Etextbook 978 0134105857 Prentice Halls Federal Taxation 2016 Corporations Partnerships Estates Trusts

eTextbook 978-0134105857 Prentice
Hall’s Federal Taxation 2016

Corporations, Partnerships, Estates &
Trusts
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CoNTENTS
PREFACE xiii Legal Requirements and Tax Considerations Related to

Forming a Corporation 2-9
cHaPter 1 Legal Requirements 2-9
c TAX RESEARCH 1-1 Tax Considerations 2-9
Overview of Tax Research 1-2 Section 351: Deferring Gain or Loss Upon
Incorporation 2-12
Steps in the Tax Research Process 1-3
The Property Requirement 2-12
Importance of the Facts to the Tax Consequences 1-5 The Control Requirement 2-13
Creating a Factual Situation Favorable to the Taxpayer 1-6 The Stock Requirement 2-16
The Sources of Tax Law 1-7 Effect of Sec. 351 on the Transferors 2-16
The Legislative Process 1-7 Tax Consequences to Transferee Corporation 2-20
The Internal Revenue Code 1-8 Assumption of the Transferor’s Liabilities 2-22
Treasury Regulations 1-9 Other Considerations in a Sec. 351 Exchange 2-25
Administrative Pronouncements 1-11
Choice of Capital Structure 2-27
Judicial Decisions 1-14
Characterization of Obligations as Debt or Equity 2-27
Tax Treaties 1-24
Debt Capital 2-28
Tax Periodicals 1-24
Equity Capital 2-29
Tax Services 1-25 Capital Contributions by Shareholders 2-29
The Internet as a Research Tool 1-26 Capital Contributions by Nonshareholders 2-31
Key Word Searches 1-27
Worthlessness of Stock or Debt Obligations 2-32
Search by Index 1-28
Securities 2-32
Search by Citation 1-29
Unsecured Debt Obligations 2-33
Search by Content 1-29
Noncommercial Internet Services 1-29 Tax Planning Considerations 2-34
Citators 1-30 Avoiding Sec. 351 2-34
Using the Citator 1-31 Compliance and Procedural Considerations 2-36
Professional Guidelines for Tax Services 1-32 Reporting Requirements Under Sec. 351 2-36
Treasury Department Circular 230 1-32 Problem Materials 2-37
AICPA’S Statements on Tax Standards 1-32 Discussion Questions 2-37
Sample Work Papers and Client Letter 1-36 Issue Identification Questions 2-38
Problems 2-38
Problem Materials 1-36
Discussion Questions 1-36 Comprehensive Problems 2-43
Problems 1-37 Tax Strategy Problems 2-44
Comprehensive Problem 1-40 Case Study Problems 2-44
Tax Strategy Problem 1-40 Tax Research Problems 2-45
Case Study Problem 1-40
Tax Research Problems 1-41
cHaPter 3
cHaPter 2 c THE CoRPoRATE INCoME TAX 3-1
c CoRPoRATE FoRMATIoNS AND CAPITAL STRUCTURE 2-1 Corporate Elections 3-2
Organization Forms Available 2-2 Choosing a Calendar or Fiscal Year 3-2
Sole Proprietorships 2-2 Accounting Methods 3-4
Partnerships 2-3 Determining a Corporation’s Taxable Income 3-5
Corporations 2-5 Sales and Exchanges of Property 3-6
Limited Liability Companies 2-8 Business Expenses 3-8
Limited Liability Partnerships 2-8 Special Deductions 3-14
Check-the-Box Regulations 2-8 Exceptions for Closely Held Corporations 3-21
iii
iv Corporations ▶ contents
Computing a Corporation’s Income Tax Liability 3-22 Stock Redemptions 4-16

General Rules 3-23 Tax Consequences of the Redemption to the
Personal Service Corporations 3-24 Shareholder 4-17
Controlled Groups of Corporations 3-24 Attribution Rules 4-18
Why Special Rules are Needed 3-24 Substantially Disproportionate Redemptions 4-20
What is a Controlled Group? 3-25 Complete Termination of the Shareholder’s Interest 4-21
Application of the Controlled Group Test 3-28 Redemptions Not Essentially Equivalent to a Dividend 4-23
Special Rules Applying to Controlled Groups 3-29 Partial Liquidations 4-23
Consolidated Tax Returns 3-29 Redemptions to Pay Death Taxes 4-25
Effect of Redemptions on the Distributing Corporation 4-26
Tax Planning Considerations 3-31
Compensation Planning for Shareholder-Employees 3-31 Preferred Stock Bailouts 4-27
Special Election to Allocate Reduced Tax Rate Sec. 306 Stock Defined 4-28
Benefits 3-32 Dispositions of Sec. 306 Stock 4-28
Using NOL Carryovers and Carrybacks 3-34 Redemptions of Sec. 306 Stock 4-29
Exceptions to Sec. 306 Treatment 4-30
Compliance and Procedural Considerations 3-35
Estimated Taxes 3-35 Stock Redemptions by Related Corporations 4-30
Requirements for Filing and Paying Taxes 3-38 Brother-Sister Corporations 4-30
When the Return Must be Filed 3-39 Parent-Subsidiary Corporations 4-32
Tax Return Schedules 3-39 Tax Planning Considerations 4-33
Financial Statement Implications 3-43 Avoiding Unreasonable Compensation 4-33
Scope, Objectives, and Principles of ASC 740 3-44 Bootstrap Acquisitions 4-34
Temporary Differences 3-44 Timing of Distributions 4-35
Deferred Tax Assets and the Valuation Compliance and Procedural Considerations 4-36
Allowance 3-44 Corporate Reporting of Nondividend Distributions 4-36
Accounting for Uncertain Tax Positions 3-45 Agreement to Terminate Interest Under Sec. 302(b)(3) 4-36
Balance Sheet Classification 3-46
Tax Provision Process 3-47
Discussion Questions 4-37
Comprehensive Example – Year 1 3-47
Issue Identification Questions 4-38
Comprehensive Example – Year 2 3-50
Problems 4-39
Other Transactions 3-54
Comprehensive Problem 4-45
Problem Materials 3-54 Tax Strategy Problem 4-46
Discussion Questions 3-54 Case Study Problems 4-46
Issue Identification Questions 3-55 Tax Research Problems 4-46
Problems 3-56
Tax Strategy Problem 3-65 cHaPter 5
Tax Form/Return Preparation Problems 3-65 c oTHER CoRPoRATE TAX LEVIES 5-1
Case Study Problems 3-70
Tax Research Problems 3-71 The Alternative Minimum Tax 5-2
The General Formula 5-2
Exemption from the AMT for Small Corporations
and First-Year Corporations 5-3
cHaPter 4 Tax Preference Items 5-5
c CoRPoRATE NoNLIQUIDATING DISTRIBUTIoNS 4-1 AMT Adjustment Items 5-5
Nonliquidating Distributions in General 4-2 Adjusted Current Earnings (ACE) Adjustment 5-9
Earnings and Profits (E&P) 4-3 Minimum Tax Credit 5-12
Current Earnings and Profits 4-3 Tax Credits and the AMT 5-13
Distinction Between Current and Accumulated E&P 4-6 Personal Holding Company Tax 5-14
Nonliquidating Property Distributions 4-8 Personal Holding Company Defined 5-15
Consequences of Nonliquidating Property Distributions Stock Ownership Requirement 5-15
to the Shareholders 4-8 Passive Income Requirement 5-15
Consequences of Property Distributions to the Calculating the PHC Tax 5-19
Distributing Corporation 4-9 Avoiding the PHC Designation and Tax Liability by
Constructive Dividends 4-11 Making Dividend Distributions 5-21
Stock Dividends and Stock Rights 4-13 PHC Tax Calculation 5-22
Nontaxable Stock Dividends 4-14 Accumulated Earnings Tax 5-23
Nontaxable Stock Rights 4-14 Corporations Subject to the Penalty Tax 5-23
Effect of Nontaxable Stock Dividends on the Distributing Proving a Tax-Avoidance Purpose 5-24
Corporation 4-15 Evidence Concerning the Reasonableness of an Earnings
Taxable Stock Dividends and Stock Rights 4-15 Accumulation 5-25
contents ◀ Corporations v
Calculating the Accumulated Earnings Tax 5-29 Problem Materials 6-21

Comprehensive Example 5-32 Discussion Questions 6-21
Tax Planning Considerations 5-33 Issue Identification Questions 6-23
Depreciation Election 5-33 Problems 6-24
Eliminating the ACE Adjustment 5-34 Comprehensive Problem 6-30
Multiyear Effects of AMT 5-34 Tax Strategy Problems 6-31
Avoiding the Personal Holding Company Tax 5-35 Case Study Problems 6-32
Avoiding the Accumulated Earnings Tax 5-35 Tax Research Problems 6-33
Alternative Minimum Tax 5-36 cHaPter 7
Personal Holding Company Tax 5-36 c CoRPoRATE ACQUISITIoNS AND REoRGANIZATIoNS 7-1
Accumulated Earnings Tax 5-36
Taxable Acquisition Transactions 7-2
Financial Statement Implications 5-37 Asset Acquisitions 7-2
Alternative Minimum Tax 5-37 Stock Acquisitions 7-4
Problem Materials 5-38 Comparison of Taxable and Nontaxable Acquisitions 7-10
Discussion Questions 5-38 Taxable and Nontaxable Asset Acquisitions 7-10
Issue Identification Questions 5-41 Comparison of Taxable and Nontaxable Stock
Problems 5-41 Acquisitions 7-11
Types of Reorganizations and Their Tax Consequences 7-14
Tax Strategy Problems 5-50
The Target or Transferor Corporation 7-14
Tax Form/Return Preparation Problem 5-50
The Acquiring or Transferee Corporation 7-15
Shareholders and Security Holders 7-16
Acquisitive Reorganizations 7-19
cHaPter 6 Type A Reorganization 7-19
c CoRPoRATE LIQUIDATING DISTRIBUTIoNS 6-1 Type C Reorganization 7-25
Overview of Corporate Liquidations 6-2 Type D Reorganization 7-28
The Shareholder 6-2 Type B Reorganization 7-29
The Corporation 6-3 Type G Reorganization 7-33
Definition of a Complete Liquidation 6-3 Divisive Reorganizations 7-33
General Liquidation Rules 6-5 Divisive Type D Reorganization 7-33
Effects of Liquidating on the Shareholders 6-5 Divisive Type G Reorganization 7-38
Effects of Liquidating on the Liquidating Corporation 6-6 Other Reorganizations 7-38
Liquidation of a Controlled Subsidiary 6-10 Type E Reorganization 7-38
Overview 6-10 Type F Reorganization 7-40
Requirements 6-11 Judicial Restrictions on the Use of Corporate
Effects of Liquidating on the Shareholders 6-12 Reorganizations 7-40
Effects of Liquidating on the Subsidiary Continuity of Interest 7-41
Corporation 6-13 Continuity of Business Enterprise 7-41
Special Reporting Issues 6-15 Business Purpose Requirement 7-42
Pertaining to Shareholders 6-15 Step Transaction Doctrine 7-42
Pertaining to the Liquidating Corporation 6-16 Tax Attributes 7-43
Recognition of Gain or Loss When Property is Distributed Assumption of Tax Attributes 7-43
in Retirement of Debt 6-17 Limitation on Use of Tax Attributes 7-43
General Rule 6-17 Tax Planning Considerations 7-46
Satisfaction of the Subsidiary’s Debt Obligations 6-17 Why Use a Reorganization Instead of a Taxable
Tax Planning Considerations 6-18 Transaction? 7-46
Timing the Liquidation Transaction 6-18 Avoiding the Reorganization Provisions 7-47
Recognition of Ordinary Losses When a Liquidation Compliance and Procedural Considerations 7-47
Occurs 6-19 Section 338 Election 7-47
Obtaining 80% Ownership to Achieve Sec. 332 Plan of Reorganization 7-47
Benefits 6-19 Party to a Reorganization 7-48
Avoiding Sec. 332 to Recognize Losses 6-20 Ruling Requests 7-48
Compliance and Procedural Considerations 6-20 Financial Statement Implications 7-48
General Liquidation Procedures 6-20 Taxable Asset Acquistion 7-48
Section 332 Liquidations 6-21 Nontaxable Asset Acquistion 7-49
Plan of Liquidation 6-21 Stock Acquistion 7-50
vi Corporations ▶ contents
Pricing the Acquisition 7-50 Financial Statement Implications 8-39

Net Operating Losses 7-51 Intercompany Transactions 8-39
Problem Materials 7-51 SRLY Losses 8-41
Discussion Questions 7-51 Problem Materials 8-42
Issue Identification Questions 7-52 Discussion Questions 8-42
Problems 7-53 Issue Identification Questions 8-43
Comprehensive Problem 7-61 Problems 8-44
Tax Strategy Problems 7-62 Comprehensive Problems 8-52
Case Study Problems 7-63 Tax Strategy Problem 8-53
Tax Research Problems 7-63 Tax Form/Return Preparation Problem 8-53
cHaPter 8
c CoNSoLIDATED TAX RETURNS 8-1 cHaPter 9
Definition of an Affiliated Group 8-2 c PARTNERSHIP FoRMATIoN AND oPERATIoN 9-1
Requirements 8-2 Definition of a Partnership 9-2
Comparison with Controlled Group Definitions 8-4 General and Limited Partnerships 9-2
Consolidated Tax Return Election 8-4 Overview of Taxation of Partnership Income 9-4
Consolidated Return Regulations 8-4 Partnership Profits and Losses 9-4
Termination of Consolidated Tax Return Filing 8-5 The Partner’s Basis 9-4
Consolidated Taxable Income 8-6 Partnership Distributions 9-5
Accounting Periods and Methods 8-6 Tax Implications of Formation of a Partnership 9-5
Income Included in the Consolidated Tax Return 8-6 Contribution of Property 9-6
Calculation of Consolidated Taxable Income Contribution of Services 9-10
and Tax 8-8 Organizational and Syndication Expenditures 9-12
Intercompany Transactions 8-8 Partnership Elections 9-12
Basic Concepts 8-8 Partnership Tax Year 9-12
Matching and Acceleration Rules 8-10 Other Partnership Elections 9-15
Applications of Matching and Acceleration Rules 8-12 Partnership Reporting of Income 9-16
Relevance of Matching and Acceleration Rules 8-18 Partnership Taxable Income 9-16
Items Computed on a Consolidated Basis 8-18 Separately Stated Items 9-16
Charitable Contribution Deduction 8-19 Partnership Ordinary Income 9-17
Net Sec. 1231 Gain or Loss 8-19 U.S. Production Activities Deduction 9-17
Capital Gains and Losses 8-19 Partner Reporting of Income 9-18
Dividends-Received Deduction 8-20 Partner’s Distributive Share 9-18
U.S. Production Activities Deduction 8-22 Special Allocations 9-19
Regular Tax Liability 8-24
Basis for Partnership Interest 9-21
Corporate Alternative Minimum Tax 8-24
Beginning Basis 9-21
Tax Credits 8-25
Effects of Liabilities 9-21
Estimated Tax Payments 8-26
Effects of Operations 9-24
Net Operating Losses (NOLs) 8-27
Special Loss Limitations 9-26
Current Year NOL 8-27
At-Risk Loss Limitation 9-26
Carrybacks and Carryovers of Consolidated NOLs 8-28
Passive Activity Limitations 9-26
Special Loss Limitations 8-30
Transactions Between a Partner and the Partnership 9-27
Stock Basis Adjustments 8-34
Sales of Property 9-27
Tiering Up of Stock Basis Adjustments 8-35
Guaranteed Payments 9-28
Excess Loss Account 8-36
Family Partnerships 9-30
Capital Ownership 9-30
Advantages of Filing a Consolidated Tax Return 8-36
Donor-Donee Allocations of Income 9-30
Disadvantages of Filing a Consolidated
Tax Return 8-37 Tax Planning Considerations 9-31
Timing of Loss Recognition 9-31
The Basic Election and Return 8-37 Compliance and Procedural Considerations 9-32
Parent Corporation as Agent for the Consolidated Reporting to the IRS and the Partners 9-32
Group 8-38 IRS Audit Procedures 9-33
Separate Entity Treatment of Intercompany Problem Materials 9-34
Transactions 8-39 Discussion Questions 9-34
Liability for Taxes Due 8-39 Issue Identification Questions 9-35
contents ◀ Corporations vii
Problems 9-36 Election of S Corporation Status 11-7

