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 2018 EDITION

TAXATION of INDIVIDUALS AND

McGraw-Hill’s

BUSINESS ENTITIES
SPILKER • AYERS • BARRICK • OUTSLAY • ROBINSON • WEAVER • WORSHAM
 McGraw-Hill’s

Taxation of Individuals
and Business Entities
Brian C. Spilker
Brigham Young University
Editor

Benjamin C. Ayers John A. Barrick

The University of Georgia Brigham Young University
Edmund Outslay John R. Robinson
Michigan State University Texas A&M University
Connie D. Weaver Ron G. Worsham
Texas A&M University Brigham Young University
McGRAW-HILL’S TAXATION OF INDIVIDUALS AND BUSINESS ENTITIES, 2018 EDITION, NINTH EDITION
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Dedications
We dedicate this book to:
My entire family, whose love and support helped make this book possible, and to Professor Dave Stewart for his
great example and friendship over the last three decades.
Brian Spilker
My wife, Marilyn, daughters Margaret Lindley and Georgia, son Benjamin, and parents Bill and Linda.
Ben Ayers
My wife, Jill, and my children Annika, Corinne, Lina, Mitch, and Connor.
John Barrick
My family, Jane, Mark, Sarah, Chloe, Lily, Jeff, and Nicole, and to Professor James E. Wheeler, my mentor and friend.
Ed Outslay
JES, Tommy, and Laura.
John Robinson
My family: Dan, Travis, Alix, and Alan, and to Professor Dave Stewart.
Connie Weaver
My wife, Anne, sons Matthew and Daniel, and daughters Whitney and Hayley.
Ron Worsham
 About the Authors

Brian Spilker (PhD, University of Texas at Austin, 1993) is the Robert Call/Deloitte Professor
in the School of Accountancy at Brigham Young University. He teaches taxation in the grad-
uate and undergraduate programs at Brigham Young University. He received both BS (Summa
Cum Laude) and MAcc (tax emphasis) degrees from Brigham Young University before work-
ing as a tax consultant for Arthur Young & Co. (now Ernst & Young). After his professional
work experience, Brian earned his PhD at the University of Texas at Austin. In 1996, he was
selected as one of two nationwide recipients of the Price Waterhouse Fellowship in Tax
Award. In 1998, he was a winner of the American Taxation Association and Arthur Andersen
Teaching Innovation Award for his work in the classroom; he has also been awarded for his
use of technology in the classroom at Brigham Young University. Brian researches issues re-
lating to tax information search and professional tax judgment. His research has been pub-
Courtesy of Brian Spilker
lished in journals such as The Accounting Review, Organizational Behavior and Human
Decision Processes, Journal of the American Taxation Association, Behavioral Research in
Accounting, Journal of Accounting Education, Journal of Corporate Taxation, and Journal of
Accountancy.

Ben Ayers (PhD, University of Texas at Austin, 1996) holds the Earl Davis Chair in Taxation
and is the dean of the Terry College of Business at the University of Georgia. He received a
PhD from the University of Texas at Austin and an MTA and BS from the University of
­Alabama. Prior to entering the PhD program at the University of Texas, Ben was a tax
­manager at KPMG in Tampa, Florida, and a contract manager with Complete Health, Inc., in
Birmingham, Alabama.

Ben teaches tax planning and research courses in the undergraduate and graduate programs at
the University of Georgia. He is the recipient of 11 teaching awards at the school, college, and
university levels, including the Richard B. Russell Undergraduate Teaching Award, the high-
est teaching honor for University of Georgia junior faculty members. His research interests
Courtesy Ben Ayers
include the effects of taxation on firm structure, mergers and acquisitions, and capital markets
and the effects of accounting information on security returns. He has published articles in
journals such as The Accounting Review, Journal of Finance, Journal of Accounting and Eco-
nomics, Contemporary Accounting Research, Review of Accounting Studies, Journal of Law
and Economics, Journal of the American Taxation Association, and National Tax Journal.
Ben was the 1997 recipient of the American Accounting Association’s Competitive Manu-
script Award, the 2003 and 2008 recipient of the American Taxation Association’s Outstand-
ing Manuscript Award, and the 2016 recipient of the American Taxation Association’s Ray
M. Sommerfeld Outstanding Tax Educator Award.

iii
iv About the Authors

John Barrick (PhD, University of Nebraska at Lincoln, 1998) is currently an associate profes-
sor in the Marriott School at Brigham Young University. He served as an accountant at the
United States Congress Joint Committee on Taxation during the 110th and 111th Congresses.
He teaches taxation in the graduate and undergraduate programs at Brigham Young Univer-
sity. He received both BS and MAcc (tax emphasis) degrees from Brigham Young University
before working as a tax consultant for Price Waterhouse (now PricewaterhouseCoopers).
­After his professional work experience, John earned his PhD at the University of Nebraska at
Lincoln. He was the 1998 recipient of the American Accounting Association, Accounting,
Behavior, and Organization Section’s Outstanding Dissertation Award. John researches issues
relating to tax corporate political activity. His research has been published in journals such as
Organizational Behavior and Human Decision Processes, Contemporary Accounting
Courtesy John Barrick
­Research, and Journal of the American Taxation Association.

Ed Outslay (PhD, University of Michigan, 1981) is a professor of accounting and the Deloitte/
Michael Licata Endowed Professor of Taxation in the Department of Accounting and Infor-
mation Systems at Michigan State University, where he has taught since 1981. He received a
BA from Furman University in 1974 and an MBA and PhD from the University of Michigan
in 1977 and 1981. Ed currently teaches graduate classes in corporate taxation, multiunit enter-
prises, accounting for income taxes, and international taxation. In February 2003, Ed testified
before the Senate Finance Committee on the Joint Committee on Taxation’s Report on Enron
Corporation. MSU has honored Ed with the Presidential Award for Outstanding Community
Service, Distinguished Faculty Award, John D. Withrow Teacher-Scholar Award, Roland H.
Salmonson Outstanding Teaching Award, Senior Class Council Distinguished Faculty Award,
MSU Teacher-Scholar Award, and MSU’s 1st Annual Curricular Service-Learning and Civic
Engagement Award in 2008. Ed received the Ray M. Sommerfeld Outstanding Tax Educator
Courtesy Ed Outslay
Award in 2004 and the Lifetime Service Award in 2013 from the American Taxation Associ-
ation. He has also received the ATA Outstanding Manuscript Award twice, the ATA/Deloitte
Teaching Innovations Award, and the 2004 Distinguished Achievement in Accounting Educa-
tion Award from the Michigan Association of CPAs. Ed has been recognized for his commu-
nity service by the Greater Lansing Chapter of the Association of Government Accountants,
the City of East Lansing (Crystal Award), and the East Lansing Education Foundation. He
received a National Assistant Coach of the Year Award in 2003 from AFLAC and was named
an Assistant High School Baseball Coach of the Year in 2002 by the Michigan High School
Baseball Coaches Association.
 About the Authors v

John Robinson (PhD, University of Michigan, 1981) is the Patricia ’77 and Grant E. Sims ’77
Eminent Scholar Chair in Business. Prior to joining the faculty at Texas A&M, John was the
C. Aubrey Smith Professor of Accounting at the University of Texas at Austin, Texas, and he
taught at the University of Kansas where he was the Arthur Young Faculty Scholar. In
2009–2010 John served as the Academic Fellow in the Division of Corporation Finance at the
Securities and Exchange Commission. He has been the recipient of the Henry A. Bubb Award
for outstanding teaching, the Texas Blazer’s Faculty Excellence Award, and the MPA Council
Outstanding Professor Award. John also received the 2012 Outstanding Service Award from
the American Taxation Association (ATA). John served as the 2014–2015 president (elect) of
the ATA and is the ATA’s president for 2015–2016. John conducts research in a broad variety
of topics involving financial accounting, mergers and acquisitions, and the influence of taxes
on financial structures and performance. His scholarly articles have appeared in The Account-
ing Review, The Journal of Accounting and Economics, Journal of Finance, National Tax Courtesy John Robinson
Journal, Journal of Law and Economics, Journal of the American Taxation Association, The
Journal of the American Bar Association, and The Journal of Taxation. John’s research was
honored with the 2003 and 2008 ATA Outstanding Manuscript Awards. In addition, John was
the editor of The Journal of the American Taxation Association from 2002–2005. Professor
Robinson received his J.D. (Cum Laude) from the University of Michigan in 1979, and he
earned a PhD in accounting from the University of Michigan in 1981. John teaches courses on
individual and corporate taxation and advanced accounting.

Connie Weaver (PhD, Arizona State University, 1997) is the KPMG Professor of Accounting
at Texas A&M University. She received a PhD from Arizona State University, an MPA from
the University of Texas at Arlington, and a BS (chemical engineering) from the University of
Texas at Austin. Prior to entering the PhD Program, Connie was a tax manager at Ernst &
Young in Dallas, Texas, where she became licensed to practice as a CPA. She teaches taxation
in the Professional Program in Accounting and the Executive MBA program at Texas A&M
University. She has also taught undergraduate and graduate students at the University of Wis-
consin–Madison and the University of Texas at Austin. She is the recipient of several teaching
awards, including the 2006 American Taxation Association/Deloitte Teaching Innovations
award, the David and Denise Baggett Teaching award, and the college level Association of
Former Students Distinguished Achievement award recognizing innovation in teaching taxa-
Courtesy Connie Weaver
tion. Connie’s current research interests include the effects of tax and financial incentives on
corporate decisions and reporting. She has published articles in journals such as The Account-
ing Review, Contemporary Accounting Research, Journal of the American Taxation Associa-
tion, National Tax Journal, Accounting Horizons, Journal of Corporate Finance, and Tax
Notes. She serves on the editorial board of Contemporary Accounting Research and Issues in
Accounting Education and was the 1998 recipient of the American Taxation Association’s
Outstanding Dissertation award.

Ron Worsham (PhD, University of Florida, 1994) is an associate professor in the School of
Accountancy at Brigham Young University. He teaches taxation in the graduate, undergradu-
ate, MBA, and Executive MBA programs at Brigham Young University. He has also taught as
a visiting professor at the University of Chicago. He received both BS and MAcc (tax empha-
sis) degrees from Brigham Young University before working as a tax consultant for Arthur
Young & Co. (now Ernst & Young) in Dallas, Texas. While in Texas, he became licensed to
practice as a CPA. After his professional work experience, Ron earned his PhD at the Univer-
sity of Florida. He has been honored for outstanding innovation in the classroom at Brigham
Young University. Ron has published academic research in the areas of taxpayer compliance
and professional tax judgment. He has also published legal research in a variety of areas. His
work has been published in journals such as Journal of the American Taxation Association,
The Journal of International Taxation, The Tax Executive, Tax Notes, The Journal of Account- Courtesy Ron Worsham
ancy, and Practical Tax Strategies.
TEACHING THE CODE IN CONTEXT

The basic approach to teaching taxation hasn’t changed in decades. Today’s

student deserves a new approach. McGraw-Hill’s Taxation of Individuals
and Business Entities is a bold and innovative series that has been adopted
by over 300 schools across the country.
McGraw-Hill’s Taxation is designed to provide
“This is the best tax book on the market. It’s very
a unique, innovative, and engaging learning ex-
readable, student-friendly, and provides great
perience for students studying taxation. The
supplements.”
breadth of the topical coverage, the storyline
approach to presenting the material, the em- – Ann Esarco,
phasis on the tax and nontax consequences of McHenry County College
multiple parties involved in transactions, and
the integration of financial and tax accounting
topics make this book ideal for the modern tax
curriculum.

Since the first manuscript was written in

“A lot of thought and planning went into the struc-
ture and content of the text, and a great product
was achieved. One of the most unique and help-
ful features is the common storyline throughout
each chapter.”
– Raymond J. Shaffer,
Youngstown State University
2005, 437 professors have contributed 478
book reviews, in addition to 26 focus groups
and symposia. Throughout this preface, their
comments on the book’s organization, peda-
gogy, and unique features are a testament to
the market-driven nature of Taxation’s
development.

“The Spilker text, in many ways, is a more logical approach than any other tax textbook. The text makes
great use of the latest learning technologies through Connect and LearnSmart.”
– Ray Rodriguez, Southern Illinois University–Carbondale

vi
A MODERN APPROACH
FOR TODAY’S STUDENT
“This text provides a new approach to the teaching of the technical material. The style of the text material
is easier to read and understand. The examples and storyline are interesting and informative. The arrangement
makes more sense in the understanding of related topics.”
– Robert Bertucelli, Long Island University–Post

Spilker’s taxation series was built around the following five core precepts:

1
Storyline Approach: Each chapter begins with a storyline that introduces a set of characters or
a business entity facing specific tax-related situations. Each chapter’s examples are related to
the storyline, providing students with opportunities to learn the code in context.

2
Integrated Examples: In addition to provid-
ing examples in-context, we provide
“What if ” scenarios within many examples
to illustrate how variations in the facts
might or might not change the answers.
“Excellent text; love the story line approach and
integrated examples. It’s easy to read and under-
stand explanations. The language of the text is very
clear and straightforward.”
– Sandra Owen, Indiana University–Bloomington

3
Conversational Writing Style: The authors took special care to write McGraw-Hill’s Taxation in
a way that fosters a friendly dialogue between the content and each individual student. The
tone of the presentation is intentionally conversational—creating the impression of speaking
with the student, as opposed to lecturing to the student.
4
Superior Organization of Related Topics:
McGraw-Hill’s Taxation provides two al- “I believe it breaks down complex topics in a way
that’s easy to understand. Definitely easier than
ternative topic sequences. In the McGraw-
other tax textbooks that I’ve had experience with.”
Hill’s Taxation of Individuals and Business
Entities volume, the individual topics gen- – Jacob Gatlin, Athens State University
erally follow the tax form sequence, with
an individual overview chapter and then chapters on income, deductions, investment-related
issues, and the tax liability computation. The topics then transition into business-related topics
that apply to individuals. This volume then provides a group of specialty chapters dealing with
topics of particular interest to individuals (including students), including separate chapters on
home ownership, compensation, and retirement savings and deferred compensation. This volume
concludes with a chapter covering the taxation of business entities. Alternatively, in the
­Essentials of Federal Taxation volume, the topics follow a more traditional sequence, with
­topics streamlined (no specialty chapters) and presented in more of a life-cycle approach.

5
Real-World Focus: Students learn best when they see how concepts are applied in the real world.
For that reason, real-world examples and articles are included in “Taxes in the Real World”
boxes throughout the book. These vignettes demonstrate current issues in taxation and show
the relevance of tax issues in all areas of business.
vii
 ®

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Connect require it; instructor Using Connect improves retention
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satisfaction increases by 28% when 12.7%, and exam scores by 9.1%.
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Connect Insight is Connect’s new one-
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Connect Insight gives the user the ability to
take a just-in-time approach to teaching and
learning, which was never before available.
Connect Insight presents data that helps
instructors improve class performance in a
way that is efficient and effective.
Adaptive
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DESIGNED TO TRANSFORM
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SmartBook®
Proven to help students improve grades and
study more efficiently, SmartBook contains the
same content within the print book, but actively
tailors that content to the needs of the individual.
SmartBook’s adaptive technology provides precise,
personalized instruction on what the student
should do next, guiding the student to master
and remember key concepts, targeting gaps in
knowledge and offering customized feedback,
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ONLINE ASSIGNMENTS
Connect helps students learn more effi-
ciently by providing feedback and practice
material when they need it, where they
need it. Connect grades homework auto-
matically and gives immediate feedback
on any questions students may have
missed. The extensive assignable, gradable
end-of-chapter content includes a general
journal application that looks and feels
more like what you would find in a general
ledger software package. Also, select ques-
tions have been redesigned to test students’
knowledge more fully. They now include
tables for students to work through rather than requiring that all calculations be done offline.

