8-15Documentation PAGEREF _Toc427622700 \h 8-15Contemporaneous Records PAGEREF _Toc427622701 \h 8-15Payback Agreements PAGEREF _Toc427622702 \h 8-15Employee Expense Reimbursement & Reporting PAGEREF _Toc427622703 \h 8-16Family Support Act of 1988 PAGEREF _Toc427622704 \h 8-17Remaining Above-The-Line Deductions PAGEREF _Toc427622705 \h 8-17Accountable Plans PAGEREF _Toc427622706 \h 8-18Reasonable Period of Time PAGEREF _Toc427622707 \h 8-18Fixed Date Safe Harbor PAGEREF _Toc427622708 \h 8-18Period Statement Safe Harbor PAGEREF _Toc427622709 \h 8-18Adequate Accounting PAGEREF _Toc427622710 \h 8-19Per Diem Allowance Arrangements PAGEREF _Toc427622711 \h 8-19Federal Per Diem Rate PAGEREF _Toc427622712 \h 8-19Related Employer PAGEREF _Toc427622713 \h 8-23Meal Break Out PAGEREF _Toc427622714 \h 8-23Partial Days of Travel PAGEREF _Toc427622715 \h 8-23Usage & Consistency PAGEREF _Toc427622716 \h 8-23Unproven or Unspent Per Diem Allowances PAGEREF _Toc427622717 \h 8-24Travel Advance PAGEREF _Toc427622718 \h 8-24Reporting Per Diem Allowances PAGEREF _Toc427622719 \h 8-24Reimbursement Not More Than Federal Rate PAGEREF _Toc427622720 \h 8-24Reimbursement More Than Federal Rate PAGEREF _Toc427622721 \h 8-25Nonaccountable Plans PAGEREF _Toc427622722 \h 8-27Non-Reimbursed Employee Expenses PAGEREF _Toc427622723 \h 8-28When an Employee Needs to File Form 2106 PAGEREF _Toc427622724 \h 8-28Self-Employed Persons PAGEREF _Toc427622725 \h 8-28Expenses Related to Taxpayer's Business PAGEREF _Toc427622726 \h 8-28Expenses Incurred on Behalf of a Client & Reimbursed PAGEREF _Toc427622727 \h 8-29Meal & Entertainment Expenses PAGEREF _Toc427622728 \h 8-29With Adequate Accounting PAGEREF _Toc427622729 \h 8-29Without Adequate Accounting PAGEREF _Toc427622730 \h 8-29Non-Entertainment Expense Deduction PAGEREF _Toc427622731 \h 8-30Employers PAGEREF _Toc427622732 \h 8-31When Can an Expense Be Deducted? PAGEREF _Toc427622733 \h 8-31Economic Performance Rule PAGEREF _Toc427622734 \h 8-31Corporation PAGEREF _Toc427622735 \h 8-31Nondeductible Meals PAGEREF _Toc427622736 \h 8-31Employer Provided Auto PAGEREF _Toc427622737 \h 8-32Chapter 9 – Insurance – Section 34 PAGEREF _Toc427622738 \h 9-1Company Paid Insurance PAGEREF _Toc427622739 \h 9-2Popularity PAGEREF _Toc427622740 \h 9-2Types of Life Insurance PAGEREF _Toc427622741 \h 9-3Group Term Life PAGEREF _Toc427622742 \h 9-3Requirements PAGEREF _Toc427622743 \h 9-3“Key Employee” Defined PAGEREF _Toc427622744 \h 9-3Popularity and Application PAGEREF _Toc427622745 \h 9-4Coverage & Premiums PAGEREF _Toc427622746 \h 9-4Medical Examination PAGEREF _Toc427622747 \h 9-6Regulations PAGEREF _Toc427622748 \h 9-6Spouse & Dependent Insurance PAGEREF _Toc427622749 \h 9-6Computation PAGEREF _Toc427622750 \h 9-6Tax Liability PAGEREF _Toc427622751 \h 9-7Reporting