Comprehensive Problems 9-44 Making the Election 11-8
Tax Strategy Problem 9-45 Termination of the Election 11-9
Tax Form/Return Preparation Problems 9-46 S Corporation Operations 11-13
Case Study Problems 9-50 Taxable Year 11-13
Tax Research Problems 9-51 Accounting Method Elections 11-14
Ordinary Income or Loss and Separately Stated
cHaPter 10 Items 11-14
c SPECIAL PARTNERSHIP ISSUES 10-1 U.S. Production Activities Deduction 11-16
Nonliquidating Distributions 10-2 Special S Corporation Taxes 11-16
Recognition of Gain 10-2 Taxation of the Shareholder 11-19
Basis Effects of Distributions 10-4 Income Allocation Procedures 11-19
Holding Period and Character of Distributed Loss and Deduction Pass-Through to Shareholders 11-20
Property 10-7 Family S Corporations 11-24
Nonliquidating Distributions with Sec. 751 10-7 Basis Adjustments 11-24
Section 751 Assets Defined 10-7 Basis Adjustments to S Corporation Stock 11-24
Exchange of Sec. 751 Assets and Other Property 10-9 Basis Adjustments to Shareholder Debt 11-25
Liquidating or Selling a Partnership Interest 10-11 S Corporation Distributions 11-27
Liquidating Distributions 10-12 Corporations Having No Earnings and Profits 11-27
Sale of a Partnership Interest 10-16 Corporations Having Accumulated Earnings and
Other Partnership Termination Issues 10-19 Profits 11-28
Retirement or Death of a Partner 10-19 Other Rules 11-32
Exchange of a Partnership Interest 10-20 Tax Preference Items and Other AMT Adjustments 11-33
Income Recognition and Transfers of a Partnership Transactions Involving Shareholders and Other Related
Interest 10-22 Parties 11-33
Termination of a Partnership 10-22 Fringe Benefits Paid to a Shareholder-Employee 11-33
Mergers and Consolidations 10-25
Division of a Partnership 10-25
Election to Allocate Income Based on the S Corporation’s
Optional and Mandatory Basis Adjustments 10-26 Accounting Methods 11-34
Adjustments on Transfers 10-26 Increasing the Benefits from S Corporation Losses 11-35
Adjustments on Distributions 10-28 Passive Income Requirements 11-36
Special Forms of Partnerships 10-29 Compliance and Procedural Considerations 11-37
Tax Shelters and Limited Partnerships 10-29 Making the Election 11-37
Publicly Traded Partnerships 10-29 Filing the Corporate Tax Return 11-37
Limited Liability Companies 10-30 Estimated Tax Payments 11-38
Limited Liability Partnerships 10-31 Consistency Rules 11-39
Limited Liability Limited Partnership 10-31 Sample S Corporation Tax Return 11-39
Electing Large Partnerships 10-32
Tax Planning Considerations 10-35 Discussion Questions 11-40
Liquidating Distribution or Sale to Partners 10-35 Issue Identification Questions 11-41
Problem Materials 10-35 Problems 11-41
Discussion Questions 10-35 Comprehensive Problems 11-47
Issue Identification Questions 10-36 Tax Strategy Problems 11-49
Problems 10-37 Tax Form/Return Preparation Problems 11-50
Comprehensive Problems 10-47 Case Study Problem 11-52
Tax Strategy Problem 10-48 Tax Research Problems 11-53
Tax Research Problems 10-50 cHaPter 12
c THE GIFT TAX 12-1
The Unified Transfer Tax System 12-2
cHaPter 11 History and Purpose of Transfer Taxes 12-2
c S CoRPoRATIoNS 11-1 Unified Rate Schedule 12-3
Should an S Election Be Made? 11-3 Impact of Taxable Gifts on Death Tax Base 12-3
Advantages of S Corporation Treatment 11-3 Unified Credit 12-3
Disadvantages of S Corporation Treatment 11-3 Gift Tax Formula 12-4
S Corporation Requirements 11-4 Determination of Gifts 12-4
Shareholder-Related Requirements 11-4 Exclusions and Deductions 12-4
Corporation-Related Requirements 11-5 Gift-Splitting Election 12-4
viii Corporations ▶ contents
Cumulative Nature of Gift Tax 12-6 The Gross Estate: Valuation 13-6
Unified Credit 12-6 Date-of-Death Valuation 13-6
Transfers Subject to the Gift Tax 12-7 Alternate Valuation Date 13-7
Transfers for Inadequate Consideration 12-7 The Gross Estate: Inclusions 13-8
Statutory Exemptions from the Gift Tax 12-8 Comparison of Gross Estate with Probate
Cessation of Donor’s Dominion and Control 12-10 Estate 13-9
Valuation of Gifts 12-11 Property in Which the Decedent Had an Interest 13-9
Gift Tax Consequences of Certain Transfers 12-13 Dower or Curtesy Rights 13-10
Exclusions 12-16 Transferor Provisions 13-10
Amount of the Exclusion 12-16 Annuities and Other Retirement Benefits 13-13
Present Interest Requirement 12-16 Jointly Owned Property 13-14
General Powers of Appointment 13-15
Gift Tax Deductions 12-18
Life Insurance 13-16
Marital Deduction 12-19
Consideration Offset 13-17
Charitable Contribution Deduction 12-21
Recipient Spouse’s Interest in QTIP Trust 13-17
The Gift-Splitting Election 12-22
Deductions 13-18
Computation of the Gift Tax Liability 12-23 Debts and Funeral and Administration
Effect of Previous Taxable Gifts 12-23 Expenses 13-18
Unified Credit Available 12-24 Losses 13-19
Comprehensive Illustration 12-25 Charitable Contribution Deduction 13-19
Basis Considerations for a Lifetime Giving Plan 12-26 Marital Deduction 13-20
Property Received by Gift 12-26 Computation of Tax Liability 13-23
Property Received at Death 12-27 Taxable Estate and Tax Base 13-23
Below-Market Loans: Gift and Income Tax Consequences Tentative Tax and Reduction for Post-1976 Gift
12-28 Taxes 13-23
General Rules 12-28 Unified Credit 13-23
De Minimis Rules 12-28 Portability Between Spouses of Exemption Amount 13-24
Tax Planning Considerations 12-29 Other Credits 13-24
Tax-Saving Features of Inter Vivos Gifts 12-29 Comprehensive Illustration 13-25
Negative Aspects of Gifts 12-30 Liquidity Concerns 13-28
Compliance and Procedural Considerations 12-30 Deferral of Payment of Estate Taxes 13-28
Filing Requirements 12-30 Stock Redemptions to Pay Death Taxes 13-29
Due Date 12-31 Special Use Valuation of Farm Real Property 13-29
Gift-Splitting Election 12-31 Generation-Skipping Transfer Tax 13-30
Liability for Tax 12-31 Tax Planning Considerations 13-31
Determination of Value 12-32 Use of Inter Vivos Gifts 13-32
Statute of Limitations 12-32 Use of Exemption Equivalent 13-32
Problem Materials 12-33 What Size Marital Deduction Is Best? 13-33
Discussion Questions 12-33 Use of Disclaimers 13-33
Issue Identification Questions 12-34 Role of Life Insurance 13-33
Problems 12-34 Qualifying the Estate for Installment
Comprehensive Problem 12-37 Payments 13-34
Tax Strategy Problems 12-38 Where to Deduct Administration Expenses 13-34
Tax Form/Return Preparation Problems 12-38 Compliance and Procedural Considerations 13-35
Filing Requirements 13-35
Due Date 13-35
Valuation 13-35
Election of Alternate Valuation Date 13-35
cHaPter 13 Problem Materials 13-35
c THE ESTATE TAX 13-1 Discussion Questions 13-35
Estate Tax Formula 13-2 Issue Identification Questions 13-37
Gross Estate 13-2 Problems 13-37
Deductions 13-3 Comprehensive Problems 13-41
Adjusted Taxable Gifts and Tax Base 13-4 Tax Strategy Problems 13-42
Tentative Tax on Estate Tax Base 13-4 Tax Form/Return Preparation Problems 13-43
Reduction for Post-1976 Gift Taxes 13-4 Case Study Problems 13-44
Unified Credit 13-5 Tax Research Problems 13-45
contents ◀ Corporations ix
cHaPter 14 Choice of Year-End for Estates 14-34

c INCoME TAXATIoN oF TRUSTS AND ESTATES 14-1 Deduction of Administration Expenses 14-34
Basic Concepts 14-2 Compliance and Procedural Considerations 14-35
Inception of Trusts 14-2 Filing Requirements 14-35
Inception of Estates 14-2 Due Date for Return and Tax 14-35
Reasons for Creating Trusts 14-3 Documents to be Furnished to IRS 14-35
Basic Principles of Fiduciary Taxation 14-3 Sample Simple and Complex Trust Returns 14-35
Principles of Fiduciary Accounting 14-4 Problem Materials 14-36
The Importance of Identifying Income and Discussion Questions 14-36
Principal 14-4 Issue Identification Questions 14-37
Principal and Income: The Uniform Act 14-5 Problems 14-37
Categorization of Depreciation 14-6 Comprehensive Problem 14-40
Formula for Taxable Income and Tax Liability 14-7 Tax Strategy Problems 14-40
Gross Income 14-7 Tax Form/Return Preparation Problems 14-41
Deductions for Expenses 14-7 Case Study Problems 14-42
Distribution Deduction 14-9 Tax Research Problems 14-43
Personal Exemption 14-9
Credits 14-10
U.S. Production Activities Deduction 14-10
cHaPter 15
Distributable Net Income 14-10 c ADMINISTRATIVE PRoCEDURES 15-1
Significance of DNI 14-11
Role of the Internal Revenue Service 15-2
Definition of DNI 14-11
Enforcement and Collection 15-2
Manner of Computing DNI 14-11
Interpretation of the Statute 15-2
Determining a Simple Trust’s Taxable Income 14-13
Audits of Tax Returns 15-3
Allocation of Expenses to Tax-Exempt Income 14-14
Percentage of Returns Examined 15-3
Determination of DNI and the Distribution
Selection of Returns for Audit 15-3
Deduction 14-15
Disclosure of Uncertain Tax Positions 15-5
Tax Treatment for Beneficiary 14-15
Alternatives for a Taxpayer Whose Return is Audited 15-5
Shortcut Approach to Proving Correctness of Taxable
90-day Letter 15-7
Income 14-16
Litigation 15-7
Effect of a Net Operating Loss 14-16
Effect of a Net Capital Loss 14-16 Requests for Rulings 15-9
Comprehensive Illustration: Determining a Simple Information to be Included in Taxpayer’s Request 15-9
Trust’s Taxable Income 14-17 Will the IRS Rule? 15-10
When Rulings are Desirable 15-10
Determining Taxable Income for Complex Trusts and
Estates 14-19 Due Dates 15-11
Determination of DNI and the Distribution Due Dates for Returns 15-11
Deduction 14-20 Extensions 15-11
Tax Treatment for Beneficiary 14-21 Due Dates for Payment of the Tax 15-11
Effect of a Net Operating Loss 14-24 Interest on Tax Not Timely Paid 15-12
Effect of a Net Capital Loss 14-24 Failure-to-File and Failure-to-Pay Penalties 15-13
Comprehensive Illustration: Determining a Complex Failure to File 15-15
Trust’s Taxable Income 14-24 Failure to Pay 15-16
Income in Respect of a Decedent 14-27 Estimated Taxes 15-17
Definition and Common Examples 14-27 Payment Requirements 15-17
Significance of IRD 14-28 Penalty for Underpaying Estimated Taxes 15-18
Grantor Trust Provisions 14-30 Exceptions to the Penalty 15-19
Purpose and Effect 14-30 Other More Severe Penalties 15-20
Revocable Trusts 14-31 Negligence 15-20
Post-1986 Reversionary Interest Trusts 14-31 Substantial Understatement 15-21
Retention of Administrative Powers 14-31 Transactions without Economic Substance 15-22
Retention of Economic Benefits 14-31 Civil Fraud 15-22
Control of Others’ Enjoyment 14-32 Criminal Fraud 15-23
Tax Planning Considerations 14-33 Statute of Limitations 15-24
Ability to Shift Income 14-33 General Three-Year Rule 15-24
Timing of Distributions 14-33 Six-Year Rule for Substantial Omissions 15-24
Property Distributions 14-34 When No Return is Filed 15-26
x Corporations ▶ contents
Other Exceptions to Three-Year Rule 15-26 Filing Requirements for Aliens and Foreign
Refund Claims 15-27 Corporations 16-37
Liability for Tax 15-27 Financial Statement Implications 16-38
Joint Returns 15-27 Foreign Tax Credit 16-38
Transferee Liability 15-29 Deferred Foreign Earnings 16-39
Tax Practice Issues 15-29 Problem Materials 16-42
Statutory Provisions Concerning Tax Return Discussion Questions 16-42
Preparers 15-29 Issue Identification Questions 16-43
Reportable Transaction Disclosures 15-30 Problems 16-44
Rules of Circular 230 15-31 Comprehensive Problem 16-48
Statements on Standards for Tax Services 15-32 Tax Strategy Problem 16-49
Tax Accounting and Tax Law 15-35 Tax Form/Return Preparation Problems 16-50
Accountant-Client Privilege 15-36 Case Study Problems 16-50
Problem Materials 15-37 Tax Research Problems 16-51
Discussion Questions 15-37
Issue Identification Questions 15-38
Problems 15-38 a P P e n d i c e s
Comprehensive Problem 15-41 c APPENDIX A
Tax Strategy Problem 15-41 Tax Research Working Paper File A-1
Tax Research Problems 15-41 c APPENDIX B
Tax Forms B-1
c APPENDIX C
cHaPter 16 MACRS Tables C-1
c U.S. TAXATIoN oF FoREIGN-RELATED TRANSACTIoNS 16-1
c APPENDIX D
Jurisdiction to Tax 16-2 Glossary D-1
Taxation of U.S. Citizens and Resident Aliens 16-3
c APPENDIX E
Foreign Tax Credit 15-3
Foreign-Earned Income Exclusion 16-8 AICPA Statements on Standards for
Tax Services Nos. 1–7 E-1
Taxation of Nonresident Aliens 16-14
Definition of Nonresident Alien 16-14 c APPENDIX F
Investment Income 16-15 Comparison of Tax Attributes for C Corporations,
Trade or Business Income 16-16 Partnerships, and S Corporations F-1
Taxation of U.S. Businesses Operating Abroad 16-18
Domestic Subsidiary Corporations 16-18 c APPENDIX G
Reserved G-1
Foreign Branches 16-18
Foreign Corporations 16-19 c APPENDIX H
Controlled Foreign Corporations 16-23 Actuarial Tables H-1
Foreign Sales Corporations Regime and Extraterritorial
Income Exclusion 16-31 c APPENDIX I
Inversions 16-31 Index of Code Sections I-1
Tax Planning Considerations 16-32 c APPENDIX J
Deduction Versus Credit for Foreign Taxes 16-32 Index of Treasury Regulations J-1
Election to Accrue Foreign Taxes 16-33
Special Earned Income Elections 16-34 c APPENDIX K
Tax Treaties 16-35 Index of Government Promulgations K-1
Special Resident Alien Elections 16-35
c APPENDIX L
Compliance and Procedural Considerations 16-36 Index of Court Cases L-1
Foreign Operations of U.S. Corporations 16-36
Reporting the Foreign Tax Credit 16-36 c APPENDIX M
Reporting the Earned Income Exclusion 16-36 Subject Index M-1
ABoUT THE EDIToRS
Kenneth E. Anderson is the Pugh CPAs Professor of Accounting at the University of
Tennessee. He earned a B.B.A. from the University of Wisconsin–Milwaukee and sub-
sequently attained the level of tax manager with Arthur Young (now part of Ernst &
Young). He then earned a Ph.D. from Indiana University. He teaches corporate taxation,
partnership taxation, and tax strategy. Professor Anderson also is the Director of the
Master of Accountancy Program. He has published articles in The Accounting Review,
The Journal of the American Taxation Association, Advances in Taxation, the Journal of
Accountancy, the Journal of Financial Service Professionals, and a number of other journals.
KENNETH E. ANDERSON
Thomas R. Pope is the Ernst & Young Professor of Accounting at the University of
Kentucky. He received a B.S. from the University of Louisville and an M.S. and D.B.A. in
business administration from the University of Kentucky. He teaches international taxa-
tion, partnership and S corporation taxation, tax research and policy, and introductory
taxation and has won outstanding teaching awards at the University, College, and School
of Accountancy levels. He has published articles in The Accounting Review, the Tax
Adviser, Taxes, Tax Notes, and a number of other journals. Professor Pope’s extensive
professional experience includes eight years with Big Four accounting firms. Five of those
years were with Ernst & Whinney (now part of Ernst & Young), including two years with
their National Tax Department in Washington, D.C. He subsequently held the position of
THOMAS R. POPE Senior Manager in charge of the Tax Department in Lexington, Kentucky. Professor Pope
also has been a leader and speaker at professional tax conferences all over the United
States and is active as a tax consultant.
Timothy J. Rupert is a Professor and the Golemme Administrative Chair at the D’Amore-
McKim School of Business at Northeastern University. He received his B.S. in Ac-
counting and his Master of Taxation from the University of Akron. He also earned his
Ph.D. from Penn State University. Professor Rupert’s research has been published in such
journals as The Accounting Review, The Journal of the American Taxation Association,
Behavioral Research in Accounting, Advances in Taxation, Applied Cognitive
Psychology, Advances in Accounting Education, and Journal of Accounting Education.
He currently is the co-editor of Advances in Accounting Education. In 2010, he received
the Outstanding Educator Award from the Massachusetts Society of CPAs. He also has
received the University’s Excellence in Teaching Award and the D’Amore-McKim
TIMOTHY J. RUPERT School’s Best Teacher of the Year award multiple times. He is active in the American
Accounting Association and the American Taxation Association (ATA) and has served as
president, vice president, and secretary of the ATA.
xi
ABoUT THE AUTHoRS
Anna C. Fowler is the John Arch White Professor Emeritus in the Department of
Accounting at the University of Texas at Austin. She received her B.S. in accounting from
the University of Alabama and her M.B.A. and Ph.D. from the University of Texas at
Austin. Active in the American Taxation Association throughout her academic career, she
served on the editorial board of its journal and held many positions, including president.
She is a former member of the American Institute of CPA’s Tax Executive Committee and
a former chair of the AICPA’s Regulation/Tax Subcommittee for the CPA exam. She has
published a number of articles, most of which have dealt with estate planning or real estate
transaction issues. In 2002, she received the Ray M. Sommerfeld Outstanding Educator
Award, co-sponsored by the American Taxation Association and Ernst & Young.
Richard J. Joseph is Provost-for-Term and Chief Academic Officer of Bryant University. In

this role, he oversees Bryant’s faculty, academic programs, Colleges of Arts and Sciences and
Business, and School of Health Sciences. Before joining Bryant, he was Provost and Global
Dean of Hult International Business School. Previously, he served on the administration
and tax faculty of The University of Texas at Austin. Before embarking on his academic
career, Dr. Joseph worked as an international banker at Citibank, Riyadh; an investment
banker at Lehman Brothers, New York; a securities trader at Becker Paribas, Dallas, and
Bear Stearns, New York; and a mergers and acquisitions lawyer for the Bass Group, Fort
Worth. A graduate magna cum laude of Harvard College, Oxford University, and The Uni-
versity of Texas at Austin School of Law, Dr. Joseph is co-editor of the Handbook of Merg-
ers and Acquisitions (Oxford University Press) and author of The Origins of the American
Income Tax (Syracuse University Press). He has written numerous commentaries in the
Financial Times, The Christian Science Monitor, Tax Notes, and Tax Notes International.
David S. Hulse is the Deloitte-Touche Professor of Accountancy at the University of