End-of-chapter questions in Connect include:

∙ Discussion Questions
∙ Problems
∙ Comprehensive Problems (Available in the Auto-graded Tax Forms!)

Auto-Graded Tax Forms

The auto-graded Tax Forms in Connect provide a much-improved student experience when
­solving the tax-form based problems. The tax form simulation allows students to apply tax con-
cepts by completing the actual tax forms online with automatic feedback and grading for both
students and instructors.

x
Guided Examples
The Guided Examples in Connect provide a narrated, animated, step-by-step walk-through of select
problems similar to those assigned. These short presentations can be turned on or off by instructors
and provide reinforcement when students need it most.

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TaxACT®
McGraw-Hill’s Taxation can be packaged with tax software from TaxACT, one of the
leading preparation software companies in the market today. The 2017 edition in-
cludes availability of both Individuals and Business Entities software, including the 1040 Forms and
TaxACT Preparer’s Business 3-Pack (with Forms 1065, 1120, and 1120S).
Roger’s CPA
McGraw-Hill Education has partnered with Roger CPA Review, a global leader
in CPA Exam preparation, to provide students a smooth transition from the ac-
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have completed their academic studies to begin preparing for the CPA Exam, research shows that those who be-
come familiar with exam content earlier in the process have a stronger chance of successfully passing the CPA
Exam. Accordingly, students using these McGraw-Hill materials will have access to sample CPA Exam Multiple-
Choice questions and Task-based Simulations from Roger CPA Review, with expert-written explanations and solu-
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xi
A STORYLINE APPROACH THAT WILL
RESONATE WITH STUDENTS
Each chapter begins with a storyline that
introduces a set of characters facing
Storyline Summary ­specific tax-related situations. This revo-
lutionary approach to teaching tax em-
Taxpayers: Courtney Wilson, age 40,
Courtney’s mother Dorothy “Gram” Weiss,
age 70

Family
description:
Courtney is divorced with a son, Deron,
age 10, and a daughter, Ellen, age 20.
Gram is currently residing with Courtney.
phasizes real people facing real tax
Location: Kansas City, Missouri dilemmas. Students learn to apply practi-
cal tax information to specific business
© Image Source Employment Courtney works as an architect for EWD.
status: Gram is retired.

C and personal situations. As their situations

ourtney has already determined her Filing status:
taxable income. Now she’s working
Current
on computing her tax liability. She
knows she owes a significant amount of regu-
situation:
lar income tax on her employment and busi-
ness activities. However, she’s not sure how to
compute the tax on the qualified dividends she re-
ceived from General Electric. Courtney is worried
that she may be subject to the alternative minimum
tax this year because she’s heard that an increasing
number of taxpayers in her income range must pay
the tax. Finally, Courtney knows she owes some self-
employment taxes on her business income. Courtney
would like to determine whether she is eligible to
claim any tax credits such as the child tax credit for
her two children and education credits because she
paid for a portion of her daughter Ellen’s tuition at
the University of Missouri–Kansas City this year.
Courtney is hoping that she has paid enough in taxes
Courtney is head of household. Gram is
single.
Courtney and Gram have computed their
taxable income. Now they are trying to
determine their tax liability, tax refund
or additional taxes due, and whether they
evolve, the characters are brought further
owe any payment-related penalties.
to life.
during the year to avoid underpayment penalties.
She’s planning on filing her tax return and paying
her taxes on time.
Gram’s tax situation is much more straight-
forward. She needs to determine the regular income tax
on her taxable income. Her income is so low she knows
she need not worry about the alternative minimum tax, “The text provides very useful tools that
and she believes she doesn’t owe any self-employment
tax. Gram didn’t prepay any taxes this year, so she is
students can read and understand, making
concerned that she might be required to pay an under- it easier to break the myth that ‘tax is
payment penalty. She also expects to file her tax return
and pay her taxes by the looming due date. hard.’”
to be continued . . .

– Daniel Hoops, Walsh College

Examples
“I absolutely love this textbook. This text-
Examples are the cornerstone of book makes my job of teaching so much
any textbook covering taxation. easier.”
For this reason, McGraw-Hill’s 8-1

Taxation authors took special care – Chuck Pier, Angelo State University
2-4 CHAPTER 2 Tax Compliance, the IRS, and Tax Authorities
to create clear and helpful exam-
spi11838_ch08_000-055.indd 1
The statute of limitations for IRS assessment can be extended in certain circumstances.
1/13/17 8:44 PM

ples that relate to the storyline For example, a six-year statute of limitations applies to IRS assessments if the taxpayer
omits items of gross income that exceed 25 percent of the gross income reported on the tax
of the chapter. Students learn to return. For fraudulent returns, or if the taxpayer fails to file a tax return, the news is under-
standably worse. The statute of limitations remains open indefinitely in these cases.
refer to the facts presented in the
storyline and apply them to other Example 2-1

­scenarios—in this way, they build Bill and Mercedes file their 2013 federal tax return on September 6, 2014, after receiving an auto-
matic extension to file their return by October 15, 2014. In 2017, the IRS selects their 2013 tax return

a greater base of knowledge for audit. When does the statute of limitations end for Bill and Mercedes’s 2013 tax return?
Answer: Assuming the six-year and “unlimited” statute of limitation rules do not apply, the statute

through application. Many exam- of limitations ends on September 6, 2017 (three years after the later of the actual filing date and the
original due date).

ples also include “What if?” sce- What if: When would the statute of limitations end for Bill and Mercedes for their 2013 tax return if the
couple filed the return on March 22, 2014 (before the original due date of April 15, 2014)?

narios that add more complexity Answer: In this scenario the statute of limitations would end on April 15, 2017, because the later of
the actual filing date and the original due date is April 15, 2014.

to the example or explore related

tax concepts. Taxpayers should prepare for the possibility of an audit by retaining all supporting doc-
uments (receipts, cancelled checks, etc.) for a tax return until the statute of limitations ex-
pires. After the statute of limitations expires, taxpayers can discard the majority of supporting
documents but should still keep a copy of the tax return itself, as well as any documents that
may have ongoing significance, such as those establishing the taxpayer’s basis or original
“The case study approach is ex- investment in existing assets like personal residences and long-term investments.

cellent as you follow the taxpayers

LO 2-2 IRS AUDIT SELECTION
through the chapters.” Why me? This is a recurring question in life and definitely a common taxpayer question after
receiving an IRS audit notice. The answer, in general, is that a taxpayer’s return is selected
– Irwin Uhr, Hunter College for audit because the IRS has data suggesting the taxpayer’s tax return has a high probability
of a significant understated tax liability. Budget constraints limit the IRS’s ability to audit a
majority or even a large minority of tax returns. Currently, fewer than 1 percent of all tax
returns are audited. Thus, the IRS must be strategic in selecting returns for audit in an effort
to promote the highest level of voluntary taxpayer compliance and increase tax revenues.
xii Specifically, how does the IRS select tax returns for audit? The IRS uses a number of
computer programs and outside data sources (newspapers, financial statement disclo-
sures, informants, and other public and private sources) to identify tax returns that may
have an understated tax liability. Common computer initiatives include the DIF (Discri-
minant Function) system, the document perfection program, and the information
matching program. The most important of these initiatives is the DIF system. The DIF
system assigns a score to each tax return that represents the probability the tax liability on
THE PEDAGOGY YOUR STUDENTS NEED
TO PUT THE CODE IN CONTEXT CHAPTER 1 An Introduction to Tax 1-3

TAXES IN THE REAL WORLD Republicans vs. Democrats

Taxes in the Real World CHAPTER 1 An Introduction to Tax 1-5
Tax Policy: Republicans versus Democrats Democrats
Taxes in the Real World are short boxes used Oliver Wendell Holmes said “taxes are the price
“At a time of massive income and wealth inequal-
we pay to live in a civilized society.” Both Demo-
ity, we believe the wealthiest Americans and larg-
throughout the book to demonstrate the real-world Example 1-1
crats and Republicans desire the same things: a
est corporations must pay their fair share of
civilized society and a healthy economy. How-
taxes. Democrats will claw back tax breaks for

use of tax concepts. Current articles

Margaret on taxAlabama,
travels to Birmingham, issues,where she rents a hotel room and dines at several restau- ever, neither party can agree on what defines a
companies that ship jobs overseas, eliminate tax
civilized society or which path best leads to a
breaks for big oil and gas companies, and crack
rants. The price she pays for her hotel room and meals includes an additional 2 percent city surcharge
the real-world applicationto fund
of roadway
chapter-specific tax
construction in Birmingham. Is this a tax?
healthy economy. The U.S. national debt is
down on inversions and other methods compa-
$20 trillion dollars and growing, yet the only thing
nies use to dodge their tax responsibilities … We
we might agree on is that something has gone
will then use the revenue raised from fixing the
rules, and short vignettes on popular news about tax
Answer: Yes. The payment is required by a local government and does not directly relate to a specific
benefit that Margaret receives.
wrong. Regardless of which party or candidate
corporate tax code to reinvest in rebuilding
you support, each party’s agenda will affect your
America and ensuring economic growth that will

are some of the issues covered in Taxes in the Real income and taxes in various ways.
lead to millions of good-paying jobs.”
To explore the divide, let’s examine excerpts
“We will ensure those at the top contribute to

World boxes. from each party’s National Platform from our most
Example 1-2
our country’s future by establishing a multimillion-
recent presidential election (2016).
aire surtax to ensure millionaires and billionaires
pay their fair share. In addition, we will shut down
Republicans the “private tax system” for those at the top, im-
“We areand
Margaret’s parents, Bill and Mercedes, recently built a house the party
wereofassessed
a growing economy
$1,000that by their
mediately close egregious loopholes like those
gives everyone a chance in life, an opportunity to enjoyed by hedge fund managers, restore fair
county government to connect to the county sewer system. Is this a tax?
“The Spilker text makes tax easy for students to under-
Answer: No. The assessment was mandatory and it wasmakes
learn, work, and realize the prosperity freedom
paid possible.”
to a local government. However, millionaires
taxation on multimillion dollar estates, and ensure
the can no longer pay a lower rate than

stand. It integrates great real-world examples so

“Government cannot create prosperity, their secretaries. At a time of near-record corpo-
third criterion was not met since the payment directly relates to a specific benefit (sewer service)
though government can limit or destroy it. Pros- rate profits, slow wage growth, and rising costs,
received by the payees. For the same reason, tolls, parkingperity
meteris thefees, and
product annual licensing
of self-discipline, fees we
enterprise, areneed to offer tax relief to middle-class
­students can see how topics will be applied in practice.
also not considered taxes. saving and investment by individuals, but it is not families—not those at the top.”
an end in itself. Prosperity provides the means by
The integration of the tax form and exhibits of the tax “We will offer tax relief to hard working, middle-
which citizens and their families can maintain class families for the cost squeeze they have
their independence from government, raise their faced for years from rising health care, childcare,
forms in the text are outstanding.”
HOW TO CALCULATE A TAX children by their own values, practice their faith,
and build communities of cooperation and mu-
education, andLO 1-3expenses.” https://www
other
.democrats.org/party-platform#preamble
tual respect.”
– Kristen In its simplest
Bigbee, form,Tech
Texas the amount of tax equals the tax base multiplied by the tax rate:
University “Republicans consider the establishment of Conclusion
a pro-growth tax code a moral imperative. Each party fundamentally believes the govern-
More than any other public policy, the way gov- ment should create/maintain cities and states that
Eq. 1-1 Tax = Tax Base × Tax Rate
ernment raises revenue—how much, at what form a civilized society, and that government
should foster a healthy economy. However, they THE KEY FACTS
rates, under what circumstances, from whom,
and for whom—has the greatest impact on our choose very different paths to reach this objec- What Qualifies
The tax base defines what is actually taxed and is usually expressed in monetary
The Key Facts terms, whereas the tax rate determines the level of taxes imposed on the tax base and is
economy’s performance. It powerfully influ-
ences the level of economic growth and job
tive. Democrats want to raise taxes on the
wealthy and createTHE KEYprograms
government FACTS which
as a Tax?
• The general purpose of

The Key Facts pro- usually expressed as a percentage. For example, a sales tax rate of 6 percent on a purchase creation, which translates into the level of op-
portunity for those who would otherwise be left
cost more money, while Republicans wish to
How to government
lower taxes and decrease Calculate asize Taxand
taxes is to fund govern-
ment agencies.
of $30 yields a tax of $1.80 ($1.80 = $30 × .06). • Unlike fines or penalties,
vide quick synopses
behind.” spending. Both •motivesTax =are Taxpure;
basehowever, cur-
× Tax rate
rent and cumulative deficits indicate that current taxes are not meant to
Federal, state, and local jurisdictions use a large variety of tax bases to collect tax. “A strong economy is one key to debt reduc-
tion, but spending restraint is a necessary com-
• The taxtobase
revenue is insufficient meetdefines what
government punish or prevent illegal

of the critical pieces Some common tax bases (and related taxes) include taxable income (federal and state ponent that must be vigorously pursued.” https:// spending. Solving isthese actually taxed will
problems
usuallyandexpressed
andrequire
in
is behavior; however, “sin
taxes” are meant to dis-
income taxes), purchases (sales tax), real estate values (real estate tax), and personal www.gop.com/platform/restoring-the-american- civil discourse, education research/informa-

of information pre- property values (personal property tax).

courage some behaviors.
dream/ tion in order to find realistic, effective
monetary terms. solutions.
• To qualify as a tax, three
• The tax rate determines criteria must be met. The

sented throughout to anDifferent portions of a tax base may be taxed at different rates. A single tax applied
entire base constitutes a flat tax. In the case ofIngraduated summary, taxes affect the
taxes, manybase aspects
the level of taxes imposed
of personal, business, and political decisions.
is divided
payment must be:
• required;
on the
youtaxtobase andinformed
is
each chapter. into a series of monetary amounts, or brackets, and
Developing a solid understanding of taxation should allow
eachin successive
decisions these areas. Thus, bracket Margaretis taxed
can take at comfort
a usually
that
make
her expressed
semester aswilla likely
• imposed by a
government;
different (gradually higher or gradually lower) percentage prove useful rate.to her personally. Who knows? Depending on
CHAPTER 2 Tax Compliance, the IRS, and Tax Authorities 2-7 percentage.
her interest in business, • and not tied directly to
the benefit received by
Calculating some taxes—income taxes for individuals or corporations,
investment, retirement planning, for and example—
the like, she may ultimately • Different decide
portionstoof pursue
a a
Exhibits career inProcess
EXHIBIT 2-2 IRS Appeals/Litigation
can be quite complex. Advocates of flat taxes argue taxation.
that the process should be simpler. But tax base may be taxed
the taxpayer.

at different rates.
Today’s students are visual
as we’ll seelearners,
IRS Exam
throughout the text, most of the difficulty
1a. Agree with proposed
adjustment in calculating proposeda taxadjustment
rests in determin-
1b. Disagree with

ing the tax base, not the tax rate. Indeed, there are only three basic tax rate structures (pro-
and McGraw-Hill’s Taxation delivers
portional, progressive, and regressive),Payand each can be mastered without much
Taxes Due
difficulty.
30-Day Letter

by making appropriate use of charts,

DIFFERENT WAYS TO MEASURE TAX RATES
diagrams, and tabular demonstrations spi11838_ch01_000-029.indd 3 3a. Agree with proposed
adjustment
2a. Request appeals
2b. No

Before we discuss the alternative tax rate structures, let’s first define three different tax Appeals Conference taxpayer

of key material. rates that will be useful in contrasting the different tax rate structures: the marginal, File Suit in U.S. District
3b. Disagree with proposed adjustment
response

File Claim for

average, and effective tax rates. CourtFederal
or U.S. Court of
Claims
5. IRS denies
refund claim
Refund with the IRS
4b. Pay tax
90-Day Letter

The marginal tax rate is the tax rate that applies to the next additional increment of
a taxpayer’s taxable income (or deductions). Specifically,
4a. Do not pay tax;
Petition Tax Court

