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ConTenTs
PREFACE xxviii Problem Materials 1-32

Discussion Questions 1-32
inDiviDUALs
Problems 1-34
Tax Strategy Problem 1-36
Case Study Problem 1-36
CHAPTER 1
Tax Research Problem 1-36
c An inTroDUCTion To TAxATion 1-1
History of Taxation in the United States 1-2
Early Periods 1-2 CHAPTER 2
Revenue Acts from 1913 to the Present 1-3 c DeTerminATion oF TAx 2-1
Revenue Sources 1-3 Formula for Individual Income Tax 2-2
Types of Tax Rate Structures 1-4 Basic Formula 2-2
The Structure of Individual Income Tax Rates 1-4 Definitions 2-3
The Structure of Corporate Tax Rates 1-5 Tax Formula Illustrated 2-6
Marginal, Average, and Effective Tax Rates for Deductions from Adjusted Gross Income 2-7
Taxpayers 1-5 Itemized Deductions 2-7
Determination of Taxable Income and Tax Due 1-6 Standard Deduction 2-10
Other Types of Taxes 1-7 Personal Exemptions 2-12
State and Local Income and Franchise Taxes 1-7 Dependency Exemptions 2-13
Wealth Transfer Taxes 1-7 Child Credit 2-19
Other Types of Taxes 1-11 Determining the Amount of Tax 2-20
Criteria for a Tax Structure 1-12 Filing Status 2-20
Equity 1-12 Joint Return 2-21
Certainty 1-13 Surviving Spouse 2-22
Convenience 1-13 Head of Household 2-22
Economy 1-13 Single Taxpayer 2-23
Simplicity 1-14 Married Filing Separately 2-23
Objectives of the Federal Income Tax Law 1-14 Abandoned Spouse 2-23
Entities in the Federal Income Tax System 1-16 Children with Unearned Income 2-24
Taxpaying Entities 1-17 Business Income and Business Entities 2-27
Flow-Through Entities 1-20 Treatment of Capital Gains and Losses 2-30
Other Entities 1-23 Definition of Capital Assets 2-30
Tax Law Sources 1-24 Tax Treatment of Gains and Losses 2-30
Enactment of a Tax Law 1-24 Provisions Applicable to Higher-Income Taxpayers 2-31
Steps in the Legislative Process 1-24 Tax Planning Considerations 2-32
Administration of the Tax Law and Tax Practice Shifting Income Between Family Members 2-32
Issues 1-26 Splitting Income 2-32
Organization of the Internal Revenue Service 1-26 Maximizing Itemized Deductions 2-33
Enforcement Procedures 1-27 Filing Joint or Separate Returns 2-33
Selection of Returns for Audit 1-27 Compliance and Procedural Considerations 2-35
Statute of Limitations 1-28 Who Must File 2-35
Interest 1-28 Due Dates and Extensions 2-35
Penalties 1-28 Use of Forms 1040, 1040EZ, and 1040A 2-36
Administrative Appeal Procedures 1-29 System for Reporting Income 2-36
Components of a Tax Practice 1-29 Problem Materials 2-37
Tax Compliance and Procedure 1-29 Discussion Questions 2-37
Tax Research 1-30 Issue Identification Questions 2-38
Tax Planning and Consulting 1-30 Problems 2-38
Financial Planning 1-31 Tax Strategy Problems 2-43
Computer Applications in Tax Practice 1-31 Tax Form/Return Preparation Problems 2-43
Tax Return Preparation 1-31 Case Study Problems 2-44
Tax Planning Applications 1-31 Tax Research Problems 2-44
Tax Research Applications 1-31
vii
viii Comprehensive ▶ Contents
CHAPTER 3 CHAPTER 4
c Gross inCome: inCLUsions 3-1 c Gross inCome: exCLUsions 4-1
Economic, Accounting, and Tax Concepts of Income 3-2 Items That Are Not Income 4-2
Economic Concept 3-2 Unrealized Income 4-2
Accounting Concept 3-2 Self-Help Income 4-3
Tax Concept of Income 3-3 Rental Value of Personal-Use Property 4-3
Selling Price of Property 4-3
To Whom Is Income Taxable? 3-6
Assignment of Income 3-6 Major Statutory Exclusions 4-4
Gifts and Inheritances 4-4
Allocating Income Between Married People 3-6
Life Insurance Proceeds 4-5
Income of Minor Children 3-8
Awards for Meritorious Achievement 4-7
When Is Income Taxable? 3-8 Scholarships and Fellowships 4-7
Cash Method 3-8 Distributions from Qualified Tuition Programs 4-7
Accrual Method 3-11 Payments for Injury and Sickness 4-8
Hybrid Method 3-12 Employee Fringe Benefits 4-10
Items of Gross Income: Sec. 61(a) 3-13 Foreign-Earned Income Exclusion 4-19
Compensation 3-13 Income from the Discharge of a Debt 4-20
Business Income 3-13 Exclusion for Gain from Small Business Stock 4-22
Other Exclusions 4-22
Gains from Dealings in Property 3-13
Interest 3-13 Tax Planning Considerations 4-23
Rents and Royalties 3-15 Employee Fringe Benefits 4-23
Dividends 3-16 Self-Help Income and Use of Personally Owned
Alimony and Separate Maintenance Payments 3-18 Property 4-24
Pensions and Annuities 3-20 Compliance and Procedural Considerations 4-24
Income from Life Insurance and Endowment Problem Materials 4-25
Contracts 3-22 Discussion Questions 4-25
Income from Discharge of Indebtedness 3-23 Issue Identification Questions 4-26
Income Passed Through to Taxpayer 3-23 Problems 4-26
Other Items of Gross Income 3-23 Comprehensive Problem 4-30
Prizes, Awards, Gambling Winnings, and Treasure Tax Strategy Problems 4-30
Finds 3-24 Tax Form/Return Preparation Problems 4-31
Illegal Income 3-24 Case Study Problems 4-31
Unemployment Compensation 3-24 Tax Research Problems 4-32
Social Security Benefits 3-24
Insurance Proceeds and Court Awards 3-26 CHAPTER 5
c properTY TrAnsACTions: CApiTAL GAins
Recovery of Previously Deducted Amounts 3-26
AnD Losses 5-1
Claim of Right 3-27
Determination of Gain or Loss 5-3
Tax Planning Considerations 3-27 Realized Gain or Loss 5-3
Shifting Income 3-27 Recognized Gain or Loss 5-5
Alimony 3-28 Basis Considerations 5-5
Prepaid Income 3-28 Cost of Acquired Property 5-5
Taxable, Tax-Exempt, or Tax-Deferred Bonds 3-29 Property Received as a Gift: Gifts After 1921 5-7
Reporting Savings Bond Interest 3-29 Property Received from a Decedent 5-8
Deferred Compensation Arrangements 3-30 Property Converted from Personal Use to Business
Compliance and Procedural Considerations 3-30 Use 5-10
Allocation of Basis 5-11
Problem Materials 3-31
Discussion Questions 3-31 Definition of a Capital Asset 5-13
Influence of the Courts 5-14
Issue Identification Questions 3-34
Other IRC Provisions Relevant to Capital Gains and
Problems 3-35
Losses 5-15
Comprehensive Problems 3-38
Tax Strategy Problems 3-38 Tax Treatment for Capital Gains and Losses of
Noncorporate Taxpayers 5-16
Tax Form/Return Preparation Problem 3-39
Capital Gains 5-17
Case Study Problems 3-39
Adjusted Net Capital Gains (ANCG) 5-18
Capital Losses 5-19
Contents ◀ Comprehensive ix
Tax Treatment of Capital Gains and Losses: Corporate Special Disallowance Rules 6-23
Taxpayers 5-21 Wash Sales 6-23
Sale or Exchange 5-22 Transactions Between Related Parties 6-26
Worthless Securities 5-23 Hobby Losses 6-29
Retirement of Debt Instruments 5-23 Vacation Home 6-31
Options 5-26 Expenses of an Office in the Home 6-35
Patents 5-27 Tax Planning Considerations 6-36
Franchises, Trademarks, and Trade Names 5-27 Hobby Losses 6-36
Lease Cancellation Payments 5-28 Unreasonable Compensation 6-36
Holding Period 5-29 Timing of Deductions 6-37
Property Received as a Gift 5-29 Compliance and Procedural Considerations 6-37
Property Received from a Decedent 5-29 Proper Classification of Deductions 6-37
Nontaxable Exchanges 5-30 Proper Substantiation 6-37
Receipt of Nontaxable Stock Dividends and Stock Business Versus Hobby 6-37
Rights 5-30
Justification for Preferential Treatment of Net Capital
Gains 5-30
Issue Identification Questions 6-39
Mobility of Capital 5-31
Problems 6-40
Mitigation of the Effects of Inflation and the Progressive
Tax System 5-31
Tax Strategy Problems 6-46
Lowers the Cost of Capital 5-31
Tax Form/Return Preparation Problems 6-47
Tax Planning Considerations 5-32 Case Study Problem 6-49
Selection of Property to Transfer by Gift 5-32 Tax Research Problems 6-50
Selection of Property to Transfer at Time of Death 5-33
Compliance and Procedural Considerations 5-33
Documentation of Basis 5-33
CHAPTER 7
c iTemizeD DeDUCTions 7-1
Reporting of Capital Gains and Losses on
Schedule D 5-34 Medical Expenses 7-2
Qualified Individuals 7-2
Qualified Medical Expenses 7-3
Issue Identification Questions 5-42 Amount and Timing of Deduction 7-6
Problems 5-42 Taxes 7-9
Comprehensive Problem 5-47 Definition of a Tax 7-9
Tax Strategy Problems 5-47 Deductible Taxes 7-9
Tax Form/Return Preparation Problems 5-48 State and Local Income Taxes 7-10
Case Study Problems 5-49 State and Local Sales Taxes 7-10
Tax Research Problems 5-49 Personal Property Taxes 7-10
Real Estate Taxes 7-10
CHAPTER 6 Self-Employment Tax 7-11
c DeDUCTions AnD Losses 6-1 Nondeductible Taxes 7-12
Classifying Deductions as For Versus From Adjusted Gross Interest 7-12
Income (AGI) 6-3 Definition of Interest 7-12
Criteria for Deducting Business and Investment Classification of Interest Expense 7-13
Expenses 6-5 Timing of the Interest Deduction 7-19
Business or Investment Activity 6-5 Charitable Contributions 7-21
Ordinary Expense 6-7 Qualifying Organization 7-21
Necessary Expense 6-8 Type of Property Contributed 7-22
Reasonable Expense 6-8 Deduction Limitations 7-25
Expenses and Losses Incurred Directly by the Application of Carryovers 7-26
Taxpayer 6-9 Special Rules for Charitable Contributions Made by
General Restrictions on the Deductibility of Expenses 6-10 Corporations 7-26
Capitalization Versus Expense Deduction 6-10 Summary of Deduction Limitations 7-27
Expenses Related to Exempt Income 6-12 Casualty and Theft Losses 7-28
Expenditures Contrary to Public Policy 6-12
Miscellaneous Itemized Deductions 7-28
Other Expenditures Specifically Disallowed 6-14
Certain Employee Expenses 7-28
Proper Substantiation Requirement 6-17 Expenses to Produce Investment Income 7-28
When an Expense Is Deductible 6-18 Cost of Tax Advice 7-29
Cash Method 6-18 Reduction of Certain Itemized
Accrual Method 6-21 Deductions 7-29
x Comprehensive ▶ Contents
Tax Planning Considerations 7-30 Tax Planning Considerations 8-34