Kentucky. He received an undergraduate degree from Shippensburg University, an M.S.
from Louisiana State University, and a Ph.D. from the Pennsylvania State University. He
teaches introductory taxation and corporate taxation courses. Professor Hulse has pub-
lished a number of articles on tax issues in academic and professional journals, including
The Journal of the American Taxation Association, Advances in Taxation, the Journal of
Financial Service Professionals, the Journal of Financial Planning, and Tax Notes.
LeAnn Luna is an Associate Professor of Accounting at the University of Tennessee. She is

a C.P.A. and holds an undergraduate degree from Southern Methodist University, a M.T.
from the University of Denver College of Law, and a Ph.D. from the University of
Tennessee. She has taught introductory taxation, corporate and partnership taxation, tax
research, and professional standards. Professor Luna also holds a joint appointment with
the Center for Business and Economic Research at the University of Tennessee, where she
interacts frequently with state policymakers on a variety of policy related issues. She has
published articles in the Journal of Accounting and Economics, the National Tax Journal,
The Journal of the American Taxation Association, Tax Adviser, State Tax Notes, and a
number of other journals.
Michael S. Schadewald, Ph.D., CPA, is on the faculty of the University of Wisconsin-

Milwaukee where he teaches graduate and undergraduate courses in business taxation. A
graduate of the University of Minnesota, Professor Schadewald is a co-author of several
books on multistate and international taxation and has published more than 40 articles in
academic and professional journals, including The Accounting Review, Journal of
Accounting Research, Contemporary Accounting Research, The Journal of the American
Taxation Association, CPA Journal, Journal of Taxation, and The Tax Adviser. Professor
Schadewald also has served on the editorial boards of The Journal of the American Taxation
Association, Journal of State Taxation, International Tax Journal, The International Journal
of Accounting, Issues in Accounting Education, and Journal of Accounting Education.
xii
PREFACE
Why is the Rupert/Pope/Anderson series the best choice for
you and your students?
The Rupert/Pope/Anderson 2016 Series in Federal Taxation is appropriate for use in any first course in federal taxation,
and comes in a choice of three volumes:
Federal Taxation 2016: Individuals
Federal Taxation 2016: Corporations, Partnerships, Estates & Trusts (the companion book to Individuals)
Federal Taxation 2016: Comprehensive (14 chapters from Individuals and 15 chapters from Corporations)
** For a customized edition of any of the chapters for these texts, contact your Pearson representative and they can cre-
ate a custom text for you.
• The Individuals volume covers all entities, although the treatment is often briefer than in the Corporations and
Comprehensive volumes. The Individuals volume, therefore, is appropriate for colleges and universities that require
only one semester of taxation as well as those that require more than one semester of taxation. Further, this volume
adapts the suggestions of the Model Tax Curriculum as promulgated by the American Institute of Certified Public
Accountants.
• The Corporations, Partnerships, Estates & Trusts and Comprehensive volumes contain three comprehensive tax
return problems whose data change with each edition, thereby keeping the problems fresh. Problem C:3-66 contains
the comprehensive corporate tax return, Problem C:9-58 contains the comprehensive partnership tax return, and
Problem C:11-64 contains the comprehensive S corporation tax return, which is based on the same facts as Problem
C:9-58 so that students can compare the returns for these two entities.
• The Corporations, Partnerships, Estates & Trusts and Comprehensive volumes contain sections called Financial
Statement Implications, which discuss the implications of Accounting Standards Codification (ASC) 740. The main
discussion of accounting for income taxes appears in Chapter C:3. The financial statement implications of other
transactions appear in Chapters C:5, C:7, C:8, and C:16 (Corporations volume only).
What’s New to this Edition?
INDIVIDUALS
• Complete updating of significant court cases and IRS rulings and procedures during 2014 and early 2015.
• Complete updating for the Tax Increase Prevention Act of 2014.
• Discussion of the expiration or reduction of some deductions and credits in 2015.
• All tax rate schedules have been updated to reflect the rates and inflation adjustments for 2015.
• Whenever new updates become available, they will be accessible via MyAccountingLab.
C O R P O R AT I O N S
• The comprehensive corporate tax return, Problem C:3-66, has all new numbers for the 2014 forms.
• The comprehensive partnership tax return, Problem C:9-58, has all new numbers for the 2014 forms.
• The comprehensive S corporation tax return, Problem C:11-64, has all new numbers for the 2014 forms.
• Changes affecting 2015 tax law have been incorporated into the text where appropriate.
• All tax rate schedules have been updated to reflect the rates and inflation adjustments for 2015.
• Whenever new updates become available, they will be accessible via MyAccountingLab.
xiii
xiv Corporations ▶ Preface
MyAccountingLab is an online homework, tutorial, and assessment program designed to work with Prentice Hall’s Federal
Taxation 2016 to engage students and improve results. MyAccountingLab’s homework and practice questions are cor-
related to the textbook, they regenerate algorithmically to give students unlimited opportunity for practice and mastery,
and they offer helpful feedback when students enter incorrect answers. Combining resources that illuminate content with
accessible self-assessment, MyAccountingLab with eText provides students with a complete digital learning experience–all
in one place. To register, go to http://www.pearsonmylabandmastering.com.
For Instructors
MyAccountingLab provides instructors with a rich and flexible set of course materials, along with course-management
tools that make it easy to deliver all or a portion of your course online.
• Powerful Homework and Test Manager Create, import, and manage online homework and media assignments, quiz-
zes, and tests. Create assignments from online questions directly correlated to this and other textbooks. Homework
questions include “Help Me Solve This” guided solutions to help students understand and master concepts. You can
choose from a wide range of assignment options, including time limits, proctoring, and maximum number of attempts
allowed. In addition, you can create your own questions—or copy and edit ours—to customize your students’ learning
path.
• Comprehensive Gradebook Tracking MyAccountingLab’s online gradebook automatically tracks your students’
results on tests, homework, and tutorials and gives you control over managing results and calculating grades. All
MyAccountingLab grades can be exported to a spreadsheet program, such as Microsoft® Excel. The MyAccount-
ingLab Gradebook provides a number of student data views and gives you the flexibility to weight assignments, select
which attempts to include when calculating scores, and omit or delete results for individual assignments.
• Department-Wide Solutions Get help managing multiple sections and working with Teaching Assistants using
MyAccountingLab Coordinator Courses. After your MyAccountingLab course is set up, it can be copied to create
sections or “member courses.” Changes to the Coordinator Course flow down to all members, so changes only need
to be made once.
We will add the most current tax information to MyAccountingLab as it becomes available.
For Students
MyAccountingLab provides students with a personalized interactive learning environment, where they can learn at their
own pace and measure their progress.
• Interactive Tutorial Exercises MyAccountingLab’s homework and practice questions are correlated to the textbook, and
“similar to”versions regenerate algorithmically to give students unlimited opportunity for practice and mastery. Questions
offer helpful feedback when students enter incorrect answers, and they include “Help Me Solve This” guided solutions
as well as other learning aids for extra help when students need it.
• Study Plan for Self-Paced Learning MyAccountingLab’s study plan helps students monitor their own progress, letting
them see at a glance exactly which topics they need to practice. MyAccountingLab generates a personalized study plan
for each student based on his or her test results, and the study plan links directly to interactive, tutorial exercises for
topics the student hasn’t yet mastered. Students can regenerate these exercises with new values for unlimited practice,
and the exercises include guided solutions and multimedia learning aids to give students the extra help they need.
Preface ◀ Corporations xv
Strong Pedagogical Aids

• Appropriate blend of technical content of the tax law with a high level of readability for students.
• Focused on enabling students to apply tax principles within the chapter to real-life situations.
Real-World Example
These comments relate the text material to events, cases, and statistics occurring in the tax and business environment. The
statistical data presented in some of these comments are taken from the IRS’s Statistics of Income at www.irs.gov.
Book-to-Tax Accounting Comparison
These comments compare the tax discussion in the text to the accounting and/or financial statement treatment of this
material. Also, the last section of Chapter C:3 discusses the financial statement implications of federal income taxes.
What Would You Do in This Situation?
Unique to the Rupert/Pope/Anderson series, these boxes place students in a decision-making role. The boxes include
many controversies that are as yet unresolved or are currently being considered by the courts. These boxes make extensive
use of Ethical Material as they represent choices that may put the practitioner at odds with the client.
Stop & Think
These “speed bumps” encourage students to pause and apply what they have just learned. Solutions for each issue are
provided in the box.
Ethical Point
These comments provide the ethical implications of material discussed in the adjoining text. Apply what they have just
learned.
Tax Strategy Tip
These comments suggest tax planning ideas related to material in the adjoining text.
Additional Comment
These comments provide supplemental information pertaining to the adjacent text.
Program Components
Materials for the instructor may be accessed at the Instructor’s Resource Center (IRC) online, located at
www.pearsonhighered.com/phtax or within the Instructor Resource section of MyAccountingLab. You may contact your
Pearson representative for assistance with the registration process.
• TaxACT 2014 Software: Available via online purchase with Individuals, Corporations, and Comprehensive Texts. This
user-friendly tax preparation program includes more than 80 tax forms, schedules, and worksheets. TaxACT calculates
returns and alerts the user to possible errors or entries. Consists of forms 1040, 1065, 1120, and 1120S.
• Instructor’s Resource Manual: Contains sample syllabi, instructor outlines, and information regarding problem areas
for students. It also contains solutions to the tax form/tax return preparation problems.
• Solutions Manual: Contains solutions to discussion questions, problems, and comprehensive and tax strategy prob-
lems. It also contains all solutions to the case study problems, research problems, and “What Would You Do in This
Situation?” boxes.
• Test Bank: Offers a wealth of true/false, multiple-choice, and calculative problems. A computerized program is avail-
able to adopters.
• PowerPoint Slides: Consists of chapter outlines, featuring images, examples, and problems throughout, to aid in class
lectures.
• Image Library: Figures, tables, and tax forms featured in the book are provided as individual files for the convenience
of instructors and students.
• Multi-State Tax Chapter: An entire chapter, complete with problems (and solutions) dedicated to multi-state tax
practices.
xvi Corporations ▶ Preface
Acknowledgments
Our policy is to provide annual editions and to prepare timely updated supplements when major tax revisions occur. We
are most appreciative of the suggestions made by outside reviewers because these extensive review procedures have been
valuable to the authors and editors during the revision process.
We also are grateful to the various graduate assistants, doctoral students, and colleagues who have reviewed the text
and supplementary materials and checked solutions to maintain a high level of technical accuracy. In particular, we would
like to acknowledge the following colleagues who assisted in the preparation of supplemental materials for this text:
Ann Burstein Cohen SUNY at Buffalo
Craig J. Langstraat University of Memphis
Kate Demarest Carroll Community College
Allison McLeod University of North Texas
Mitchell Franklin LeMoyne College
Anthony Masino East Tennessee State University
In addition, we want to thank Myron S. Scholes, Mark A. Wolfson, Merle M. Erickson, M. L. Hanlon, Edward L.
Maydew, and Terry J. Shevlin for allowing us to use the model discussed in their text, Taxes and Business Strategy: A
Planning Approach, as the basis for material in Chapter I:18.
Please send any comments to Kenneth E. Anderson or Timothy J. Rupert.
CHAPTER
1
Tax ReseaRch
Learning Objectives
After studying this chapter, you should be able to
▶ Distinguish between closed fact and open fact tax situations

1
▶ Describe the steps in the tax research process

2
▶ Explain how the facts influence tax consequences

3
▶ Identify the sources of tax law and assess the authoritative value of each
4
▶ Consult tax services to research an issue

5
▶ Apply the basics of Internet-based tax research

6
▶ Use a citator to assess tax authorities

7
▶ Describe
8
follow
the professional guidelines that CPAs in tax practice should
▶ Prepare work papers and communicate to clients

9
1-2 Corporations ▶ Chapter 1
CHAPTER OUTLINE This chapter introduces the reader to the tax research process. Its major focus is the sources
Overview of Tax Research...1-2 of the tax law (i.e., the Internal Revenue Code and other tax authorities) and the relative
Steps in the Tax Research weight given to each source. The chapter describes the steps in the tax research process
Process...1-3 and places particular emphasis on the importance of the facts to the tax consequences. It
Importance of the Facts to the Tax
Consequences...1-5
also describes the features of frequently used tax services and computer-based tax research
The Sources of Tax Law...1-7 resources. Finally, it explains how to use a citator.
Tax Services...1-25 The end product of the tax research process—the communication of results to the
The Internet as a Research client—also is discussed. This text uses a hypothetical set of facts to provide a compre-
Tool...1-26
hensive illustration of the process. Sample work papers demonstrating how to document
Citators...1-30
Professional Guidelines for Tax
the results of research are included in Appendix A. The text also discusses two types
Services...1-32 of professional guidelines for CPAs in tax practice: the American Institute of Certified
Sample Work Papers and Client Public Accountants’ (AICPA’s) Statements on Standards for Tax Services (reproduced in
Letter...1-36 Appendix E) and Treasury Department Circular 230.
OveRview Of Tax ReseaRch

Objective 1 Tax research is the process of solving tax-related problems by applying tax law to spe-
Distinguish between cific sets of facts. Sometimes it involves researching several issues and often is conducted
closed fact and open fact to formulate tax policy. For example, policy-oriented research would determine how far
tax situations the level of charitable contributions might decline if such contributions were no longer
deductible. Economists usually conduct this type of tax research to assess the effects of
government policy.
Tax research also is conducted to determine the tax consequences of transactions
to specific taxpayers. For example, client-oriented research would determine whether
Smith Corporation could deduct a particular expenditure as a trade or business expense.
Accounting and law firms generally engage in this type of research on behalf of their
ADDITIONAL COMMENT clients.
Closed-fact situations afford the This chapter deals only with client-oriented tax research, which occurs in two contexts:
tax advisor the least amount of
flexibility. Because the facts are 1. closed fact or tax compliance situations: The client contacts the tax advisor after com-
already established, the tax advi-
sor must develop the best solution
pleting a transaction or while preparing a tax return. In such situations, the tax con-
possible within certain predeter- sequences are fairly straightforward because the facts cannot be modified to obtain
mined constraints. different results. Consequently, tax saving opportunities may be lost.
EXAMPLE C:1-1 c Tom informs Carol, his tax advisor, that on November 4 of the current year, he sold land held
as an investment for $500,000 cash. His basis in the land was $50,000. On November 9, Tom
reinvested the sales proceeds in another plot of investment property costing $500,000. This is a
closed fact situation. Tom wants to know the amount and the character of the gain (if any) he
must recognize. Because Tom solicits the tax advisor’s advice after the sale and reinvestment,
the opportunity for tax planning is limited. For example, the possibility of deferring taxes by
using a like-kind exchange or an installment sale is lost. b
ADDITIONAL COMMENT
Open-fact or tax-planning situa- 2. Open fact or tax planning situations: Before structuring or concluding a transaction,
tions give a tax advisor flexibility
to structure transactions to accom- the client contacts the tax advisor to discuss tax planning opportunities. Tax-planning
plish the client’s objectives. In this situations generally are more difficult and challenging because the tax advisor must
type of situation, a creative tax consider the client’s tax and nontax objectives. Most clients will not engage in a trans-
advisor can save taxpayers dollars
through effective tax planning. action if it is inconsistent with their nontax objectives, even though it produces tax
savings.
EXAMPLE C:1-2 c Diane is a widow with three children and five grandchildren and at present owns property
valued at $30 million. She seeks advice from Carol, her tax advisor, about how to minimize
her estate taxes and convey the greatest value of property to her descendants. This is an
open-fact situation. Carol could advise Diane to leave all but $5 million of her property to
a charitable organization so that her estate would owe no estate taxes. Although this rec-
ommendation would eliminate Diane’s estate taxes, Diane is likely to reject it because she
wants her children or grandchildren to be her primary beneficiaries. Thus, reducing estate
Tax Research ◀ Corporations 1-3
taxes to zero is inconsistent with her objective of allowing her descendants to receive as much
after-tax wealth as possible. b
TAX STRATEGY TIP When conducting research in a tax planning context, the tax professional should keep
Taxpayers should make invest- a number of points in mind. First, the objective is not to minimize taxes per se but rather
ment decisions based on after-tax to maximize a taxpayer’s after-tax return. For example, if the federal income tax rate is a
rates of return or after-tax cash
flows. constant 30%, an investor should not buy a tax-exempt bond yielding 5% when he or she
could buy a corporate bond of equal risk that yields 9% before tax and 6.3% after tax.
This is the case even though his or her explicit taxes (actual tax liability) would be mini-
mized by investing in the tax-exempt bond.1 Second, taxpayers typically do not engage
in unilateral or self-dealing transactions; thus, the tax ramifications for all parties to the
transaction should be considered. For example, in the executive compensation context,
employees may prefer to receive incentive stock options (because they will not recognize
income until they sell the stock), but the employer may prefer to grant a different type of
option (because the employer cannot deduct the value of incentive stock options upon is-
suance). Thus, the employer might grant a different number of options if it uses one type
of stock option versus another type as compensation. Third, taxes are but one cost of do-
ADDITIONAL COMMENT ing business. In deciding where to locate a manufacturing plant, for example, factors more
It is important to consider nontax important to some businesses than the amount of state and local taxes paid might be the
as well as tax objectives. In many proximity to raw materials, good transportation systems, the cost of labor, the quantity of
situations, the nontax consider-
ations outweigh the tax consider- available skilled labor, and the quality of life in the area. Fourth, the time for tax planning
ations. Thus, the plan eventually is not restricted to the beginning date of an investment, contract, or other arrangement.
adopted by a taxpayer may not
always be the best when viewed Instead, the time extends throughout the duration of the activity. As tax rules change or
strictly from a tax perspective. as business and economic environments change, the tax advisor must reevaluate whether
the taxpayer should hold onto an investment and must consider the transaction costs of
any alternatives.
One final note: the tax advisor should always bear in mind the financial accounting
implications of proposed transactions. An answer that may be desirable from a tax per-
spective may not always be desirable from a financial accounting perspective. Though in-
terrelated, the two fields of accounting have different orientations and different objectives.
Tax accounting is oriented primarily to the Internal Revenue Service (IRS). Its objectives
include calculating, reporting, and predicting one’s tax liability according to legal prin-
ciples. Financial accounting is oriented primarily to shareholders, creditors, managers, and
employees. Its objectives include determining, reporting, and predicting a business’s finan-
cial position and operating results according to Generally Accepted Accounting Principles.
Because tax and financial accounting objectives may differ, planning conflicts could arise.
For example, management might be reluctant to engage in tax reduction strategies that also
reduce book income and reported earnings per share. Success in any tax practice, especially
at the managerial level, requires consideration of both sets of objectives and orientations.
sTepsin The Tax