“A good textbook that uses great Marginal Tax Rate = Tax Court

­examples throughout the chapters to ΔTax* (New Total Tax − Old Total Tax)
Eq. 1-2 =
ΔTaxable Income (New Taxable Income − Old Taxable Income)
give a student an understanding of the IRS Exam: © Royalty-Free/Corbis, Supreme Court: © McGraw-Hill Education/Jill Braaten, photographer, File Claim: © Michael A. Keller/Corbis

*Δ means change in.

tax theory and how it applies to the Claims to interpret and rule differently on the same basic tax issue. Given a choice of
courts, the taxpayer should prefer the court most likely to rule favorably on his or her
particular issues. The courts also differ in other ways. For example, the U.S. District
taxpayers.” “Spilker’s use of examples immediately following the
Court is the only court that provides for a jury trial; the U.S. Tax Court is the only court
that allows tax cases to be heard before the taxpayer pays the disputed liability and the
only court with a small claims division (hearing claims involving disputed liabilities of
concept is a great way to reinforce the concepts.”
$50,000 or less); the U.S. Tax Court judges are tax experts, whereas the U.S. District
– Jennifer Wright, Court and U.S. Court of Federal Claims judges are generalists. The taxpayer should con-
sider each of these factors in choosing a trial court. For example, if the taxpayer feels very

Drexel University – Karen Wisniewski, County College of Morris

confident in her tax return position but does not have sufficient funds to pay the disputed
liability, she will prefer the U.S. Tax Court. If, instead, the taxpayer is litigating a tax re-
turn position that is low on technical merit but high on emotional appeal, a jury trial in
the local U.S. District Court may be the best option.
spi11838_ch01_000-029.indd 5 What happens after the taxpayer’s case is decided in a trial court? The process may 19/01/17 2:11 PM
not be quite finished. After the trial court’s verdict, the losing party has the right to re-
quest one of the 13 U.S. Circuit Courts of Appeals to hear the case. Exhibit 2-3 depicts
the specific appellant courts for each lower-level court. Both the U.S. Tax Court and local
U.S. District Court cases are appealed to the specific U.S. Circuit Court of Appeals based
on the taxpayer’s residence.9 Cases litigated in Alabama, Florida, and Georgia, for example,

9
Decisions rendered by the U.S. Tax Court Small Claims Division cannot be appealed by the taxpayer or the IRS.
xiii

spi11838_ch02_000-035.indd 7 01/11/17 9:25 PM

 the appeals officer may consider the hazards of litigation. Accordingly, Bill and Mercedes
have a good likelihood of a favorable resolution at the appeals conference.
In this chapter we discussed several of the fundamentals of tax practice and proce-
dure: taxpayer filing requirements, the statute of limitations, the IRS audit process, the
primary tax authorities, tax research, tax professional standards, and taxpayer and tax
practitioner penalties. For the tax accountant, these fundamentals form the basis for much
of her work. Likewise, tax research forms the basis of much of a tax professional’s com-
pliance and planning services. Even for the accountant who doesn’t specialize in tax ac-

PRACTICE MAKES PERFECT WITH A

counting, gaining a basic understanding of tax practice and procedure is important.
Assisting clients with the IRS audit process is a valued service that accountants provide,
and clients expect all accountants to understand basic tax procedure issues and how to
research basic tax issues.

Summary Summary
LO 2-1 Identify the filing requirements for income tax returns and the statute of limitations for A unique feature of McGraw-Hill’s
assessment.
• All corporations must file a tax return annually regardless of their taxable income. Estates Taxation is the end-of-chapter sum-
and trusts are required to file annual income tax returns if their gross income exceeds
$600. The filing requirements for individual taxpayers depend on the taxpayer’s filing mary organized around learning
status, age, and gross income.
• Individual and C corporation tax returns (except for C corporations with a June 30 year-end) ­objectives. Each objective has a
are due on the fifteenth day of the fourth month following year-end. For C corporations
with a June 30 year-end, partnerships and S corporations, tax returns must be filed by the brief, bullet-point summary that
covers the major topics and con-
fifteenth day of the third month following the entity’s fiscal year-end. Any taxpayer unable
to file a tax return by the original due date can request an extension to file.

cepts for that chapter, including

2-30 CHAPTER 2
Tax Compliance,
KEY TERMS
LO 2-2
30-day letter (2-6)
90-day letter (2-6)
• The three types of IRS audits consist of correspondence, office,statute
acquiescence (2-17)
• After the audit, the IRS will send the taxpayer a 30-day letter, which provides the taxpayer
action on decision (2-17)
annotated tax service (2-18)
Circular 230 (2-24)
citator (2-21)
civil penalties (2-26)
• For both amended tax returns filed by a taxpayer and proposed tax assessments by the
IRS,the
theIRS,
statute of limitations
and generally ends three years from the later of (1) the date the
Tax Authorities
chapter
Tax Compliance,
tax return was actually filed or (2) the tax return’s original due date.
­references to critical exhibits and
2
happens after the audit. the IRS, and Tax
Outline the IRS audit process, how returns are selected, the different types of audits, and what
examples. All end-of-chapter mate-
Authorities
• The IRS uses a number of computer programs and outside data sources to identify tax
returns that may have an understated tax liability. Common computer initiatives include the
information matching program (2-4) Statements on Standards for rial
Taxis tied to learning objectives.
DIF (Discriminant Function) system, the document perfection program, and the information
matching Internal
program.Revenue Code of 1986 (2-11) Services (SSTS) (2-23)
of limitations (2-3)
and field examinations.
interpretative regulations (2-16)
legislative
the opportunity to pay regulations
the proposed(2-16) assessment or request an substantial authority (2-24)
appeals conference.
If an agreement is not reached at appeals or the taxpayer does
nonacquiescence (2-17) taxnottreaties (2-14)
pay the proposed
Learning Objectives
office examination (2-6) technical advice memorandum “You can tell the authors of this text-
(2-16)
Upon completing this chapter, you should be able to:
primary authorities (2-9) temporary regulations (2-15)
book are still in the classroom and
LO 2-1 private
Identify theletter rulings
filing requirements (2-16)
for income tax returns and the statute topical
of limitationstax
for service (2-19)

correspondence examination (2-5)

assessment.
procedural regulations (2-16) U.S. Circuit Courts of Appeals ­responsible
(2-7) for the day-to-day
U.S. Constitution (2-11) ­education of accounting students.
LO 2-2 Outline the IRS audit process, how returns are selected, the different types of audits, and
criminal penalties (2-26)
spi11838_ch02_000-035.indd 28
proposed regulations
what happens after the audit. (2-15) 01/11/17 2:51 PM
determination letters (2-16) LO 2-3 question of fact
Evaluate the relative (2-19)
weights of the various tax law sources. U.S. Court of Federal Claims ­Examples
(2-6) are representative of the
DIF (Discriminant Function) question of law (2-19) U.S. District Court (2-6)
LO 2-4 Describe the legislative process as it pertains to taxation.
end-of-chapter problems, and the
system (2-4) LO 2-5 regulations (2-15)
Perform the basic steps U.S.when
in tax research and evaluate various tax law sources Supreme
faced Court (2-8)
document perfection program (2-4) with ambiguous statutes.
revenue procedures (2-16) U.S. Tax Court (2-6) end-of-chapter summary is an excellent
field examination (2-6) LO 2-6 Describe tax professional responsibilities in providing tax advice.
revenue rulings (2-16) writ of certiorari (2-8) study tool.”
LO 2-7 Identify taxpayer and tax professional penalties.
final regulations (2-15) secondary authorities (2-9)
Golsen rule (2-15) stare decisis (2-15)
– Debra Petrizzo, Franklin University

Discussion
DISCUSSION QUESTIONS Questions
Discussion Questions are available in Connect®. Discussion questions,
LO 2-1 1. Name three factors that determine whether a taxpayer is required to file a tax
spi11838_ch02_000-035.indd 1 01/11/17 2:50 PM
now available in Con-
return. nect, are provided for
2. Benita is concerned that she will not be able to complete her tax return by April 15.
LO 2-1
Can she request an extension to file her return? By what date must she do so? each of the major con-
Assuming she requests an extension, what is the latest date that she could file cepts in each chapter,
her return this year without penalty?
providing students
LO 2-1 3. Agua Linda Inc. is a calendar-year corporation. What is the original due date for
the corporate tax return? What happens if the original due date falls on a with an opportunity
Saturday? to review key parts of
4. Approximately what percentage of tax returns does the IRS audit? What are the
LO 2-2
implications of this number for the IRS’s strategy in selecting returns for audit?
the chapter and answer
“This 5. Explain
LO 2-2 is a very the difference
readable between the
text. Students willDIF system and the
understand National
it on theirResearch
own, Program. evocative questions
How do they relate to each other?
generally, freeing more class time for application, practice, and student about what they have
6. Describe the differences between the three types of audits in terms of their scope
LO 2-2
questions.” and taxpayer type. learned.
LO 2-2 7. Simon just received a 30-day letter from the IRS indicating a proposed assessment.
Does he have to pay the additional tax? What are his – Valrie Chambers,
options?
LO 2-2 8. Compare and contrast the Texas
three A&M
trial-level University–Corpus
courts. Christi
LO 2-3 9. Compare and contrast the three types of tax law sources and give examples of
each.
LO 2-3 10. The U.S. Constitution is the highest tax authority but provides very little in the
way of tax laws. What are the next highest tax authorities beneath the U.S.
Constitution?
LO 2-3 11. Jackie has just opened her copy of the Code for the first time. She looks at the
xiv table of contents and wonders why it is organized the way it is. She questions
whether it makes sense to try and understand the Code’s organization. What are
 b) As a salesperson, Alyssa incurred $2,000 in travel expenses related to her
employment that were not reimbursed by her employer.
2-32 CHAPTER 2 Tax Compliance, the IRS, and Tax Authorities
c) The Johnsons own a piece of raw land held as an investment. They paid $500 of
real property taxes on the property and they incurred $200 of expenses in travel
LO 2-6 37.costs
Levitoissee recommending
the property and a taxto return
evaluate position to his client.
other similar potential What standard must he
investment
meet to satisfy his professional standards? What is the source of this professional
properties.
standard?
d) The Johnsons own a rental home. They incurred $8,500 of expenses associated
LO 2-6 38.withWhat theisproperty.
Circular 230?
LO 2-7 39.
e) TheWhat are the home
Johnsons’ basic differences
was only five between
miles from civil theandOffice
criminal Depottax store
penalties?
where

WIDE VARIETY OF ASSIGNMENT MATERIAL LO 2-7

LO 2-7

LO 2-7
40.Alyssa
What worked
home,
are some
so the
inof
Johnsons
January
the most andcommon
decided
February.civil
to move
Thepenalties
to
41. What are the taxpayer’s standards to avoid the substantial understatement
The
make
Johnsons’ new home was only 10 miles from the ST store. However, their
penalty?
new home was 50 miles from their former residence. The Johnsons paid a mov-
ST store imposed

42. What are the tax practitioner’s standards to avoid a penalty for recommending a tax
the
was 60 miles
commute easier
from their
on taxpayers?
for Alyssa.
of tax

ing company $2,002 to move their possessions to the new location. They also
return position?
drove the 50 miles to their new residence. They stopped along the way for
lunch and spent $60 eating at Denny’s. None of the moving expenses were
Problems Problems are designed 2-34 CHAPTER 2 Tax Compliance, reimbursed
the IRS, and Tax
PROBLEMS byAuthorities
ST.
f) Jeremy paid $4,500 for health insurance coverage for himself (not through an
to test the comprehension of more LO 2-5 66. Georgette
Select
researchJeremy
has identified
exchange).
problems
question.
Alyssa
is not What
are was
eligible
a 1983
available
must
covered
for the
court bycase
in Connect
she plan
health
do tountil
that
. appears
® plans
determine
next year.
providedto answer
by her her employer, but
if the case still represents
complex topics. Each problem at the LO 2-5
43.
LO 2-1 “current”
67. Sandyportion
Ahmed
g) Jeremy law? paid
thatdetermined
has heofcan
does not have
$2,500
therequest thatan
self-employment
enough cash ontaxes
in self-employment
herextension
research to
taxes).
hand($1,250
to pay his
file his depends
question tax return.
taxes. He
represents
Does
upon thethis
thewas excited to hear
employer
solve his problem?
interpretation
end of the chapter is tied to one of that of the What are
phrase “not the ramifications
compensated by ifinsurance.”
he doesn’t pay
h) Jeremy paid $5,000 in alimony and $3,000 in child support from his prior
44.marriage.
LO 2-1 is this?
What histype
tax of
Molto Stancha Corporation had zero earnings this fiscal year; in fact, it lost money.
liability
research by April
question 15?