Medical Expense Deduction 7-30 Bad Debts 8-34
Interest Expense Deduction 7-30 Casualties 8-34
Deduction for Charitable Contributions 7-31 Net Operating Losses 8-34
Compliance and Procedural Considerations 7-32 Compliance and Procedural Considerations 8-34
Medical Expenses 7-32 Casualty Losses 8-34
Charitable Contributions 7-32 Net Operating Losses 8-35
Taxes 7-34 Worthless Securities 8-35
Problem Materials 7-36 Problem Materials 8-35
Discussion Questions 7-36 Discussion Questions 8-35
Issue Identification Questions 7-37 Issue Identification Questions 8-37
Problems 7-38 Problems 8-37
Comprehensive Problem 7-42 Tax Strategy Problems 8-41
Tax Strategy Problems 7-42 Tax Form/Return Preparation Problems 8-42
Tax Research Problems 7-45
CHAPTER 9
CHAPTER 8 c empLoYee expenses AnD DeFerreD
c Losses AnD BAD DeBTs 8-1 CompensATion 9-1
Transactions That May Result in Losses 8-2 Classification and Limitations of Employee Expenses 9-2
Sale or Exchange of Property 8-2 Nature of the Employment Relationship 9-2
Expropriated, Seized, Confiscated, or Condemned Limitations on Unreimbursed Employee
Property 8-3 Expenses 9-4
Abandoned Property 8-3 Travel Expenses 9-5
Worthless Securities 8-3 Deductibility of Travel Expenses 9-5
Demolition of Property 8-4 Definition of Travel Expenses 9-5
General Qualification Requirements 9-6
Classifying the Loss on the Taxpayer’s Tax Return 8-4 Business Versus Pleasure 9-7
Ordinary Versus Capital Loss 8-5 Foreign Travel 9-8
Disallowance Possibilities 8-6 Additional Limitations on Travel Expenses 9-9
Passive Losses 8-7 Transportation Expenses 9-9
Computation of Passive Losses and Credits 8-7 Definition and Classification 9-9
Carryovers 8-8 Treatment of Automobile Expenses 9-11
Definition of a Passive Activity 8-10 Reimbursement of Automobile Expenses 9-12
Taxpayers Subject to Passive Loss Rules 8-12 Entertainment Expenses 9-13
Real Estate Businesses 8-14 50% Disallowance for Meal and Entertainment
Other Rental Real Estate Activities 8-15 Expenses 9-13
Casualty and Theft Losses 8-17 Classification of Expenses 9-13
Casualty Defined 8-17 Business Meals 9-14
Theft Defined 8-19 Entertainment Facilities and Club Dues 9-15
Deductible Amount of Casualty Loss 8-19 Business Gifts 9-16
Limitations on Personal-Use Property 8-20 Limitations on Entertainment Tickets 9-16
Netting Casualty Gains and Losses on Personal-Use Reimbursed Employee Business Expenses 9-17
Property 8-21 Moving Expenses 9-19
Casualty Gains and Losses Attributable to Business and Expense Classification 9-20
Investment Property 8-22 Definition of Moving Expenses 9-20
Timing of Casualty Loss Deduction 8-22 Treatment of Employer Reimbursements 9-21
Bad Debts 8-24 Education Expenses 9-21
Bona Fide Debtor-Creditor Relationship 8-24 Classification of Education Expenses 9-22
Taxpayer’s Basis in the Debt 8-25 General Requirements for a Deduction 9-23
Debt Must Be Worthless 8-26 Office in Home Expenses 9-24
Nonbusiness Bad Debts 8-26 General Requirements for a Deduction 9-24
Business Bad Debts 8-28 Deductions and Limitations 9-25
Deposits in Insolvent Financial Institutions 8-28 Deferred Compensation 9-27
Net Operating Losses 8-29 Qualified Pension and Profit-Sharing Plans 9-28
Computing the Net Operating Loss for Individuals 8-30 Qualification Requirements for a Qualified Plan 9-29
Carryback and Carryover Periods 8-32 Tax Treatment to Employees and Employers 9-30
Recomputation of Taxable Income in the Carryover Nonqualified Plans 9-32
Year 8-33 Employee Stock Options 9-34
Contents ◀ Comprehensive xi
Plans for Self-Employed Individuals 9-36 CHAPTER 11

Simplified Employee Pensions (SEP IRAs) 9-38 c ACCoUnTinG perioDs AnD meThoDs 11-1
Simple Retirement Plans 9-38
Accounting Periods 11-2
Individual Retirement Accounts (IRAs) 9-38
Required Payments and Fiscal Years 11-3
Traditional IRA 9-39
Changes in the Accounting Period 11-4
Roth IRA 9-40 Returns for Periods of Less than 12 Months 11-5
Coverdell Education Savings Account 9-43
Health Savings Accounts 9-44 Overall Accounting Methods 11-7
Cash Receipts and Disbursements
Tax Planning Considerations 9-44
Method 11-7
Moving Expenses 9-44
Accrual Method 11-9
Providing Nontaxable Compensation
Hybrid Method 11-10
to Employees 9-45
Rollovers to Roth IRA 9-45 Inventories 11-11
Determination of Inventory Cost 11-11
Substantiating Travel and Entertainment Expenses 9-46 Special Accounting Methods 11-15
Reporting Employee Business Expenses 9-46 Long-Term Contracts 11-15
Reporting Moving Expenses 9-47 Installment Sales Method 11-17
Reporting Office in Home Expenses 9-47 Deferred Payment Sales 11-21
Qualification of Pension and Profit-Sharing Plans 9-50 Imputed Interest 11-22
Problem Materials 9-50 Imputed Interest Computation 11-23
Discussion Questions 9-50 Accrual of Interest 11-23
Issue Identification Questions 9-53 Gift, Shareholder, and Other Loans 11-24
Problems 9-53 Change in Accounting Methods 11-25
Comprehensive Problem 9-61 Amount of Change 11-26
Tax Strategy Problem 9-62 Reporting the Amount of the Change 11-27
Tax Form/Return Preparation Problems 9-62 Obtaining IRS Consent 11-27
Accounting Periods 11-28
Accounting Methods 11-28
CHAPTER 10 Installment Sales 11-28
c DepreCiATion, CosT reCoverY, AmorTizATion,
AnD DepLeTion 10-1
Reporting Installment Sales on Form 6252 11-28
Depreciation and Cost Recovery 10-2 Procedures for Changing to LIFO 11-30
General Considerations 10-2
Depreciation Methods 10-4 Problem Materials 11-30
Calculation of Depreciation 10-5 Discussion Questions 11-30
MACRS Restrictions 10-12 Issue Identification Questions 11-31
Problems 11-32
Amortization 10-17
Comprehensive Problem 11-34
Sec. 197 Intangibles 10-17
Tax Strategy Problems 11-35
Research and Experimental Expenditures 10-19
Tax Form/Return Preparation Problem 11-35
Computer Software 10-20
Depletion, Intangible Drilling and Development Costs 10-21 Tax Research Problems 11-36
Depletion Methods 10-22
Treatment of Intangible Drilling and Development
Costs 10-23 CHAPTER 12
c properTY TrAnsACTions: nonTAxABLe
exChAnGes 12-1
Alternative Depreciation System Under MACRS 10-24
Use of Units of Production Depreciation 10-24 Like-Kind Exchanges 12-2
Structuring a Business Combination 10-24 Like-Kind Property Defined 12-2
Compliance and Procedural Considerations 10-25 A Direct Exchange Must Occur 12-5
Reporting Cost Recovery, Depreciation, Depletion, and Three-Party Exchanges 12-5
Amortization Deductions 10-25 Receipt of Boot 12-6
Basis of Property Received 12-7
Exchanges Between Related Parties 12-8
Issue Identification Questions 10-30 Transfer of Non–Like-Kind Property 12-9
Problems 10-30 Holding Period for Property Received 12-9
Comprehensive Problem 10-35 Involuntary Conversions 12-10
Tax Strategy Problem 10-36 Involuntary Conversion Defined 12-11
Tax Form/Return Preparation Problems 10-36 Tax Treatment of Gain Due to Involuntary Conversion
Case Study Problems 10-37 into Boot 12-12
Tax Research Problem 10-37 Replacement Property 12-13
xii Comprehensive ▶ Contents
Obtaining Replacement Property 12-14 Gain on Sale of Depreciable Property Between Related
Time Requirements for Replacement 12-15 Parties 13-22
Sale of Principal Residence 12-16 Tax Planning Considerations 13-23
Principal Residence Defined 12-17 Avoiding the Recapture Provisions 13-23
Sale of More than One Principal Residence Within a Compliance and Procedural Considerations 13-24
Two-Year Period 12-18 Reporting Sec. 1231 Gains and Losses on Form 4797 13-24
Nonqualified Use After 2008 12-20 Reporting Gains Recaptured as Ordinary Income on
Involuntary Conversion of a Principal Residence 12-21 Form 4797 13-24
Tax Planning Considerations 12-21 Reporting Casualty or Theft Gain or Loss on
Avoiding the Like-Kind Exchange Provisions 12-21 Form 4684 13-24
Sale of a Principal Residence 12-22 Problem Materials 13-28
Compliance and Procedural Considerations 12-23 Discussion Questions 13-28
Reporting of Involuntary Conversions 12-23 Issue Identification Questions 13-29
Reporting of Sale or Exchange of a Principal Problems 13-30
Residence 12-24 Comprehensive Problem 13-35
Problem Materials 12-24 Tax Strategy Problems 13-35
Discussion Questions 12-24 Tax Form/Return Preparation Problems 13-36
Issue Identification Questions 12-25 Case Study Problems 13-36
Problems 12-26 Tax Research Problem 13-37
Tax Strategy Problem 12-30 CHAPTER 14
Tax Form/Return Preparation Problems 12-31 c speCiAL TAx CompUTATion meThoDs, TAx CreDiTs,
Case Study Problem 12-32 AnD pAYmenT oF TAx 14-1
Alternative Minimum Tax 14-2
CHAPTER 13 AMT Computation 14-3
AMT Tax Rates and Brackets 14-3
c properTY TrAnsACTions: seCTion 1231
AMT Exemption Amount 14-3
AnD reCApTUre 13-1
History of Sec. 1231 13-2 AMT Tax Preference Items 14-4
AMT Adjustments 14-4
Overview of Basic Tax Treatment for Sec. 1231 13-3 AMT Credits 14-6
Net Gains 13-3
Summary Illustration of the AMT Computation 14-7
Net Losses 13-3
Tax Rate for Net Sec. 1231 Gain 13-4 Self-Employment Tax 14-8
What Constitutes Self-Employment Income 14-9
Section 1231 Property 13-5
Section 1231 Property Defined 13-5 Personal and Business Tax Credits 14-10
Real or Depreciable Property Used in Trade or Use and Importance of Tax Credits 14-10
Business 13-5 Value of a Credit Versus a Deduction 14-10
Involuntary Conversions 13-6 Nonrefundable Personal Tax Credits 14-11
Condemnations 13-6 Foreign Tax Credit 14-17
Other Involuntary Conversions 13-7 Business Related Tax Credits 14-19
Procedure for Sec. 1231 Treatment 13-7 Refundable Personal Credits 14-23
Recapture Provisions of Sec. 1245 13-8 Provisions Related to Health Insurance 14-24
Purpose of Sec. 1245 13-9 Health Insurance Premium Assistance Credit (Also
Recapture Provisions of Sec. 1250 13-10 Known as Premium Tax Credit) 14-24
Purpose of Sec. 1250 13-11 Shared Responsibility Payment 14-26
Section 1250 Property Defined 13-11 Payment of Taxes 14-27
Unrecaptured Section 1250 Gain 13-12 Withholding of Taxes 14-27
Taxation of Gains on Sale or Exchange of Depreciable Estimated Tax Payments 14-29
Real Property 13-12 Tax Planning Considerations 14-30
Low-Income Housing 13-15
Avoiding the Alternative Minimum Tax 14-30
Additional Recapture for Corporations 13-16 Avoiding the Underpayment Penalty for Estimated
Summary of Secs. 1231, 1245, and 1250 Gains 13-17 Tax 14-31
Recapture Provisions—Other Applications 13-18 Cash-Flow Considerations 14-32
Gifts of Property Subject to Recapture 13-18 Use of General Business Tax Credits 14-32
Transfer of Property Subject to Recapture at Death 13-18 Foreign Tax Credits and the Foreign Earned Income
Charitable Contributions 13-18 Exclusion 14-32
Like-Kind Exchanges 13-19
Involuntary Conversions 13-19
Installment Sales 13-19 Alternative Minimum Tax (AMT) Filing Procedures 14-33
Section 179 Expensing Election 13-20 Withholdings and Estimated Tax Payments 14-33
Conservation and Land Clearing Expenditures 13-20 General Business Tax Credits 14-33
Intangible Drilling Costs and Depletion 13-21 Nonrefundable Personal Tax Credits 14-33
Contents ◀ Comprehensive xiii
Problem Materials 14-34 Check-the-Box Regulations 2-8