ReseaRch pROcess
Objective 2 In both open- and closed-fact situations, the tax research process involves six basic steps:
Describe the steps in the 1. Determine the facts.
tax research process 2. Identify the issues (questions).
3. Locate the applicable authorities.
4. Evaluate the authorities and choose those to follow where the authorities conflict.
5. Analyze the facts in terms of the applicable authorities.
6. Communicate conclusions and recommendations to the client.
1
For an excellent discussion of explicit and implicit taxes and tax planning Individuals volume. An example of an implicit tax is the excess of the before-
see M. S. Scholes, M. A. Wolfson, M. Erickson, L. Maydew, and T. Shevlin, tax earnings on a taxable bond over the risk-adjusted before-tax earnings on
Taxes and Business Strategy: A Planning Approach, fourth edition (Upper a tax-favored investment (e.g., a municipal bond).
Saddle River, NJ: Pearson Prentice Hall, 2008). Also see Chapter I:18 of the
You may need to

Determine the facts. gather additional
facts.
You may need to

Identify the issues restate the
(questions). questions.
Locate the applicable

authorities.
Evaluate the authorities;

choose those to follow where
the authorities conflict.
Analyze the facts in

terms of the applicable
authorities.
Communicate conclusions and

recommendations to the client.
FIGURE C:1-1 c STEPS In THE TAx RESEARCH PRoCESS
ADDITIONAL COMMENT Although the above outline suggests a linear approach, the tax research process often is
The steps of tax research provide circular. That is, it does not always proceed step-by-step. Figure C:1-1 illustrates a more
an excellent format for a written accurate process, and Appendix A provides a comprehensive example of this process.
tax communication. For example,
a good format for a client memo In a closed-fact situation, the facts have already occurred, and the tax advisor’s task
includes (1) statement of facts, is to analyze them to determine the appropriate tax treatment. In an open-fact situation,
(2) list of issues, (3) discussion of
relevant authority, (4) analysis, by contrast, the facts have not yet occurred, and the tax advisor’s task is to plan for them
and (5) recommendations to the or shape them so as to produce a favorable tax result. The tax advisor performs the latter
client of appropriate actions
based on the research results.
task by reviewing the relevant legal authorities, particularly court cases and IRS rulings,
all the while bearing in mind the facts of those cases or rulings that produced favorable
results compared with those that produced unfavorable results. For example, if a client
wants to realize an ordinary loss (as opposed to a capital loss) on the sale of several plots
of land, the tax advisor might consult cases involving similar land sales. The advisor
might attempt to distinguish the facts of those cases in which the taxpayer realized an
ordinary loss from the facts of those cases in which the taxpayer realized a capital loss.
The advisor then might recommend that the client structure the transaction based on the
fact pattern in the ordinary loss cases.
TYPICAL MISCONCEPTION Often, tax research involves a question to which no clearcut, unequivocally correct an-
Many taxpayers think the tax law swer exists. In such situations, probing a related issue might lead to a solution pertinent to
is all black and white. However, the central question. For example, in researching whether the taxpayer may deduct a loss
most tax research deals with
gray areas. Ultimately, when con- as ordinary instead of capital, the tax advisor might research the related issue of whether
fronted with tough issues, the abil- the presence of an investment motive precludes classifying a loss as ordinary. The solution
ity to develop strategies that favor
the taxpayer and then to find rel- to that issue might be relevant to the central question of whether the taxpayer may deduct
evant authority to support those the loss as ordinary.
strategies will make a successful
tax advisor. Thus, recognizing plan-
Identifying the issue(s) to be researched often is the most difficult step in the tax re-
ning opportunities and avoiding search process. In some instances, the client defines the issue(s) for the tax advisor, such as
potential traps is often the real where the client asks, “May I deduct the costs of a winter trip to Florida recommended by
value added by a tax advisor.
my physician?” In other instances, the tax advisor, after reviewing the documents submit-
ted to him or her by the client, identifies and defines the issue(s) himself or herself. Doing
so presupposes a firm grounding in tax law.2
2 Often, in an employment context, supervisors define the questions to be

researched and the authorities that might be relevant to the tax consequences.
Once the tax advisor locates the applicable legal authorities, he or she might have to
obtain additional information from the client. Example C:1-3 illustrates the point. The
example assumes that all relevant tax authorities are in agreement.
EXAMPLE C:1-3 c Mark calls his tax advisor, Al, and states that he (1) incurred a loss on renting his beach cottage
during the current year and (2) wonders whether he may deduct the loss. He also states that
he, his wife, and their minor child occupied the cottage only eight days during the current year.
This is the first time Al has dealt with the Sec. 280A vacation home rules. On reading Sec.
280A(d), Al learns that a loss is not deductible if the taxpayer used the residence for personal
purposes for longer than the greater of (1) 14 days or (2) 10% of the number of days the unit
was rented at a fair rental value. He also learns that the property is deemed to be used by the
taxpayer for personal purposes on any days on which it is used by any member of his or her
family (as defined in Sec. 267(c)(4)). The Sec. 267(c)(4) definition of family members includes
brothers, sisters, spouse, ancestors (e.g., parents and grandparents), or lineal descendants (e.g.,
children and grandchildren).
Mark’s eight-day use is not long enough to make the rental loss nondeductible. However,
Al must inquire about the number of days, if any, Mark’s brothers, sisters, or parents used the
property. (He already knows about use by Mark, his spouse, and his lineal descendants.) In ad-
dition, Al must find out how many days the cottage was rented to other persons at a fair rental
value. Upon obtaining the additional information, Al proceeds to determine how to calculate
the deductible expenses. Al then derives his conclusion concerning the deductible loss, if any,
and communicates it to Mark. (This example assumes the passive activity and at-risk rules re-
stricting a taxpayer’s ability to deduct losses from real estate activities will not pose a problem
for Mark. See Chapter I:8 for a comprehensive discussion of these topics.) b
Many firms require that a researcher’s conclusions be communicated to the client in
writing. Members or employees of such firms may answer questions orally, but their oral
conclusions should be followed by a written communication. According to the AICPA’s
Statements on Standards for Tax Services (reproduced in Appendix E),
Although oral advice may serve a client’s needs appropriately in routine matters or in well-
defined areas, written communications are recommended in important, unusual, substantial
dollar value, or complicated transactions. The member may use professional judgment about
whether, subsequently, to document oral advice.3
In addition, Treasury Department Circular 230 covers all written advice communi-
cated to clients. These requirements are more fully discussed at the end of this chapter and
in Chapter C:15.
impORTance Of The facTs

TO The Tax cOnsequences
Objective 3 Many terms and phrases used in the Internal Revenue Code (IRC) and other tax authori-
Explain how the ties are vague or ambiguous. Some provisions conflict with others or are difficult to rec-
facts influence tax oncile, creating for the researcher the dilemma of deciding which rules are applicable and
consequences which tax results are proper. For example, as a condition to claiming another person as a
dependent, the taxpayer must provide a certain level of support for such person.4 Neither
the IRC nor the Treasury Regulations define “support.” This lack of definition could be
problematic. For example, if the taxpayer purchased a used automobile costing $8,000
for an elderly parent whose only source of income is $7,800 in Social Security benefits,
the question of whether the expenditure constitutes support would arise. The tax advisor
would have to consult court opinions, revenue rulings, and other IRS pronouncements to
ascertain the legal meaning of the term “support.” Only after thorough research would the
meaning of the term become clear.
3 AICPA, Statement on Standards for Tax Services, No. 7, “Form and Con- 4 Sec. 152(e)(1)(A) and Sec. 152(d)(1)(C).
tent of Advice to Taxpayers,” 2010, Para. 6.
In other instances, the legal language is quite clear, but a question arises as to whether
the taxpayer’s transaction conforms to a specific pattern of facts that gives rise to a par-
ticular tax result. Ultimately, the peculiar facts of a transaction or event determine its tax
consequences. A change in the facts can significantly change the consequences. Consider
the following illustrations:
illustration One
Facts: A holds stock, a capital asset, that he purchased two years ago at a cost of $1,000. He
sells the stock to B for $920. What are the tax consequences to A?
Result: Under Sec. 1001, A realizes an $80 capital loss. He recognizes this loss in the current
year. A must offset the loss against any capital gains recognized during the year. Any excess
loss is deductible from ordinary income up to a $3,000 annual limit.
Change of Facts: A is B’s son.
New Result: Under Sec. 267, A and B are related parties. Therefore, A may not recognize the
realized loss. However, B may use the loss if she subsequently sells the stock at a gain.
illustration Two
Facts: C donates to State University ten acres of land that she purchased two years ago for
$10,000. The fair market value (FMV) of the land on the date of the donation is $25,000. C’s
adjusted gross income is $100,000. What is C’s charitable contribution deduction?
Result: Under Sec. 170, C is entitled to a $25,000 charitable contribution deduction (i.e., the
FMV of the property unreduced by the unrealized long-term gain).
Change of Facts: C purchased the land 11 months ago.
New Result: Under the same IRC section, C is entitled to only a $10,000 charitable contri-
bution deduction (i.e., the FMV of the property reduced by the unrealized short-term gain).
illustration Three
Facts: Acquiring Corporation pays Target Corporation’s shareholders one million shares of
Acquiring voting stock. In return, Target’s shareholders tender 98% of their Target voting
stock. The acquisition is for a bona fide business purpose. Acquiring continues Target’s busi-
ness. What are the tax consequences of the exchange to Target’s shareholders?
Result: Because the transaction qualifies as a reorganization under Sec. 368(a)(1)(B), Target’s
shareholders are not taxed on the exchange, which is solely for Acquiring voting stock.
Change of Facts: In the transaction, Acquiring purchases the remaining 2% of Target’s
shares with cash.
New Result: Under the same IRC provision, Target’s shareholders are now taxed on the
exchange, which is not solely for Acquiring voting stock.
C R E At I n G A FA C t U A l S I t U At I o n
FAv o R A b l E t o t h E tA x pAy E R
TYPICAL MISCONCEPTION Based on his or her research, a tax advisor might recommend to a taxpayer how to struc-
Many taxpayers believe tax prac- ture a transaction or plan an event so as to increase the likelihood that related expenses
titioners spend most of their time will be deductible. For example, suppose a taxpayer is assigned a temporary task in a
preparing tax returns. In reality,
providing tax advice that accom- location (City Y) different from the location (City X) of his or her permanent employ-
plishes the taxpayer’s objectives ment. Suppose also that the taxpayer wants to deduct the meal and lodging expenses
is one of the most important re-
sponsibilities of a tax advisor. This incurred in City Y as well as the cost of transportation thereto. To do so, the taxpayer
latter activity is tax consulting as must establish that City X is his or her tax home and that he or she temporarily works
compared to tax compliance.
in City Y. (Section 162 provides that a taxpayer may deduct travel expenses while “away
from home” on business. A taxpayer is deemed to be “away from home” if his or her em-
ployment at the new location does not exceed one year, i.e., it is “temporary.”) Suppose
the taxpayer wants to know the tax consequences of his or her working in City Y for ten
months and then, within that ten-month period, finding permanent employment in City Y.
What is tax research likely to reveal?
Tax research will lead to an IRS ruling stating that, in such circumstances, the employ-
ment will be deemed to be temporary until the date on which the realistic expectation
about the temporary nature of the assignment changes.5 After this date, the employment
5 Rev. Rul. 93-86, 1993-2 C.B. 71.

will be deemed to be permanent, and travel expenses relating to it will be nondeductible.

Based on this finding, the tax advisor might advise the taxpayer to postpone his or her
permanent job search in City Y until the end of the ten-month period and simply treat his
or her assignment as temporary. So doing would lengthen the time he or she is deemed
to be “away from home” on business and thus increase the amount of meal, lodging, and
transportation costs deductible as travel expenses. The taxpayer should compare the tax
savings to any additional personal costs of maintaining two residences.
The sOuRces Of Tax Law