PAGEREF _Toc427622752 \h 9-7Discrimination PAGEREF _Toc427622753 \h 9-7Eligibility & Benefits PAGEREF _Toc427622754 \h 9-7Excluded Employees PAGEREF _Toc427622755 \h 9-7Policy Requirements PAGEREF _Toc427622756 \h 9-8Ten Employee Rule PAGEREF _Toc427622757 \h 9-8Less Than Ten Employees PAGEREF _Toc427622758 \h 9-8Permanent Benefits PAGEREF _Toc427622759 \h 9-9Nondiscrimination Requirements PAGEREF _Toc427622760 \h 9-9Retired Lives Reserve PAGEREF _Toc427622761 \h 9-9Revenue Ruling 68-577 PAGEREF _Toc427622762 \h 9-9Taxation PAGEREF _Toc427622763 \h 9-10Advantages PAGEREF _Toc427622764 \h 9-10Comparison With Other Programs PAGEREF _Toc427622765 \h 9-10Executive Bonus PAGEREF _Toc427622766 \h 9-10Split Dollar PAGEREF _Toc427622767 \h 9-11Disadvantages PAGEREF _Toc427622768 \h 9-11Reserve Account PAGEREF _Toc427622769 \h 9-11Revenue Rulings PAGEREF _Toc427622770 \h 9-11Qualified Trusts PAGEREF _Toc427622771 \h 9-12Nonqualified Trusts PAGEREF _Toc427622772 \h 9-12Deductibility of Contributions PAGEREF _Toc427622773 \h 9-12Separate Account for Key Employees PAGEREF _Toc427622774 \h 9-12Disqualified Benefit PAGEREF _Toc427622775 \h 9-12Effective Date PAGEREF _Toc427622776 \h 9-13Revenue Procedure 93-3 PAGEREF _Toc427622777 \h 9-13Estate Planning Considerations PAGEREF _Toc427622778 \h 9-13Policy Assignments PAGEREF _Toc427622779 \h 9-13Chapter 9 – Insurance – Section 35 PAGEREF _Toc427622780 \h 9-17Split Dollar Life PAGEREF _Toc427622781 \h 9-17Low Cost Term Insurance PAGEREF _Toc427622782 \h 9-17Regulatory Requirements PAGEREF _Toc427622783 \h 9-17Taxation PAGEREF _Toc427622784 \h 9-17Revenue Ruling 64-328 PAGEREF _Toc427622785 \h 9-18Johnson Case PAGEREF _Toc427622786 \h 9-18Business Travel Accident Insurance PAGEREF _Toc427622787 \h 9-20Medical & Dental Insurance PAGEREF _Toc427622788 \h 9-20Premiums PAGEREF _Toc427622789 \h 9-20Disability Income Insurance PAGEREF _Toc427622790 \h 9-20Interest Limitation on Policy Loans - §264A PAGEREF _Toc427622791 \h 9-21Disallowance of Interest Deduction PAGEREF _Toc427622792 \h 9-21Impact PAGEREF _Toc427622793 \h 9-21Limit on Deductibility of Premiums & Interest PAGEREF _Toc427622794 \h 9-21Key Person Life Insurance PAGEREF _Toc427622795 \h 9-22Closely Held Corporations PAGEREF _Toc427622796 \h 9-22Sole Shareholder Applications PAGEREF _Toc427622797 \h 9-22Application of AMT PAGEREF _Toc427622798 \h 9-23COBRA PAGEREF _Toc427622799 \h 9-23Affected Employers PAGEREF _Toc427622800 \h 9-23VEBAs - §501(c)(9) Trusts PAGEREF _Toc427622801 \h 9-24Section 419 PAGEREF _Toc427622802 \h 9-24Self Insurance PAGEREF _Toc427622803 \h 9-24Severance Pay PAGEREF _Toc427622804 \h 9-24Post-Retirement Medical Benefits PAGEREF _Toc427622805 \h 9-25VEBA Taxation on Earnings PAGEREF _Toc427622806 \h 9-25Nondiscrimination Rules Applied PAGEREF _Toc427622807 \h 9-25Uniform Application PAGEREF _Toc427622808 \h 9-25Controlled Groups PAGEREF _Toc427622809 \h 9-25Termination PAGEREF _Toc427622810 \h 9-26Disqualified Benefits PAGEREF _Toc427622811 \h 9-26Conclusion PAGEREF _Toc427622812 \h 9-26Chapter 10 - Nonqualified Deferred Compensation – Section 36 PAGEREF _Toc427622813 \h 10-1Postponement of Income PAGEREF _Toc427622814 \h 10-2Advantages PAGEREF _Toc427622815 \h 10-2IRS Scrutiny & Approval PAGEREF _Toc427622816 \h 10-2Nondiscrimination PAGEREF _Toc427622817 \h 10-2ERISA PAGEREF _Toc427622818 \h 10-2Funding PAGEREF _Toc427622819 \h 10-2No Immediate Cash Outlay PAGEREF _Toc427622820 \h 10-3Annual Report PAGEREF _Toc427622821 \h 10-3Notice Requirement PAGEREF _Toc427622822 \h 10-3Purposes & Benefits PAGEREF _Toc427622823 \h 10-3Benefit Formula PAGEREF _Toc427622824 \h 10-3Incentive PAGEREF _Toc427622825 \h 10-3Deferred Bonuses PAGEREF _Toc427622826 \h 10-4Contractual Arrangement PAGEREF _Toc427622827 \h 10-4Necessary Provisions PAGEREF _Toc427622828 \h 10-4Tax Status PAGEREF _Toc427622829 \h 10-4Service’s Position PAGEREF _Toc427622830 \h 10-4Rationale PAGEREF _Toc427622831 \h 10-5Congressional Moratorium PAGEREF _Toc427622832 \h 10-5No Ruling or Regulation Policy PAGEREF _Toc427622833 \h 10-6Constructive Receipt PAGEREF _Toc427622834 \h 10-6Beyond Actual Receipt PAGEREF _Toc427622835 \h 10-6Simple Set-Asides Are Not Possible PAGEREF _Toc427622836 \h 10-6Revenue Ruling 60-31 PAGEREF _Toc427622837 \h 10-6Regulations PAGEREF _Toc427622838 \h 10-6Time & Control Concept PAGEREF _Toc427622839 \h 10-7Control PAGEREF _Toc427622840 \h 10-7Timing PAGEREF _Toc427622841 \h 10-7After-the-Fact Contract PAGEREF _Toc427622842 \h 10-8Amendment to Existing Contract PAGEREF _Toc427622843 \h 10-8Economic Benefit PAGEREF _Toc427622844 \h 10-8Has Something of Value Been Transferred? PAGEREF _Toc427622845 \h 10-8Insurance Coverage Has a Calculable Value PAGEREF _Toc427622846 \h 10-8Segregated Funds Have Immediate Economic Value PAGEREF _Toc427622847 \h 10-9Value v. Control PAGEREF _Toc427622848 \h 10-9Revenue Ruling 60-31 PAGEREF _Toc427622849 \h 10-9Situation 1 PAGEREF _Toc427622850 \h 10-9Situation 2 PAGEREF _Toc427622851 \h 10-9Situation 3 PAGEREF _Toc427622852 \h 10-10Situation 4 PAGEREF _Toc427622853 \h 10-10Situation 5 PAGEREF _Toc427622854 \h 10-10General Principles PAGEREF _Toc427622855 \h 10-11Chapter 10 - Nonqualified Deferred Compensation – Section 37 PAGEREF _Toc427622856 \h 10-14Unfunded Bare Contractual Promise Plan - Type I PAGEREF _Toc427622857 \h 10-14Risk PAGEREF _Toc427622858 \h 10-14Funded Company Account Plan - Type II PAGEREF _Toc427622859 \h 10-16Ownership & Segregation PAGEREF _Toc427622860 \h 10-16Bookkeeping Reserve or Separate Account PAGEREF _Toc427622861 \h 10-16Employee Still Bears Economic Risk