chapter’s learning objectives, with LO 2-5 68. J. C.i) has

LO 2-1 believes
45.The
Must
beenpaid
Alyssa the
theJohnsons
The
corporation
a professional
$3,100 of tuition
incomeofwould
estate isMonique
tax-free.
file
gambler
like to
a
Chablis
tax return?
andforfees
deductearned
many
as much
years.night
to attend
$450
He loves
classes
of income
of this
thisatline
expenditure
of work
a local
this year.
and
university.
Is the rather
as possible estate
research
multiple problems for critical topics. LO 2-1
a) Usethan
46.
j) The
required
an
correct.
claim to
available
Jamarcus,
Johnsons
file
tax an
a credit.
Is the answera full-time
donated
income
research
to this
tax return?
service
question
student,
$2,000
to determine whether J. C.’s thinking is
found
to earned
their in thecharity.
$2,500
favorite Internal
this yearRevenue
from a summer Code? Ifjob. He had
not, what
no other typeincome
of authoritythis year answers
and will this question?
have zero federal income tax liability this year.
70. Shauna Coleman is single. She is employed as an architectural designer for Stream-
Tax Forms Problems Tax forms tax forms
LO 2-5
b)
69. Katie
Write His
a
recently
correctly
employer
memo
calculated
withheld $300
communicating
a ceramic AGI.
the of federal
results
a tax return?
dalmatian
However, valued
of income
your
line Design (SD). Shauna wanted to determine her taxable income for this year. She
Jamarcus wonrequired her to file Should
at $800
she wasn’t
tax from his summer pay. Is
research.
Jamarcus
sureonhow to file
a television a tax
compute game return?
the rest of
problems are a set of requirements research
LO 2-1 show.47.
herShe
on the
Shane
taxable
gambler.
show.
has
questions never
income.
When
whether
Shefiled
does
a tax
this
provided
the
could use it to determine her taxable income.
return
prize
statute of
despitesince
theisfollowing
taxable
limitations
earning
information excessive
it was
expire
awith
for
“gift”
the
sums
she won
hopes
years
of money
that
in
you as a
which Shane
hasavailable
not paid
filedtax a tax return?
included in the end-of-chapter material a) Use
a) an
LO 2-1 b) Write
Shauna
48. Shauna’s
Latoya
a letterfiled
$4,680
boyfriend,
to Katie
research
her tax Blake,
communicating
serviceexpenses
for medical
returndrove
to answer
on February
Shauna
the results
forKatie’s
10
care from
(in this
her
question.
a broken ankle. Also,
year.aresearch.
car)
of your When
total ofwill 115themilesstatute
to theof limita-
tions expire forsothis tax return?
of the 2018 edition. These problems
doctor’s
70. Pierre recently office
received ashe
taxcouldpenalty receive care for
for failing to her
file broken ankle.He was upset
a tax return.
LO 2-5
49. Using
b) Shauna
LO 2-1 to receive the penalty, but he was comforted by the thought that he will get a tax (notif
the
paidfacts
a from
total of the previous
$3,400 in problem,
health insurance how would
premiums your answer
during the change
year
through
Latoya an exchange).
understated her SDincome
did notby reimburse
40 percent? any Howof thiswould
expense. yourBesides
answerthe change if
require students to complete a tax form
research deduction for paying the penalty.
a) Use an Latoya
availableintentionally
tax research failed to report
service as taxableif income
to determine Pierre isany cash payments she
correct.
received from her clients?
(or part of a tax form), providing students with valuable experience and practice with filling out these
LO 2-2
b) Write a memo communicating the results of your research.
50. Paula could not reach an agreement with the IRS at her appeals conference and has
71. Paris was
LO 2-5
justhappy
received to provide
a 90-day a contribution
letter. If she wants to her to friend
litigateNicole’s
the issue campaign
but doesfor not have
forms. These requirements—and their relevant forms—are also included in Connect. Each tax form
research
mayor, sufficient
deductible.
especiallycash aftertoshe paylearned that charitable
the proposed deficiency, contributions
what is herare besttaxcourt choice?
51. In choosing a trial-level court, how should a court’s previous rulings influence the
problem includes an icon to differentiate it from regular problems.
LO 2-2
a) Use an available
choice? Howtax service
should to determine
circuit court rulings whether Paris can
influence thededuct
taxpayer’s this choice of a trial-
spi11838_ch06_000-055.indd 52 contribution. 1/13/17 5:06 PM
level court?
b) Write a memo
52. Sophia communicating
recently won a taxthe case results
litigatedof your
in the research.
7th Circuit. She recently heard
Research Problems Research
LO 2-2
LO 2-5 72. Matt and Lori
that therecently
Supreme wereCourt divorced.
deniedAlthough
the writ of grief stricken,Should
certiorari. Matt was sheatbeleast
happy or not,
partiallyand comforted
why? by his monthly receipt of $10,000 alimony. He was particularly
problems are special problems research
LO 2-2
excited to learn from his friend, Denzel, that the alimony was not taxable. Use an
53. Campbell’s tax return was audited because she failed to report interest she earned
available tax service to determine if Denzel is correct. Would your answer change
on her tax return. What IRS audit selection method identified her tax return?
throughout the end-of-chapter LO 2-5
LO 2-2
if Matt and Lori continued to live together?
54. Yong’s tax return was audited because he calculated his tax liability incorrectly.
73. Shaun is a huge college football fan. In the past, he has always bought football
What IRS audit procedure identified his tax return for audit?
assignment material. These tickets on the street from ticket scalpers. This year, he decided to join the univer-
research LO 2-2 sity’s 55.ticket
Randy deducted
program, whicha high level of
requires itemized
a $2,000 deductionstotwo
contribution the years
universityago relative to his
incometo level. He recently
tickets. received an then
IRS notice requesting documentation for
require students to do both basic for the “right”
his itemizedthat
Shaun understands
for audit?
purchase
deductions.
the price What
Shaun will
paid for audit
theprocedure
pay $400
season tickets likely
per season
is identified
ticket.
his tax return
not tax deductible
as a charitable contribution. However, contributions to a university are typically
and more complex research on topics outside of the scope of the book. Each research problem includes
tax deductible.
a) Use an available tax service to determine how much, if any, of Shaun’s $2,000
an icon to differentiate it from regular problems. contribution for the right to purchase tickets is tax deductible.
b) Write a letter to Shaun communicating the results of your research.
LO 2-5 74. Latrell recently used his Delta Skymiles to purchase a free round-trip ticket to
Milan, Italy (value $1,200). The frequent flyer miles used to purchase the ticket
“The textbook is comprehensive, uses an integrated approach to taxation, contains clear illustrations
research
spi11838_ch02_000-035.indd 32
were generated from Latrell’s business travel as a CPA. Latrell’s employer paid for
01/11/17 2:51 PM
his business trips, and he was not taxed on the travel reimbursement.
and examples in each chapter, and has a wealth of end-of-chapter assignment material.”
4-40 CHAPTER 4 Individual Income Tax Overview, Exemptions, and Filing Status
a) Use an available tax research service to determine how much income, if any,
Latrell will have to recognize as a result of purchasing an airline ticket with
a separate tax return. In year 4, the couple divorced. Both Jasper and Crewella filed sin-
Skymiles
b) Write anda each
memo
– James P. Trebby, Marquette University
earned from business travel.
gle tax returns in year 4. In year 5, the IRS audited the couple’s joint year 2 tax return
communicating
spouse’s separate yearthe results
3 tax returns.of The
yourIRS research.
determined that the year 2 joint
return and Crewella’s separate year 3 tax
CHAPTER 2 return understatedthe
Tax Compliance, Crewella’s self-employ-
IRS, and Tax Authorities 2-33
ment income, causing the joint return year 2 tax liability to be understated by $4,000
Planning Problems Planning problems 56. and Crewella’s
Jackie has a corporate client
also assessed
with a $100,000 tax assessment.
year 3 separate
that has recently
Herpenalties
client is and
received return tax liability
a 30-day
interest on
considering
notice to
both of these
requesting
frombe understated
the IRS by
LO$6,000.
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tax returns. Try as it might, the IRS
an appeals planning
are another unique set of problems conference to contest the hasassessment.
not been able
a) What
to consider before requesting anamount
to locate
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appealsof
factors Crewella, but theyadvise
should Jackie have been able to find Jasper.
her client
tax can the IRS require Jasper to pay for the Dahvill’s year 2
conference?
joint
anreturn?
audit ofExplain.
included in the end-of-chapter
57. The IRS recently completed Shea’s tax return and assessed $15,000 ad- LO 2-2

spi11838_ch02_000-035.indd 34
ditional tax. Shea requestedb) What amountconference
an appeals of tax can the butIRS
was require
unable Jasper
to settletothe paycase
for Crewella’s year 3
planning 01/11/17 2:51 PM
separate tax return?
at the conference. She is contemplating whichExplain.
trial court to choose to hear her case.
assignment material. These require Provide aLOrecommendation
4-3 51. Janice
a) Shea resides in the 2nd
based on the
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onlyCircuit,
child. Marty
and the
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has2nd
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lived with has
Circuit Janice
facts: son named Marty. Marty is Janice’s
has an 18-year-old
his entire
recently ruledlife. However,
against the Marty recently

students to test their tax planning skills research

position joined the Marines and was sent on a special assignment to Australia. During the
Shea is litigating.
b) The Federal Circuit current
Court ofyear, Martyhas
Appeals spent nine months
recently ruled ininfavor Australia.
of Shea’s Marty was extremely homesick
while in Australia, since he had never lived away from home. However, Marty knew
after covering the chapter topics. Each planning problem includes an icon to differentiate it from
position.
c) The issue being litigatedthis assignment was onlyof
involves a question temporary,
fact. Sheaand hashe couldn’t
a very wait to come home and find his
appealing
story to tell but littleroom just the
favorable casewaylawhetoleft it. Janice
support her has always filed as head of household, and Marty
position.
regular problems. has always been considered a qualifying child (and he continues to meet all the tests
d) The issue being litigated is highly technical, and Shea believes strongly in her
with the possible exception of the residence test due to his stay in Australia). How-
interpretation of the law.
ever, this year Janice is unsure whether she qualifies as head of household due to
e) Shea is a local elected official and wouldabsenceprefer toduring
minimize any Janice
local publicity
Comprehensive and tax return problems address
Marty’s nine-month the year. has come to you for advice on
Comprehensive and Tax Return Problems 58.
regarding the case. whether she qualifies for head of household filing status. What do you tell her?
Juanita, aLOTexas resident (5th Jones
Circuit), is researching a tax
52. Doug submitted his 2017 taxquestion
return on andtimefindsanda elected toLOfile2-3
a joint tax
multiple concepts in a single problem. Comprehensive problems are ideal for cumulative topics; for
4-3
5th Circuit case ruling return
that is favorable and aDarlene.
with his wife, 9th Circuit Dougcaseand thatDarlene
is unfavorable.
did not request an extension for
Whichresearch
circuit case has their
more2017“authoritative
tax return. weight”
Doug and and why?
Darlene How owedwould andyourpaid the IRS $124,000 for

this reason, they are located at the end of all chapters. In the end-of-book Appendix C, we include tax
answer change if Juanita were
their a Kentucky
2017 tax year.resident
Two years (6thlater,
Circuit)?Doug amended his return and claimed mar-
59. Faith, a resident of Floridaried (11th
filingCircuit)
separaterecently
status. found a circuithis
By changing court case
filing that isDoug sought
status, LO 2-3 a refund
favorable to her research question. Which two circuits
for an overpayment for the tax year 2017 would she prefer
(he paid to have
more tax in the original joint
return problems that cover multiple chapters. Additional
60.
tax return problems are also available in
issued the opinion? return than he owed on a separate return). Is Doug allowed to change his filing
Robert has found a “favorable”
status forauthority
the 2017directly
tax year onand
point for hisa tax
receive taxquestion.
refund with If the
his amended
LO 2-3 return?

the Connect Library. These problems authority is a court case, which court would he prefer to have issued the opinion?
Which court would he least prefer to have issued the opinion?
Jamareo has foundCOMPREHENSIVE PROBLEMS
range from simple to complex and 61. a “favorable” authority directly
the authority is an administrative authority, which specific type
Select problems are available
he prefer to answer his question? Which administrative
on point for his tax question. If
in Connect ®
authority.
of authority would
would he least
LO 2-3

cover individual taxation, corporate 62.

prefer to answer his53.
For each
tax of
forms
question?
the following
Marc and Michelle are married and earned salaries this year of $64,000 and
citations,
$12,000, identify the
respectively. In type of authority
addition (statutory,
to their salaries, admin-
they received interest
LO 2-3 of $350

taxation, partnership taxation, and istrative, or judicial) and explain

from the citation.
municipal bonds and $500 from corporate bonds. Marc and Michelle also paid
a) Reg. Sec. 1.111-1(b)$2,500 of qualifying moving expenses, and Marc paid alimony to a prior spouse in

S corporation taxation. b) IRC Sec. 469(c)(7)(B)(i) the amount of $1,500. Marc and Michelle have a 10-year-old son, Matthew, who
lived with them throughout the entire year. Thus, Marc and Michelle are allowed to
c) Rev. Rul. 82-204, 1982-2 C.B. 192
claim a $1,000 child tax credit for Matthew. Marc and Michelle paid $6,000 of ex-
d) Amdahl Corp., 108 TC 507 (1997)
penditures that qualify as itemized deductions and they had a total of $5,500 in fed-
e) PLR 9727004 eral income taxes withheld from their paychecks during the course of the year.
f) Hills v. Comm., 50 AFTR2da) What 82-6070
is Marc and (11th Cir., 1982)
Michelle’s gross income?
63. For each of the following citations,
b) What identify
is Marc and the type of adjusted
Michelle’s authoritygross (statutory,
income? admin- LO 2-3
istrative, or judicial) and explain the citation.
c) What is the total amount of Marc and Michelle’s deductions from AGI? xv
a) IRC Sec. 280A(c)(5)d) What is Marc and Michelle’s taxable income?
b) Rev. Proc. 2004-34, e) 2004-1
WhatC.B.
is Marc911and Michelle’s taxes payable or refund due for the year? (Use the
c) Lakewood Associates, RIA TC schedules.)
tax rate Memo 95-3566
d) TAM 200427004 f) Complete the first two pages of Marc and Michelle’s Form 1040 (use 2016 forms
e) U.S. v. Muncy, 2008-2 if USTC
2017par.forms50,449 (E.D., AR, 2008)
are unavailable).
64. Justine would like to clarify her understanding of a code section recently enacted by LO 2-4
Congress. What tax law sources are available to assist Justine?

McGraw-Hill’s Taxation of Individuals is organized to empha-
size topics that are most important to undergraduates taking their
first tax course. The first three chapters provide an introduction
to taxation and then carefully guide students through tax re-
search and tax planning. Part II discusses the fundamental ele-
ments of individual income tax, starting with the tax formula
in Chapter 4 and then proceeding to more discussion on income,
deductions, investments, and computing tax liabilities in
­Chapters 5–8. Part III then discusses tax issues associated with
business-related activities. Specifically, this part addresses busi-
ness income and deductions, accounting methods, and tax conse-
quences associated with purchasing assets and property disposi-
tions (sales, trades, or other dispositions). Part IV is unique
among tax textbooks; this section combines related tax issues for
compensation, retirement savings, and home ownership.
Part I: Introduction to Taxation
1. An Introduction to Tax
2. Tax Compliance, the IRS, and Tax Authorities
3. Tax Planning Strategies and Related Limitations
Part II: Basic Individual Taxation
4. Individual Income Tax Overview, Exemptions and Filing
Status
5. Gross Income and Exclusions
6. Individual Deductions
7. Investments
8. Individual Income Tax Computation and Tax Credits
Part III: Business-Related Transactions
9. Business Income, Deductions, and Accounting Methods
10. Property Acquisition and Cost Recovery
11. Property Dispositions
Part IV: Specialized Topics
12. Compensation
13. Retirement Savings and Deferred Compensation
14. Tax Consequences of Home Ownership
xvi
Four Volumes to Fit
McGraw-Hill’s Taxation of Business Entities begins with the
process for determining gross income and deductions for
­businesses, and the tax consequences associated with purchasing
assets and property dispositions (sales, trades, or other disposi-
tions). Part II provides a comprehensive overview of entities and
the formation, reorganization, and liquidation of corporations.
Unique to this series is a complete chapter on accounting for in-
come taxes, which provides a primer on the basics of calculating
the income tax provision. Included in the narrative is a discus-
sion of temporary and permanent differences and their impact on
a company’s book “effective tax rate.” Part III provides a de-
tailed discussion of partnerships and S corporations. The last
part of the book covers state and local taxation, multinational
taxation, and transfer taxes and wealth planning.
Part I: Business-Related Transactions
1. Business Income, Deductions, and Accounting Methods
2. Property Acquisition and Cost Recovery
3. Property Dispositions
Part II: Entity Overview and Taxation of C Corporations
4. Entities Overview
5. Corporate Operations
6. Accounting for Income Taxes
7. Corporate Taxation: Nonliquidating Distributions
8. Corporate Formation, Reorganization, and Liquidation
Part III: Taxation of Flow-Through Entities
9. Forming and Operating Partnerships
10. Dispositions of Partnership Interests and Partnership
Distributions
11. S Corporations
Part IV: Multijurisdictional Taxation and Transfer Taxes
12. State and Local Taxes
13. The U.S. Taxation of Multinational Transactions
14. Transfer Taxes and Wealth Planning
Four Course Approaches
McGraw-Hill’s Taxation of Individuals and Busi-
ness Entities covers all chapters included in the
two split volumes in one convenient volume.
See Table of Contents.
McGraw-Hill’s Essentials of Federal Taxation is designed for a
one-semester course, covering the basics of taxation of individu-
als and business entities. To facilitate a one-semester course,
McGraw-Hill’s Essentials of Federal Taxation folds the key top-
ics from the investments, compensation, retirement savings, and
home ownership chapters in Taxation of Individuals into three
individual taxation chapters that discuss gross income and
­exclusions, for AGI deductions, and from AGI deductions,
­respectively. The essentials volume also includes a two-chapter
C corporation sequence that uses a life-cycle approach covering
corporate formations and then corporate operations in the first
chapter and nonliquidating and liquidating corporate distribu-
tions in the second chapter. This volume is perfect for those
teaching a one-semester course and for those who struggle to get
through the 25-chapter comprehensive volume.
Part I: Introduction to Taxation
1. An Introduction to Tax
2. Tax Compliance, the IRS, and Tax Authorities
3. Tax Planning Strategies and Related Limitations
Part II: Individual Taxation
4. Individual Income Tax Overview, Exemptions, and Filing
Status
5. Gross Income and Exclusions
6. Individual For AGI Deductions
7. Individual From AGI Deductions
8. Individual Income Tax Computation and Tax Credits
Part III: Business-Related Transactions
9. Business Income, Deductions, and Accounting Methods
10. Property Acquisition and Cost Recovery
11. Property Dispositions
Part IV: Entity Overview and Taxation of C Corporations
12. Entities Overview
13. Corporate Formations and Operations
14. Corporate Nonliquidating and Liquidating Distributions
Part V: Taxation of Flow-Through Entities
15. Forming and Operating Partnerships
16. 
D ispositions of Partnership Interests and Partnership
Distributions
17. S Corporations
xvii
SUPPLEMENTS FOR INSTRUCTORS
Assurance of Learning Ready
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on the notion of assurance of learning, an im-
portant element of many accreditation stan-
dards. McGraw-Hill’s Taxation is designed
specifically to support your assurance of learn-
ing initiatives with a simple, yet powerful,
solution.
Each chapter in the book begins with a list
of numbered learning objectives, which appear
throughout the chapter as well as in the end-of-
chapter assignments. Every test bank question
for McGraw-Hill’s Taxation maps to a specific
chapter learning objective in the textbook. Each
test bank question also identifies topic area,
level of difficulty, Bloom’s Taxonomy level,
and AICPA and AACSB skill area.
AACSB Statement
McGraw-Hill Education is a proud corporate
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The statements contained in McGraw-
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McGraw-Hill’s Taxation and the teaching
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for today’s educators.