Objective 4 The language of the IRC is general; that is, it prescribes the tax treatment of broad catego-
Identify the sources of ries of transactions and events. The reason for the generality is that Congress can neither
tax law and assess the foresee nor provide for every conceivable transaction or event. Even if it could, doing so
authoritative value of each would render the statute narrow in scope and inflexible in application. Accordingly, in-
terpretations of the IRC—both administrative and judicial—are necessary. Administrative
interpretations are provided in Treasury Regulations, revenue rulings, revenue procedures,
and several other pronouncements discussed later in this chapter. Judicial interpretations
are presented in court opinions. The term tax law as used by most tax advisors encom-
passes administrative and judicial interpretations in addition to the IRC. It also includes
the meaning conveyed in reports issued by Congressional committees involved in the
legislative process.
t h E l E G I S l At I v E p R o C E S S
Tax legislation begins in the House of Representatives. Initially, a tax proposal is incorporated
in a bill. The bill is referred to the House Ways and Means Committee, which is charged with
reviewing all tax legislation. The Ways and Means Committee holds hearings in which inter-
ested parties, such as the Treasury Secretary and IRS Commissioner, testify. At the conclusion
of the hearings, the Ways and Means Committee votes to approve or reject the measure. If
approved, the bill goes to the House floor where it is debated by the full membership. If the
House approves the measure, the bill moves to the Senate where it is taken up by the Senate
Finance Committee. Like Ways and Means, the Finance Committee holds hearings in which
Treasury officials, tax experts, and other interested parties testify. If the committee approves
the measure, the bill goes to the Senate floor where it is debated by the full membership. Upon
approval by the Senate, it is submitted to the President for his or her signature. If the President
signs the measure, the bill becomes public law. If the President vetoes it, Congress can over-
ride the veto by at least a two-thirds majority vote in each chamber.
Generally, at each stage of the legislative process, the bill is subject to amendment. If
amended, and if the House version differs from the Senate version, the bill is referred to a
House-Senate conference committee.6 This committee attempts to resolve the differences
between the House and Senate versions. Ultimately, it submits a compromise version of the
measure to each chamber for its approval. Such referrals are common. For example, in 1998
the House and Senate disagreed over what the taxpayer must do to shift the burden of proof
to the IRS. The House proposed that the taxpayer assert a “reasonable dispute” regarding a
ADDITIONAL COMMENT taxable item. The Senate proposed that the taxpayer introduce “credible evidence” regard-
Committee reports can be helpful ing the item. A conference committee was appointed to resolve the differences. This com-
in interpreting new legislation mittee ultimately adopted the Senate proposal, which was later approved by both chambers.
because they indicate the intent
of Congress. With the prolifera- After approving major legislation, the Ways and Means Committee and Senate Fi-
tion of tax legislation, committee nance Committee usually issue official reports. These reports, published by the U.S.
reports have become especially
important because the Treasury Government Printing Office (GPO) as part of the Cumulative Bulletin and as separate
Department often is unable to documents, explain the committees’ reasoning for approving (and/or amending) the leg-
draft the needed regulations in a islation.7 In addition, the GPO publishes both records of the committee hearings and
timely manner.
transcripts of the floor debates. The records are published as separate House or Senate doc-
uments. The transcripts are incorporated in the Congressional Record for the day of the
6 The size of a conference committee can vary. It is made up of an equal num- 7The Cumulative Bulletin is described in the discussion of revenue rulings on
ber of members from the House and the Senate. page C:1-12.
debate. In tax research, these records, reports, and transcripts are useful in deciphering the
meaning of the statutory language. Where this language is ambiguous or vague, and the
courts have not interpreted it, the documents can shed light on congressional intent, i.e., what
Congress intended by a particular term, phrase, or provision.
EXAMPLE C:1-4 c In 1998, Congress passed legislation concerning shifting the burden of proof to the IRS. This
legislation was codified in Sec. 7491. The question arises as to what constitutes “credible evi-
dence” because the taxpayer must introduce such evidence to shift the burden of proof to the
IRS. Section 7491 does not define the term. Because the provision was relatively new, few courts
had an opportunity to interpret what “credible evidence” means. In the absence of relevant
statutory or judicial authority, the researcher might have looked to the committee reports to
ascertain what Congress intended by the term. Senate Report No. 105-174 states that “credible
evidence” means evidence of a quality, which, “after critical analysis, the court would find suf-
ficient upon which to base a decision on the issue if no contrary evidence were submitted.”8
This language suggests that Congress intended the term to mean evidence of a kind sufficient
to withstand judicial scrutiny. Such a meaning should be regarded as conclusive in the absence
of other authority. b
thE IntERnAl REvEnUE CodE
The IRC, which comprises Title 26 of the United States Code, is the foundation of all tax
law. First codified (i.e., organized into a single compilation of revenue statutes) in 1939,
the tax law was recodified in 1954. The IRC was known as the Internal Revenue Code
of 1954 until 1986, when its name was changed to the Internal Revenue Code of 1986.
Whenever changes to the IRC are approved, the old language is deleted and new language
ADDITIONAL COMMENT added. Thus, the IRC is organized as an integrated document, and a researcher need not
The various tax services, discussed read through the relevant parts of all previous tax bills to find the current version of the
later in this chapter, provide IRC law. Nevertheless, a researcher must be sure that he or she is working with the law in effect
histories for researchers who need
to work with prior years’ tax law. when a particular transaction occurred.
The IRC contains provisions dealing with income taxes, estate and gift taxes, employ-
ment taxes, alcohol and tobacco taxes, and other excise taxes. Organizationally, the IRC
is divided into subtitles, chapters, subchapters, parts, subparts, sections, subsections, para-
graphs, subparagraphs, and clauses. Subtitle A contains rules relating to income taxes, and
Subtitle B deals with estate and gift taxes. A set of provisions concerned with one general
area constitutes a subchapter. For example, the topics of corporate distributions and ad-
justments appear in Subchapter C, and topics relating to partners and partnerships appear
in Subchapter K. Figure C:1-2 presents the organizational scheme of the IRC.
An IRC section contains the operative provisions to which tax advisors most often
refer. For example, they speak of “Sec. 351 transactions,” “Sec. 306 stock,” and “Sec. 1231
gains and losses.” Although a tax advisor need not know all the IRC sections, paragraphs,
and parts, he or she must be familiar with the IRC’s organizational scheme to read and
interpret it correctly. The language of the IRC is replete with cross-references to titles,
paragraphs, subparagraphs, and so on.
EXAMPLE C:1-5 c Section 7701, a definitional section, begins, “When used in this title . . .” and then provides a
series of definitions. Because of this broad reference, a Sec. 7701 definition applies for all of
Title 26; that is, it applies for purposes of the income tax, estate and gift tax, excise tax, and
other taxes governed by Title 26. b
EXAMPLE C:1-6 c Section 302(b)(3) allows taxpayers whose stock holdings are completely terminated in a re-
demption (a corporation’s purchase of its stock from one or more of its shareholders) to receive
capital gain treatment on the excess of the redemption proceeds over the stock’s basis instead
of ordinary income treatment on the entire proceeds. Section 302(c)(2)(A) states, “In the case
of a distribution described in subsection (b)(3), section 318(a)(1) shall not apply if. . . .” Further,
Sec. 302(c)(2)(C)(i) indicates “Subparagraph (A) shall not apply to a distribution to any entity
unless. . . .” Thus, in determining whether a taxpayer will receive capital gain treatment in a
stock redemption, a tax advisor must be able to locate and interpret various cross-referenced
IRC sections, subsections, paragraphs, subparagraphs, and clauses. b
8 S. Rept. No. 105-174, 105th Cong., 1st Sess. (unpaginated) (1998).
Overall Scheme
Title 26. All matters concerned with taxation
Subtitle A. Income taxes
Chapter 1. Normal taxes and surtaxes
Subchapter A. Determination of tax liability
Part I. Tax on individuals
Sec. 1. Tax imposed
Scheme for Sections, Subsections, etc.
Sec. 165 (h) (2) (A) (i) and (ii)
Section Paragraph Clauses
Subsection Subparagraph
FIGURE C:1-2 c oRgAnIzATIonAl SCHEmE of THE InTERnAl REvEnUE CoDE
t R E A S U Ry R E G U l At I o n S
The Treasury Department issues regulations that expound upon the IRC. Treasury Regula-
tions often provide examples with computations that assist the reader in understanding
how IRC provisions apply. Treasury Regulations are formulated on the basis of Treasury
Decisions (T.D.s). The numbers of the Treasury Decisions that form the basis of a Treasury
Regulation usually are found in the notes at the end of the regulation.
Because of frequent IRC changes, the Treasury Department does not always update the
regulations in a timely manner. Consequently, when consulting a regulation, a tax advisor
should check its introductory or end note to determine when the regulation was adopted.
If the regulation was adopted before the most recent revision of the applicable IRC section,
the regulation should be treated as authoritative to the extent consistent with the revision.
Thus, for example, if a regulation issued before the passage of an IRC amendment specifies
a dollar amount, and the amendment changed the dollar amount, the regulation should be
regarded as authoritative in all respects except for the dollar amount.
Proposed, Temporary, and Final Regulations. A Treasury Regulation is first issued in proposed
form to the public, which is given an opportunity to comment on it. Parties most likely
to comment are individual tax practitioners and representatives of organizations such as
the American Bar Association, the Tax Division of the AICPA, and the American Taxation
Association. The comments may suggest that the proposed rules could affect taxpayers
more adversely than Congress had anticipated. In drafting a final regulation, the Treasury
Department generally considers the comments and may modify the rules accordingly. If
the comments are favorable, the Treasury Department usually finalizes the regulation with
minor revisions. If the comments are unfavorable, it usually finalizes the regulation with
major revisions or allows the proposed regulation to expire.
Proposed regulations are just that—proposed. Consequently, they carry no more au-
thoritative weight than do the arguments of the IRS in a court brief. Nevertheless, they rep-
resent the Treasury Department’s official interpretation of the IRC. By contrast, temporary
regulations are binding on the taxpayer. Effective as of the date of their publication, they
often are issued immediately after passage of a major tax act to guide taxpayers and their
advisors on procedural or computational matters. Regulations issued as temporary are con-
currently issued as proposed. Because their issuance is not preceded by a public comment
period, they are regarded as somewhat less authoritative than final regulations.
Once finalized, regulations can be effective the earliest of (1) the date they were pro-
posed; (2) the date temporary regulations preceding them were first published in the
Federal Register, a daily publication that contains federal government pronouncements;
or (3) the date on which a notice describing the expected contents of the regulation was
issued to the public.9 For changes to the IRC enacted after July 29, 1996, the Treasury
Department generally cannot issue regulations with retroactive effect.
Interpretative and Legislative Regulations. In addition to being officially classified as proposed,

temporary, or final, Treasury Regulations are unofficially classified as interpretative or
legislative. interpretative regulations are issued under the general authority of Sec. 7805
and, as the name implies, merely make the IRC’s statutory language easier to understand
and apply. In addition, they often illustrate various computations. Legislative regulations,
by contrast, arise where Congress delegates its rule-making authority to the Treasury
Department. When Congress believes it lacks the expertise necessary to deal with a highly
technical matter, it instructs the Treasury Department to set forth substantive tax rules
relating to the matter.
Whenever the IRC contains language such as “The Secretary shall prescribe such regu-
lations as he may deem necessary” or “under regulations prescribed by the Secretary,”
the regulations interpreting the IRC provision are legislative. The consolidated tax return
regulations are an example of legislative regulations. In Sec. 1502, Congress delegated to
the Treasury Department authority to issue regulations that determine the tax liability of
a group of affiliated corporations filing a consolidated tax return. As a precondition to fil-
ing such a return, the corporations must consent to follow the consolidated return regula-
tions.10 Such consent generally precludes the corporations from later arguing in court that
the regulatory provisions are invalid.
Authoritative Weight. Final Treasury Regulations are presumed to be valid and have almost
the same authoritative weight as the IRC. Despite this presumption, taxpayers occasionally
argue that a regulation is invalid and, consequently, should not be followed.
Prior to 2011, courts held interpretive and legislative regulations to different standards, giv-
ing more authority to legislative regulations that Congress specifically delegated to the Treasury
Department to draft. The difference in authoritative weight largely disappeared, however, in
2011 with the Supreme Court decision in Mayo Foundation.11 Going forward, both types of
regulations will have the same authoritative weight and will be overturned only in very limited
cases such as when, in the Court’s opinion, the regulations exceed the scope of power delegated
to the Treasury Department,12 are contrary to the IRC,13 or are unreasonable.14
KEY POINT In assessing the validity of long-standing Treasury Regulations, some courts apply the
The older a Treasury Regulation legislative reenactment doctrine. Under this doctrine, a regulation is deemed to receive
becomes, the less likely a court is
to invalidate the regulation. The
congressional approval whenever the IRC provision under which the regulation was is-
legislative reenactment doctrine sued is reenacted without amendment.15 Underlying this doctrine is the rationale that, if
holds that if a regulation did not Congress believed that the regulation offered an erroneous interpretation of the IRC, it
reflect the intent of Congress,
lawmakers would have changed would have amended the IRC to conform to its belief. Congress’s failure to amend the IRC
the statute in subsequent leg- signifies approval of the regulation.16 This doctrine is predicated on Congress’s constitu-
islation to obtain their desired
objectives. tional authority to levy taxes. This authority implies that, if Congress is dissatisfied with
the manner in which either the executive or the judiciary has interpreted the IRC, it can
invalidate these interpretations through new legislation.
STOP & THINK Question: You are researching the manner in which a deduction is calculated. You con-
sult Treasury Regulations for guidance because the IRC states that the calculation is to
be done “in a manner prescribed by the Secretary.” After reviewing these authorities, you
9 Sec. 7805(b). 15 United States v. Homer O. Correll, 20 AFTR 2d 5845, 68-1 USTC ¶9101
10 Sec. 1501. (USSC, 1967).
11 Mayo Foundation for Medical Education & Research, et al. v. U.S., 107 16 One can rebut the presumption that Congress approved of the regulation
AFTR 2d 2011-341, 131 S.Ct. 704 (2011). by showing that Congress was unaware of the regulation when it reenacted
12 McDonald v. CIR, 56 AFTR 2d 85-5318, 85-2 USTC ¶9494 (5th Cir., 1985). the statute.
13 Jeanese, Inc. v. U.S., 15 AFTR 2d 429, 65-1 USTC ¶9259 (9th Cir., 1965).
14 United States v. Vogel Fertilizer Co., 49 AFTR 2d 82-491, 82-1 USTC
¶9134 (USSC, 1982).
conclude that another way of doing the calculation arguably is correct under an intuitive
approach. This approach would result in a lower tax liability for the client. Should you
follow the Treasury Regulations, or should you use the intuitive approach and argue that
the regulations are invalid?
Solution: Because of the language “in a manner prescribed by the Secretary,” the Trea-
sury Regulations dealing with the calculation are legislative. Whenever Congress calls for
legislative regulations, it explicitly authorizes (directs) the Treasury Department to write
the “rules.” Thus, a challenge based on the existence of a reasonable alternative method is
unlikely to succeed in court. Under the Mayo Foundation decision, you should reach the
same conclusion even if dealing with an interpretive Treasury Regulation.
ADDITIONAL COMMENT Citations. Citations to Treasury Regulations are relatively easy to understand. One or more
Citations serve two purposes in numbers appear before a decimal place, and several numbers follow the decimal place.
tax research: first, they substanti- The numbers immediately following the decimal place indicate the IRC section being
ate propositions; second, they
enable the reader to locate un- interpreted. The numbers preceding the decimal place indicate the general subject of the
derlying authority. regulation. Numbers that often appear before the decimal place and their general subjects
are as follows:
Number General Subject Matter

1 Income tax
20 Estate tax
25 Gift tax
301 Administrative and procedural matters
601 Procedural rules
The number following the IRC section number indicates the numerical sequence of the
regulation, such as the fifth regulation. No relationship exists between this number and
the subsection of the IRC being interpreted. An example of a citation to a final regulation
is as follows:
Reg. Sec. 1.165 2 5
Income tax IRC section Fifth regulation
Citations to proposed or temporary regulations follow the same format. They are ref-
erenced as Prop. Reg. Sec. or Temp. Reg. Sec. For temporary regulations the numbering
system following the IRC section number always begins with the number of the regulation
and an upper case T (e.g., -1T).
Section 165 addresses the broad topic of losses and is interpreted by several regula-
tions. According to its caption, the topic of Reg. Sec. 1.165-5 is worthless securities,
which also is addressed in subsection (g) of IRC Sec. 165. Parenthetical information fol-
lowing the text of the Treasury Regulation indicates that the regulation was last revised
on March 11, 2008, by Treasury Decision (T.D.) 9386. Section 165(g) was last amended
in 2000. A researcher must always check when the regulations were last amended and
be aware that an IRC change may have occurred after the most recent regulation amend-
ment, potentially making the regulation inapplicable.
When referencing a regulation, the researcher should fine-tune the citation to indicate
the precise passage that supports his or her conclusion. An example of such a detailed cita-
tion is Reg. Sec. 1.165-5(j), Ex. 2(i), which refers to paragraph (i) of Example 2, found in
paragraph (j) of the fifth regulation interpreting Sec. 165.
A d m I n I S t R At I v E p R o n o U n C E m E n t S
The IRS interprets the IRC through administrative pronouncements, the most important
of which are discussed below. After consulting the IRC and Treasury Regulations, tax
advisors are likely next to consult these pronouncements.
TYPICAL MISCONCEPTION Revenue Rulings. In revenue rulings, the IRS indicates the tax consequences of specific
Even though revenue rulings do transactions encountered in practice. For example, in a revenue ruling, the IRS might
not have the same weight as
Treasury Regulations or court indicate whether the exchange of stock for stock derivatives in a corporate acquisition is
cases, one should not underesti- tax-free.
mate their importance. Because a The IRS issues more than 50 revenue rulings a year. These rulings do not rank as high
revenue ruling is the official pub-
lished position of the IRS, in audits in the hierarchy of authorities as do Treasury Regulations or federal court cases. They
the examining agent will place simply represent the IRS’s view of the tax law. Taxpayers who do not follow a revenue
considerable weight on any appli-
cable revenue rulings. ruling will not incur a substantial understatement penalty if they have substantial authority
for different treatment.17 Nonetheless, the IRS presumes that the tax treatment specified in
a revenue ruling is correct. Consequently, if an examining agent discovers in an audit that
a taxpayer did not adopt the position prescribed in a revenue ruling, the agent will con-
tend that the taxpayer’s tax liability should be adjusted to reflect that position.
Soon after it is issued, a revenue ruling appears in the weekly Internal Revenue Bulletin
(cited as I.R.B.), published by the U.S. Government Printing Office (GPO). Revenue rulings
later appear in the Cumulative Bulletin (cited as C.B.), a bound volume issued semiannu-
ally by the GPO. An example of a citation to a revenue ruling appearing in the Cumulative
Bulletin is as follows:
Rev. Rul. 97-4, 1997-1 C.B. 5.
This is the fourth ruling issued in 1997, and it appears on page 5 of Volume 1 of the 1997
Cumulative Bulletin. Before the GPO publishes the pertinent volume of the Cumulative
Bulletin, researchers should use citations to the Internal Revenue Bulletin. An example of
such a citation follows:
Rev. Rul. 2013-8, 2013-15 I.R.B. 763.
For revenue rulings (and other IRS pronouncements) issued after 1999, the full four digits
of the year of issuance are set forth in the title. For revenue rulings (and other IRS pro-
nouncements) issued before 2000, only the last two digits of the year of issuance are set
forth in the title. The above citation represents the eighth ruling for 2013. This ruling is
located on page 763 of the Internal Revenue Bulletin for the fifteenth week of 2013. Once a
revenue ruling is published in the Cumulative Bulletin, only the citation to the Cumulative
Bulletin should be used. Thus, a citation to the I.R.B. is temporary.
Revenue Procedures. As the name suggests, revenue procedures are IRS pronouncements
that usually deal with the procedural aspects of tax practice. For example, one revenue
procedure deals with the manner in which tip income should be reported. Another revenue
procedure describes the requirements for reproducing paper substitutes for informational
returns such as Form 1099.
As with revenue rulings, revenue procedures are published first in the Internal Revenue
Bulletin, then in the Cumulative Bulletin. An example of a citation to a revenue procedure
appearing in the Cumulative Bulletin is as follows:
SELF-STUDY QUESTION
Rev. Proc. 97-19, 1997-1 C.B. 644.
Are letter rulings of precedential
value for third parties?
This pronouncement is found in Volume 1 of the 1997 Cumulative Bulletin on page 644.
It is the nineteenth revenue procedure issued in 1997.
ANSWER In addition to revenue rulings and revenue procedures, the Cumulative Bulletin con-
No. A letter ruling is binding only tains IRS notices, as well as the texts of proposed regulations, tax treaties, committee
on the taxpayer to whom the reports, and U.S. Supreme Court decisions.
ruling was issued. Nevertheless,
letter rulings can be very useful to
third parties because they provide Letter Rulings. Letter rulings are initiated by taxpayers who ask the IRS to explain the tax
insight as to the IRS’s opinion
about the tax consequences of consequences of a particular transaction.18 The IRS provides its explanation in the form
various transactions. of a letter ruling, a response personal to the taxpayer requesting an answer. Only the
17 Chapter C:15 discusses the authoritative support taxpayers and tax advi- 18 Chapter C:15 further discusses letter rulings.
sors should have for positions they adopt on a tax return.
taxpayer to whom the ruling is addressed may rely on it as authority. Nevertheless, letter
rulings are relevant for other taxpayers and tax advisors because they offer insight into the
IRS’s position on the tax treatment of particular transactions.
Originally the public did not have access to letter rulings issued to other taxpayers. As a
result of Sec. 6110, enacted in 1976, letter rulings (with confidential information deleted)
are accessible to the general public and have been reproduced by major tax services. An
example of a citation to a letter ruling appears below:
Ltr. Rul. 200130006 (July 30, 2001).
The first four digits (two if issued before 2000) indicate the year in which the ruling was
made public, in this case, 2001.19 The next two digits denote the week in which the rul-
ing was made public, here the thirtieth. The last three numbers indicate the numerical
sequence of the ruling for the week, here the sixth. The date in parentheses denotes the
date of the ruling.
ADDITIONAL COMMENT Other Interpretations