PAGEREF _Toc427622862 \h 10-17Limited Protection PAGEREF _Toc427622863 \h 10-17Investment of Deferred Amounts PAGEREF _Toc427622864 \h 10-17Life Insurance PAGEREF _Toc427622865 \h 10-18Premiums PAGEREF _Toc427622866 \h 10-18Third Party Guarantees PAGEREF _Toc427622867 \h 10-19Segregated Asset Plan - Type III PAGEREF _Toc427622868 \h 10-19Section 83 Approach PAGEREF _Toc427622869 \h 10-20Tight Rope Format PAGEREF _Toc427622870 \h 10-20Transferable or Not Subject To A Risk of Substantial Forfeiture PAGEREF _Toc427622871 \h 10-20Substantial Restrictions PAGEREF _Toc427622872 \h 10-21Redemption or Forfeiture PAGEREF _Toc427622873 \h 10-21Condition Related to a Purpose of the Transfer PAGEREF _Toc427622874 \h 10-21Noncompetition PAGEREF _Toc427622875 \h 10-21Consultation PAGEREF _Toc427622876 \h 10-22Time Alone is Not Enough PAGEREF _Toc427622877 \h 10-22Realization & Taxation PAGEREF _Toc427622878 \h 10-2230-Day Election Period PAGEREF _Toc427622879 \h 10-22Deduction Allowed PAGEREF _Toc427622880 \h 10-22Timing PAGEREF _Toc427622881 \h 10-22Withholding PAGEREF _Toc427622882 \h 10-23Tax Consequences PAGEREF _Toc427622883 \h 10-23Reciprocal Taxation/Deduction Rule PAGEREF _Toc427622884 \h 10-23No Difference for Cash or Accrual PAGEREF _Toc427622885 \h 10-24Separate Accounts for Two or More Participants PAGEREF _Toc427622886 \h 10-24Employer Deduction Traps PAGEREF _Toc427622887 \h 10-24Income Tax on Employer Held Assets PAGEREF _Toc427622888 \h 10-24Inclusion in Income Under §409A PAGEREF _Toc427622889 \h 10-25State Tax Issues PAGEREF _Toc427622890 \h 10-26Accounting PAGEREF _Toc427622891 \h 10-26Two Sets of Rules PAGEREF _Toc427622892 \h 10-26Financial Accounting Rules PAGEREF _Toc427622893 \h 10-26IRS Rules PAGEREF _Toc427622894 \h 10-27Estate Planning Considerations PAGEREF _Toc427622895 \h 10-27Death During Deferral PAGEREF _Toc427622896 \h 10-27Income Tax Consequences PAGEREF _Toc427622897 \h 10-28Estate Tax Consequences PAGEREF _Toc427622898 \h 10-28Gift Tax Consequences PAGEREF _Toc427622899 \h 10-28Withholding, Social Security & IRA’s PAGEREF _Toc427622900 \h 10-28Other Payroll Taxes PAGEREF _Toc427622901 \h 10-29Social Security Benefits PAGEREF _Toc427622902 \h 10-29IRA’s PAGEREF _Toc427622903 \h 10-29Chapter 11 - S Corporations – Section 38 PAGEREF _Toc427622904 \h 11-1Introduction PAGEREF _Toc427622905 \h 11-2Advantages PAGEREF _Toc427622906 \h 11-2Planning PAGEREF _Toc427622907 \h 11-3Disadvantages PAGEREF _Toc427622908 \h 11-5Becoming an S Corporation PAGEREF _Toc427622909 \h 11-5S Corporation Status PAGEREF _Toc427622910 \h 11-8Number of Shareholders PAGEREF _Toc427622911 \h 11-8Individuals Only PAGEREF _Toc427622912 \h 11-8Estates PAGEREF _Toc427622913 \h 11-8Grantor Trusts PAGEREF _Toc427622914 \h 11-8Voting Trusts PAGEREF _Toc427622915 \h 11-8Testamentary