Part I Introduction to Income Taxation 1 The Professional Practice of Taxation 1-1 1.1 The Basics of Tax Planning 1-4 The IRS: An Uninvited Third Party 1-4 The Goal of Tax Planning 1-5 Considering Tax Costs and Non-Tax Costs 1-6 1.2 Individual Income Tax Formula 1-7 1.3 Tax Compliance vs. Tax Planning 1-15 Closed vs. Open Transactions 1-16 Marginal Tax Rates, Average Tax Rates, and Effective Tax Rates 1-17 Tax Planning Opportunities 1-20 1.4 Tax Avoidance vs. Tax Evasion 1-28 Tax Evasion 1-28 Spotlight on the Law: Is the Tax Law Unconstitutional? 1-29 Tax Ethics 1-30 1.

5 Tax Rules vs. GAAP 1-32 1.6 Goals of Tax Policymakers 1-33 Raise Revenue 1-34 Social Objectives 1-34 Economic Objectives 1-35 Equity Objectives 1-35 Political Objectives 1-37 1.7 Other Taxes Paid by Individuals 1-38 Other Federal Taxes 1-38 State and Local Taxes 1-39 Implicit Taxes 1-40 1.8 Professional Taxation as a Career 1-41 The Role of a Tax Professional 1-41 Characteristics of Successful Tax Professionals 1-42 2 Fundamentals of the Federal Income Tax System 2-1 2.1 Taxpayer Activities: Trade or Business, Investment, or Personal Use 2-4 Trade or Business 2-4 Investment Activities 2-5 Personal Activities 2-7 2.2 Classification of Assets 2-10 Ordinary, Section 1231, and Capital 2-10 Spotlight on the Law: Classification of an Asset: Sell Now or Later? 2-11 Realty vs. Personalty 2-12 Holding Period 2-13 2.

3 Basis 2-14 What Is Basis? 2-14 Recovery of Basis 2-15 2.4 Foundations of Income 2-17 An All-Inclusive Definition of Income 2-18 Realization of Income 2-18 Income and Basis 2-19 2.5 Foundations of Deductions 2-21 Is an Expenditure Deductible? 2-21 Where Are Expenses Deductible? 2-23 2.6 Introduction to Property Transactions 2-24 Gains and Losses from Sales and Dispositions 2-24 Deferred Gains and Losses 2-26 Excluded Gains and Losses 2-31 3 Tax Authority, Research, Compliance Rules, and Professional Responsibilities 3-1 3.1 Sources of Tax Authority 3-5 Legislative Sources of Tax Authority 3-6 Administrative Sources of Tax Authority 3-8 Judicial Sources of Tax Authority 3-11 Spotlight on the Law: Impact of Filing a Petition Late 3-13 Secondary Sources of Tax Authority 3-16 3.2 Locating and Evaluating Authority 3-17 Weighting of Tax Authority 3-17 The Research Process 3-18 3.3 Compliance Responsibilities 3-20 Filing Requirements 3-20 Taxpayer Penalties 3-22 3.4 Tax Professional Responsibilities 3-31 Circular 230 3-31 Statements on Standards for Tax Services (ssts) 3-34 3.

5 Tax Practice and Procedure 3-37 Audit Process 3-38 Appeals Process 3-40 Other Audit Issues 3-40 Signing a Return 3-41 4 Dependents and Filing Status 4-1 4.1 Dependents--Introduction and Qualifying Child 4-3 General Rules for Dependency 4-4 General Rules for Qualifying Child 4-4 Tiebreaker Rules 4-7 Unmarried Parents 4-8 Spotlight on the Law: Can I Claim My Dog as a Dependent? 4-10 4.2 Qualifying Relative and Other Dependency Rules 4-11 General Rules for Qualifying Relative 4-11 Other Dependency Rules 4-13 4.3 Filing Status--Introduction 4-16 General Rules for Married Filing Jointly (MFJ) and Single 4-17 Married Filing Separately (MFS) 4-19 Innocent Spouse Relief 4-20 4.4 Head of Household and Qualifying Widow(er) 4-21 General Rules for Head of Household Status 4-21 Qualifying Widow(er) 4-25 4.5 Dependent on Another Return and Kiddie Tax 4-28 Standard Deduction for a Dependent 4-28 Kiddie Tax 4-29 4.6 Filing Requirements 4-32 Part II Income 5 Framework for Income Recognition 5-1 5.1 All-Inclusive Approach to Income 5-4 Determining Income Recognition 5-5 Form of Receipt 5-5 Treasure Trove Principle 5-6 Spotlight on the Law: Great Catch but Beware of the Taxes! 5-7 5.