A HEARTFELT THANKS TO THE MANY COLLEAGUES WHO SHAPED THIS BOOK

The version of the book you are reading would not be the same book without the valuable suggestions, keen insights,
and constructive criticisms of the list of reviewers below. Each professor listed here contributed in substantive ways
to the organization of chapters, coverage of topics, and the use of pedagogy. We are grateful to them for taking the
time to read chapters or attend reviewer conferences, focus groups, and symposia in support of the development for
the book:
Previous Edition Reviewers Cynthia Bird, Tidewater Community College
Donna Abelli, Mount Ida College Lisa Blum, University of Louisville
Joseph Assalone, Rowan College at Gloucester County Rick Blumenfeld, Sierra College
Valeriya Avdeev, William Paterson University Cindy Bortman Boggess, Babson College
Robyn Barrett, St. Louis Community College Cathalene Bowler, University of Northern Iowa
Kevin Baugess, ICDC College Justin Breidenbach, Ohio Wesleyan University
Christopher Becker, Coastal Carolina University Suzon Bridges, Houston Community College
Jeanne Bedell, Keiser University Stephen Bukowy, UNC Pembroke
Marcia Behrens, Nichols College Esther Bunn, Stephen F. Austin State University
Michael Belleman, St. Clair County Community College Holly Caldwell, Bridgewater College
David Berman, Community College of Philadelphia James Campbell, Thomas College
Tim Biggart, Berry College Alisa Carini, UCSD Extension

xviii
Ronald Carter, Patrick Henry Community College
Cynthia Caruso, Endicott College
Paul Caselton, University of Illinois Springfield
Christine Cheng, Louisiana State University
Amy Chataginer, Mississippi Gulf Coast Community College
Machiavelli Chao, University of California, Irvine
Max Chao, University of California, Irvine
Lisa Church, Rhode Island College
Marilyn Ciolino, Delgado Community College
Wayne Clark, Southwest Baptist University
Ann Cohen, University at Buffalo, SUNY
Sharon Cox, University of Illinois–Urbana-Champaign
Terry Crain, University of Oklahoma–Norman
Roger Crane, Indiana University East
Brad Cripe, Northern Illinois University
Richard Cummings, University of Wisconsin–Whitewater
Joshua Cutler, University of Houston
William Dams, Lenoir Community College
Nichole Dauenhauer, Lakeland Community College
Susan Snow Davis, Green River College
Jim Desimpelare, University of Michigan–Ann Arbor
Julie Dilling, Moraine Park Technical College
Steve Dombrock, Carroll University
John Dorocak, California State University–San Berdinado
Amy Dunbar, University of Connecticut–Storrs
John Eagan, Morehouse College
Reed Easton, Seton Hall University
Elizabeth Ekmekjian, William Paterson University
Ann Esarco, Columbia College Columbia
Frank Faber, St. Joseph’s College
Michael Fagan, Raritan Valley Community College
Frank Farina, Catawba College
Andrew Finley, Claremont McKenna
Tim Fogarty, Case Western Reserve University
Mimi Ford, Middle Georgia State University
Wilhelmina Ford, Middle Georgia State University
George Frankel, SFSU
Lawrence Friedken, Penn State University
Stephen Gara, Drake University
Robert Gary, University of New Mexico
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Earl Godfrey, Gardner Webb University
Thomas Godwin, Purdue University
David Golub, Northeastern University
Marina Grau, Houston Community College
Brian Greenstein, University of Delaware
Patrick Griffin, Lewis University
Lillian Grose, University of Holy Cross
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Marcye Hampton, University of Central Florida
Cass Hausserman, Portland State University
Rebecca Helms, Ivy Tech Community College
Melanie Hicks, Liberty University
Mary Ann Hofmann, Appalachian State University
Robert Joseph Holdren, Muskingum University
Bambi Hora, University of Central Oklahoma
Carol Hughes, Asheville Buncombe Technical Community
College
Helen Hurwitz, Saint Louis University
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Kerry Inger, Auburn University
Paul Johnson, MGCCC–JD Campus
Athena Jones, University of Maryland University College
Andrew Junikiewicz, Temple University
Susan Jurney, University of Arkansas Fayetteville
Sandra Kemper, Regis University
Jon Kerr, Baruch College–CUNY
Lara Kessler, Grand Valley State University
Janice Klimek, University of Central Missouri
Pamela Knight, Columbus Technical College
Satoshi Kojima, East Los Angeles College
Dawn Konicek, Idaho State University
Jack Lachman, Brooklyn College
Brandon Lanciloti, Freed-Hardeman University
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Troy Lewis, Brigham Young University
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Robert Lin, California State University–East Bay
Chris Loiselle, Cornerstone University
Bruce Lubich, Penn State–Harrisburg
Michael Malmfeldt, Shenandoah University
Kate Mantzke, Northern Illinois University
Robert Martin, Kennesaw State University
Anthony Masino, East Tennessee State University
Paul Mason, Baylor University
Lisa McKinney, University of Alabama at Birmingham
Lois McWhorter, Somerset Community College
Allison McLeod, University of North Texas
Janet Meade, University of Houston
Michele Meckfessel, University of Missouri–St. Louis
Frank Messina, University of Alabama at Birmingham
R Miedaner, Lee University
Ken Milani, University of Notre Dame
Karen Morris, Northeast Iowa Community College
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Michelle Moshier, University at Albany
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James Motter, IUPUI Indianapolis
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Jeff Paterson, Florida State University
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Miles Romney, Michigan State University
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xix
Alisa Shapiro, Raritan Valley Community College
Deanna Sharpe, University of Missouri
Wayne Shaw, Southern Methodist University
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Chris Woehrle, American College
Jennifer Wright, Drexel University
Massood Yahya-Zadeh, George Mason University
James Yang, Montclair State University
Scott Yetmar, Cleveland State University
Charlie Yuan, Elizabeth City State University
Xiaoli Yuan, Elizabeth City State University
Mingjun Zhou, DePaul University

Acknowledgments
We would like to thank the many talented people who made valuable contributions to the creation of this ninth edition.
William A. Padley of Madison Area Technical College, Deanna Sharpe of the University of Missouri–Columbia, and
Troy Lewis of Brigham Young University checked the page proofs and solutions manual for accuracy; we greatly appre-
ciate the hours they spent checking tax forms and double-checking our calculations throughout the book. Teressa F
­ arough,
Troy Lewis of Brigham Young University, and Deanna Sharpe of the University of Missouri–Columbia accuracy-checked
the test bank. Thank you to Troy Lewis, Michele Meckfessel of University of Missouri at St. Louis, and Shannon Book-
out of Columbus State Community College for your contributions to the Smartbook revision for this edition. Special
thanks to Troy Lewis of Brigham Young University for his sharp eye and valuable feedback throughout the revision
process. Thanks as well to Colton Gigot from Agate Publishing for managing the supplement process. Finally, William
A. Padley of Madison Area Technical College, Deanna Sharpe of the University of Missouri–Columbia, and Vivian
Paige of Old Dominion University greatly contributed to the accuracy of McGraw-Hill’s Connect for the 2018 edition.
We also appreciate the expert attention given to this project by the staff at McGraw-Hill Education, especially Tim
Vertovec, Managing Director; Kathleen Klehr, Executive Brand Manager; Danielle Andries, Product Developer; Erin
Quinones, Product Developer; Lori Koetters, Brian Nacik, and Jill Eccher, Content Project Managers; Matt Backhaus,
Designer; Natalie King, Marketing Director; Cheryl Osgood, Marketing Manager; and Sue Culbertson, Senior Buyer.

xx
Changes in Taxation of Individuals
and Business Entities, 2018 Edition
For the 2018 edition of McGraw-Hill’s Taxation of Individuals and Business Entities, many changes
were made in response to feedback from reviewers and focus group participants:
∙ All tax forms have been updated for the latest
­available tax form as of January 2017. In addition,
chapter content throughout the text has been
­updated to reflect tax law changes through
­January 2017.
Other notable changes in the 2018 edition include:
Chapter 1
∙ Updated tax rates for 2017.
∙ Updated Social Security Wage base for 2017.
∙ Updated Unified Tax Credit for 2017.
∙ Updated Taxes in the Real World: Republicans vs.
Democrats.
∙ Updated Taxes in the Real World: Affordable Care
Act amount for 2017.
∙ Updated Taxes in the Real World: National Debt for
current debt limit.
∙ Updated Exhibit 1-4 for 2015 Federal revenues by
source from Treasury.
∙ Updated Exhibit 1-5 for 2015 State revenues by
source from U.S. Census.
Chapter 2
∙ Updated gross income thresholds by filing status
for 2017.
∙ Revised discussion of primary authorities and IRS
Publications and tax forms.
∙ Updated penalty amounts for failure to file a tax re-
turn and willful understatement of tax.
Chapter 3
∙ Updated tax rates for 2017.
∙ Updated Exhibit 3-3 for new tax rates.
Chapter 4
∙ Updated personal exemption amounts for 2017.
∙ Updated standard deduction amounts for 2017.
∙ Updated tax rates for 2017.
∙ Updated tax forms from 2015 to 2016 forms.
∙ Clarified discussion of who is a qualifying person
for head of household filing status for divorced
­parents by editing footnote to Exhibit 4-9 and
­Appendix B.
Chapter 5
∙ Updated for 2017 amounts for Flexible Spending
­Account contributions.
∙ Added discussion of new exclusion for awards and prize
money for Team USA Olympic and Paralympic athletes.
∙ Revised discussion of foreign-earned income exclusion
and updated for 2017 exclusion amounts.
∙ Updated for annual gift tax exclusion and unified tax
credit for 2017.
∙ Updated U.S. Series EE Bond interest income exclusion
for 2017.
∙ Updated tax forms from 2015 to 2016 forms.
Chapter 6
∙ Updated mileage rate for 2017 moving expense
deduction.
∙ Updated phase-out for interest on qualified education
loan for 2017.
∙ Updated pending expiration date for qualified educa-
tion expense deduction.
∙ Updated mileage rate for medical expense itemized
deduction for 2017.
∙ Updated standard business mileage rate for 2017.
∙ Updated thresholds for the itemized deduction and
personal exemption phase-outs for 2017.
∙ Updated standard deduction and personal exemption
amounts for 2017.
∙ Updated tax forms from 2015 to 2016 forms.
Chapter 7
∙ Updated tax rates for 2017.
∙ Updated tax forms from 2015 to 2016 forms.
Chapter 8
∙ Updated tax rate schedules for 2017.
∙ Updated AMT discussion for medical expense
adjustment.
∙ Updated AMT exemption and AMT tax rate schedule
for 2017.
∙ Revised Self-Employment Tax discussion.
∙ Updated Social Security Tax wage base and Self-­
Employment Tax base for 2017.
∙ Updated Lifetime Learning Credit phase-out for 2017.
∙ Updated Earned Income Credit amounts for 2017.
∙ Updated tax forms from 2015 to 2016 forms.
xxi
Chapter 9
∙ Updated standard business mileage rate for 2017.
∙ Updated tax forms from 2015 to 2016.
Chapter 10
∙ Updated tax rates for 2017.
∙ Updated tax forms from 2015 to 2016 forms.
∙ Updated §179 amounts for inflation adjustments.
∙ Updated examples and end of chapter problems for
2017 §179 amounts.
∙ Clarified luxury car (§280F) depreciation limit
calculation.
Chapter 11
∙ Updated tax rates for 2017.
∙ Updated tax forms from 2015 to 2016 forms.
∙ Clarified related-party holding period rules.
∙ Clarified like-kind exchange debt offset rules.
Chapter 12
∙ Updated qualified transportation fringe amounts
for 2017.
∙ Updated tax forms from 2015 to 2016.
∙ Updated Exhibits 12-2 through 12-4 and 12-8 for
2016 proxy statements.
∙ Updated Taxes in the Real World for 2016 proxy
statement information.
Chapter 13
∙ Increased salary for Dave Allan in storyline.
∙ Updated inflation adjusted limits for defined benefit
plans, defined contribution plans, and individually
managed plans.
∙ Updated Exhibit 13-6 to reflect most recent proxy
statement for Coca-Cola Company.
∙ Updated AGI phase-out thresholds for deductible
contributions to traditional IRAs and contributions to
Roth IRAs.
∙ Updated Saver’s credit information.
∙ Clarified language in Discussion Question 33.
∙ Clarified language in Problem 50 part e.
Chapter 14
∙ Clarified that the terms “dwelling unit” and “home”
are used interchangebly.
∙ Updated discussion of government’s list of expendi-
tures from 2015–2024 to 2016–2025.
∙ Updated URL in footnote 4.
∙ Inserted new footnote 7 indicating that the IRS
­recently ruled that a couple’s need to move because
of a birth of a second child was an unforeseen
­circumstance (LTR 201628002).
xxii
∙ In the discussion about combined limit for qualifying
debt, the use of average method and chronological
method of determining deductible interest expense
has been changed to the “simple” and “exact” meth-
ods of determining deductible interest expense, re-
spectively. This is consistent with the terminology
provided in the regulations.
∙ Updated Taxes in the Real World (“Double Take on
Home-Related Interest Deductions”) to reflect the
fact that the IRS has now acquiesced to the Voss 12th
Circuit case. Consequently, the finding in Voss should
apply to taxpayers anywhere in the country.
∙ Updated Example 14-14 dealing with the IRS method
versus Tax Court method of allocating rent expense
to reflect non-leap year in 2017.
∙ Clarified discussion of losses from nonresidential
rental property.
∙ Updated tax forms from 2015 to 2016.
∙ Clarified that taxpayer’s personal use of an office
­disqualifies the taxpayer from claiming a home
­office deduction in Example 14-17.
∙ Updated settlement statement in Appendix A.
∙ Clarified language in Discussion Question 2.
Chapter 15
∙ In Exhibit 15-3, changed “Nontaxable” to “Tax de-
ferred” when discussing the tax consequences of con-
tributing appreciated property to the various entities.
∙ Updated URL in Taxes in the Real World titled
­Comparing Entities Selected.
∙ Shortened the fact pattern in problem 73. The relevant
facts have not changed.
Chapter 16
∙ Updated the discussion on stock option compensation.
∙ Revised Taxes in the Real World for Facebook stock
options.
∙ Updated the compliance section for new year-end filing.
Chapter 17
∙ Updated the Taxes in the Real World saga of
Weatherford.
∙ Updated the material to incorporate the new FASB
rules on disclosures of deferred tax assets and
liabilities.
∙ Updated the Microsoft uncertain tax benefit footnote
disclosure.
∙ Updated the FASB’s projects involving accounting
for income taxes.
Chapter 18
∙ Edited key facts summary of earnings and profits
(E&P) calculation.
∙ Edited discussion of effect of distributions on E&P.
 ∙ Streamlined and edited discussion of effect of
­noncash property distributions and the effect of
these distributions on taxable income and E&P.
∙ Clarified examples of effect of distributions on
E&P.
Chapter 19
∙ Clarified facts in Example 19-25.
∙ Clarified facts in Comprehensive Problems 19-58
and 19-59.
Chapter 20
∙ Added new Taxes in the Real World box in passive
losses discussion.
∙ Clarified the definition of material participant for
passive loss purposes.
∙ Clarified new partnership tax return due date.
∙ Clarified the connection between 704(b) capital
­accounts and partnership agreements.
Chapter 21
∙ Clarified the explanation of disproportionate distribu-
tions to be more consistent with the §751(b) proposed
regulations.
∙ Clarified the problem illustrating disproportionate
distributions to be more consistent with the §751(b)
proposed regulations.
∙ Clarified the explanation of special basis adjustments
applicable to distributions.
As We Go to Press
The 2018 Edition is current through February 21, 2017. You can visit the
Connect Library for updates that occur after this date.
Chapter 22
∙ Revised discussion of the family member rules for pur-
poses of the S corporation qualification requirements.
∙ Revised discussion of the excess passive investment
income rules.
∙ Updated Social Security Tax wage base for 2017.
∙ Updated tax forms from 2015 to 2016 forms.
Chapter 23
∙ Updated Exhibit 23-4.
∙ Updated Taxes in the Real World for sourcing receipts.
∙ Updated Taxes in the Real World for apportionment.
Chapter 24
∙ Updated the discussion on the OECD base erosion
and profit-shifting project.
∙ Updated the proposals for international tax reform.
∙ Updated the discussion on inversions.
Chapter 25
∙ Clarified computation for unified credit.
∙ Updated exemption equivalent for inflation adjust-
ment made for 2016.
∙ Revised terminology used for unified credit, which is
now referred to as the “applicable credit.”
∙ Updated tax forms for 2016.
∙ Revised discount factors for changes in the regulations.
∙ Revised ethics problem to focus on what constitutes
an intent to make a gift.
xxiii
 Table of Contents