Discussion Questions 14-34 Legal Requirements and Tax Considerations Related to
Issue Identification Questions 14-36 Forming a Corporation 2-9
Problems 14-37 Legal Requirements 2-9
Comprehensive Problem 14-41 Tax Considerations 2-9
Section 351: Deferring Gain or Loss Upon
Incorporation 2-12
The Property Requirement 2-12
The Control Requirement 2-13
The Stock Requirement 2-16
CorporATions Effect of Sec. 351 on the Transferors 2-16
Tax Consequences to Transferee Corporation 2-20
CHAPTER 1 Assumption of the Transferor’s Liabilities 2-22
c TAx reseArCh 1-1 Other Considerations in a Sec. 351 Exchange 2-25
Overview of Tax Research 1-2 Choice of Capital Structure 2-27

Characterization of Obligations as Debt or Equity 2-27
Steps in the Tax Research Process 1-3
Debt Capital 2-28
Importance of the Facts to the Tax Consequences 1-5 Equity Capital 2-29
Creating a Factual Situation Favorable Capital Contributions by Shareholders 2-29
to the Taxpayer 1-6 Capital Contributions by Nonshareholders 2-31
The Sources of Tax Law 1-7 Worthlessness of Stock or Debt Obligations 2-32
The Legislative Process 1-7 Securities 2-32
The Internal Revenue Code 1-8 Unsecured Debt Obligations 2-33
Treasury Regulations 1-9
Administrative Pronouncements 1-11 Tax Planning Considerations 2-34
Judicial Decisions 1-14 Avoiding Sec. 351 2-34
Tax Treaties 1-24 Compliance and Procedural Considerations 2-36
Tax Periodicals 1-24 Reporting Requirements Under Sec. 351 2-36
Tax Services 1-25 Problem Materials 2-37
The Internet as a Research Tool 1-26 Discussion Questions 2-37
Keyword Searches 1-27 Issue Identification Questions 2-38
Search by Citation 1-28 Problems 2-38
Noncommercial Internet Services 1-28 Comprehensive Problems 2-43
Citators 1-28 Tax Strategy Problems 2-44
Using the Citator 1-30 Case Study Problems 2-44
Professional Guidelines for Tax Services 1-30 Tax Research Problems 2-45
Treasury Department Circular 230 1-30
AICPA’s Statements on Tax Standards 1-31
CHAPTER 3
Sample Work Papers and Client Letter 1-34
c The CorporATe inCome TAx 3-1
Corporate Elections 3-2
Choosing a Calendar or Fiscal Year 3-2
Problems 1-35
Accounting Methods 3-4
Tax Strategy Problem 1-38 Determining a Corporation’s Taxable Income 3-5
Case Study Problem 1-39 Sales and Exchanges of Property 3-6
Tax Research Problems 1-39 Business Expenses 3-8
Special Deductions 3-14
Exceptions for Closely Held Corporations 3-21
CHAPTER 2 Computing a Corporation’s Income Tax Liability 3-22
c CorporATe FormATions AnD CApiTAL General Rules 3-23
sTrUCTUre 2-1 Personal Service Corporations 3-24
Organization Forms Available 2-2 Controlled Groups of Corporations 3-24
Sole Proprietorships 2-2 Why Special Rules Are Needed 3-24
Partnerships 2-3 What Is a Controlled Group? 3-25
Corporations 2-5 Application of the Controlled Group Test 3-28
Limited Liability Companies 2-8 Special Rules Applying to Controlled Groups 3-29
Limited Liability Partnerships 2-8 Consolidated Tax Returns 3-29
xiv Comprehensive ▶ Contents
Tax Planning Considerations 3-31 Complete Termination of the Shareholder’s

Compensation Planning for Shareholder-Employees 3-31 Interest 4-21
Special Election to Allocate Reduced Tax Rate Redemptions Not Essentially Equivalent to a Dividend 4-23
Benefits 3-32 Partial Liquidations 4-23
Using NOL Carryovers and Carrybacks 3-34 Redemptions to Pay Death Taxes 4-25
Compliance and Procedural Considerations 3-35 Effect of Redemptions on the Distributing Corporation 4-26
Estimated Taxes 3-35 Preferred Stock Bailouts 4-27
Requirements for Filing and Paying Taxes 3-38 Sec. 306 Stock Defined 4-28
When the Return Must Be Filed 3-38 Dispositions of Sec. 306 Stock 4-28
Tax Return Schedules 3-39 Redemptions of Sec. 306 Stock 4-29
Financial Statement Implications 3-43 Exceptions to Sec. 306 Treatment 4-30
Scope, Objectives, and Principles of ASC 740 3-44 Stock Redemptions by Related Corporations 4-30
Temporary Differences 3-44 Brother-Sister Corporations 4-30
Deferred Tax Assets and the Valuation Parent-Subsidiary Corporations 4-32
Allowance 3-44
Accounting for Uncertain Tax Positions 3-45
Avoiding Unreasonable Compensation 4-33
Balance Sheet Classification 3-46
Bootstrap Acquisitions 4-34
Tax Provision Process 3-47
Timing of Distributions 4-35
Comprehensive Example – Year 1 3-47
Comprehensive Example – Year 2 3-50 Compliance and Procedural Considerations 4-36
Other Transactions 3-54 Corporate Reporting of Nondividend Distributions 4-36
Agreement to Terminate Interest Under Sec. 302(b)(3) 4-36
Discussion Questions 3-54 Problem Materials 4-37
Issue Identification Questions 3-55 Discussion Questions 4-37
Problems 3-56 Issue Identification Questions 4-38
Comprehensive Problem 3-64 Problems 4-39
Tax Strategy Problem 3-65 Comprehensive Problem 4-45
Tax Form/Return Preparation Problems 3-65 Tax Strategy Problem 4-46
Case Study Problems 3-70 Case Study Problems 4-46
Tax Research Problems 3-71 Tax Research Problems 4-47
CHAPTER 5
CHAPTER 4
c oTher CorporATe TAx Levies 5-1
c CorporATe nonLiqUiDATinG DisTriBUTions 4-1
The Alternative Minimum Tax 5-2
Nonliquidating Distributions in General 4-2
The General Formula 5-2
Earnings and Profits (E&P) 4-3 Exemption from the AMT for Small Corporations
Current Earnings and Profits 4-3 and First-Year Corporations 5-3
Distinction Between Current and Accumulated E&P 4-6 Tax Preference Items 5-5
Nonliquidating Property Distributions 4-8 AMT Adjustment Items 5-5
Consequences of Nonliquidating Property Distributions Adjusted Current Earnings (ACE) Adjustment 5-9
to the Shareholders 4-8 Minimum Tax Credit 5-12
Consequences of Property Distributions to the Tax Credits and the AMT 5-13
Distributing Corporation 4-9 Personal Holding Company Tax 5-14
Constructive Dividends 4-11 Personal Holding Company Defined 5-15
Stock Dividends and Stock Rights 4-13 Stock Ownership Requirement 5-15
Nontaxable Stock Dividends 4-14 Passive Income Requirement 5-15
Nontaxable Stock Rights 4-14 Calculating the PHC Tax 5-19
Effect of Nontaxable Stock Dividends on the Distributing Avoiding the PHC Designation and Tax Liability by
Corporation 4-15 Making Dividend Distributions 5-21
Taxable Stock Dividends and Stock Rights 4-15 PHC Tax Calculation 5-22
Stock Redemptions 4-16 Accumulated Earnings Tax 5-23
Tax Consequences of the Redemption to the Corporations Subject to the Penalty Tax 5-23
Shareholder 4-17 Proving a Tax-Avoidance Purpose 5-24
Attribution Rules 4-18 Evidence Concerning the Reasonableness of an Earnings
Substantially Disproportionate Redemptions 4-20 Accumulation 5-25
Contents ◀ Comprehensive xv
Calculating the Accumulated Earnings Tax 5-29 Compliance and Procedural Considerations 6-20
Comprehensive Example 5-32 General Liquidation Procedures 6-20
Tax Planning Considerations 5-33 Section 332 Liquidations 6-21
Depreciation Election 5-33 Plan of Liquidation 6-21
Eliminating the ACE Adjustment 5-34 Problem Materials 6-21
Multiyear Effects of AMT 5-34 Discussion Questions 6-21
Avoiding the Personal Holding Company Tax 5-35 Issue Identification Questions 6-23
Avoiding the Accumulated Earnings Tax 5-35 Problems 6-24
Compliance and Procedural Considerations 5-36 Comprehensive Problem 6-30
Alternative Minimum Tax 5-36 Tax Strategy Problems 6-31
Personal Holding Company Tax 5-36 Case Study Problems 6-32
Accumulated Earnings Tax 5-36 Tax Research Problems 6-33
Financial Statement Implications 5-37
Alternative Minimum Tax 5-37 CHAPTER 7
Problem Materials 5-38 c CorporATe ACqUisiTions AnD reorGAnizATions 7-1
Discussion Questions 5-38 Taxable Acquisition Transactions 7-2
Issue Identification Questions 5-41 Asset Acquisitions 7-2
Problems 5-41 Stock Acquisitions 7-4
Comprehensive Problem 5-49 Comparison of Taxable and Nontaxable
Tax Strategy Problems 5-50 Acquisitions 7-10
Tax Form/Return Preparation Problem 5-50 Taxable and Nontaxable Asset Acquisitions 7-10
Case Study Problems 5-51 Comparison of Taxable and Nontaxable Stock
Tax Research Problems 5-51 Acquisitions 7-11
Types of Reorganizations and Their Tax
CHAPTER 6 Consequences 7-14
c CorporATe LiqUiDATinG DisTriBUTions 6-1
The Target or Transferor Corporation 7-14
Overview of Corporate Liquidations 6-2
The Acquiring or Transferee Corporation 7-15
The Shareholder 6-2
Shareholders and Security Holders 7-16
The Corporation 6-3
Definition of a Complete Liquidation 6-3 Acquisitive Reorganizations 7-19
Type A Reorganization 7-19
General Liquidation Rules 6-5
Type C Reorganization 7-25
Effects of Liquidating on the Shareholders 6-5
Type D Reorganization 7-28
Effects of Liquidating on the Liquidating
Type B Reorganization 7-29
Corporation 6-6
Type G Reorganization 7-33
Liquidation of a Controlled Subsidiary 6-10
Divisive Reorganizations 7-33
Overview 6-10
Divisive Type D Reorganization 7-33
Requirements 6-11
Divisive Type G Reorganization 7-38
Effects of Liquidating on the Shareholders 6-12
Effects of Liquidating on the Subsidiary Other Reorganizations 7-38
Corporation 6-13 Type E Reorganization 7-38
Type F Reorganization 7-40
Special Reporting Issues 6-15
Pertaining to Shareholders 6-15 Judicial Restrictions on the Use of Corporate
Pertaining to the Liquidating Corporation 6-16 Reorganizations 7-40
Continuity of Interest 7-41
Recognition of Gain or Loss When Property Is Distributed
Continuity of Business Enterprise 7-41
in Retirement of Debt 6-17
Business Purpose Requirement 7-42
General Rule 6-17
Step Transaction Doctrine 7-42
Satisfaction of the Subsidiary’s Debt Obligations 6-17
Tax Attributes 7-43
Assumption of Tax Attributes 7-43
Timing the Liquidation Transaction 6-18
Limitation on Use of Tax Attributes 7-43
Recognition of Ordinary Losses When a Liquidation
Occurs 6-19 Tax Planning Considerations 7-46
Obtaining 80% Ownership to Achieve Sec. 332 Why Use a Reorganization Instead of a Taxable
Benefits 6-19 Transaction? 7-46
Avoiding Sec. 332 to Recognize Losses 6-20 Avoiding the Reorganization Provisions 7-47
xvi Comprehensive ▶ Contents
Compliance and Procedural Considerations 7-47 Tax Planning Considerations 8-36