A technical advice memorandum Technical Advice Memoranda. When the IRS audits a taxpayer’s return, the IRS agent
is published as a letter ruling.
Whereas a taxpayer-requested
might ask the IRS national office for advice on a complicated, technical matter. The
letter ruling deals with prospec- national office will provide its advice in a technical advice memorandum, released to the
tive transactions, a technical ad- public in the form of a letter ruling.20 Researchers can identify which letter rulings are
vice memorandum deals with past
or consummated transactions. technical advice memoranda by introductory language such as, “In response to a request
for technical advice. . . .” An example of a citation to a technical advice memorandum is
as follows:
T.A.M. 9801001 (January 2, 1998).
This citation refers to the first technical advice memorandum issued in the first week of
1998. The memorandum is dated January 2, 1998.
Information Releases. If the IRS wants to disseminate information to the general

public, it will issue an information release. Information releases are written in lay terms
and are dispatched to thousands of newspapers throughout the country. The IRS, for
example, may issue an information release to announce the standard mileage rate for
business travel. An example of a citation to an information release is as follows:
I.R. 86-70 (June 12, 1986).
This citation is to the seventieth information release issued in 1986. The release is dated
June 12, 1986.
ADDITIONAL COMMENT Announcements and Notices. The IRS also disseminates information to tax practitioners
Announcements are used to in the form of announcements and notices. These pronouncements generally are more
summarize new tax legislation
or publicize procedural matters.
technical than information releases and frequently address current tax developments. After
Announcements generally are passage of a major tax act, and before the Treasury Department has had an opportunity
aimed at tax practitioners and to issue proposed or temporary regulations, the IRS may issue an announcement or notice
are considered to be “substantial
authority” [Rev. Rul. 90-91, 1990-2 to clarify the legislation. The IRS is bound to follow the announcement or notice just as
C.B. 262]. it is bound to follow a revenue procedure or revenue ruling. Examples of citations to
announcements and notices are as follows:
Announcement 2007-3, 2007-1 C.B. 376.

Notice 2007-9, 2007-1 C.B. 401.
The first citation is to the third announcement issued in 2007. It can be found on
page 376 of the first Cumulative Bulletin for 2007. The second citation is to the ninth
19 Sometimes a letter ruling is cited as PLR (private letter ruling) instead of 20 Technical advice memoranda are discussed further in Chapter C:15.
Ltr. Rul.
notice issued in 2007. It can be found on page 401 of the first Cumulative Bulletin for
2007. Notices and announcements appear in both the Internal Revenue Bulletin and the
Cumulative Bulletin.
JUdICIAl dECISIonS
Judicial decisions are an important source of tax law. Judges are reputed to be unbiased
individuals who decide questions of fact (the existence of a fact or the occurrence of an
event) or questions of law (the applicability of a legal principle or the proper interpreta-
tion of a legal term or provision). Judges do not always agree on the tax consequences of
a particular transaction or event. Therefore, tax advisors often must derive conclusions
against a background of conflicting judicial authorities. For example, a U.S. district court
might disagree with the Tax Court on the deductibility of an expense. Likewise, one circuit
court might disagree with another circuit court on the same issue.
Overview of the Court System. A taxpayer may begin tax litigation in any of three courts: the
U.S. Tax Court, the U.S. Court of Federal Claims (formerly the U.S. Claims Court), or U.S.
district courts. Court precedents are important in deciding where to begin such litigation
(see page C:1-21 for a discussion of precedent). Also important is when the taxpayer must
pay the deficiency the IRS contends is due. A taxpayer who wants to litigate either in a
U.S. district court or in the U.S. Court of Federal Claims must first pay the deficiency.
The taxpayer then files a claim for refund, which the IRS is likely to deny. Following this
denial, the taxpayer must petition the court for a refund. If the court grants the taxpayer’s
SELF-STUDY QUESTION petition, he or she receives a refund of the taxes in question plus accrued interest. If the
What are some of the factors that taxpayer begins litigation in the Tax Court, on the other hand, he or she need not pay
a taxpayer should consider when
deciding in which court to file a
the deficiency unless and until the court decides the case against him or her. In that event,
tax-related claim? the taxpayer also must pay interest and penalties.21 A taxpayer who believes that a jury
would be sympathetic to his or her case should litigate in a U.S. district court, the only
forum where a jury trial is possible.
ANSWER If a party loses at the trial court level, it can appeal the decision to a higher court.
(1) Each court’s published prec- Appeals of Tax Court and U.S. district court decisions are made to the court of appeals
edent pertaining to the issue,
(2) desirability of a jury trial, for the taxpayer’s circuit. The appeals court system is comprised of 11 geographical cir-
(3) tax expertise of each court, cuits designated by numbers, the District of Columbia Circuit, and the Federal Circuit.22
and (4) when the deficiency must
be paid. Table C:1-1 shows the states that lie in the various circuits. California, for example,
lies in the Ninth Circuit. When referring to these appellate courts, instead of saying, for
example, “the Court of Appeals for the Ninth Circuit,” one generally says “the Ninth
Circuit.” All decisions of the U.S. Court of Federal Claims are appealable to one court—
the Court of Appeals for the Federal Circuit—irrespective of where the taxpayer resides
or does business.23 The only cases the Federal Circuit hears are those that originate in
the U.S. Court of Federal Claims.
ADDITIONAL COMMENT The party losing at the appellate level can petition the U.S. Supreme Court to review
Because the Tax Court deals only the case under a writ of certiorari. If the Supreme Court agrees to hear the case, it grants
with tax cases, it presumably has certiorari.24 If it refuses to hear the case, it denies certiorari. In recent years, the Court has
a higher level of tax expertise
than do other courts. Tax Court granted certiorari in only about six to ten tax cases per year. Figure C:1-3 and Table C:1-2
judges are appointed by the provide an overview and summary of the court system with respect to tax matters.
President, in part, due to their
considerable tax experience. The
Tax Court typically maintains a The U.S. Tax Court. The U.S. Tax Court was created in 1942 as a successor to the Board
large backlog of tax cases, some- of Tax Appeals. It is a court of national jurisdiction that hears only tax-related cases. All
times numbering in the tens of
thousands. taxpayers, regardless of their state of residence or place of business, may litigate in the Tax
Court. It has 19 judges, including one chief judge.25 The President, with the consent of the
Senate, appoints the judges for a 15-year term and may reappoint them for an additional
21 Revenue Procedure 2005-18, 2005-1 C.B. 798, provides procedures for 24 The granting of certiorari signifies that the Supreme Court is granting an
taxpayers to make remittances or apply overpayments to stop the accrual of appellate review. The denial of certiorari does not necessarily mean that the
interest on deficiencies. Supreme Court endorses the lower court’s decision. It simply means the court
22 The Federal Circuit has nationwide jurisdiction to hear appeals in special-
has decided not to hear the case.
ized cases, such as those involving patent laws. 25 The Tax Court also periodically appoints, depending on budgetary con-
23 The Court of Claims was reconstituted as the United States Court of Claims
straints, a number of trial judges and senior judges who hear cases and render
in 1982. In 1992, this court was renamed the U.S. Court of Federal Claims. decisions with the same authority as the regular Tax Court judges.
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DANCE ON STILTS AT THE GIRLS’ UNYAGO, NIUCHI
Newala, too, suffers from the distance of its water-supply—at least

the Newala of to-day does; there was once another Newala in a lovely
valley at the foot of the plateau. I visited it and found scarcely a trace
of houses, only a Christian cemetery, with the graves of several
missionaries and their converts, remaining as a monument of its
former glories. But the surroundings are wonderfully beautiful. A
thick grove of splendid mango-trees closes in the weather-worn
crosses and headstones; behind them, combining the useful and the
agreeable, is a whole plantation of lemon-trees covered with ripe
fruit; not the small African kind, but a much larger and also juicier
imported variety, which drops into the hands of the passing traveller,
without calling for any exertion on his part. Old Newala is now under
the jurisdiction of the native pastor, Daudi, at Chingulungulu, who,
as I am on very friendly terms with him, allows me, as a matter of
course, the use of this lemon-grove during my stay at Newala.
FEET MUTILATED BY THE RAVAGES OF THE “JIGGER”
(Sarcopsylla penetrans)
The water-supply of New Newala is in the bottom of the valley,

some 1,600 feet lower down. The way is not only long and fatiguing,
but the water, when we get it, is thoroughly bad. We are suffering not
only from this, but from the fact that the arrangements at Newala are
nothing short of luxurious. We have a separate kitchen—a hut built
against the boma palisade on the right of the baraza, the interior of
which is not visible from our usual position. Our two cooks were not
long in finding this out, and they consequently do—or rather neglect
to do—what they please. In any case they do not seem to be very
particular about the boiling of our drinking-water—at least I can
attribute to no other cause certain attacks of a dysenteric nature,
from which both Knudsen and I have suffered for some time. If a
man like Omari has to be left unwatched for a moment, he is capable
of anything. Besides this complaint, we are inconvenienced by the
state of our nails, which have become as hard as glass, and crack on
the slightest provocation, and I have the additional infliction of
pimples all over me. As if all this were not enough, we have also, for
the last week been waging war against the jigger, who has found his
Eldorado in the hot sand of the Makonde plateau. Our men are seen
all day long—whenever their chronic colds and the dysentery likewise
raging among them permit—occupied in removing this scourge of
Africa from their feet and trying to prevent the disastrous
consequences of its presence. It is quite common to see natives of
this place with one or two toes missing; many have lost all their toes,
or even the whole front part of the foot, so that a well-formed leg
ends in a shapeless stump. These ravages are caused by the female of
Sarcopsylla penetrans, which bores its way under the skin and there
develops an egg-sac the size of a pea. In all books on the subject, it is
stated that one’s attention is called to the presence of this parasite by
an intolerable itching. This agrees very well with my experience, so
far as the softer parts of the sole, the spaces between and under the
toes, and the side of the foot are concerned, but if the creature
penetrates through the harder parts of the heel or ball of the foot, it
may escape even the most careful search till it has reached maturity.
Then there is no time to be lost, if the horrible ulceration, of which
we see cases by the dozen every day, is to be prevented. It is much
easier, by the way, to discover the insect on the white skin of a
European than on that of a native, on which the dark speck scarcely
shows. The four or five jiggers which, in spite of the fact that I
constantly wore high laced boots, chose my feet to settle in, were
taken out for me by the all-accomplished Knudsen, after which I
thought it advisable to wash out the cavities with corrosive
sublimate. The natives have a different sort of disinfectant—they fill
the hole with scraped roots. In a tiny Makua village on the slope of
the plateau south of Newala, we saw an old woman who had filled all
the spaces under her toe-nails with powdered roots by way of
prophylactic treatment. What will be the result, if any, who can say?
The rest of the many trifling ills which trouble our existence are
really more comic than serious. In the absence of anything else to
smoke, Knudsen and I at last opened a box of cigars procured from
the Indian store-keeper at Lindi, and tried them, with the most
distressing results. Whether they contain opium or some other
narcotic, neither of us can say, but after the tenth puff we were both
“off,” three-quarters stupefied and unspeakably wretched. Slowly we
recovered—and what happened next? Half-an-hour later we were
once more smoking these poisonous concoctions—so insatiable is the
craving for tobacco in the tropics.
Even my present attacks of fever scarcely deserve to be taken
seriously. I have had no less than three here at Newala, all of which
have run their course in an incredibly short time. In the early
afternoon, I am busy with my old natives, asking questions and
making notes. The strong midday coffee has stimulated my spirits to
an extraordinary degree, the brain is active and vigorous, and work
progresses rapidly, while a pleasant warmth pervades the whole
body. Suddenly this gives place to a violent chill, forcing me to put on
my overcoat, though it is only half-past three and the afternoon sun
is at its hottest. Now the brain no longer works with such acuteness
and logical precision; more especially does it fail me in trying to
establish the syntax of the difficult Makua language on which I have
ventured, as if I had not enough to do without it. Under the
circumstances it seems advisable to take my temperature, and I do
so, to save trouble, without leaving my seat, and while going on with
my work. On examination, I find it to be 101·48°. My tutors are
abruptly dismissed and my bed set up in the baraza; a few minutes
later I am in it and treating myself internally with hot water and
lemon-juice.
Three hours later, the thermometer marks nearly 104°, and I make
them carry me back into the tent, bed and all, as I am now perspiring
heavily, and exposure to the cold wind just beginning to blow might
mean a fatal chill. I lie still for a little while, and then find, to my
great relief, that the temperature is not rising, but rather falling. This
is about 7.30 p.m. At 8 p.m. I find, to my unbounded astonishment,
that it has fallen below 98·6°, and I feel perfectly well. I read for an
hour or two, and could very well enjoy a smoke, if I had the
wherewithal—Indian cigars being out of the question.
Having no medical training, I am at a loss to account for this state
of things. It is impossible that these transitory attacks of high fever
should be malarial; it seems more probable that they are due to a
kind of sunstroke. On consulting my note-book, I become more and
more inclined to think this is the case, for these attacks regularly
follow extreme fatigue and long exposure to strong sunshine. They at
least have the advantage of being only short interruptions to my
work, as on the following morning I am always quite fresh and fit.
My treasure of a cook is suffering from an enormous hydrocele which
makes it difficult for him to get up, and Moritz is obliged to keep in
the dark on account of his inflamed eyes. Knudsen’s cook, a raw boy
from somewhere in the bush, knows still less of cooking than Omari;
consequently Nils Knudsen himself has been promoted to the vacant
post. Finding that we had come to the end of our supplies, he began
by sending to Chingulungulu for the four sucking-pigs which we had
bought from Matola and temporarily left in his charge; and when
they came up, neatly packed in a large crate, he callously slaughtered
the biggest of them. The first joint we were thoughtless enough to
entrust for roasting to Knudsen’s mshenzi cook, and it was
consequently uneatable; but we made the rest of the animal into a
jelly which we ate with great relish after weeks of underfeeding,
consuming incredible helpings of it at both midday and evening
meals. The only drawback is a certain want of variety in the tinned
vegetables. Dr. Jäger, to whom the Geographical Commission
entrusted the provisioning of the expeditions—mine as well as his
own—because he had more time on his hands than the rest of us,
seems to have laid in a huge stock of Teltow turnips,[46] an article of
food which is all very well for occasional use, but which quickly palls
when set before one every day; and we seem to have no other tins
left. There is no help for it—we must put up with the turnips; but I
am certain that, once I am home again, I shall not touch them for ten
years to come.
Amid all these minor evils, which, after all, go to make up the
genuine flavour of Africa, there is at least one cheering touch:
Knudsen has, with the dexterity of a skilled mechanic, repaired my 9
× 12 cm. camera, at least so far that I can use it with a little care.
How, in the absence of finger-nails, he was able to accomplish such a
ticklish piece of work, having no tool but a clumsy screw-driver for
taking to pieces and putting together again the complicated
mechanism of the instantaneous shutter, is still a mystery to me; but
he did it successfully. The loss of his finger-nails shows him in a light
contrasting curiously enough with the intelligence evinced by the
above operation; though, after all, it is scarcely surprising after his
ten years’ residence in the bush. One day, at Lindi, he had occasion
to wash a dog, which must have been in need of very thorough
cleansing, for the bottle handed to our friend for the purpose had an
extremely strong smell. Having performed his task in the most
conscientious manner, he perceived with some surprise that the dog
did not appear much the better for it, and was further surprised by
finding his own nails ulcerating away in the course of the next few
days. “How was I to know that carbolic acid has to be diluted?” he
mutters indignantly, from time to time, with a troubled gaze at his
mutilated finger-tips.
Since we came to Newala we have been making excursions in all
directions through the surrounding country, in accordance with old
habit, and also because the akida Sefu did not get together the tribal
elders from whom I wanted information so speedily as he had
promised. There is, however, no harm done, as, even if seen only
from the outside, the country and people are interesting enough.
The Makonde plateau is like a large rectangular table rounded off
at the corners. Measured from the Indian Ocean to Newala, it is
about seventy-five miles long, and between the Rovuma and the
Lukuledi it averages fifty miles in breadth, so that its superficial area
is about two-thirds of that of the kingdom of Saxony. The surface,
however, is not level, but uniformly inclined from its south-western
edge to the ocean. From the upper edge, on which Newala lies, the
eye ranges for many miles east and north-east, without encountering
any obstacle, over the Makonde bush. It is a green sea, from which
here and there thick clouds of smoke rise, to show that it, too, is
inhabited by men who carry on their tillage like so many other
primitive peoples, by cutting down and burning the bush, and
manuring with the ashes. Even in the radiant light of a tropical day
such a fire is a grand sight.
Much less effective is the impression produced just now by the
great western plain as seen from the edge of the plateau. As often as
time permits, I stroll along this edge, sometimes in one direction,
sometimes in another, in the hope of finding the air clear enough to
let me enjoy the view; but I have always been disappointed.
Wherever one looks, clouds of smoke rise from the burning bush,
and the air is full of smoke and vapour. It is a pity, for under more
favourable circumstances the panorama of the whole country up to
the distant Majeje hills must be truly magnificent. It is of little use
taking photographs now, and an outline sketch gives a very poor idea
of the scenery. In one of these excursions I went out of my way to
make a personal attempt on the Makonde bush. The present edge of
the plateau is the result of a far-reaching process of destruction
through erosion and denudation. The Makonde strata are
everywhere cut into by ravines, which, though short, are hundreds of
yards in depth. In consequence of the loose stratification of these
beds, not only are the walls of these ravines nearly vertical, but their
upper end is closed by an equally steep escarpment, so that the
western edge of the Makonde plateau is hemmed in by a series of
deep, basin-like valleys. In order to get from one side of such a ravine
to the other, I cut my way through the bush with a dozen of my men.
It was a very open part, with more grass than scrub, but even so the
short stretch of less than two hundred yards was very hard work; at
the end of it the men’s calicoes were in rags and they themselves
bleeding from hundreds of scratches, while even our strong khaki
suits had not escaped scatheless.
NATIVE PATH THROUGH THE MAKONDE BUSH, NEAR