1 An Introduction to Tax Tax Law Sources 2-9

Legislative Sources: Congress and the
Who Cares about Taxes and Why? 1-2 Constitution 2-11
What Qualifies as a Tax? 1-4 Internal Revenue Code 2-11
How to Calculate a Tax 1-5 The Legislative Process for Tax Laws 2-12
Different Ways to Measure Tax Rates 1-5 Basic Organization of the Code 2-13
Tax Treaties 2-14
Tax Rate Structures 1-9
Judicial Sources: The Courts 2-14
Proportional Tax Rate Structure 1-9
Administrative Sources: The U.S. Treasury 2-15
Progressive Tax Rate Structure 1-9
Regulations, Revenue Rulings, and Revenue
Regressive Tax Rate Structure 1-10
Procedures 2-15
Types of Taxes 1-11 Letter Rulings 2-16
Federal Taxes 1-11
Tax Research 2-17
Income Tax 1-12
Step 1: Understand Facts 2-17
Employment and Unemployment Taxes 1-12
Step 2: Identify Issues 2-17
Excise Taxes 1-13
Step 3: Locate Relevant Authorities 2-18
Transfer Taxes 1-13
Step 4: Analyze Tax Authorities 2-19
State and Local Taxes 1-14
Step 5: Document and Communicate the
Income Taxes 1-14 Results 2-21
Sales and Use Taxes 1-14 Facts 2-21
Property Taxes 1-15 Issues 2-21
Excise Taxes 1-15 Authorities 2-22
Implicit Taxes 1-16 Conclusion 2-22
Evaluating Alternative Tax Systems 1-17 Analysis 2-22
Sufficiency 1-18 Client Letters 2-22
Static versus Dynamic Forecasting 1-18 Research Question and Limitations 2-22
Income versus Substitution Effects 1-19 Facts 2-22
Equity 1-20 Analysis 2-22
Horizontal versus Vertical Equity 1-21 Closing 2-22
Certainty 1-22 Tax Professional Responsibilities 2-23
Convenience 1-22
Taxpayer and Tax Practitioner Penalties 2-26
Economy 1-22
Conclusion 2-28
Evaluating Tax Systems—The Trade-Off 1-23
Conclusion 1-23
3 Tax Planning Strategies and Related
Limitations
2 Tax Compliance, the IRS, and Tax
Basic Tax Planning Overview 3-2
Authorities
Timing Strategies 3-2
Taxpayer Filing Requirements 2-2
Present Value of Money 3-3
Tax Return Due Date and Extensions 2-3
The Timing Strategy When Tax Rates Are
Statute of Limitations 2-3 Constant 3-4
IRS Audit Selection 2-4 The Timing Strategy When Tax Rates
Types of Audits 2-5 Change 3-7
After the Audit 2-6 Limitations to Timing Strategies 3-10

xxiv
 Table of Contents xxv

Income-Shifting Strategies 3-11 5 Gross Income and Exclusions

Transactions between Family Members and
Limitations 3-11 Realization and Recognition of Income 5-2
What Is Included in Gross Income? 5-2
Transactions between Owners and Their
Businesses and Limitations 3-12 Economic Benefit 5-3
Income Shifting across Jurisdictions and Realization Principle 5-3
Limitations 3-15 Recognition 5-4
Conversion Strategies 3-16 Other Income Concepts 5-4
Limitations of Conversion Strategies 3-19 Form of Receipt 5-4
Return of Capital Principle 5-4
Additional Limitations to Tax Planning Strategies:
Judicial Doctrines 3-19 Recovery of Amounts Previously
Deducted 5-5
Tax Avoidance versus Tax Evasion 3-20
When Do Taxpayers Recognize Income? 5-6
Conclusion 3-21 Accounting Methods 5-6
Constructive Receipt 5-7
Claim of Right 5-7
4 Individual Income Tax Overview, Who Recognizes the Income? 5-8
Exemptions, and Filing Status Assignment of Income 5-8
The Individual Income Tax Formula 4-2 Community Property Systems 5-8
Gross Income 4-2 Types of Income 5-9
Character of Income 4-5 Income from Services 5-10
Deductions 4-7 Income from Property 5-10
For AGI Deductions 4-7 Annuities 5-11
From AGI Deductions 4-8 Property Dispositions 5-13
Income Tax Calculation 4-10 Other Sources of Gross Income 5-14
Other Taxes 4-10 Income from Flow-Through Entities 5-14
Tax Credits 4-11 Alimony 5-14
Tax Prepayments 4-11 Prizes, Awards, and Gambling
Winnings 5-16
Personal and Dependency Exemptions 4-12
Social Security Benefits 5-17
Dependency Requirements 4-12
Imputed Income 5-19
Qualifying Child 4-12
Discharge of Indebtedness 5-20
Qualifying Relative 4-15
Exclusion Provisions 5-21
Filing Status 4-19
Common Exclusions 5-21
Married Filing Jointly and Married Filing
Municipal Interest 5-21
Separately 4-19
Gains on the Sale of Personal
Qualifying Widow or Widower (Surviving
Residence 5-22
Spouse) 4-20
Fringe Benefits 5-23
Single 4-21
Education-Related Exclusions 5-25
Head of Household 4-21
Scholarships 5-25
Married Individuals Treated as Unmarried
Other Educational Subsidies 5-25
(Abandoned Spouse) 4-23
U.S. Series EE Bonds 5-26
Summary of Income Tax Formula 4-24
Exclusions That Mitigate Double Taxation 5-26
Conclusion 4-27 Gifts and Inheritances 5-26
Appendix A: Dependency Exemption Flowchart Life Insurance Proceeds 5-27
(Part I and Part II) 4-27 Foreign-Earned Income 5-28
Appendix B: Qualifying Person for Head of Sickness and Injury-Related Exclusions 5-29
Household Filing Status Flowchart 4-29 Workers’ Compensation 5-29
Appendix C: Determination of Filing Status Payments Associated with Personal
Flowchart 4-30 Injury 5-29
xxvi Table of Contents

Health Care Reimbursement 5-30 Miscellaneous Itemized Deductions Subject to

Disability Insurance 5-30
Deferral Provisions 5-31
Income Summary 5-31
Conclusion 5-32
Appendix: 2016 Social Security Worksheet from
Form 1040 5-33
6 Individual Deductions
Deductions for AGI 6-2
Deductions Directly Related to Business
Activities 6-2
Trade or Business Expenses 6-4
Rental and Royalty Expenses 6-5
Losses 6-6
Flow-Through Entities 6-6
Deductions Indirectly Related to Business
Activities 6-6
Moving Expenses 6-6
Health Insurance Deduction by Self-
Employed Taxpayers 6-8
Self-Employment Tax Deduction 6-9
Penalty for Early Withdrawal of
Savings 6-9
Deductions Subsidizing Specific
Activities 6-9
Deduction for Interest on Qualified Education
Loans 6-10
Deduction for Qualified Education
Expenses 6-11
Summary: Deductions for AGI 6-12
Deductions from AGI: Itemized
Deductions 6-13
Medical Expenses 6-13
Transportation and Travel for Medical
Purposes 6-15
Hospitals and Long-Term Care
Facilities 6-15
Medical Expense Deduction
Limitation 6-15
Taxes 6-16
Interest 6-17
Charitable Contributions 6-18
Contributions of Money 6-19
Contributions of Property Other Than
Money 6-20
Charitable Contribution Deduction
Limitations 6-21
Casualty and Theft Losses on Personal-Use
Assets 6-23
Tax Loss from Casualties 6-24
Casualty Loss Deduction Floor
Limitations 6-24
AGI Floor 6-26
Employee Business Expenses 6-26
Investment Expenses 6-28
Tax Preparation Fees 6-29
Hobby Losses 6-29
Limitation on Miscellaneous Itemized
Deductions (2 Percent of AGI Floor) 6-31
Miscellaneous Itemized Deductions Not Subject
to AGI Floor 6-31
Phase-Out of Itemized Deductions 6-32
Summary of Itemized Deductions 6-32
The Standard Deduction and Exemptions 6-34
Standard Deduction 6-34
Bunching Itemized Deductions 6-36
Deduction for Personal and Dependency
Exemptions 6-36
Taxable Income Summary 6-37
Conclusion 6-38
Appendix A: Calculation of Itemized Deduction
Phase-Out for 2017 6-38
Appendix B: Personal Exemption Phase-Out
Computation for 2017 6-39
7 Investments
Investments Overview 7-2
Portfolio Income: Interest and Dividends 7-2
Interest 7-3
Corporate and U.S. Treasury Bonds 7-3
U.S. Savings Bonds 7-4
Dividends 7-6
Portfolio Income: Capital Gains and Losses 7-7
Types of Capital Gains and Losses 7-10
25 Percent Gains 7-10
28 Percent Gains 7-10
Netting Process for Gains and Losses 7-12
Calculating Tax Liability on Net Capital
Gains 7-16
Limitations on Capital Losses 7-21
Losses on the Sale of Personal-Use
Assets 7-21
Capital Losses on Sales to Related
Parties 7-22
Wash Sales 7-22
Balancing Tax Planning Strategies for Capital
Assets with Other Goals 7-23
Portfolio Income Summary 7-25
Portfolio Investment Expenses 7-25
Investment Expenses 7-25
Investment Interest Expense 7-26
Net Investment Income 7-27
Net Investment Income Tax 7-29
 Table of Contents xxvii

Passive Activity Income and Losses 7-29 Filing Requirements 8-38

Passive Activity Definition 7-30
Income and Loss Categories 7-31
Rental Real Estate Exception to the Passive
Activity Loss Rules 7-33
Net Investment Income Tax on Net Passive
Income 7-34
Conclusion 7-34
8 Individual Income Tax Computation
and Tax Credits
Regular Federal Income Tax Computation 8-2
Tax Rate Schedules 8-2
Marriage Penalty or Benefit 8-3
Exceptions to the Basic Tax Computation 8-3
Preferential Tax Rates for Capital Gains and
Dividends 8-4
Net Investment Income Tax 8-5
Kiddie Tax 8-6
Alternative Minimum Tax 8-8
Alternative Minimum Tax Formula 8-9
Alternative Minimum Taxable Income
(AMTI) 8-9
AMT Exemption 8-12
Tentative Minimum Tax and AMT
Computation 8-13
General AMT Planning
Strategies 8-14
Employment and Self-Employment
Taxes 8-14
Employee FICA Taxes Payable 8-15
Self-Employment Taxes 8-17
Employee vs. Self-Employed (Independent
Contractor) 8-22
Employee vs. Independent Contractor
Comparison 8-22
Tax Credits 8-24
Nonrefundable Personal Credits 8-25
Child Tax Credit 8-25
Child and Dependent Care Credit 8-26
Education Credits 8-28
Refundable Personal Credits 8-31
Earned Income Credit 8-31
Other Refundable Personal Credits 8-32
Business Tax Credits 8-33
Foreign Tax Credit 8-33
Tax Credit Summary 8-34
Credit Application Sequence 8-34
Taxpayer Prepayments and Filing
Requirements 8-35
Prepayments 8-36
Underpayment Penalties 8-36
Late Filing Penalty 8-38
Late Payment Penalty 8-39
Tax Summary 8-39
Conclusion 8-41
9 Business Income, Deductions,
and Accounting Methods
Business Gross Income 9-2
Business Deductions 9-2
Ordinary and Necessary 9-3
Reasonable in Amount 9-4
Limitations on Business Deductions 9-5
Expenditures against Public Policy 9-5
Political Contributions and Lobbying Costs 9-5
Capital Expenditures 9-6
Expenses Associated with the Production of Tax-
Exempt Income 9-6
Personal Expenditures 9-7
Mixed-Motive Expenditures 9-8
Meals and Entertainment 9-8
Travel and Transportation 9-9
Property Use 9-11
Record Keeping and Other
Requirements 9-11
Specific Business Deductions 9-12
Domestic Production Activities Deduction 9-12
Losses on Dispositions of Business
Property 9-13
Business Casualty Losses 9-14
Accounting Periods 9-15
Accounting Methods 9-16
Financial and Tax Accounting Methods 9-17
Overall Accounting Method 9-17
Cash Method 9-17
Accrual Method 9-18
Accrual Income 9-19
All-Events Test for Income 9-19
Taxation of Advance Payments of Income
(Unearned Income) 9-19
Unearned Service Revenue 9-20
Advance Payment for Goods 9-20
Inventories 9-21
Uniform Capitalization 9-21
Inventory Cost-Flow Methods 9-22
Accrual Deductions 9-24
All-Events Test for Deductions 9-24
Economic Performance 9-24
Bad Debt Expense 9-27
Limitations on Accruals to Related
Parties 9-28
xxviii Table of Contents
Comparison of Accrual and Cash
Methods 9-29
Adopting an Accounting Method 9-30
Changing Accounting Methods 9-33
Tax Consequences of Changing Accounting
Methods 9-33
Conclusion 9-34
10 Property Acquisition and Cost
Recovery
Cost Recovery and Basis for Cost Recovery 10-2
Basis for Cost Recovery 10-3
Depreciation 10-6
Personal Property Depreciation 10-7
Depreciation Method 10-7
Depreciation Recovery Period 10-8
Depreciation Conventions 10-9
Calculating Depreciation for Personal
Property 10-9
Applying the Half-Year Convention 10-10
Applying the Mid-Quarter Convention 10-13
Real Property 10-16
Applicable Method 10-17
Applicable Convention 10-17
Depreciation Tables 10-17
Special Rules Relating to Cost Recovery 10-18
Immediate Expensing 10-18
Listed Property 10-24
Luxury Automobiles 10-26
Depreciation for the Alternative Minimum
Tax 10-29
Depreciation Summary 10-29
Amortization 10-31
Section 197 Intangibles 10-31
Organizational Expenditures and Start-Up
Costs 10-32
Research and Experimentation
Expenditures 10-35
Patents and Copyrights 10-35
Amortizable Intangible Asset Summary 10-36
Depletion 10-37
Conclusion 10-39
Appendix: MACRS Tables 10-40
11 Property Dispositions
Dispositions 11-2
Amount Realized 11-2
Determination of Adjusted Basis 11-3
Gifts 11-3
Inherited Property 11-3
Property Converted from Personal Use to
Business Use 11-3
Realized Gain or Loss on Disposition 11-5
Recognized Gain or Loss on Disposition 11-6
Character of Gain or Loss 11-6
Ordinary Assets 11-7
Capital Assets 11-7
§1231 Assets 11-8
Depreciation Recapture 11-9
§1245 Property 11-10
Scenario 1: Gain Created Solely through Cost
Recovery Deductions 11-11
Scenario 2: Gain Due to Both Cost
Recovery Deductions and Asset
Appreciation 11-11
Scenario 3: Asset Sold at a Loss 11-12
§1250 Depreciation Recapture for Real
Property 11-13
Other Provisions Affecting the Rate at Which Gains
Are Taxed 11-14
Unrecaptured §1250 Gain for Individuals 11-14
Characterizing Gains on the Sale of Depreciable
Property to Related Persons 11-16
Calculating Net §1231 Gains or Losses 11-16
§1231 Look-Back Rule 11-18
Gain or Loss Summary 11-20
Nonrecognition Transactions 11-20
Like-Kind Exchanges 11-20
Definition of Like-Kind Property 11-24
Real Property 11-24
Personal Property 11-24
Property Ineligible for Like-Kind
Treatment 11-25
Property Use 11-25
Timing Requirements for a Like-Kind
Exchange 11-25
Tax Consequences When Like-Kind Property Is
Exchanged Solely for Like-Kind
Property 11-27
Tax Consequences of Transfers Involving Like-
Kind and Non-Like-Kind Property
(Boot) 11-27
Reporting Like-Kind Exchanges 11-29
Involuntary Conversions 11-29
Installment Sales 11-32
Gains Ineligible for Installment
Reporting 11-34
Other Nonrecognition Provisions 11-34
Related-Person Loss Disallowance
Rules 11-35
Conclusion 11-36