Section 338 Election 7-47 Advantages of Filing a Consolidated Tax
Plan of Reorganization 7-47 Return 8-36
Party to a Reorganization 7-48 Disadvantages of Filing a Consolidated
Ruling Requests 7-48 Tax Return 8-37
Financial Statement Implications 7-48 Compliance and Procedural Considerations 8-37
Taxable Asset Acquisition 7-48 The Basic Election and Return 8-37
Nontaxable Asset Acquisition 7-49 Parent Corporation as Agent for the Consolidated
Stock Acquisition 7-50 Group 8-38
Pricing the Acquisition 7-50 Separate Entity Treatment of Intercompany
Net Operating Losses 7-51 Transactions 8-39
Problem Materials 7-51 Liability for Taxes Due 8-39
Discussion Questions 7-51 Financial Statement Implications 8-39
Issue Identification Questions 7-52 Intercompany Transactions 8-39
Problems 7-53 SRLY Losses 8-41
Comprehensive Problem 7-61 Problem Materials 8-42
Tax Strategy Problems 7-62 Discussion Questions 8-42
Case Study Problems 7-63 Issue Identification Questions 8-43
Tax Research Problems 7-63 Problems 8-44
CHAPTER 8 Tax Form/Return Preparation Problem 8-53
c ConsoLiDATeD TAx reTUrns 8-1 Case Study Problem 8-54
Definition of an Affiliated Group 8-2 Tax Research Problems 8-55
Requirements 8-2
Comparison with Controlled Group Definitions 8-4
CHAPTER 9
Consolidated Tax Return Election 8-4 c pArTnership FormATion AnD operATion 9-1
Consolidated Return Regulations 8-4
Definition of a Partnership 9-2
Termination of Consolidated Tax Return Filing 8-5
General and Limited Partnerships 9-2
Consolidated Taxable Income 8-6
Overview of Taxation of Partnership Income 9-4
Accounting Periods and Methods 8-6
Partnership Profits and Losses 9-4
Income Included in the Consolidated Tax Return 8-6
The Partner’s Basis 9-4
Calculation of Consolidated Taxable Income
Partnership Distributions 9-5
and Tax 8-8
Tax Implications of Formation of a Partnership 9-5
Intercompany Transactions 8-8
Contribution of Property 9-6
Basic Concepts 8-8
Contribution of Services 9-10
Matching and Acceleration Rules 8-10
Organizational and Syndication Expenditures 9-12
Applications of Matching and Acceleration Rules 8-12
Relevance of Matching and Acceleration Rules 8-18 Partnership Elections 9-12
Partnership Tax Year 9-12
Items Computed on a Consolidated Basis 8-18
Other Partnership Elections 9-15
Charitable Contribution Deduction 8-19
Net Sec. 1231 Gain or Loss 8-19 Partnership Reporting of Income 9-16
Capital Gains and Losses 8-19 Partnership Taxable Income 9-16
Dividends-Received Deduction 8-20 Separately Stated Items 9-16
U.S. Production Activities Deduction 8-22 Partnership Ordinary Income 9-17
Regular Tax Liability 8-24 U.S. Production Activities Deduction 9-17
Corporate Alternative Minimum Tax 8-24 Partner Reporting of Income 9-18
Tax Credits 8-25 Partner’s Distributive Share 9-18
Estimated Tax Payments 8-26 Special Allocations 9-19
Net Operating Losses (NOLs) 8-27 Basis for Partnership Interest 9-21
Current Year NOL 8-27 Beginning Basis 9-21
Carrybacks and Carryovers of Consolidated NOLs 8-28 Effects of Liabilities 9-21
Special Loss Limitations 8-30 Effects of Operations 9-24
Stock Basis Adjustments 8-34 Special Loss Limitations 9-26
Tiering Up of Stock Basis Adjustments 8-35 At-Risk Loss Limitation 9-26
Excess Loss Account 8-36 Passive Activity Limitations 9-26
Contents ◀ Comprehensive xvii
Transactions Between a Partner and the Partnership 9-27 Problem Materials 10-35
Sales of Property 9-27 Discussion Questions 10-35
Guaranteed Payments 9-28 Issue Identification Questions 10-36
Family Partnerships 9-30 Problems 10-37
Capital Ownership 9-30 Comprehensive Problems 10-47
Donor-Donee Allocations of Income 9-30 Tax Strategy Problem 10-48
Case Study Problem 10-49
Timing of Loss Recognition 9-31
Reporting to the IRS and the Partners 9-32 CHAPTER 11
IRS Audit Procedures 9-33 c s CorporATions 11-1
Problem Materials 9-34 Should an S Election Be Made? 11-3
Discussion Questions 9-34 Advantages of S Corporation Treatment 11-3
Issue Identification Questions 9-35 Disadvantages of S Corporation Treatment 11-3
Problems 9-36 S Corporation Requirements 11-4
Comprehensive Problems 9-44 Shareholder-Related Requirements 11-4
Tax Strategy Problem 9-45 Corporation-Related Requirements 11-5
Tax Form/Return Preparation Problems 9-46 Election of S Corporation Status 11-7
Case Study Problems 9-50 Making the Election 11-8
Tax Research Problems 9-51 Termination of the Election 11-9
S Corporation Operations 11-13
CHAPTER 10 Taxable Year 11-13
c speCiAL pArTnership issUes 10-1
Accounting Method Elections 11-14
Nonliquidating Distributions 10-2 Ordinary Income or Loss and Separately Stated
Recognition of Gain 10-2 Items 11-14
Basis Effects of Distributions 10-4 U.S. Production Activities Deduction 11-16
Holding Period and Character of Distributed Special S Corporation Taxes 11-16
Property 10-7 Taxation of the Shareholder 11-19
Nonliquidating Distributions with Sec. 751 10-7 Income Allocation Procedures 11-19
Section 751 Assets Defined 10-7 Loss and Deduction Pass-Through
Exchange of Sec. 751 Assets and Other to Shareholders 11-20
Property 10-9 Family S Corporations 11-24
Liquidating or Selling a Partnership Interest 10-11 Basis Adjustments 11-24
Liquidating Distributions 10-12 Basis Adjustments to S Corporation Stock 11-24
Sale of a Partnership Interest 10-16 Basis Adjustments to Shareholder Debt 11-25
Other Partnership Termination Issues 10-19 S Corporation Distributions 11-27
Retirement or Death of a Partner 10-19 Corporations Having No Earnings and Profits 11-27
Exchange of a Partnership Interest 10-20 Corporations Having Accumulated Earnings and
Income Recognition and Transfers of a Partnership Profits 11-28
Interest 10-22 Other Rules 11-32
Termination of a Partnership 10-22 Tax Preference Items and Other AMT
Mergers and Consolidations 10-25 Adjustments 11-33
Division of a Partnership 10-25 Transactions Involving Shareholders and Other Related
Optional and Mandatory Basis Adjustments 10-26 Parties 11-33
Adjustments on Transfers 10-26 Fringe Benefits Paid to a Shareholder-Employee 11-33
Adjustments on Distributions 10-28 Tax Planning Considerations 11-34
Special Forms of Partnerships 10-29 Election to Allocate Income Based on the S Corporation’s
Tax Shelters and Limited Partnerships 10-29 Accounting Methods 11-34
Publicly Traded Partnerships 10-29 Increasing the Benefits from S Corporation
Limited Liability Companies 10-30 Losses 11-35
Limited Liability Partnerships 10-31 Passive Income Requirements 11-36
Limited Liability Limited Partnership 10-31 Compliance and Procedural Considerations 11-37
Electing Large Partnerships 10-32 Making the Election 11-37
Tax Planning Considerations 10-35 Filing the Corporate Tax Return 11-37
Liquidating Distribution or Sale to Partners 10-35 Estimated Tax Payments 11-38
xviii Comprehensive ▶ Contents
Consistency Rules 11-39 Liability for Tax 12-31