MAHUTA
I see increasing reason to believe that the view formed some time
back as to the origin of the Makonde bush is the correct one. I have
no doubt that it is not a natural product, but the result of human
occupation. Those parts of the high country where man—as a very
slight amount of practice enables the eye to perceive at once—has not
yet penetrated with axe and hoe, are still occupied by a splendid
timber forest quite able to sustain a comparison with our mixed
forests in Germany. But wherever man has once built his hut or tilled
his field, this horrible bush springs up. Every phase of this process
may be seen in the course of a couple of hours’ walk along the main
road. From the bush to right or left, one hears the sound of the axe—
not from one spot only, but from several directions at once. A few
steps further on, we can see what is taking place. The brush has been
cut down and piled up in heaps to the height of a yard or more,
between which the trunks of the large trees stand up like the last
pillars of a magnificent ruined building. These, too, present a
melancholy spectacle: the destructive Makonde have ringed them—
cut a broad strip of bark all round to ensure their dying off—and also
piled up pyramids of brush round them. Father and son, mother and
son-in-law, are chopping away perseveringly in the background—too
busy, almost, to look round at the white stranger, who usually excites
so much interest. If you pass by the same place a week later, the piles
of brushwood have disappeared and a thick layer of ashes has taken
the place of the green forest. The large trees stretch their
smouldering trunks and branches in dumb accusation to heaven—if
they have not already fallen and been more or less reduced to ashes,
perhaps only showing as a white stripe on the dark ground.
This work of destruction is carried out by the Makonde alike on the
virgin forest and on the bush which has sprung up on sites already
cultivated and deserted. In the second case they are saved the trouble
of burning the large trees, these being entirely absent in the
secondary bush.
After burning this piece of forest ground and loosening it with the
hoe, the native sows his corn and plants his vegetables. All over the
country, he goes in for bed-culture, which requires, and, in fact,
receives, the most careful attention. Weeds are nowhere tolerated in
the south of German East Africa. The crops may fail on the plains,
where droughts are frequent, but never on the plateau with its
abundant rains and heavy dews. Its fortunate inhabitants even have
the satisfaction of seeing the proud Wayao and Wamakua working
for them as labourers, driven by hunger to serve where they were
accustomed to rule.
But the light, sandy soil is soon exhausted, and would yield no
harvest the second year if cultivated twice running. This fact has
been familiar to the native for ages; consequently he provides in
time, and, while his crop is growing, prepares the next plot with axe
and firebrand. Next year he plants this with his various crops and
lets the first piece lie fallow. For a short time it remains waste and
desolate; then nature steps in to repair the destruction wrought by
man; a thousand new growths spring out of the exhausted soil, and
even the old stumps put forth fresh shoots. Next year the new growth
is up to one’s knees, and in a few years more it is that terrible,
impenetrable bush, which maintains its position till the black
occupier of the land has made the round of all the available sites and
come back to his starting point.
The Makonde are, body and soul, so to speak, one with this bush.
According to my Yao informants, indeed, their name means nothing
else but “bush people.” Their own tradition says that they have been
settled up here for a very long time, but to my surprise they laid great
stress on an original immigration. Their old homes were in the
south-east, near Mikindani and the mouth of the Rovuma, whence
their peaceful forefathers were driven by the continual raids of the
Sakalavas from Madagascar and the warlike Shirazis[47] of the coast,
to take refuge on the almost inaccessible plateau. I have studied
African ethnology for twenty years, but the fact that changes of
population in this apparently quiet and peaceable corner of the earth
could have been occasioned by outside enterprises taking place on
the high seas, was completely new to me. It is, no doubt, however,
correct.
The charming tribal legend of the Makonde—besides informing us
of other interesting matters—explains why they have to live in the
thickest of the bush and a long way from the edge of the plateau,
instead of making their permanent homes beside the purling brooks
and springs of the low country.
“The place where the tribe originated is Mahuta, on the southern
side of the plateau towards the Rovuma, where of old time there was
nothing but thick bush. Out of this bush came a man who never
washed himself or shaved his head, and who ate and drank but little.
He went out and made a human figure from the wood of a tree
growing in the open country, which he took home to his abode in the
bush and there set it upright. In the night this image came to life and
was a woman. The man and woman went down together to the
Rovuma to wash themselves. Here the woman gave birth to a still-
born child. They left that place and passed over the high land into the
valley of the Mbemkuru, where the woman had another child, which
was also born dead. Then they returned to the high bush country of
Mahuta, where the third child was born, which lived and grew up. In
course of time, the couple had many more children, and called
themselves Wamatanda. These were the ancestral stock of the
Makonde, also called Wamakonde,[48] i.e., aborigines. Their
forefather, the man from the bush, gave his children the command to
bury their dead upright, in memory of the mother of their race who
was cut out of wood and awoke to life when standing upright. He also
warned them against settling in the valleys and near large streams,
for sickness and death dwelt there. They were to make it a rule to
have their huts at least an hour’s walk from the nearest watering-
place; then their children would thrive and escape illness.”
The explanation of the name Makonde given by my informants is
somewhat different from that contained in the above legend, which I
extract from a little book (small, but packed with information), by
Pater Adams, entitled Lindi und sein Hinterland. Otherwise, my
results agree exactly with the statements of the legend. Washing?
Hapana—there is no such thing. Why should they do so? As it is, the
supply of water scarcely suffices for cooking and drinking; other
people do not wash, so why should the Makonde distinguish himself
by such needless eccentricity? As for shaving the head, the short,
woolly crop scarcely needs it,[49] so the second ancestral precept is
likewise easy enough to follow. Beyond this, however, there is
nothing ridiculous in the ancestor’s advice. I have obtained from
various local artists a fairly large number of figures carved in wood,
ranging from fifteen to twenty-three inches in height, and
representing women belonging to the great group of the Mavia,
Makonde, and Matambwe tribes. The carving is remarkably well
done and renders the female type with great accuracy, especially the
keloid ornamentation, to be described later on. As to the object and
meaning of their works the sculptors either could or (more probably)
would tell me nothing, and I was forced to content myself with the
scanty information vouchsafed by one man, who said that the figures
were merely intended to represent the nembo—the artificial
deformations of pelele, ear-discs, and keloids. The legend recorded
by Pater Adams places these figures in a new light. They must surely
be more than mere dolls; and we may even venture to assume that
they are—though the majority of present-day Makonde are probably
unaware of the fact—representations of the tribal ancestress.
The references in the legend to the descent from Mahuta to the
Rovuma, and to a journey across the highlands into the Mbekuru
valley, undoubtedly indicate the previous history of the tribe, the
travels of the ancestral pair typifying the migrations of their
descendants. The descent to the neighbouring Rovuma valley, with
its extraordinary fertility and great abundance of game, is intelligible
at a glance—but the crossing of the Lukuledi depression, the ascent
to the Rondo Plateau and the descent to the Mbemkuru, also lie
within the bounds of probability, for all these districts have exactly
the same character as the extreme south. Now, however, comes a
point of especial interest for our bacteriological age. The primitive
Makonde did not enjoy their lives in the marshy river-valleys.
Disease raged among them, and many died. It was only after they
had returned to their original home near Mahuta, that the health
conditions of these people improved. We are very apt to think of the
African as a stupid person whose ignorance of nature is only equalled
by his fear of it, and who looks on all mishaps as caused by evil
spirits and malignant natural powers. It is much more correct to
assume in this case that the people very early learnt to distinguish
districts infested with malaria from those where it is absent.
This knowledge is crystallized in the
ancestral warning against settling in the
valleys and near the great waters, the
dwelling-places of disease and death. At the
same time, for security against the hostile
Mavia south of the Rovuma, it was enacted
that every settlement must be not less than a
certain distance from the southern edge of the
plateau. Such in fact is their mode of life at the
present day. It is not such a bad one, and
certainly they are both safer and more
comfortable than the Makua, the recent
intruders from the south, who have made USUAL METHOD OF
good their footing on the western edge of the CLOSING HUT-DOOR
plateau, extending over a fairly wide belt of
country. Neither Makua nor Makonde show in their dwellings
anything of the size and comeliness of the Yao houses in the plain,
especially at Masasi, Chingulungulu and Zuza’s. Jumbe Chauro, a
Makonde hamlet not far from Newala, on the road to Mahuta, is the
most important settlement of the tribe I have yet seen, and has fairly
spacious huts. But how slovenly is their construction compared with
the palatial residences of the elephant-hunters living in the plain.
The roofs are still more untidy than in the general run of huts during
the dry season, the walls show here and there the scanty beginnings
or the lamentable remains of the mud plastering, and the interior is a
veritable dog-kennel; dirt, dust and disorder everywhere. A few huts
only show any attempt at division into rooms, and this consists
merely of very roughly-made bamboo partitions. In one point alone
have I noticed any indication of progress—in the method of fastening
the door. Houses all over the south are secured in a simple but
ingenious manner. The door consists of a set of stout pieces of wood
or bamboo, tied with bark-string to two cross-pieces, and moving in
two grooves round one of the door-posts, so as to open inwards. If
the owner wishes to leave home, he takes two logs as thick as a man’s
upper arm and about a yard long. One of these is placed obliquely
against the middle of the door from the inside, so as to form an angle
of from 60° to 75° with the ground. He then places the second piece
horizontally across the first, pressing it downward with all his might.
It is kept in place by two strong posts planted in the ground a few
inches inside the door. This fastening is absolutely safe, but of course
cannot be applied to both doors at once, otherwise how could the
owner leave or enter his house? I have not yet succeeded in finding
out how the back door is fastened.
MAKONDE LOCK AND KEY AT JUMBE CHAURO

This is the general way of closing a house. The Makonde at Jumbe
Chauro, however, have a much more complicated, solid and original
one. Here, too, the door is as already described, except that there is
only one post on the inside, standing by itself about six inches from
one side of the doorway. Opposite this post is a hole in the wall just
large enough to admit a man’s arm. The door is closed inside by a
large wooden bolt passing through a hole in this post and pressing
with its free end against the door. The other end has three holes into
which fit three pegs running in vertical grooves inside the post. The
door is opened with a wooden key about a foot long, somewhat
curved and sloped off at the butt; the other end has three pegs
corresponding to the holes, in the bolt, so that, when it is thrust
through the hole in the wall and inserted into the rectangular
opening in the post, the pegs can be lifted and the bolt drawn out.[50]
MODE OF INSERTING THE KEY
With no small pride first one householder and then a second

showed me on the spot the action of this greatest invention of the
Makonde Highlands. To both with an admiring exclamation of
“Vizuri sana!” (“Very fine!”). I expressed the wish to take back these
marvels with me to Ulaya, to show the Wazungu what clever fellows
the Makonde are. Scarcely five minutes after my return to camp at
Newala, the two men came up sweating under the weight of two
heavy logs which they laid down at my feet, handing over at the same
time the keys of the fallen fortress. Arguing, logically enough, that if
the key was wanted, the lock would be wanted with it, they had taken
their axes and chopped down the posts—as it never occurred to them
to dig them out of the ground and so bring them intact. Thus I have
two badly damaged specimens, and the owners, instead of praise,
come in for a blowing-up.
The Makua huts in the environs of Newala are especially
miserable; their more than slovenly construction reminds one of the
temporary erections of the Makua at Hatia’s, though the people here
have not been concerned in a war. It must therefore be due to
congenital idleness, or else to the absence of a powerful chief. Even
the baraza at Mlipa’s, a short hour’s walk south-east of Newala,
shares in this general neglect. While public buildings in this country
are usually looked after more or less carefully, this is in evident
danger of being blown over by the first strong easterly gale. The only
attractive object in this whole district is the grave of the late chief
Mlipa. I visited it in the morning, while the sun was still trying with
partial success to break through the rolling mists, and the circular
grove of tall euphorbias, which, with a broken pot, is all that marks
the old king’s resting-place, impressed one with a touch of pathos.
Even my very materially-minded carriers seemed to feel something
of the sort, for instead of their usual ribald songs, they chanted
solemnly, as we marched on through the dense green of the Makonde
bush:—
“We shall arrive with the great master; we stand in a row and have
no fear about getting our food and our money from the Serkali (the
Government). We are not afraid; we are going along with the great
master, the lion; we are going down to the coast and back.”
With regard to the characteristic features of the various tribes here
on the western edge of the plateau, I can arrive at no other
conclusion than the one already come to in the plain, viz., that it is
impossible for anyone but a trained anthropologist to assign any
given individual at once to his proper tribe. In fact, I think that even
an anthropological specialist, after the most careful examination,
might find it a difficult task to decide. The whole congeries of peoples
collected in the region bounded on the west by the great Central
African rift, Tanganyika and Nyasa, and on the east by the Indian
Ocean, are closely related to each other—some of their languages are
only distinguished from one another as dialects of the same speech,
and no doubt all the tribes present the same shape of skull and
structure of skeleton. Thus, surely, there can be no very striking
differences in outward appearance.
Even did such exist, I should have no time
to concern myself with them, for day after day,
I have to see or hear, as the case may be—in
any case to grasp and record—an
extraordinary number of ethnographic
phenomena. I am almost disposed to think it
fortunate that some departments of inquiry, at
least, are barred by external circumstances.
Chief among these is the subject of iron-
working. We are apt to think of Africa as a
country where iron ore is everywhere, so to
speak, to be picked up by the roadside, and
where it would be quite surprising if the
inhabitants had not learnt to smelt the
material ready to their hand. In fact, the
knowledge of this art ranges all over the
continent, from the Kabyles in the north to the
Kafirs in the south. Here between the Rovuma
and the Lukuledi the conditions are not so
favourable. According to the statements of the
Makonde, neither ironstone nor any other
form of iron ore is known to them. They have
not therefore advanced to the art of smelting
the metal, but have hitherto bought all their
THE ANCESTRESS OF
THE MAKONDE
iron implements from neighbouring tribes.
Even in the plain the inhabitants are not much
better off. Only one man now living is said to
understand the art of smelting iron. This old fundi lives close to
Huwe, that isolated, steep-sided block of granite which rises out of
the green solitude between Masasi and Chingulungulu, and whose
jagged and splintered top meets the traveller’s eye everywhere. While
still at Masasi I wished to see this man at work, but was told that,
frightened by the rising, he had retired across the Rovuma, though
he would soon return. All subsequent inquiries as to whether the
fundi had come back met with the genuine African answer, “Bado”
(“Not yet”).
BRAZIER
Some consolation was afforded me by a brassfounder, whom I

came across in the bush near Akundonde’s. This man is the favourite
of women, and therefore no doubt of the gods; he welds the glittering
brass rods purchased at the coast into those massive, heavy rings
which, on the wrists and ankles of the local fair ones, continually give
me fresh food for admiration. Like every decent master-craftsman he
had all his tools with him, consisting of a pair of bellows, three
crucibles and a hammer—nothing more, apparently. He was quite
willing to show his skill, and in a twinkling had fixed his bellows on
the ground. They are simply two goat-skins, taken off whole, the four
legs being closed by knots, while the upper opening, intended to
admit the air, is kept stretched by two pieces of wood. At the lower
end of the skin a smaller opening is left into which a wooden tube is
stuck. The fundi has quickly borrowed a heap of wood-embers from
the nearest hut; he then fixes the free ends of the two tubes into an
earthen pipe, and clamps them to the ground by means of a bent
piece of wood. Now he fills one of his small clay crucibles, the dross
on which shows that they have been long in use, with the yellow
material, places it in the midst of the embers, which, at present are
only faintly glimmering, and begins his work. In quick alternation
the smith’s two hands move up and down with the open ends of the
bellows; as he raises his hand he holds the slit wide open, so as to let
the air enter the skin bag unhindered. In pressing it down he closes
the bag, and the air puffs through the bamboo tube and clay pipe into
the fire, which quickly burns up. The smith, however, does not keep
on with this work, but beckons to another man, who relieves him at
the bellows, while he takes some more tools out of a large skin pouch
carried on his back. I look on in wonder as, with a smooth round
stick about the thickness of a finger, he bores a few vertical holes into
the clean sand of the soil. This should not be difficult, yet the man
seems to be taking great pains over it. Then he fastens down to the
ground, with a couple of wooden clamps, a neat little trough made by
splitting a joint of bamboo in half, so that the ends are closed by the
two knots. At last the yellow metal has attained the right consistency,
and the fundi lifts the crucible from the fire by means of two sticks
split at the end to serve as tongs. A short swift turn to the left—a
tilting of the crucible—and the molten brass, hissing and giving forth
clouds of smoke, flows first into the bamboo mould and then into the
holes in the ground.
The technique of this backwoods craftsman may not be very far
advanced, but it cannot be denied that he knows how to obtain an
adequate result by the simplest means. The ladies of highest rank in
this country—that is to say, those who can afford it, wear two kinds
of these massive brass rings, one cylindrical, the other semicircular
in section. The latter are cast in the most ingenious way in the
bamboo mould, the former in the circular hole in the sand. It is quite
a simple matter for the fundi to fit these bars to the limbs of his fair
customers; with a few light strokes of his hammer he bends the
pliable brass round arm or ankle without further inconvenience to
the wearer.
SHAPING THE POT
SMOOTHING WITH MAIZE-COB
CUTTING THE EDGE