12 Compensation
Salary and Wages 12-2
Employee Considerations for Salary and
Wages 12-2
Tax Withholding 12-2
Employer Considerations for Salary and
Wages 12-2
Deductibility of Salary Payments 12-3
Equity-Based Compensation 12-7
Stock Options 12-8
Employee Considerations for Stock
Options 12-10
Employer Considerations for Stock
Options 12-13
Restricted Stock 12-15
Employee Considerations for Restricted
Stock 12-16
Employer Considerations for Restricted
Stock 12-18
Equity-Based Compensation
Summary 12-19
Fringe Benefits 12-19
Taxable Fringe Benefits 12-20
Employee Considerations for Taxable Fringe
Benefits 12-20
Employer Considerations for Taxable Fringe
Benefits 12-22
Nontaxable Fringe Benefits 12-24
Group-Term Life Insurances 12-24
Health and Accident Insurance and
Benefits 12-25
Meals and Lodging for the Convenience of
the Employer 12-25
Employee Educational Assistance 12-26
Dependent Care Benefits 12-26
No-Additional-Cost Services 12-26
Qualified Employee Discounts 12-27
Working Condition Fringe
Benefits 12-28
De Minimis Fringe Benefits 12-28
Qualified Transportation Fringe
Benefits 12-28
Qualified Moving Expense
Reimbursement 12-28
Cafeteria Plans and Flexible Spending
Accounts (FSAs) 12-29
Employee and Employer Considerations for
Nontaxable Fringe Benefits 12-29
Tax Planning with Fringe Benefits 12-30
Fringe Benefits Summary 12-31
Conclusion 12-33
Table of Contents xxix
13 Retirement Savings and Deferred
Compensation
Employer-Provided Qualified Plans 13-3
Defined Benefit Plans 13-3
Vesting 13-4
Distributions 13-5
Nontax Considerations 13-5
Defined Contribution Plans 13-6
Employer Matching 13-6
Contribution Limits 13-7
Vesting 13-7
After-Tax Cost of Contributions to Traditional
(non-Roth) Defined Contribution Plans 13-8
Distributions from Traditional Defined
Contribution Plans 13-9
After-Tax Rates of Return for Traditional Defined
Contribution Plans 13-11
Roth 401(k) Plans 13-11
Comparing Traditional Defined Contribution
Plans and Roth 401(k) Plans 13-14
Nonqualified Deferred Compensation
Plans 13-15
Nonqualified Plans versus Qualified Defined
Contribution Plans 13-15
Employee Considerations 13-16
Employer Considerations 13-18
Individually Managed Qualified Retirement
Plans 13-19
Individual Retirement Accounts 13-19
Traditional IRAs 13-20
Contributions 13-20
Nondeductible Contributions 13-22
Distributions 13-23
Roth IRAs 13-23
Contributions 13-23
Distributions 13-24
Rollover from Traditional to Roth IRA 13-25
Comparing Traditional and Roth IRAs 13-26
Self-Employed Retirement Accounts 13-27
Simplified Employee Pension (SEP)
IRA 13-27
Nontax Considerations 13-28
Individual 401(k) Plans 13-28
Nontax Considerations 13-30
Saver’s Credit 13-30
Conclusion 13-31
Appendix A: Traditional IRA Deduction
Limitations 13-32
Appendix B: Roth IRA Contribution
Limits 13-34
xxx Table of Contents
14 Tax Consequences of Home
Ownership
Personal Use of the Home 14-3
Exclusion of Gain on Sale of Personal
Residence 14-4
Requirements 14-5
Exclusion of Gain from Debt Forgiveness on
Foreclosure of Home Mortgage 14-8
Interest Expense on Home-Related
Debt 14-8
Limitations on Home-Related
Debt 14-9
Mortgage Insurance 14-13
Points 14-13
Real Property Taxes 14-15
Rental Use of the Home 14-17
Residence with Minimal Rental Use 14-17
Residence with Significant Rental Use (Vacation
Home) 14-18
Nonresidence (Rental Property) 14-21
Losses on Rental Property 14-23
Business Use of the Home 14-25
Direct versus Indirect Expenses 14-27
Limitations on Deductibility of Expenses 14-28
Conclusion 14-30
Appendix A: Sample Settlement Statement for the
Jeffersons 14-32
Appendix B: Flowchart of Tax Rules Relating to
Home Used for Rental Purposes 14-34
15 Entities Overview
Entity Legal Classification and Nontax
Characteristics 15-2
Legal Classification 15-2
Nontax Characteristics 15-2
Responsibility for Liabilities 15-3
Rights, Responsibilities, and Legal
Arrangements among Owners 15-3
Entity Tax Classification 15-5
Entity Tax Characteristics 15-7
Double Taxation 15-8
After-Tax Earnings Distributed 15-8
Some or All After-Tax Earnings
Retained 15-11
Mitigating the Double Tax 15-12
Deductibility of Entity Losses 15-14
Other Tax Characteristics 15-15
Converting to Other Entity Types 15-15
Conclusion 15-20
16 Corporate Operations
Corporate Taxable Income Formula 16-2
Accounting Periods and Methods 16-2
Computing Corporate Regular Taxable
Income 16-3
Book–Tax Differences 16-3
Common Permanent Book–Tax
Differences 16-4
Common Temporary Book–Tax
Differences 16-6
Corporate-Specific Deductions and Associated
Book–Tax Differences 16-9
Stock Options 16-9
Net Capital Losses 16-12
Net Operating Losses 16-13
Charitable Contributions 16-15
Dividends Received Deduction 16-18
Taxable Income Summary 16-22
Regular Tax Liability 16-22
Controlled Groups 16-24
Compliance 16-25
Consolidated Tax Returns 16-29
Corporate Tax Return Due Dates and Estimated
Taxes 16-29
Corporate Alternative Minimum Tax 16-33
Preference Items 16-33
Adjustments 16-34
Depreciation Adjustment 16-34
Gain or Loss on Disposition of Depreciable
Assets 16-35
ACE Adjustment 16-35
AMT NOL Deduction (ATNOLD) 16-37
Alternative Minimum Taxable Income
(AMTI) 16-37
AMT Exemption 16-38
Alternative Minimum Tax 16-38
Conclusion 16-39
17 Accounting for Income Taxes
Objectives of Accounting for Income Taxes and the
Income Tax Provision Process 17-2
Why Is Accounting for Income Taxes So
Complex? 17-3
Objectives of ASC 740 17-4
The Income Tax Provision Process 17-6
Calculating the Current and Deferred Income Tax
Expense or Benefit Components of a Company’s
Income Tax Provision 17-6
Step 1: Adjust Pretax Net Income for All
Permanent Differences 17-6

Step 2: Identify All Temporary Differences and
Tax Carryforward Amounts 17-8
Revenues or Gains That Are Taxable after
They Are Recognized in Financial
Income 17-8
Expenses or Losses That Are Deductible
after They Are Recognized in Financial
Income 17-8
Revenues or Gains That Are Taxable before
They Are Recognized in Financial
Income 17-9
Expenses or Losses That Are Deductible
before They Are Recognized in Financial
Income 17-9
Identifying Taxable and Deductible Temporary
Differences 17-9
Taxable Temporary Difference 17-9
Deductible Temporary Difference 17-9
Step 3: Compute the Current Income Tax
Expense or Benefit 17-11
Step 4: Determine the Ending Balances in the
Balance Sheet Deferred Tax Asset and
Liability Accounts 17-12
Determining Whether a Valuation Allowance Is
Needed 17-18
Step 5: Evaluate the Need for a Valuation
Allowance for Gross Deferred Tax
Assets 17-18
Determining the Need for a Valuation
Allowance 17-18
Future Reversals of Existing Taxable
Temporary Differences 17-18
Taxable Income in Prior Carryback Year(s) 17-19
Expected Future Taxable Income Exclusive of
Reversing Temporary Differences and
Carryforwards 17-19
Tax Planning Strategies 17-19
Negative Evidence That a Valuation
Allowance Is Needed 17-19
Step 6: Calculate the Deferred Income Tax
Expense or Benefit 17-22
Accounting for Uncertainty in Income Tax
Positions 17-23
Application of ASC 740 to Uncertain Tax
Positions 17-24
Step 1: Recognition 17-24
Step 2: Measurement 17-24
Subsequent Events 17-26
Interest and Penalties 17-26
Disclosures of Uncertain Tax
Positions 17-27
Schedule UTP (Uncertain Tax Position)
Statement 17-27
Table of Contents xxxi
Financial Statement Disclosure and the
Computation of a Corporation’s Effective Tax
Rate 17-28
Balance Sheet Classification 17-28
Income Tax Footnote Disclosure 17-28
Computation and Reconciliation of the
Income Tax Provision with a Company’s
Hypothetical Tax Provision 17-30
Importance of a Corporation’s Effective Tax
Rate 17-31
Interim Period Effective Tax Rates 17-32
FASB Projects Related to Accounting for Income
Taxes 17-32
Conclusion 17-32
18 Corporate Taxation: Nonliquidating
Distributions
Taxation of Property Distributions 18-2
Determining the Dividend Amount from Earnings
and Profits 18-3
Overview 18-3
Dividends Defined 18-3
Computing Earnings and Profits 18-4
Nontaxable Income Included in Current
E&P 18-4
Deductible Expenses That Do Not Reduce
Current E&P 18-5
Nondeductible Expenses That Reduce
Current E&P 18-5
Items Requiring Separate Accounting
Methods for E&P Purposes 18-5
Ordering of E&P Distributions 18-8
Positive Current E&P and Positive
Accumulated E&P 18-8
Positive Current E&P and Negative
Accumulated E&P 18-8
Negative Current E&P and Positive
Accumulated E&P 18-9
Negative Current E&P and Negative
Accumulated E&P 18-10
Distributions of Noncash Property to
Shareholders 18-11
The Tax Consequences to a Corporation
Paying Noncash Property as a
Dividend 18-12
Liabilities 18-12
Effect of Noncash Property Distributions on
E&P 18-13
Constructive Dividends 18-15
The Motivation to Pay Dividends 18-17
xxxii Table of Contents
Stock Dividends 18-17
Tax Consequences to Shareholders Receiving a
Stock Distribution 18-18
Nontaxable Stock Distributions 18-18
Taxable Stock Distributions 18-18
Stock Redemptions 18-19
The Form of a Stock Redemption 18-20
Redemptions That Reduce a Shareholder’s
Ownership Interest 18-21
Redemptions That Are Substantially
Disproportionate 18-21
Complete Redemption of the Stock Owned
by a Shareholder 18-24
Redemptions That Are Not Essentially
Equivalent to a Dividend 18-25
Tax Consequences to the Distributing
Corporation 18-26
Trends in Stock Redemptions by Publicly Traded
Corporations 18-27
Partial Liquidations 18-28
Conclusion 18-29
19 Corporate Formation, Reorganization,
and Liquidation
Review the Taxation of Property Dispositions 19-2
Tax-Deferred Transfers of Property to a
20 Forming and Operating Partnerships
Corporation 19-4
Transactions Subject to Tax Deferral 19-5
Meeting the Section 351 Tax Deferral
Requirements 19-5
Section 351 Applies Only to the Transfer of
Property to the Corporation 19-5
The Property Transferred to the Corporation
Must Be Exchanged for Stock of the
Corporation 19-6
The Transferor(s) of Property to the
Corporation Must Be in Control, in the
Aggregate, of the Corporation Immediately
after the Transfer 19-6
Tax Consequences to Shareholders 19-9
Tax Consequences When a Shareholder
Receives Boot 19-10
Assumption of Shareholder Liabilities by the
Corporation 19-12
Tax-Avoidance Transactions 19-12
Liabilities in Excess of Basis 19-12
Tax Consequences to the Transferee
Corporation 19-14
Other Issues Related to Incorporating an
Ongoing Business 19-17
Depreciable Assets Transferred to a
Corporation 19-17
Contributions to Capital 19-18
Section 1244 Stock 19-18
Taxable and Tax-Deferred Corporate
Acquisitions 19-20
The Acquisition Tax Model 19-21
Tax Consequences to a Corporate Acquisition 19-22
Taxable Acquisitions 19-23
Tax-Deferred Acquisitions 19-26
Judicial Principles That Underlie All Tax-Deferred
Reorganizations 19-26
Continuity of Interest (COI) 19-26
Continuity of Business Enterprise
(COBE) 19-26
Business Purpose Test 19-27
Type A Asset Acquisitions 19-27
Forward Triangular Type A Merger 19-29
Reverse Triangular Type A Merger 19-29
Type B Stock-for-Stock Reorganizations 19-30
Complete Liquidation of a Corporation 19-33
Tax Consequences to the Shareholders in a
Complete Liquidation 19-34
Tax Consequences to the Liquidating Corporation
in a Complete Liquidation 19-35
Taxable Liquidating Distributions 19-35
Nontaxable Liquidating Distributions 19-38
Conclusion 19-39
Flow-Through Entities Overview 20-2
Aggregate and Entity Concepts 20-2
Partnership Formations and Acquisitions of
Partnership Interests 20-3
Acquiring Partnership Interests When
Partnerships Are Formed 20-3
Contributions of Property 20-3
Contribution of Services 20-9
Organization, Start-Up, and Syndication
Costs 20-12
Acquisitions of Partnership Interests 20-13
Partnership Accounting: Tax Elections, Accounting
Periods, and Accounting Methods 20-13
Tax Elections 20-14
Accounting Periods 20-14
Required Year-Ends 20-14
Accounting Methods 20-16
Reporting the Results of Partnership
Operations 20-17
Ordinary Business Income (Loss) and Separately
Stated Items 20-17
Guaranteed Payments 20-19
Self-Employment Tax 20-20
Net Investment Income Tax 20-22
Allocating Partners’ Shares of Income and
Loss 20-22
Partnership Compliance Issues 20-23
 Table of Contents xxxiii