Sample S Corporation Tax Return 11-39 Determination of Value 12-32
Problem Materials 11-40 Statute of Limitations 12-32
Discussion Questions 11-40 Problem Materials 12-33
Issue Identification Questions 11-41 Discussion Questions 12-33
Problems 11-41 Issue Identification Questions 12-34
Comprehensive Problems 11-47 Problems 12-34
Tax Strategy Problems 11-49 Comprehensive Problem 12-37
Tax Form/Return Preparation Problems 11-50 Tax Strategy Problems 12-38
Case Study Problem 11-52 Tax Form/Return Preparation Problems 12-38
Tax Research Problems 11-53 Case Study Problems 12-39
CHAPTER 12
c The GiFT TAx 12-1
The Unified Transfer Tax System 12-2 CHAPTER 13
History and Purpose of Transfer Taxes 12-2 c The esTATe TAx 13-1
Unified Rate Schedule 12-3 Estate Tax Formula 13-2
Impact of Taxable Gifts on Death Tax Base 12-3 Gross Estate 13-2
Unified Credit 12-3 Deductions 13-3
Gift Tax Formula 12-4 Adjusted Taxable Gifts and Tax Base 13-4
Determination of Gifts 12-4 Tentative Tax on Estate Tax Base 13-4
Exclusions and Deductions 12-4 Reduction for Post-1976 Gift Taxes 13-4
Gift-Splitting Election 12-4 Unified Credit 13-5
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
Gift Tax Deductions 12-18 General Powers of Appointment 13-15
Marital Deduction 12-19 Life Insurance 13-16
Charitable Contribution Deduction 12-21 Consideration Offset 13-17
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
Contents ◀ Comprehensive xix
Generation-Skipping Transfer Tax 13-30 Effect of a Net Operating Loss 14-16

Tax Planning Considerations 13-31 Effect of a Net Capital Loss 14-16
Use of Inter Vivos Gifts 13-32 Comprehensive Illustration: Determining a Simple
Use of Exemption Equivalent 13-32 Trust’s Taxable Income 14-17
What Size Marital Deduction Is Best? 13-33 Determining Taxable Income for Complex Trusts and
Use of Disclaimers 13-33 Estates 14-19
Role of Life Insurance 13-33 Determination of DNI and the Distribution
Qualifying the Estate for Installment Deduction 14-20
Payments 13-34 Tax Treatment for Beneficiary 14-21
Where to Deduct Administration Expenses 13-34 Effect of a Net Operating Loss 14-24
Compliance and Procedural Considerations 13-35 Effect of a Net Capital Loss 14-24
Filing Requirements 13-35 Comprehensive Illustration: Determining a Complex
Due Date 13-35 Trust’s Taxable Income 14-24
Valuation 13-35 Income in Respect of a Decedent 14-27
Election of Alternate Valuation Date 13-35 Definition and Common Examples 14-27
Significance of IRD 14-28
Discussion Questions 13-36 Grantor Trust Provisions 14-30
Issue Identification Questions 13-37 Purpose and Effect 14-30
Problems 13-37 Revocable Trusts 14-31
Comprehensive Problems 13-41 Post-1986 Reversionary Interest Trusts 14-31
Tax Strategy Problems 13-42 Retention of Administrative Powers 14-31
Tax Form/Return Preparation Problems 13-43 Retention of Economic Benefits 14-31
Case Study Problems 13-44 Control of Others’ Enjoyment 14-32
Tax Research Problems 13-45 Tax Planning Considerations 14-33
Ability to Shift Income 14-33
Timing of Distributions 14-33
CHAPTER 14 Property Distributions 14-34
c inCome TAxATion oF TrUsTs AnD esTATes 14-1 Choice of Year-End for Estates 14-34
Basic Concepts 14-2 Deduction of Administration Expenses 14-34
Inception of Trusts 14-2 Compliance and Procedural Considerations 14-35
Inception of Estates 14-2 Filing Requirements 14-35
Reasons for Creating Trusts 14-3 Due Date for Return and Tax 14-35
Basic Principles of Fiduciary Taxation 14-3 Documents to Be Furnished to IRS 14-35
Principles of Fiduciary Accounting 14-4 Sample Simple and Complex Trust Returns 14-35
The Importance of Identifying Income and Problem Materials 14-36
Principal 14-4 Discussion Questions 14-36
Principal and Income: The Uniform Act 14-5 Issue Identification Questions 14-37
Categorization of Depreciation 14-6 Problems 14-37
Formula for Taxable Income and Tax Liability 14-7 Comprehensive Problem 14-40
Gross Income 14-7 Tax Strategy Problems 14-40
Deductions for Expenses 14-7 Tax Form/Return Preparation Problems 14-41
Distribution Deduction 14-9 Case Study Problems 14-42
Personal Exemption 14-9 Tax Research Problems 14-43
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
Shortcut Approach to Proving Correctness of Taxable
Audited 15-5
Income 14-16
xx Comprehensive ▶ Contents
90-Day Letter 15-7 Tax Accounting and Tax Law 15-35

Litigation 15-7 Accountant-Client Privilege 15-36
Requests for Rulings 15-9 Problem Materials 15-37
Information to Be Included in Taxpayer’s Request 15-9 Discussion Questions 15-37
Will the IRS Rule? 15-10 Issue Identification Questions 15-38
When Rulings Are Desirable 15-10 Problems 15-38
Due Dates 15-10 Comprehensive Problem 15-41
Due Dates for Returns 15-10 Tax Strategy Problem 15-41
Extensions 15-11 Case Study Problem 15-41
Due Dates for Payment of the Tax 15-11 Tax Research Problems 15-41
Interest on Tax Not Timely Paid 15-12
Failure-to-File and Failure-to-Pay Penalties 15-13
Failure to File 15-15 T A B l E S
Failure to Pay 15-16
Estimated Taxes 15-17 2016 Tax Tables and Rate Schedules and 2017 Withholding
Payment Requirements 15-17 Tables (Partial) T-1
Penalty for Underpaying Estimated Taxes 15-18
Exceptions to the Penalty 15-19
Other More Severe Penalties 15-20 A P P E N d i C E S
Negligence 15-20
Substantial Understatement 15-21 c AppenDix A
Transactions Without Economic Substance 15-22 Tax Research Working Paper File A-1
Civil Fraud 15-22
Criminal Fraud 15-23
c AppenDix B
Statute of Limitations 15-24
General Three-Year Rule 15-24 Tax Forms B-1
Six-Year Rule for Substantial Omissions 15-24
When No Return Is Filed 15-26
Other Exceptions to Three-Year Rule 15-26 c AppenDix C
Refund Claims 15-27 MACRS Tables C-1
Liability for Tax 15-27
Joint Returns 15-27
c AppenDix D
Transferee Liability 15-29
Tax Practice Issues 15-29 Glossary D-1
Statutory Provisions Concerning Tax Return
Preparers 15-29
c AppenDix e
Reportable Transaction Disclosures 15-30
Rules of Circular 230 15-31 AICPA Statements on Standards for
Statements on Standards for Tax Services 15-32 Tax Services Nos. 1–7 E-1
Contents ◀ Comprehensive xxi
c AppenDix F c AppenDix J
Comparison of Tax Attributes for C Corporations, Index of Treasury Regulations J-1

Partnerships, and S Corporations F-1
c AppenDix K
c AppenDix G
Index of Government Promulgations K-1
Reserved G-1
c AppenDix h c AppenDix L
Actuarial Tables H-1 Index of Court Cases L-1
c AppenDix i c AppenDix m
Index of Code Sections I-1 Subject Index M-1
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ABoUT The eDiTors
Timothy J. Rupert is a Professor at the D’Amore-McKim School of Business at North-