FINISHING THE BOTTOM
LAST SMOOTHING BEFORE

BURNING
FIRING THE BRUSH-PILE

LIGHTING THE FARTHER SIDE OF
THE PILE
TURNING THE RED-HOT VESSEL
NYASA WOMAN MAKING POTS AT MASASI

Pottery is an art which must always and everywhere excite the
interest of the student, just because it is so intimately connected with
the development of human culture, and because its relics are one of
the principal factors in the reconstruction of our own condition in
prehistoric times. I shall always remember with pleasure the two or
three afternoons at Masasi when Salim Matola’s mother, a slightly-
built, graceful, pleasant-looking woman, explained to me with
touching patience, by means of concrete illustrations, the ceramic art
of her people. The only implements for this primitive process were a
lump of clay in her left hand, and in the right a calabash containing
the following valuables: the fragment of a maize-cob stripped of all
its grains, a smooth, oval pebble, about the size of a pigeon’s egg, a
few chips of gourd-shell, a bamboo splinter about the length of one’s
hand, a small shell, and a bunch of some herb resembling spinach.
Nothing more. The woman scraped with the
shell a round, shallow hole in the soft, fine
sand of the soil, and, when an active young
girl had filled the calabash with water for her,
she began to knead the clay. As if by magic it
gradually assumed the shape of a rough but
already well-shaped vessel, which only wanted
a little touching up with the instruments
before mentioned. I looked out with the
MAKUA WOMAN closest attention for any indication of the use
MAKING A POT. of the potter’s wheel, in however rudimentary
SHOWS THE a form, but no—hapana (there is none). The
BEGINNINGS OF THE embryo pot stood firmly in its little
POTTER’S WHEEL
depression, and the woman walked round it in
a stooping posture, whether she was removing
small stones or similar foreign bodies with the maize-cob, smoothing
the inner or outer surface with the splinter of bamboo, or later, after
letting it dry for a day, pricking in the ornamentation with a pointed
bit of gourd-shell, or working out the bottom, or cutting the edge
with a sharp bamboo knife, or giving the last touches to the finished
vessel. This occupation of the women is infinitely toilsome, but it is
without doubt an accurate reproduction of the process in use among
our ancestors of the Neolithic and Bronze ages.
There is no doubt that the invention of pottery, an item in human
progress whose importance cannot be over-estimated, is due to
women. Rough, coarse and unfeeling, the men of the horde range
over the countryside. When the united cunning of the hunters has
succeeded in killing the game; not one of them thinks of carrying
home the spoil. A bright fire, kindled by a vigorous wielding of the
drill, is crackling beside them; the animal has been cleaned and cut
up secundum artem, and, after a slight singeing, will soon disappear
under their sharp teeth; no one all this time giving a single thought
to wife or child.
To what shifts, on the other hand, the primitive wife, and still more
the primitive mother, was put! Not even prehistoric stomachs could
endure an unvarying diet of raw food. Something or other suggested
the beneficial effect of hot water on the majority of approved but
indigestible dishes. Perhaps a neighbour had tried holding the hard
roots or tubers over the fire in a calabash filled with water—or maybe
an ostrich-egg-shell, or a hastily improvised vessel of bark. They
became much softer and more palatable than they had previously
been; but, unfortunately, the vessel could not stand the fire and got
charred on the outside. That can be remedied, thought our
ancestress, and plastered a layer of wet clay round a similar vessel.
This is an improvement; the cooking utensil remains uninjured, but
the heat of the fire has shrunk it, so that it is loose in its shell. The
next step is to detach it, so, with a firm grip and a jerk, shell and
kernel are separated, and pottery is invented. Perhaps, however, the
discovery which led to an intelligent use of the burnt-clay shell, was
made in a slightly different way. Ostrich-eggs and calabashes are not
to be found in every part of the world, but everywhere mankind has
arrived at the art of making baskets out of pliant materials, such as
bark, bast, strips of palm-leaf, supple twigs, etc. Our inventor has no
water-tight vessel provided by nature. “Never mind, let us line the
basket with clay.” This answers the purpose, but alas! the basket gets
burnt over the blazing fire, the woman watches the process of
cooking with increasing uneasiness, fearing a leak, but no leak
appears. The food, done to a turn, is eaten with peculiar relish; and
the cooking-vessel is examined, half in curiosity, half in satisfaction
at the result. The plastic clay is now hard as stone, and at the same
time looks exceedingly well, for the neat plaiting of the burnt basket
is traced all over it in a pretty pattern. Thus, simultaneously with
pottery, its ornamentation was invented.
Primitive woman has another claim to respect. It was the man,
roving abroad, who invented the art of producing fire at will, but the
woman, unable to imitate him in this, has been a Vestal from the
earliest times. Nothing gives so much trouble as the keeping alight of
the smouldering brand, and, above all, when all the men are absent
from the camp. Heavy rain-clouds gather, already the first large
drops are falling, the first gusts of the storm rage over the plain. The
little flame, a greater anxiety to the woman than her own children,
flickers unsteadily in the blast. What is to be done? A sudden thought
occurs to her, and in an instant she has constructed a primitive hut
out of strips of bark, to protect the flame against rain and wind.
This, or something very like it, was the way in which the principle
of the house was discovered; and even the most hardened misogynist
cannot fairly refuse a woman the credit of it. The protection of the
hearth-fire from the weather is the germ from which the human
dwelling was evolved. Men had little, if any share, in this forward
step, and that only at a late stage. Even at the present day, the
plastering of the housewall with clay and the manufacture of pottery
are exclusively the women’s business. These are two very significant
survivals. Our European kitchen-garden, too, is originally a woman’s
invention, and the hoe, the primitive instrument of agriculture, is,
characteristically enough, still used in this department. But the
noblest achievement which we owe to the other sex is unquestionably
the art of cookery. Roasting alone—the oldest process—is one for
which men took the hint (a very obvious one) from nature. It must
have been suggested by the scorched carcase of some animal
overtaken by the destructive forest-fires. But boiling—the process of
improving organic substances by the help of water heated to boiling-
point—is a much later discovery. It is so recent that it has not even
yet penetrated to all parts of the world. The Polynesians understand
how to steam food, that is, to cook it, neatly wrapped in leaves, in a
hole in the earth between hot stones, the air being excluded, and
(sometimes) a few drops of water sprinkled on the stones; but they
do not understand boiling.
To come back from this digression, we find that the slender Nyasa
woman has, after once more carefully examining the finished pot,
put it aside in the shade to dry. On the following day she sends me
word by her son, Salim Matola, who is always on hand, that she is
going to do the burning, and, on coming out of my house, I find her
already hard at work. She has spread on the ground a layer of very
dry sticks, about as thick as one’s thumb, has laid the pot (now of a
yellowish-grey colour) on them, and is piling brushwood round it.
My faithful Pesa mbili, the mnyampara, who has been standing by,
most obligingly, with a lighted stick, now hands it to her. Both of
them, blowing steadily, light the pile on the lee side, and, when the
flame begins to catch, on the weather side also. Soon the whole is in a
blaze, but the dry fuel is quickly consumed and the fire dies down, so
that we see the red-hot vessel rising from the ashes. The woman
turns it continually with a long stick, sometimes one way and
sometimes another, so that it may be evenly heated all over. In
twenty minutes she rolls it out of the ash-heap, takes up the bundle
of spinach, which has been lying for two days in a jar of water, and
sprinkles the red-hot clay with it. The places where the drops fall are
marked by black spots on the uniform reddish-brown surface. With a
sigh of relief, and with visible satisfaction, the woman rises to an
erect position; she is standing just in a line between me and the fire,
from which a cloud of smoke is just rising: I press the ball of my
camera, the shutter clicks—the apotheosis is achieved! Like a
priestess, representative of her inventive sex, the graceful woman
stands: at her feet the hearth-fire she has given us beside her the
invention she has devised for us, in the background the home she has
built for us.
At Newala, also, I have had the manufacture of pottery carried on
in my presence. Technically the process is better than that already
described, for here we find the beginnings of the potter’s wheel,
which does not seem to exist in the plains; at least I have seen
nothing of the sort. The artist, a frightfully stupid Makua woman, did
not make a depression in the ground to receive the pot she was about
to shape, but used instead a large potsherd. Otherwise, she went to
work in much the same way as Salim’s mother, except that she saved
herself the trouble of walking round and round her work by squatting
at her ease and letting the pot and potsherd rotate round her; this is
surely the first step towards a machine. But it does not follow that
the pot was improved by the process. It is true that it was beautifully
rounded and presented a very creditable appearance when finished,
but the numerous large and small vessels which I have seen, and, in
part, collected, in the “less advanced” districts, are no less so. We
moderns imagine that instruments of precision are necessary to
produce excellent results. Go to the prehistoric collections of our
museums and look at the pots, urns and bowls of our ancestors in the
dim ages of the past, and you will at once perceive your error.
MAKING LONGITUDINAL CUT IN
BARK
DRAWING THE BARK OFF THE LOG
REMOVING THE OUTER BARK

BEATING THE BARK
WORKING THE BARK-CLOTH AFTER BEATING, TO MAKE IT

SOFT
MANUFACTURE OF BARK-CLOTH AT NEWALA

To-day, nearly the whole population of German East Africa is
clothed in imported calico. This was not always the case; even now in
some parts of the north dressed skins are still the prevailing wear,
and in the north-western districts—east and north of Lake
Tanganyika—lies a zone where bark-cloth has not yet been
superseded. Probably not many generations have passed since such
bark fabrics and kilts of skins were the only clothing even in the
south. Even to-day, large quantities of this bright-red or drab
material are still to be found; but if we wish to see it, we must look in
the granaries and on the drying stages inside the native huts, where
it serves less ambitious uses as wrappings for those seeds and fruits
which require to be packed with special care. The salt produced at
Masasi, too, is packed for transport to a distance in large sheets of
bark-cloth. Wherever I found it in any degree possible, I studied the
process of making this cloth. The native requisitioned for the
purpose arrived, carrying a log between two and three yards long and
as thick as his thigh, and nothing else except a curiously-shaped
mallet and the usual long, sharp and pointed knife which all men and
boys wear in a belt at their backs without a sheath—horribile dictu!
[51]
Silently he squats down before me, and with two rapid cuts has
drawn a couple of circles round the log some two yards apart, and
slits the bark lengthwise between them with the point of his knife.
With evident care, he then scrapes off the outer rind all round the
log, so that in a quarter of an hour the inner red layer of the bark
shows up brightly-coloured between the two untouched ends. With
some trouble and much caution, he now loosens the bark at one end,
and opens the cylinder. He then stands up, takes hold of the free
edge with both hands, and turning it inside out, slowly but steadily
pulls it off in one piece. Now comes the troublesome work of
scraping all superfluous particles of outer bark from the outside of
the long, narrow piece of material, while the inner side is carefully
scrutinised for defective spots. At last it is ready for beating. Having
signalled to a friend, who immediately places a bowl of water beside
him, the artificer damps his sheet of bark all over, seizes his mallet,
lays one end of the stuff on the smoothest spot of the log, and
hammers away slowly but continuously. “Very simple!” I think to
myself. “Why, I could do that, too!”—but I am forced to change my
opinions a little later on; for the beating is quite an art, if the fabric is
not to be beaten to pieces. To prevent the breaking of the fibres, the
stuff is several times folded across, so as to interpose several
thicknesses between the mallet and the block. At last the required
state is reached, and the fundi seizes the sheet, still folded, by both
ends, and wrings it out, or calls an assistant to take one end while he
holds the other. The cloth produced in this way is not nearly so fine
and uniform in texture as the famous Uganda bark-cloth, but it is
quite soft, and, above all, cheap.
Now, too, I examine the mallet. My craftsman has been using the
simpler but better form of this implement, a conical block of some
hard wood, its base—the striking surface—being scored across and
across with more or less deeply-cut grooves, and the handle stuck
into a hole in the middle. The other and earlier form of mallet is
shaped in the same way, but the head is fastened by an ingenious
network of bark strips into the split bamboo serving as a handle. The
observation so often made, that ancient customs persist longest in
connection with religious ceremonies and in the life of children, here
finds confirmation. As we shall soon see, bark-cloth is still worn
during the unyago,[52] having been prepared with special solemn
ceremonies; and many a mother, if she has no other garment handy,
will still put her little one into a kilt of bark-cloth, which, after all,
looks better, besides being more in keeping with its African
surroundings, than the ridiculous bit of print from Ulaya.
MAKUA WOMEN

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eTextbook 978-0134105857 Prentice

Hall’s Federal Taxation 2016

PREFACE xiii Legal Requirements and Tax Considerations Related to

Computing a Corporation’s Income Tax Liability 3-22 Stock Redemptions 4-16

Calculating the Accumulated Earnings Tax 5-29 Problem Materials 6-21

Pricing the Acquisition 7-50 Financial Statement Implications 8-39

Problems 9-36 Election of S Corporation Status 11-7

cHaPter 14 Choice of Year-End for Estates 14-34

Richard J. Joseph is Provost-for-Term and Chief Academic Officer of Bryant University. In

David S. Hulse is the Deloitte-Touche Professor of Accountancy at the University of

LeAnn Luna is an Associate Professor of Accounting at the University of Tennessee. She is

Michael S. Schadewald, Ph.D., CPA, is on the faculty of the University of Wisconsin-

What’s New to this Edition?

Strong Pedagogical Aids

▶ Distinguish between closed fact and open fact tax situations

▶ Describe the steps in the tax research process

▶ Explain how the facts influence tax consequences

▶ Consult tax services to research an issue

▶ Apply the basics of Internet-based tax research

▶ Use a citator to assess tax authorities

▶ Prepare work papers and communicate to clients

OveRview Of Tax ReseaRch

sTepsin The Tax

You may need to

You may need to

Locate the applicable

Evaluate the authorities;

Analyze the facts in

Communicate conclusions and

FIGURE C:1-1 c STEPS In THE TAx RESEARCH PRoCESS

2 Often, in an employment context, supervisors define the questions to be

impORTance Of The facTs

5 Rev. Rul. 93-86, 1993-2 C.B. 71.

will be deemed to be permanent, and travel expenses relating to it will be nondeductible.

The sOuRces Of Tax Law

Title 26. All matters concerned with taxation

Subtitle A. Income taxes

Chapter 1. Normal taxes and surtaxes

Subchapter A. Determination of tax liability

Part I. Tax on individuals

Sec. 1. Tax imposed

Scheme for Sections, Subsections, etc.

Sec. 165 (h) (2) (A) (i) and (ii)

Section Paragraph Clauses

FIGURE C:1-2 c oRgAnIzATIonAl SCHEmE of THE InTERnAl REvEnUE CoDE

Interpretative and Legislative Regulations. In addition to being officially classified as proposed,

Number General Subject Matter

Reg. Sec. 1.165 2 5

Income tax IRC section Fifth regulation

Rev. Rul. 97-4, 1997-1 C.B. 5.

Rev. Rul. 2013-8, 2013-15 I.R.B. 763.

Ltr. Rul. 200130006 (July 30, 2001).

ADDITIONAL COMMENT Other Interpretations

T.A.M. 9801001 (January 2, 1998).

Information Releases. If the IRS wants to disseminate information to the general

I.R. 86-70 (June 12, 1986).

Announcement 2007-3, 2007-1 C.B. 376.

Newala, too, suffers from the distance of its water-supply—at least

The water-supply of New Newala is in the bottom of the valley,

NATIVE PATH THROUGH THE MAKONDE BUSH, NEAR

MAKONDE LOCK AND KEY AT JUMBE CHAURO

MODE OF INSERTING THE KEY

With no small pride first one householder and then a second

Some consolation was afforded me by a brassfounder, whom I