Trust PAGEREF _Toc427622916 \h 11-9Qualifying Simple Trusts PAGEREF _Toc427622917 \h 11-9Electing Small Business Trusts PAGEREF _Toc427622918 \h 11-9Aliens PAGEREF _Toc427622919 \h 11-10C Corporations PAGEREF _Toc427622920 \h 11-10Tax-Exempt Entities PAGEREF _Toc427622921 \h 11-10Exception for S Corporation ESOP - §512 PAGEREF _Toc427622922 \h 11-10One Class of Stock PAGEREF _Toc427622923 \h 11-10Affiliated Groups & Subsidiaries PAGEREF _Toc427622924 \h 11-12Prior Law PAGEREF _Toc427622925 \h 11-12Current Law PAGEREF _Toc427622926 \h 11-13Domestic Corporation PAGEREF _Toc427622927 \h 11-13Election Requirement PAGEREF _Toc427622928 \h 11-16Making the Election PAGEREF _Toc427622929 \h 11-16Form 2553 PAGEREF _Toc427622930 \h 11-16Invalid S Elections PAGEREF _Toc427622931 \h 11-17Extension PAGEREF _Toc427622932 \h 11-17Chapter 11 - S Corporations – Section 39 PAGEREF _Toc427622933 \h 11-21S Corporation Termination PAGEREF _Toc427622934 \h 11-21Revoking the Election PAGEREF _Toc427622935 \h 11-21Procedure PAGEREF _Toc427622936 \h 11-21Effective Date PAGEREF _Toc427622937 \h 11-22Ceasing to Qualify PAGEREF _Toc427622938 \h 11-24Effective Date PAGEREF _Toc427622939 \h 11-24Passive Income - §1362 PAGEREF _Toc427622940 \h 11-24Effective Date PAGEREF _Toc427622941 \h 11-24S Termination Year PAGEREF _Toc427622942 \h 11-24Pro Rata Allocation PAGEREF _Toc427622943 \h 11-25Allocation Based On Normal Accounting Rules PAGEREF _Toc427622944 \h 11-26Annualization of 1120 Short Year PAGEREF _Toc427622945 \h 11-26Taxation of S Corporations PAGEREF _Toc427622946 \h 11-27S Corporation Income & Expense PAGEREF _Toc427622947 \h 11-27Separately Stated Items PAGEREF _Toc427622948 \h 11-27Nonseparately Stated Items PAGEREF _Toc427622949 \h 11-28Interest Expense on Debt-Financed Distributions PAGEREF _Toc427622950 \h 11-29Tax Exempt Income PAGEREF _Toc427622951 \h 11-29Net Operation Losses PAGEREF _Toc427622952 \h 11-29Carryover of C Corporation NOLs PAGEREF _Toc427622953 \h 11-29Reduction of Pass-Thru Items PAGEREF _Toc427622954 \h 11-30Built-In Gain - §1374 PAGEREF _Toc427622955 \h 11-30Net Recognized Built-In Gain PAGEREF _Toc427622956 \h 11-31Recognized Built-In Gains PAGEREF _Toc427622957 \h 11-31Recognized Built-In Loss PAGEREF _Toc427622958 \h 11-32Deduction Items PAGEREF _Toc427622959 \h 11-32Amount of Tax PAGEREF _Toc427622960 \h 11-32Credits PAGEREF _Toc427622961 \h 11-33Net Operating Loss Carryovers PAGEREF _Toc427622962 \h 11-33Treatment of Certain Property PAGEREF _Toc427622963 \h 11-33Transfer of Assets PAGEREF _Toc427622964 \h 11-33Passive Income - §1375 PAGEREF _Toc427622965 \h 11-33Gross Receipts PAGEREF _Toc427622966 \h 11-34Sales or Exchanges of Stock or Securities PAGEREF _Toc427622967 \h 11-34Passive Investment Income PAGEREF _Toc427622968 \h 11-34Royalties PAGEREF _Toc427622969 \h 11-35Rents PAGEREF _Toc427622970 \h 11-35Interest PAGEREF _Toc427622971 \h 11-35Figuring the Tax on Excess Net Passive Income PAGEREF _Toc427622972 \h 11-36Net Passive Income PAGEREF _Toc427622973 \h 11-36Excess Net Passive Income PAGEREF _Toc427622974 \h 11-36Special Provisions PAGEREF _Toc427622975 \h 11-36Waiver of Tax PAGEREF _Toc427622976 \h 11-37Tax Preference Items PAGEREF _Toc427622977 \h 11-37LIFO Recapture Tax PAGEREF _Toc427622978 \h 11-38Capital Gains Tax PAGEREF _Toc427622979 \h 11-38Reducing Corporate Capital Gains PAGEREF _Toc427622980 \h 11-38Figuring Corporate Taxable Income PAGEREF _Toc427622981 \h 11-38Recapture of Investment Credit PAGEREF _Toc427622982 \h 11-39Estimated Corporate Tax Payments PAGEREF _Toc427622983 \h 11-39Chapter 11 - S Corporations – Section 40 PAGEREF _Toc427622984 \h 11-42Basis of Stock & Debts PAGEREF _Toc427622985 \h 11-42Adjustments to Basis PAGEREF _Toc427622986 \h 11-42Limitation on Loss Deductions PAGEREF _Toc427622987 \h 11-42Basis Limit PAGEREF _Toc427622988 \h 11-42Adjustments to Stock Basis PAGEREF _Toc427622989 \h 11-43Increases PAGEREF _Toc427622990 \h 11-43Decreases PAGEREF _Toc427622991 \h 11-43Adjustments to Debt Basis PAGEREF _Toc427622992 \h 11-45Restoring Basis of Loans PAGEREF _Toc427622993 \h 11-45Loan Repayments PAGEREF _Toc427622994 \h 11-45Guarantees PAGEREF _Toc427622995 \h 11-46At-Risk Rules - §465 PAGEREF _Toc427622996 \h 11-46Reasonable Compensation PAGEREF _Toc427622997 \h 11-47Related Party Rules PAGEREF _Toc427622998 \h 11-47Definition of Related Party PAGEREF _Toc427622999 \h 11-47Stock Attribution Rules PAGEREF _Toc427623000 \h 11-47Business Expenses & Interest PAGEREF _Toc427623001 \h 11-48Distributions PAGEREF _Toc427623002 \h 11-48Earnings & Profits PAGEREF _Toc427623003 \h 11-48Accumulated Adjustments Account (AAA) PAGEREF _Toc427623004 \h 11-49Dividend Election PAGEREF _Toc427623005 \h 11-49Post-Termination Distributions PAGEREF _Toc427623006 \h 11-52Transition Period PAGEREF _Toc427623007 \h 11-52Order of Distribution PAGEREF _Toc427623008 \h 11-52No Earnings & Profits PAGEREF _Toc427623009 \h 11-53Appreciated Property Distributions PAGEREF _Toc427623010 \h 11-54Taxable Year PAGEREF _Toc427623011 \h 11-54Business Purpose PAGEREF _Toc427623012 \h 11-54Change of Tax Year PAGEREF _Toc427623013 \h 11-55Form 1120S PAGEREF _Toc427623014 \h 11-55Extension PAGEREF _Toc427623015 \h 11-55Late Filing PAGEREF _Toc427623016 \h 11-55Reasonable Cause PAGEREF _Toc427623017 \h 11-56Schedule K-1 PAGEREF _Toc427623018 \h 11-56Shareholder’s Treatment Of S Corporation Items PAGEREF _Toc427623019 \h 11-56Pro Rata Share PAGEREF _Toc427623020 \h 11-57Optional 10-year Write-Off of Tax Preferences PAGEREF _Toc427623021 \h 11-57Fringe Benefits PAGEREF _Toc427623022 \h 11-58Health Insurance