eastern University. He received his B.S. in Accounting and his Master of Taxation from
the University of Akron. He also earned his Ph.D. from Penn State University. Profes-
sor Rupert’s research has been published in such journals as The Accounting Review,
The Journal of the American Taxation Association, Behavioral Research in Account-
ing, Advances in Taxation, Applied Cognitive Psychology, Advances in Accounting
Education, and Journal of Accounting Education. He 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 School’s Best Teacher of the Year award
TIMOTHY J. RUPERT 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.
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.
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
xxiii
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have vastly increased the product,—would have improved and
beautified the whole face of the country; and the Moral and
Intellectual advantages thence accruing would alone have been
inestimable. A season of suspension of labor in a community is
usually one of aggravated dissipation, drunkenness, and crime.
But let me more clearly illustrate the effect of foreign competition
in raising prices to the consumer. To do this, I will take my own
calling for an example, because I understand that best; though any of
you can apply the principle to that with which he may be better
acquainted. I am a publisher of newspapers, and suppose I afford
them at a cheap rate. But the ability to maintain that cheapness is
based on the fact that I can certainly sell a large edition daily, so that
no part of that edition shall remain a dead loss on my hands. Now, if
there were an active and formidable Foreign competition in
newspapers,—if the edition which I printed during the night were
frequently rendered unsalable by the arrival of a foreign ship
freighted with newspapers early in the morning,—the present rates
could not be continued: the price must be increased or the quality
would decline. I presume this holds equally good of the production of
calicoes, glass, and penknives as of newspapers, though it may be
somewhat modified by the nature of the article to which it is applied.
That it does hold true of sheetings, nails, and thousands of articles, is
abundantly notorious.
I have not burdened you with statistics,—you know they are the
reliance, the stronghold, of the cause of Protection, and that we can
produce them by acres. My aim has been to exhibit not mere
collections of facts, however pertinent and forcible, but the laws on
which those facts are based,—not the immediate manifestation, but
the ever-living necessity from which it springs. The contemplation of
these laws assures me that those articles which are supplied to us by
Home Production alone are relatively cheaper than those which are
rivalled and competed with from abroad. And I am equally confident
that the shutting out of Foreign competition from our markets for
other articles of general necessity and liberal consumption which can
be made here with as little labor as anywhere would be followed by a
corresponding result,—a reduction of the price to the consumer at
the same time with increased employment and reward to our
Producing Classes.
But, Mr. President, were this only on one side true,—were it
certain that the price of the Home product would be permanently
higher than that of the Foreign, I should still insist on efficient
Protection, and for reasons I have sufficiently shown. Grant that a
British cloth costs but $3 per yard, and a corresponding American
fabric $4, I still hold that the latter would be decidedly the cheaper
for us. The Fuel, Timber, Fruits, Vegetables, &c., which make up so
large a share of the cost of the Home product, would be rendered
comparatively valueless by having our workshops in Europe. I look
not so much to the nominal price as to the comparative facility of
payment. And, where cheapness is only to be attained by a
depression of the wages of Labor to the neighborhood of the
European standard, I prefer that it should be dispensed with. One
thing must answer to another; and I hold that the farmers of this
country can better afford, as a matter of pecuniary advantage, to pay
a good price for manufactured articles than to obtain them lower
through the depression and inadequacy of the wages of the artisan
and laborer.
You will understand me, then, to be utterly hostile to that idol of
Free Trade worship, known as Free or unlimited Competition. The
sands of my hour are running low, and I cannot ask time to examine
this topic more closely; yet I am confident I could show that this Free
Competition is a most delusive and dangerous element of Political
Economy. Bear with a brief illustration: At this moment, common
shirts are made in London at the incredibly low price of three cents
per pair. Should we admit these articles free of duty and buy them
because they are so cheap? Free trade says Yes; but I say No! Sound
Policy as well as Humanity forbids it. By admitting them, we simply
reduce a large and worthy and suffering class of our population from
the ability they now possess of procuring a bare subsistence by their
labor to unavoidable destitution and pauperism. They must now
subsist upon the charity of relatives or of the community,—unless we
are ready to adopt the demoniac doctrine of the Free Trade
philosopher Malthus, that the dependent Poor ought to be rigorously
starved to death. Then what have we gained by getting these articles
so exorbitantly cheap? or, rather, what have we not lost? The labor
which formerly produced them is mainly struck out of existence; the
poor widows and seamstresses among us must still have a
subsistence; and the imported garments must be paid for: where are
the profits of our speculation?
But even this is not the worst feature of the case. The labor which
we have here thrown out of employment by the cheap importation of
this article is now ready to be employed again at any price,—if not
one that will afford bread and straw, then it must accept one that will
produce potatoes and rubbish; and with the product some Free-
Trader proceeds to break down the price and destroy the reward of
similar labor in some other portion of the earth. And thus each
depression of wages produces another, and that a third, and so on,
making the circuit of the globe,—the aggravated necessities of the
Poor acting and reacting upon each other, increasing the
omnipotence of Capital and deepening the dependence of Labor,
swelling and pampering a bloated and factitious Commerce, grinding
down and grinding down the destitute, until Malthus’s remedy for
Poverty shall become a grateful specific, and, amid the splendors and
luxuries of an all-devouring Commercial Feudalism, the squalid and
famished Millions, its dependants and victims, shall welcome death
as a deliverer from their sufferings and despair.
I wish time permitted me to give a hasty glance over the doctrines
and teachings of the Free Trade sophists, who esteem themselves the
Political Economists, christen their own views liberal and
enlightened, and complacently put ours aside as benighted and
barbarous. I should delight to show you how they mingle subtle
fallacy with obvious truth, how they reason acutely from assumed
premises, which, being mistaken or incomplete, lead to false and
often absurd conclusions,—how they contradict and confound each
other, and often, from Adam Smith, their patriarch, down to
McCulloch and Ricardo, either make admissions which undermine
their whole fabric, or confess themselves ignorant or in the dark on
points the most vital to a correct understanding of the great subject
they profess to have reduced to a Science. Yet even Adam Smith
himself expressly approves and justifies the British Navigation Act,
the most aggressively Protective measure ever enacted,—a measure
which, not being understood and seasonably counteracted by other
nations, changed for centuries the destinies of the World,—which
silently sapped and overthrew the Commercial and Political
greatness of Holland,—which silenced the thunder of Van Tromp,
and swept the broom from his mast-head. But I must not detain you
longer. I do not ask you to judge of this matter by authority, but from
facts which come home to your reason and your daily experience.
There is not an observing and strong-minded mechanic in our city
who could not set any one of these Doctors of the Law right on
essential points. I beg you to consider how few great practical
Statesmen they have ever been able to win to their standard,—I
might almost say none; for Huskisson was but a nominal disciple,
and expressly contravened their whole system upon an attempt to
apply it to the Corn Laws; and Calhoun is but a Free-Trader by
location, and has never yet answered his own powerful arguments in
behalf of Protection. On the other hand, we point you to the long
array of mighty names which have illustrated the annals of
Statesmanship of modern times,—to Chatham, William Pitt, and the
Great Frederick of Prussia; to the whole array of memorable French
Statesmen, including Napoleon the first of them all; to our own
Washington, Hamilton, Jefferson, and Madison; to our two
Clintons, Tompkins, to say nothing of the eagle-eyed and genial-
hearted LIVING master-spirit [Henry Clay] of our time. The opinions
and the arguments of all these are on record; it is by hearkening to
and heeding their counsels that we shall be prepared to walk in the
light of experience and look forward to a glorious National destiny.
My friends! I dare not detain you longer. I commit to you the cause
of the Nation’s Independence, of her Stability and her Prosperity.
Guard it wisely and shield it well; for it involves your own happiness
and the enduring welfare of your countrymen!
Henry A. Wise
Against Know-Nothingism, Sept. 18, 1852.
The laws of the United States—federal and state laws—declare and
defend the liberties of our people. They are free in every sense—free
in the sense of Magna Charta and beyond Magna Charta; free by the
surpassing franchise of American charters, which makes them
sovereign and their wills the sources of constitutions and laws.
In this country, at this time, does any man think anything? Would
he think aloud? Would he speak anything? Would he write anything?
His mind is free; his person is safe; his property is secure; his house
is his castle; the spirit of the laws is his body-guard and his house-
guard; the fate of one is the fate of all measured by the same common
rule of right; his voice is heard and felt in the general suffrage of
freemen; his trial is in open court, confronted by witnesses and
accusers; his prison house has no secrets, and he has the judgment of
his peers; and there is nought to make him afraid, so long as he
respects the rights of his equals in the eye of the law. Would he
propagate truth? Truth is free to combat error. Would he propagate
error? Error itself may stalk abroad and do her mischief, and make
night itself grow darker, provided truth is left free to follow, however
slowly, with her torches to light up the wreck! Why, then, should any
portion of the people desire to retire in secret, and by secret means to
propagate a political thought, or word, or deed, by stealth? Why band
together, exclusive of others, to do something which all may not
know of, towards some political end? If it be good, why not make the
good known? Why not think it, speak it, write it, act it out openly and
aloud? Or, is it evil, which loveth darkness rather than light? When
there is no necessity to justify a secret association for political ends,
what else can justify it? A caucus may sit in secret to consult on the
general policy of a great public party. That may be necessary or
convenient; but that even is reprehensible, if carried too far. But here
is proposed a great primary, national organization, in its inception—
What? Nobody knows. To do what? Nobody knows. How organized?
Nobody knows. Governed by whom? Nobody knows. How bound? By
what rites? By what test oaths? With what limitations and restraints?
Nobody, nobody knows! All we know is that persons of foreign birth
and of Catholic faith are proscribed; and so are all others who don’t
proscribe them at the polls. This is certainly against the spirit of
Magna Charta.
A Prussian born subject came to this country. He complied with