2 Judicial Doctrines 5-8 Constructive Receipt Doctrine 5-9 Tax Benefit Rule 5-10 Claim of Right Doctrine 5-12 Assignment of Income Doctrine 5-13 5.3 Accounting Methods and Periods--Income 5-14 Cash vs. Accrual Method of Accounting 5-14 Recovery of Capital 5-16 Installment Sales 5-17 Income from Community Property 5-22 Change in Accounting Method 5-23 5.4 Business Income for Individuals 5-24 Sole Proprietorships and Single Member LLCs 5-25 Rental Real Estate 5-26 Royalty Income: Investment or Business? 5-27 Income from Other Pass-Through Entities: Partnerships, Limited Liability Companies (LLCs), and S Corporations 5-27 Advanced Topic--Drilling Down 5-28 5.5 Qualified Business Income Deduction 5-30 Qualified Business Income 5-30 Rental Real Estate 5-31 Determining the Qualified Business Income Deduction (Steps 1-5) 5-31 Determining the Qualified Business Income Deduction (Steps 6-7) 5-36 Determining the Qualified Business Income Deduction (Step 8) 5-38 Advanced Topics--Drilling Down 5-39 6 Income from Personal Activities 6-1 6.1 Income from Prizes, Awards, and Scholarships 6-6 Taxable Prizes and Awards 6-6 Exclusion for Awards for Recognition of Civic or Other Achievements 6-7 Exclusion for Olympic Medals 6-7 Scholarships 6-8 6.2 Divorces 6-10 Alimony 6-10 Child Support 6-12 Property Transfers 6-12 Inadequate Payments of Alimony or Child Support 6-13 6.3 Income and Basis Issues for Gifts and Inheritances 6-14 Income Tax Consequences of Gifts and Inheritances 6-15 Basis and Holding Period Issues for Property Received as Gift 6-16 Basis and Holding Period Issues for Inheritances 6-21 Basis and Issues for Property Converted from Personal Use 6-22 Advanced Topic--Drilling Down 6-24 6.

4 Income from Injuries and Other Damage Awards 6-26 Determining the Tax Implications of Damage Awards: Key Questions 6-27 Legal Fees and Damage Awards 6-29 6.5 Income from Death of a Taxpayer 6-31 General Rule 6-31 Exceptions to the General Rule 6-32 Advanced Topic--Drilling Down 6-34 6.6 Forgiveness of Debt 6-35 Love or Generosity 6-36 Bankruptcy 6-36 Insolvency 6-38 Real Property Used in a Trade or Business 6-38 Other Debt Forgiveness 6-38 Spotlight on the Law: Is Debt Forgiveness Always Equitable? 6-39 6.7 Other Inclusions and Exclusions 6-40 Foster Child Payments 6-41 Government Assistance Program Payments (Welfare) 6-41 Parsonage 6-41 Income in Respect of a Decedent (IRD) 6-42 Jury Duty Pay 6-43 Unemployment Compensation 6-43 Advanced Topic--Drilling Down 7-45 7.7 Distribution Rules 7-47 Withdrawals from a Traditional IRA 7-47 Withdrawals from a Roth IRA 7-48 Distributions from Other Qualified Plans 7-49 Required Minimum Distributions 7-49 Rollovers 7-50 Annuities 7-50 7.8 Social Security Benefits 7-54 Spotlight on the Law: Taxation of Social Security Benefits 7-56 7.9 Foreign Earned Income 7-57 Part II (Ch. 5-7): Comprehensive Tax Return Problem 7 Income from Services 7-1 7.

1 Wages and Tip Income 7-6 Wages 7-7 Tip Income 7-8 7.2 Income from Insurance-Related Fringe Benefits 7-9 Discrimination Rules 7-9 Employer-Purchased Health, Disability, and Long- Term Care Insurance 7-10 Life Insurance Premiums 7-12 Insurance Benefits Received 7-14 7.3 Income from Other Fringe Benefits 7-18 Personal Expenses Paid by Employer 7-18 Food and Lodging 7-19 Working Condition Fringe Benefits 7-20 De Minimis Fringe Benefits 7-21 No-Additional-Cost Services 7-21 Employee Discounts 7-22 Nominal Gifts 7-22 Safety and Length of Service Achievement Awards 7-22 Transportation and Parking 7-23 Other Fringe Benefits 7-23 Cafeteria Plans 7-25 7.4 Stock Options 7-27 Nonqualified Stock Options 7-29 Incentive Stock Options 7-29 Advanced Topics--Drilling Down 7-32 7.5 Reimbursement of Employee Business Expenses 7-34 Scenario 1: Accountable Plan 7-34 Scenario 2: Nonaccountable Plan 7-35 7.6 Retirement Plans 7-36 Section 401(k) Plans 7-36 Pension Plans 7-37 Self-Employed Plans 7-38 Individual Retirement Accounts 7-38 Part III Deductions 8 Framework for Deductions 8-1 8.1 Types of Activities 8-4 Trade or Business Activity 8-4 Investment/Production of Income Expenses 8-6 Personal Expenses 8-7 8.2 Disallowance of Deductions 8-8 Disallowed Expenses 8-8 Adequate Substantiation 8-11 Benefit of the Taxpayer 8-12 8.

3 Types of Deductions 8-13 Spotlight on the Law: Insurance Fraud Payback: Deductible or Not Deductible? 8-14 8.4 Accounting Methods for Deductions 8-15 Prepaid Expenses 8-15 Prepaid Interest 8-16 All-Events Test and Economic Performance 8-17 Payments to a Related Party 8-19 Advanced Topic--Drilling Down 8-20 8.5 Capital Expenditure vs. Repair 8-22 8.6 Accounting for Inventories 8-24 Small Businesses 8.