Premiums PAGEREF _Toc427623023 \h 11-58Reporting Requirements PAGEREF _Toc427623024 \h 11-58Medical Deduction PAGEREF _Toc427623025 \h 11-59Entity Tax Comparison PAGEREF _Toc427623026 \h 11-59Chapter 12 - Business Dispositions & Reorganizations – Section 41 PAGEREF _Toc427623027 \h 12-1Starting a New Business PAGEREF _Toc427623028 \h 12-2Organization Costs PAGEREF _Toc427623029 \h 12-2Start-up Costs PAGEREF _Toc427623030 \h 12-2Syndication Costs PAGEREF _Toc427623031 \h 12-2Buying an Existing Business PAGEREF _Toc427623032 \h 12-3Finding a Business for Sale PAGEREF _Toc427623033 \h 12-3Tax Considerations PAGEREF _Toc427623034 \h 12-5Stock Acquisitions PAGEREF _Toc427623035 \h 12-5Section 338 Election PAGEREF _Toc427623036 \h 12-5Asset Acquisitions PAGEREF _Toc427623037 \h 12-5Allocation of Purchase Price to Assets PAGEREF _Toc427623038 \h 12-6Allocation Regulations PAGEREF _Toc427623039 \h 12-7Practical Considerations PAGEREF _Toc427623040 \h 12-7Reorganizations - §368 PAGEREF _Toc427623041 \h 12-8Types of Reorganizations PAGEREF _Toc427623042 \h 12-8Type 1 Reorganizations PAGEREF _Toc427623043 \h 12-9Benefits and Considerations PAGEREF _Toc427623044 \h 12-10Boot PAGEREF _Toc427623045 \h 12-10Limitation PAGEREF _Toc427623046 \h 12-10Type 2 Reorganizations PAGEREF _Toc427623047 \h 12-1080% Control Requirement PAGEREF _Toc427623048 \h 12-10Voting Stock as Sole Consideration PAGEREF _Toc427623049 \h 12-10Shareholder Action PAGEREF _Toc427623050 \h 12-10Type 3 Reorganizations PAGEREF _Toc427623051 \h 12-11Consideration PAGEREF _Toc427623052 \h 12-11Transfer of Assets PAGEREF _Toc427623053 \h 12-1190/70 Test PAGEREF _Toc427623054 \h 12-11Liquidation of Acquired Corporation PAGEREF _Toc427623055 \h 12-11Type 4 Reorganizations PAGEREF _Toc427623056 \h 12-12Asset Distributions PAGEREF _Toc427623057 \h 12-12Continuity of Business PAGEREF _Toc427623058 \h 12-12Boot PAGEREF _Toc427623059 \h 12-12Type 5 Reorganizations PAGEREF _Toc427623060 \h 12-12Type 6 Reorganizations PAGEREF _Toc427623061 \h 12-12Type 7 Reorganizations PAGEREF _Toc427623062 \h 12-12Bona Fide Business Purpose PAGEREF _Toc427623063 \h 12-13Test PAGEREF _Toc427623064 \h 12-13Carryover of Corporate Tax Attributes PAGEREF _Toc427623065 \h 12-13Mandatory Carry-Over PAGEREF _Toc427623066 \h 12-13Effect of Carry-Over on Acquisition PAGEREF _Toc427623067 \h 12-13Application of Rules to Subsidiary Liquidations PAGEREF _Toc427623068 \h 12-13Loss or Tax Credit Carryovers PAGEREF _Toc427623069 \h 12-13Review Questions Feedback………………………………………………………… 12-17Glossary……………………………………………………………………………. 12-140Index of Keyword & Phrases…………………………………………………….…… 12-aExam Score Sheet…………………………………………………………………….. 12-nCPE Exam…………………………………………………………………………….. 12-p ................
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