our naturalization laws in all respects of notice of intention,
residence, oath of allegiance, and proof of good moral character. He
remained continuously in the United States the full period of five
years. When he had fully filled the measure of his probation and was
consummately a naturalized citizen of the United States, he then,
and not until then, returned to Prussia to visit an aged father. He was
immediately, on his return, seized and forced into the Landwehr, or
militia system of Prussia, under the maxim: “Once a citizen, always a
citizen!” There he is forced to do service to the king of Prussia at this
very hour. He applies for protection to the United States. Would the
Know-Nothings interpose in his behalf or not? Look at the principles
involved. We, by our laws, encouraged him to come to our country,
and here he was allowed to become naturalized, and to that end
required to renounce and abjure all allegiance and fidelity to the king
of Prussia, and to swear allegiance and fidelity to the United States.
The king of Prussia now claims no legal forfeiture from him—he
punishes him for no crime—he claims of him no legal debt—he
claims alone that very allegiance and fidelity which we required the
man to abjure and renounce. Not only so, but he hinders the man
from returning to the United States, and from discharging the
allegiance and fidelity we required him to swear to the United States.
The king of Prussia says he should do him service for seven years, for
this was what he was born to perform; his obligations were due to
him first, and his laws were first binding him. The United States say
—true, he was born under your laws, but he had a right to expatriate
himself; he owed allegiance first to you, but he had a right to
forswear it and to swear allegiance to us; your laws first applied, but
this is a case of political obligation, not of legal obligation; it is not
for any crime or debt you claim to bind him, but it is for allegiance;
and the claim you set up to his services on the ground of his political
obligation, his allegiance to you, which we allow him to abjure and
renounce, is inconsistent with his political obligation, his allegiance,
which we required him to swear to the United States; he has sworn
fidelity to us, and we have, by our laws, pledged protection to him.
Such is the issue. Now, with which will the Know-Nothings take
sides? With the king of Prussia against our naturalized citizen and
against America, or with America and our naturalized citizen? Mark,
now, Know-Nothingism is opposed to all foreign influence—against
American institutions. The king of Prussia is a pretty potent foreign
influence—he was one of the holy alliance of crowned heads. Will
they take part with him, and not protect the citizen? Then they will
aid a foreign influence against our laws! Will they take sides with our
naturalized citizen? If so, then upon what grounds? Now, they must
have a good cause of interposition to justify us against all the
received dogmas of European despotism.
Don’t they see, can’t they perceive, that they have no other grounds
than those I have urged? He is our citizen, nationalized, owing us
allegiance and we owing him protection. And if we owe him
protection abroad, because of his sworn allegiance to us as a
naturalized citizen, what then can deprive him of his privileges at
home among us when he returns? If he be a citizen at all, he must be
allowed the privileges of citizenship, or he will not be the equal of his
fellow-citizens. And must not Know-Nothingism strike at the very
equality of citizenship, or allow him to enjoy all its lawful privileges?
If Catholics and naturalized citizens are to be citizens and yet to be
proscribed from office, they must be rated as an inferior class—an
excluded class of citizens. Will it be said that the law will not make
this distinction? Then are we to understand that Know-Nothings
would not make them equal by law? If not by law, how can they
pretend to make them unequal, by their secret order, without law
and against law? For them, by secret combination, to make them
unequal, to impose a burthen or restriction upon their privileges
which the law does not, is to set themselves up above the law, and to
supersede by private and secret authority, intangible and
irresponsible, the rule of public, political right. Indeed, is this not the
very essence of the “Higher Law” doctrine? It cannot be said to be
legitimate public sentiment and the action of its authority. Public
sentiment, proper, is a concurrence of the common mind in some
conclusion, conviction, opinion, taste, or action in respect to persons
or things subject to its public notice. It will, and it must control the
minds and actions of men, by public and conventional opinion.
Count Molé said that in France it was stronger than statutes. It is so
here. That it is which should decide at the polls of a republic. But,
here is a secret sentiment, which may be so organized as to
contradict the public sentiment. Candidate A. may be a native and a
Protestant, and may concur with the community, if it be a Know-
Nothing community, on every other subject except that of
proscribing Catholics and naturalized citizens: and candidate B. may
concur with the community on the subject of this proscription alone,
and upon no other subject; and yet the Know-Nothings might elect B.
by their secret sentiment against the public sentiment. Thus it
attacks not only American doctrines of expatriation, allegiance, and
protection, but the equality of citizenship, and the authority of public
sentiment. In the affair of Koszta, how did our blood rush to his
rescue? Did the Know-Nothing side with him and Mr. Marcy, or with
Hulseman and Austria? If with Koszta, why? Let them ask
themselves for the rationale, and see if it can in reason abide with
their orders. There is no middle ground in respect to naturalization.
We must either have naturalization laws and let foreigners become
citizens, on equal terms of capacities and privileges, or we must
exclude them altogether. If we abolish naturalization laws, we return
to the European dogma: “Once a citizen, always a citizen.” If we let
foreigners be naturalized and don’t extend to them equality of
privileges, we set up classes and distinctions of persons wholly
opposed to republicanism. We will, as Rome did, have citizens who
may be scourged. The three alternatives are presented—Our present
policy, liberal, and just, and tolerant, and equal: or the European
policy of holding the noses of native born slaves to the grind-stone of
tyranny all their lives; or, odious distinctions of citizenship tending
to social and political aristocracy. I am for the present laws of
naturalization.
As to religion, the Constitution of the United States, art. 6, sec. 3,
especially provides that no religious test shall ever be required as a
qualification to any office or public trust under the United States.
The state of Virginia has, from her earliest history, passed the most
liberal laws, not only towards naturalization, but towards foreigners.
But I have said enough to show the spirit of American laws and the
true sense of American maxims.
3d. Know-Nothingism is against the spirit of Reformation and of
Protestantism.
What was there to reform?
Let the most bigoted Protestant enumerate what he defines to have
been the abominations of the church of Rome. What would he say
were the worst? The secrets of Jesuitism, of the Auto da fe, of the
Monasteries and of the Nunneries. The private penalties of the
Inquisition’s Scavenger’s Daughter. Proscription, persecution,
bigotry, intolerance, shutting up of the book of the word. And do
Protestants now mean to out-Jesuit the Jesuits? Do they mean to
strike and not be seen? To be felt and not to be heard? To put a
shudder upon humanity by the masks of mutes? Will they wear the
monkish cowls? Will they inflict penalties at the polls without
reasoning together with their fellows at the hustings? Will they
proscribe? Persecute? Will they bloat up themselves into that bigotry
which would burn nonconformists? Will they not tolerate freedom of
conscience, but doom dissenters, in secret conclave, to a forfeiture of
civil privileges for a religious difference? Will they not translate the
scripture of their faith? Will they visit us with dark lanterns and
execute us by signs, and test oaths, and in secrecy? Protestantism!
forbid it!
If anything was ever open, fair, and free—if anything was ever
blatant even—it was the Reformation. To quote from a mighty British
pen: “It gave a mighty impulse and increased activity to thought and
inquiry, agitated the inert mass of accumulated prejudices
throughout Europe. The effect of the concussion was general, but the
shock was greatest in this country” (England). It toppled down the
full grown intolerable abuses of centuries at a blow; heaved the
ground from under the feet of bigoted faith and slavish obedience;
and the roar and dashing of opinions, loosened from their
accustomed hold, might be heard like the noise of an angry sea, and
has never yet subsided. Germany first broke the spell of misbegotten
fear, and gave the watchword; but England joined the shout, and
echoed it back, with her island voice, from her thousand cliffs and
craggy shores, in a longer and louder strain. With that cry the genius
of Great Britain rose, and threw down the gauntlet to the nations.
There was a mighty fermentation: the waters were out; public
opinion was in a state of projection; liberty was held out to all to
think and speak the truth; men’s brains were busy; their spirits
stirring; their hearts full; and their hands not idle. Their eyes were
opened to expect the greatest things, and their ears burned with
curiosity and zeal to know the truth, that the truth might make them
free. The death-blow which had been struck at scarlet vice and
bloated hypocrisy, loosened tongues, and made the talismans and
love tokens of popish superstitions with which she had beguiled her
followers and committed abominations with the people, fall harmless
from their necks.
The translation of the Bible was the chief engine in the great work.
It threw open, by a secret spring, the rich treasures of religion and
morality, which had then been locked up as in a shrine. It revealed
the visions of the Prophets, and conveyed the lessons of inspired
teachers to the meanest of the people. It gave them a common
interest in a common cause. Their hearts burnt within them as they
read. It gave a mind to the people, by giving them common subjects
of thought and feeling. It cemented their Union of character and
sentiment; it created endless diversity and collision of opinion. They
found objects to employ their faculties, and a motive in the
magnitude of the consequences attached to them, to exert the utmost
eagerness in the pursuit of truth, and the most daring intrepidity in
maintaining it. Religious controversy sharpens the understanding by
the subtlety and remoteness of the topics it discusses, and braces the
will by their infinite importance. We perceive in the history of this
period a nervous, masculine intellect. No levity, no feebleness, no
indifference; or, if there were, it is a relaxation from the intense
activity which gives a tone to its general character. But there is a
gravity approaching to piety, a seriousness of impression, a
conscientious severity of argument, an habitual fervor of enthusiasm
in their method of handling almost every subject. The debates of the
schoolmen were sharp and subtle enough: but they wanted interest
and grandeur, and were besides confined to a few. They did not affect
the general mass of the community. But the Bible was thrown open
to all ranks and conditions “to own and read,” with its wonderful
table of contents, from Genesis to the Revelation. Every village in
England would present the scene so well described in Burns’s
“Cotter’s Saturday Night.” How unlike this agitation, this shock, this
angry sea, this fermentation, this shout and its echoes, this impulse
and activity, this concussion, this general effect, this blow, this
earthquake, this roar and dashing, this longer and louder strain, this
public opinion, this liberty to all to think and speak the truth, this
stirring of spirits, this opening of eyes, this zeal to know—not
nothing—but the truth, that the truth might make them free. How
unlike to this is Know-Nothingism, sitting and brooding in secret to
proscribe Catholics and naturalized citizens! Protestantism protested
against secrecy, it protested against shutting out the light of truth, it
protested against proscription, bigotry, and intolerance. It loosened
all tongues, and fought the owls and bats of night with the light of
meridian day. The argument of Know-Nothings is the argument of
silence. The order ignores all knowledge. And its proscription can’t
arrest itself within the limit of excluding Catholics and naturalized
citizens. It must proscribe natives and Protestants both, who will not
consent to unite in proscribing Catholics and naturalized citizens.
Nor is that all; it must not only apply to birth and religion, it must
necessarily extend itself to the business of life as well as to political
preferments.
Kenneth Raynor, of North Carolina, on
Fusion of Fremont and Fillmore Forces.
Extracts from his Speech at Philadelphia, November 1, 1856.

My brother Americans, do you intend to let these mischief-makers
put you and me together by the ears? [Many voices; “no, no.”] Then
let us beat James Buchanan for the Presidency. [“We will—we will,”
and great applause.] He is the representative of slavery agitation; he
is the representative of discord between sections; he is the man
whom Northern and Southern agitators have agreed to present as
their candidate. If he be elected now, and the difficulties in Kansas be
healed, at the end of four years they will spring upon you another
question of slavery agitation. It will be the taking of Cuba from Spain,
or cutting off another slice from Mexico for the purpose of
embroiling the North against the South; and then, if I shall resist that
agitation, I shall be called an Abolitionist, again.
My countrymen, God forbid that I should attempt to dictate to you

or even advise you. I am not competent to do so. I know that
divisions exist among you, while I feel also confident that the same
purpose animates all your hearts. Do not suppose for one moment
that I am the representative of any clique or faction.
Unfortunately, I find that our friends here are in the same
condition in which the Jews were, when besieged by the Roman
general, Titus. Whilst the battering-rams of the Romans were beating
down their walls, and the firebrand of the heathen was consuming
their temple, the historian tells us that that great people were
engaged in intestine commotions, some advocating the claims of one,
and some of another, to the high priesthood of that nation; and
instead of the Romans devouring them, they devoured each other.
God forbid that my brother Americans should devour each other, at a
time when every heart and every hand should be enlisted in the same
cause, of overthrowing the common enemy of us all.
Who is that common enemy? [Voices, “The Democratic party.”]
Yes, that party have reviled us, abused us, persecuted us, and all only
because we are determined to adhere to the Constitution of our
country. Give Buchanan a lease of power for four years, and we must
toil through persecution, submit to degradation, or cause the streets
of our cities to run blood. But we will submit to degradation provided
we can see the end of our troubles. We are willing to go through a
pilgrimage, not only of four years, but of ten, or twenty, or forty
years, provided we can have an assurance that at last we shall reach
the top of Pisgah, and see the promised land which our children are
to inherit. God has not given to us poor frail mortals the power, at all
times, of controlling events. When we cannot control events, should
we not, where no sacrifice of honor is involved, pursue the policy of
Lysander, and where the lion’s skin is too short, eke it out with the
fox’s [applause]—not where principle is involved—not where a
surrender of our devotion to our country is at stake. No; never,
never!
I know nothing of your straight-out ticket; I know nothing of your
Union ticket; I know nothing of Fremont. I do know something of
Fillmore; but I would not give my Americanism, and the hopes which
I cherish of seeing Americanism installed as the policy of this nation,
for all the Fillmores, or Fremonts, or Buchanans, that ever lived on
the face of the earth.
St. Paul says, “if it offends my brother, I will eat no meat;” and if it
offends my brother here, I will not open my mouth. Nobody can
suspect me. [Voices: “certainly not.”] Then I say, can’t you combine
the vote of this state, and beat Buchanan? [This question was
responded to in the affirmative, with the greatest enthusiasm.]
Repeated cheers were proposed for the straight ticket, but the
responding voices were by no means numerous, and were mingled
with hisses. Such was the universal excitement, that for some
minutes the speaker was obliged to pause. He finally raised his voice
above the subsiding storm, and said:—
Come, my friends, we are all brothers; we are all seeking the same
end. Our object is the same. We are all struggling to reach the same
haven of safety. The only difference of opinion is as to the proper
means by which to accomplish our common end. Will not Americans
learn prudence from the past? Misfortune should have taught us
charity for each other. We have passed through the ordeal of
persecution together; we have been subjected to the same difficulties,
and the same oppression; we have been baptized (I may say) in the
same stream of calumny. Then, in the name of God—in the name of
our common country—in the name of Americanism—in the name of
American nationality—in the name of religious freedom—in the
name of the Union, I beseech you to learn charity for the difference
of opinion which prevails among you. Let brethren forbear with
brethren. Let us recollect that it is not by vituperation, by the censure
of our brethren, that we can ever accomplish this great end of
conquering a common enemy. My friends, how long are we to suffer?
How long will it be before we shall learn that it is only by a union of
counsels, a concentration of energy, a combination of purpose, that
we can destroy the common enemy of every conservative man. [Great
applause.]
I shall not attempt to advise you, for I am not competent to do it.
You have information which I do not possess. You know all the
undercurrents of opinion which prevail here in your community,
with which I am unacquainted; but will you allow an humble man to
express his opinion to brethren whom he loves? May I do it? I am a
Fillmore man—nothing but a Fillmore man, and if I resided here, I
would vote no ticket which had not the name of Millard Fillmore at
its head, and I would advise no Fillmore man to vote a ticket with
Fremont’s name on it; but I would vote for that ticket which would
make my voice tell at the polls.
Now let us look at this thing practically. In reading history I have
always admired the character of Oliver Cromwell. What was the great
motive by which he was actuated in overthrowing the house of
Stuart? It was unfailing devotion to principle. His motto was, “Put
your trust in God, and keep your powder dry.” I admire the devotion
to principle in every man who says that he does not intend to vote
any but the straight ticket, for it shows that Americanism has such a
lodgment in his heart, that he cannot bear even seemingly to
compromise it. That is “putting your trust in God;” but, my friends, is
it “keeping your powder dry?” The enemy may steal into the camp
while you are asleep, and may pour water upon your cartridges, so
that when the day of battle shall come, you may shoot, but you will
kill nobody. I want the vote of every American, on Tuesday next, to
tell. Would to God that you could give the twenty-seven electoral
votes of Pennsylvania to Fillmore. Then vote the straight ticket, if
that will give him the twenty-seven votes. But suppose it will not
(and I am afraid it will not), then the question is, had you better give
Buchanan the twenty-seven votes, or give Fillmore eight, ten, twelve,
or twenty, as the case may be. I go for beating Buchanan.
Gentlemen, you do not know what we Americans suffer at the
South. I am abused and reviled for standing up in defence of you.
When I hear the whole North denounced as a set of Abolitionists,
whose purpose it is to interfere with the peculiar institutions of the
South, I brand such charges as slanders on the Northern people. I tell
them that the great mass of the Northern people are sound on this
question; that they are opposed to slavery, as I should be if I were a
Northern man; but that I do not believe that the great mass of the
Northern people have any idea of interfering with the constitutional
rights of the people of the South. I know that such men as Garrison
and Forney have. I know that Garrison believes the Constitution to
be a “league with hell,” and would therefore destroy it if he could;
and I know that Forney loves office so well, that even at the risk of
snapping the Union, he will keep alive slavery agitation. But Garrison
does not represent New England, and Forney does not represent you.
As much as I have been reviled for standing by you, I am so
anxious to have Buchanan beaten, that were I residing here, if I could
not give Fillmore the whole twenty-seven votes, I would give him all I
could, by giving him the number to which he might be entitled by the
numerical proportion of the votes at the ballot-box. Yet, if there is a
brother American here who feels in his “heart of hearts,” that by
voting that Union ticket, he would compromise his Americanism, I
say to such an one, “do not vote that ticket.” At the same time,
candor compels me to say, that I differ in opinion with him. If I
believed that that ticket was a fusion, or that it called upon any
Fillmore man to vote for Fremont, I would advise no one to vote it. I
would not vote a ticket that had on it the name of Fremont; but I
would vote a ticket with Fillmore’s name upon it, and which would
give him (if not the twenty-seven electoral votes) seven, or ten, or
twenty, just as the numerical proportion of the votes might decide.
I appeal to every conservative, Union-loving man in this nation,
who is disposed to give to the South all the constitutional privileges
to which she is entitled, and who wishes to rebuke the Democratic
party for the repeal of the Missouri compromise, and for keeping up
the eternal agitation of slavery. I appeal to you as a southern man—as
a slaveholder. I do not ask you to be pro-slavery men, to be the
advocates of slavery, when I say to you that we, your brethren of the
South, expect you to preserve our constitutional rights—and, God
knows, we ask nothing more—against fanatics, either north or south.
Will you do it?
My friends, the election is fast approaching. There is but little time
for deliberation left. Is there no way by which the votes of the anti-
Buchanan party can be concentrated on the same ticket? I would
shed tears of blood—God knows I would—if I could be instrumental
in prevailing on all true Americans to combine. I cannot tell you how
to combine; but is it yet too late? If it is too late to do it throughout
the state, cannot you in Philadelphia do it? The Presidential election
may depend upon the state of Pennsylvania, and the state of
Pennsylvania may depend upon the city of Philadelphia. On the vote
of the city of Philadelphia may depend not only our own rights, but
the rights of our children and our children’s children. I appeal to my
brother Americans, for I have no right to appeal to anybody else; I
cannot address the Fremont party, for I have no affiliation with
them; I cannot address the Buchanan party, for my object is to
destroy them if possible. To my American brethren, then, I appeal,
for God’s sake, do not let the sun rise upon that wrath, which I see
divides you. Your object is the same—to rescue your common
country.
Let me advise you who know nothing of your divisions—who
belong neither to one clique or the other. I say with the deepest
sincerity that I think all parties ought to have concentrated upon the
Fillmore ticket. Mr. Fillmore is a northern man. Your southern
brethren were willing to support him. He had guided the ship of state
safely through the storm, and it was but reasonable to suppose that
in time of difficulty he would again be found the same good pilot. But
if we cannot get all others to unite on Mr. Fillmore, each of us must
inquire, “What is my duty? If the mountain will not come to
Mahomet, shall not Mahomet go to the mountain; and if he will not
go to the mountain, in heaven’s name, shall he not go half way?”
I am fighting for the victory which we may obtain in this contest.
And what an issue is now pending! We read in the Iliad how, for ten
long years, a great people of antiquity were engaged in the siege of
Troy. What was the stake for which they contended? It was nothing
more than a beautiful woman, who had been ravished by a sprig of
the royal line of Troy. What is the stake for which we contend? It is
constitutional liberty—the right of the American people to govern
their own country—the right of every citizen to worship God
according to the dictates of his conscience. The great issue is,
whether the American flag shall still wave in glory when we shall
have gone to our graves, or whether it shall be trailed in dishonor—
whether the “blackness of darkness” which would follow the
dissolution of this Union, shall cover the land.
I do not tell you how to combine: but I urge you to resort to that
mode (if there is such a mode possible), by which you can get
together—by which your votes can be made effectual at the polls—by
which Millard Fillmore can go before the House of Representatives
with the strong moral power which a large electoral vote will give
him.
That is the way in which we must view the question as practical
men. Yet so different are the conditions of our nature, so different
the sentiments which actuate us, that I will not be guilty of such
presumption, as to tell any man what particular course he should
take. You know my opinions; if they are worth anything, receive
them into your hearts, simply as the sentiments of a brother
American; if they are worth nothing, let them pass as the idle wind.
In conclusion I will only say that whether we be defeated or
whether we be victorious, the only reward I ask for in the labor in
which I am engaged is, that you may recollect me as one who had at
heart only the welfare of his country, and who endeavored to
promote it by appealing to the associations of the past, and all the
hopes of the future.
Religious Test.
Debate in the Convention on that article in the Constitution in

regard to it.
Mr. Pinkney moved that no religious test shall ever be required as
a qualification to any office or public trust under the United States.
Mr. Sherman thought it unnecessary, the prevailing liberality
being a sufficient security against all such tests.
Rev. Mr. Backus of Mass. I beg leave to offer a few thoughts upon
the Constitution proposed to us; and I shall begin with the exclusion
of any religious test. Many appear to be much concerned about it;
but nothing is more evident, both in reason and the Holy Scriptures,
than that religion is ever a matter between God and individuals; and
that, therefore, no man or set of men can impose any religious test
without invading the essential prerogatives of our Lord Jesus Christ.
Ministers first assumed this power under the Christian name, and
then Constantine approved of the practice when he adopted the
profession of Christianity as an engine of state policy. And let the
history of all nations be searched, from that day to this, and it will
appear that the imposing of religious tests hath been the greatest
engine of tyranny in the world.
Oliver Wolcott of Conn. For myself I should be content either
with or without that clause in the Constitution which excludes test
laws. Knowledge and liberty are so prevalent in this country, that I
do not believe that the United States would ever be disposed to
establish one religious sect and lay all others under legal disabilities.
But as we know not what may take place hereafter, and any such test
would be destructive of the rights of free citizens, I cannot think it
superfluous to have added a clause which secures us from the
possibility of such oppression.
Mr. Madison of Va. I confess to you, sir, that were uniformity of
religion to be introduced by this system, it would, in my opinion, be
ineligible; but I have no reason to conclude that uniformity of
government will produce that of religion. This subject is, for the
honor of America, left perfectly free and unshackled. The
government has no jurisdiction over it—the least reflection will
convince us there is no danger on this ground. Happily for the states,
they enjoy the utmost freedom of religion. This freedom arises from
that multiplicity of sects which pervades America, and which is the
best and only security for religious liberty in any society. For, where
there is such a variety of sects, there cannot be a majority of any one
sect to oppress and persecute the rest.
Mr. Iredell of N. C. used this language: “Every person in the least
conversant with the history of mankind, knows what dreadful
mischiefs have been committed by religious persecution. Under the
color of religious tests, the utmost cruelties have been exercised.
Those in power have generally considered all wisdom centred in
themselves, that they alone had the right to dictate to the rest of
mankind, and that all opposition to their tenets was profane and
impious. The consequence of this intolerant spirit has been that each
church has in turn set itself up against every other, and persecutions
and wars of the most implacable and bloody nature have taken place
in every part of the world. America has set an example to mankind to
think more rationally—that a man may be of religious sentiments
differing from our own, without being a bad member of society. The
principles of toleration, to the honor of this age, are doing away those
errors and prejudices which have so long prevailed even in the most
intolerant countries. In Roman Catholic lands, principles of
moderation are adopted, which would have been spurned a century
or two ago. It will be fatal, indeed, to find, at the time when examples
of toleration are set even by arbitrary governments, that this country,
so impressed with the highest sense of liberty, should adopt
principles on this subject that were narrow, despotic, and illiberal.”

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Taxation 2018 Comprehensive 31st

PREFACE xxviii Problem Materials 1-32

Tax Planning Considerations 7-30 Tax Planning Considerations 8-34

Plans for Self-Employed Individuals 9-36 CHAPTER 11

Problem Materials 14-34 Check-the-Box Regulations 2-8

Overview of Tax Research 1-2 Choice of Capital Structure 2-27

Tax Planning Considerations 3-31 Complete Termination of the Shareholder’s

Compliance and Procedural Considerations 7-47 Tax Planning Considerations 8-36

Consistency Rules 11-39 Liability for Tax 12-31

Generation-Skipping Transfer Tax 13-30 Effect of a Net Operating Loss 14-16

90-Day Letter 15-7 Tax Accounting and Tax Law 15-35

Comparison of Tax Attributes for C Corporations, Index of Treasury Regulations J-1

Actuarial Tables H-1 Index of Court Cases L-1

Timothy J. Rupert is a Professor at the D’Amore-McKim School of Business at North-

Kenneth E. Anderson is the Pugh CPAs Professor of Accounting at the University of

A Prussian born subject came to this country. He complied with

Extracts from his Speech at Philadelphia, November 1, 1856.

My countrymen, God forbid that I should attempt to dictate to you

Debate in the Convention on that article in the Constitution in

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