Partner’s Adjusted Tax Basis in Partnership Operating Issues 22-8

Interest 20-27
Cash Distributions in Operating
Partnerships 20-29
Loss Limitations 20-29
Tax-Basis Limitation 20-29
At-Risk Limitation 20-30
Passive Activity Loss Limitation 20-31
Passive Activity Defined 20-32
Income and Loss Baskets 20-33
Conclusion 20-34
21 Dispositions of Partnership Interests
and Partnership Distributions
Basics of Sales of Partnership Interests 21-2
Seller Issues 21-3
Hot Assets 21-3
Buyer and Partnership Issues 21-7
Varying Interest Rule 21-8
Basics of Partnership Distributions 21-9
Operating Distributions 21-9
Operating Distributions of Money Only 21-9
Operating Distributions That Include Property
Other Than Money 21-10
Liquidating Distributions 21-12
Gain or Loss Recognition in Liquidating
Distributions 21-13
Basis in Distributed Property 21-13
Partner’s Outside Basis Is Greater Than Inside
Basis of Distributed Assets 21-14
Partner’s Outside Basis Is Less Than Inside
Basis of Distributed Assets 21-17
Character and Holding Period of Distributed
Assets 21-21
Disproportionate Distributions 21-24
Special Basis Adjustments 21-26
Special Basis Adjustments for
Dispositions 21-27
Special Basis Adjustments for
Distributions 21-28
Conclusion 21-29
22 S Corporations
S Corporation Elections 22-2
S Corporation Qualification Requirements 22-2
S Corporation Election 22-3
S Corporation Terminations 22-5
Voluntary Terminations 22-5
Involuntary Terminations 22-5
Failure to Meet Requirements 22-5
Excess of Passive Investment Income 22-6
Short Tax Years 22-6
S Corporation Reelections 22-7
Accounting Methods and Periods 22-8
Income and Loss Allocations 22-8
Separately Stated Items 22-9
Shareholder’s Basis 22-11
Initial Basis 22-11
Annual Basis Adjustments 22-12
Loss Limitations 22-13
Tax-Basis Limitation 22-13
At-Risk Limitation 22-14
Post-Termination Transition Period Loss
Limitation 22-14
Passive Activity Loss Limitation 22-15
Self-Employment Income 22-15
3.8 Percent Net Investment Income
Tax 22-16
Fringe Benefits 22-16
Distributions 22-17
Operating Distributions 22-17
S Corporation with No C Corporation
Accumulated Earnings and Profits 22-17
S Corporations with C Corporation
Accumulated Earnings and Profits 22-18
Property Distributions 22-20
Post-Termination Transition Period
Distributions 22-21
Liquidating Distributions 22-21
S Corporation Taxes and Filing
Requirements 22-22
Built-in Gains Tax 22-22
Excess Net Passive Income Tax 22-24
LIFO Recapture Tax 22-26
Estimated Taxes 22-28
Filing Requirements 22-28
Comparing C and S Corporations and
Partnerships 22-30
Conclusion 22-31
23 State and Local Taxes
State and Local Taxes 23-2
Sales and Use Taxes 23-5
Sales and Use Tax Nexus 23-5
Sales and Use Tax Liability 23-7
Income Taxes 23-9
Income Tax Nexus 23-10
Public Law 86-272 23-10
Income Tax Nexus for Other Business Types
or Nonincome-Based Taxes 23-13
Economic Income Tax Nexus 23-13
Entities Included on Income Tax Return 23-15
Separate Tax Returns 23-15
Unitary Tax Returns 23-15
xxxiv Table of Contents

State Taxable Income 23-16 Proposals for Change 24-33

Dividing State Tax Base among States 23-18 Conclusion 24-33
Business Income 23-19
Nonbusiness Income 23-24
State Income Tax Liability 23-24
25 Transfer Taxes and Wealth
Non (Net) Income-Based Taxes 23-25
Planning
Conclusion 23-25 Introduction to Federal Transfer Taxes 25-2
Beginnings 25-2
24 The U.S. Taxation of Multinational Common Features of Integrated Transfer
Taxes 25-2
Transactions
The Federal Gift Tax 25-4
The U.S. Framework for Taxing Multinational Transfers Subject to Gift Tax 25-5
Transactions 24-2
Valuation 25-6
U.S. Taxation of a Nonresident 24-3
The Annual Exclusion 25-8
Definition of a Resident for U.S. Tax
Taxable Gifts 25-9
Purposes 24-4
Gift-Splitting Election 25-10
Overview of the U.S. Foreign Tax Credit
System 24-5 Marital Deduction 25-10
Charitable Deduction 25-12
U.S. Source Rules for Gross Income and
Deductions 24-6 Computation of the Gift Tax 25-12
Source of Income Rules 24-7 Tax on Current Taxable Gifts 25-13
Interest 24-7 Applicable Credit 25-14
Dividends 24-8 The Federal Estate Tax 25-17
Compensation for Services 24-8 The Gross Estate 25-17
Rents and Royalties 24-10 Specific Inclusions 25-18
Gain or Loss from Sale of Real Property 24-10 Valuation 25-21
Gain or Loss from Sale of Purchased Gross Estate Summary 25-22
Personal Property 24-10 The Taxable Estate 25-22
Inventory Produced within the United States Administrative Expenses, Debts, Losses, and
and Sold Outside the United States (§863 State Death Taxes 25-23
Sales) 24-11 Marital and Charitable Deductions 25-23
Source of Deduction Rules 24-12 Computation of the Estate Tax 25-25
General Principles of Allocation and Adjusted Taxable Gifts 25-25
Apportionment 24-12
Applicable Credit 25-26
Special Apportionment Rules 24-13
Wealth Planning Concepts 25-29
Treaties 24-15
The Generation-Skipping Tax 25-29
Foreign Tax Credits 24-20 Income Tax Considerations 25-29
FTC Limitation Categories of Taxable Transfer Tax Planning Techniques 25-30
Income 24-20
Serial Gifts 25-30
Passive Category Income 24-20
The Step-Up in Tax Basis 25-31
General Category Income 24-20
Integrated Wealth Plans 25-32
Creditable Foreign Taxes 24-21
Conclusion 25-33
Direct Taxes 24-22
In Lieu of Taxes 24-22
Appendix A Tax Forms A-1
Indirect (Deemed Paid) Taxes 24-22
Planning for International Operations 24-25 Appendix B Tax Terms Glossary B
Check-the-Box Hybrid Entities 24-26 Appendix C Comprehensive Tax Return
U.S. Anti-Deferral Rules 24-27 Problems C
Definition of a Controlled Foreign Appendix D Tax Rates D
Corporation 24-28
Definition of Subpart F Income 24-29 Code Index CI
Planning to Avoid Subpart F Income 24-31 Subject Index SI-1
 McGraw-Hill’s

Taxation of Individuals
and Business Entities
 chapter

1 An Introduction to Tax

Learning Objectives

Upon completing this chapter, you should be able to:

LO 1-1 Demonstrate how taxes influence basic business, investment, personal, and political
decisions.

LO 1-2 Discuss what constitutes a tax and the general objectives of taxes.

LO 1-3 Describe the different tax rate structures and calculate a tax.

LO 1-4 Identify the various federal, state, and local taxes.

LO 1-5 Apply appropriate criteria to evaluate alternative tax systems.

 Storyline Summary
Taxpayer: Margaret

Employment status:  argaret is a full-time student at

M
the University of Georgia.

Current situation: She is beginning her first

tax class.

© Andrew Rich/Getty Images

M
argaret is a junior beginning her first tax
course. She is excited about her career
prospects as an accounting major but
hasn’t had much exposure to taxes. On her way to
campus she runs into an old friend, Eddy, who is go-
ing to Washington, D.C., to protest recent proposed
changes to the U.S. tax system. Eddy is convinced the
IRS is evil and that the current tax system is blatantly
unfair and corrupt. He advocates a simpler, fairer way
of taxation. Margaret is intrigued by Eddy’s passion
but questions whether he has a complete understand-
ing of the U.S. tax system. She decides to withhold all
judgments about it (or about pursuing a career in
­taxation) until the end of her tax course. ■

1-1
1-2 CHAPTER 1 An Introduction to Tax

LO 1-1 WHO CARES ABOUT TAXES AND WHY?

A clear understanding of the role of taxes in everyday decisions will help you make an
informed decision about the value of studying taxation or pursuing a career in taxa-
tion. One view of taxation is that it represents an inconvenience every April 15th (the
annual due date for filing federal individual tax returns without extensions). However,
the role of taxation is much more pervasive than this view suggests. Your study of this
subject will provide you a unique opportunity to develop an informed opinion about
taxation. As a business student, you can overcome the mystery that encompasses
­popular impressions of the tax system and perhaps, one day, share your expertise with
friends or clients.
What are some common decisions you face that taxes may influence? In this
course, we alert you to situations in which you can increase your return on investments
by up to one-third! Even the best lessons in finance courses can’t approach the in-
crease in risk-adjusted return that smart tax planning provides. Would you like to own
your home someday? Tax deductions for home mortgage interest and real estate taxes
can reduce the after-tax costs of owning a home relative to renting. Thus, when you
face the decision to buy or rent, you can make an informed choice if you understand
the relative tax advantages of home ownership. Would you like to retire someday?
Understanding the tax-advantaged methods of saving for retirement can increase the
after-tax value of your retirement nest egg—and thus increase the likelihood that you
can afford to retire, and do so in style. Other common personal financial decisions that
taxes influence include: choosing investments, evaluating alternative job offers, sav-
ing for education expenses, and doing gift or estate planning. Indeed, taxes are a part
of everyday life and have a significant effect on many of the personal financial
­decisions all of us face.
The role of taxes is not limited to personal finance. Taxes play an equally important
role in fundamental business decisions such as the following:
∙ What organizational form should a business use?
∙ Where should the business locate?
∙ How should business acquisitions be structured?
∙ How should the business compensate employees?
∙ What is the appropriate mix of debt and equity for the business?
∙ Should the business rent or own its equipment and property?
∙ How should the business distribute profits to its owners?
Savvy business decisions require owners and managers to consider all costs and
b­ enefits in order to evaluate the merits of a transaction. Although taxes don’t necessarily
dominate these decisions, they do represent large transaction costs that businesses should
factor into the financial decision-making process.
Taxes also play a major part in the political process. U.S. presidential candidates
­often distinguish themselves from their opponents based upon their tax rhetoric. Indeed,
the major political parties generally have very diverse views of the appropriate way to tax
the public.1 Determining who is taxed, what is taxed, and how much is taxed are tough
questions with nontrivial answers. Voters must have a basic understanding of taxes to
evaluate the merits of alternative tax proposals. Later in this chapter, we’ll introduce
­criteria you can use to evaluate alternative tax proposals.

1
The U.S. Department of the Treasury provides a “history of taxation” on its website (www.treasury.gov/
resource-center/faqs/Taxes/Pages/historyrooseveltmessage.aspx). You may find it interesting to read this
history in light of the various political parties in office at the time.

TAXES IN THE REAL WORLD Republicans vs. Democrats
Tax Policy: Republicans versus Democrats
Oliver Wendell Holmes said “taxes are the price
we pay to live in a civilized society.” Both Demo-
crats and Republicans desire the same things: a
civilized society and a healthy economy. How-
ever, neither party can agree on what defines a
civilized society or which path best leads to a
healthy economy. The U.S. national debt is
$20 trillion dollars and growing, yet the only thing
we might agree on is that something has gone
wrong. Regardless of which party or candidate
you support, each party’s agenda will affect your
income and taxes in various ways.
To explore the divide, let’s examine excerpts
from each party’s National Platform from our most
recent presidential election (2016).
Republicans
“We are the party of a growing economy that
gives everyone a chance in life, an opportunity to
learn, work, and realize the prosperity freedom
makes possible.”
“Government cannot create prosperity,
though government can limit or destroy it. Pros-
perity is the product of self-discipline, enterprise,
saving and investment by individuals, but it is not
an end in itself. Prosperity provides the means by
which citizens and their families can maintain
their independence from government, raise their
children by their own values, practice their faith,
and build communities of cooperation and mu-
tual respect.”
“Republicans consider the establishment of
a pro-growth tax code a moral imperative.
More than any other public policy, the way gov-
ernment raises revenue—how much, at what
rates, under what circumstances, from whom,
and for whom—has the greatest impact on our
economy’s performance. It powerfully influ-
ences the level of economic growth and job
creation, which translates into the level of op-
portunity for those who would otherwise be left
behind.”
“A strong economy is one key to debt reduc-
tion, but spending restraint is a necessary com-
ponent that must be vigorously pursued.” https://
www.gop.com/platform/restoring-the-american-
dream/
In summary, taxes affect many aspects of personal, business, and political decisions.
Developing a solid understanding of taxation should allow you to make informed
­decisions in these areas. Thus, Margaret can take comfort that her semester will likely
prove useful to her personally. Who knows? Depending on her interest in business,
­investment, retirement planning, and the like, she may ultimately decide to pursue a
­career in taxation.
CHAPTER 1 An Introduction to Tax 1-3
Democrats
“At a time of massive income and wealth inequal-
ity, we believe the wealthiest Americans and larg-
est corporations must pay their fair share of
taxes. Democrats will claw back tax breaks for
companies that ship jobs overseas, eliminate tax
breaks for big oil and gas companies, and crack
down on inversions and other methods compa-
nies use to dodge their tax responsibilities … We
will then use the revenue raised from fixing the
corporate tax code to reinvest in rebuilding
America and ensuring economic growth that will
lead to millions of good-paying jobs.”
“We will ensure those at the top contribute to
our country’s future by establishing a multimillion-
aire surtax to ensure millionaires and billionaires
pay their fair share. In addition, we will shut down
the “private tax system” for those at the top, im-
mediately close egregious loopholes like those
enjoyed by hedge fund managers, restore fair
taxation on multimillion dollar estates, and ensure
millionaires can no longer pay a lower rate than
their secretaries. At a time of near-record corpo-
rate profits, slow wage growth, and rising costs,
we need to offer tax relief to middle-class
­families—not those at the top.”
“We will offer tax relief to hard working,­middle-
class families for the cost squeeze they have
faced for years from rising health care, childcare,
education, and other expenses.” https://www
.democrats.org/party-platform#preamble
Conclusion
Each party fundamentally believes the govern-
ment should create/maintain cities and states that
form a civilized society, and that government
should foster a healthy economy. However, they THE KEY FACTS
choose very different paths to reach this objec- What Qualifies
tive. Democrats want to raise taxes on the as a Tax?
wealthy and create government programs which • The general purpose of
cost more money, while Republicans wish to taxes is to fund govern-
lower taxes and decrease government size and ment agencies.
spending. Both motives are pure; however, cur- • Unlike fines or penalties,
rent and cumulative deficits indicate that current taxes are not meant to
revenue is insufficient to meet government punish or prevent illegal
spending. Solving these problems will require behavior; however, “sin
civil discourse, education and research/informa- taxes” are meant to dis-
courage some behaviors.
tion in order to find realistic, effective solutions.
• To qualify as a tax, three
criteria must be met. The
payment must be:
• required;
• imposed by a
government;
• and not tied directly to
the benefit received by
the taxpayer.
1-4 CHAPTER 1 An Introduction to Tax

LO 1-2 WHAT QUALIFIES AS A TAX?

“Taxes are the price we pay for a civilized society.” —Oliver Wendell Holmes, Jr.
Taxes have been described in many terms: some positive, some negative, some
­printable, some not. Let’s go directly to a formal definition of a tax, which should prove
useful in identifying alternative taxes and discussing alternative tax systems.
A tax is a payment required by a government that is unrelated to any specific benefit
or service received from the government. The general purpose of a tax is to fund the
­operations of the government (to raise revenue). Taxes differ from fines and penalties in
that taxes are not intended to punish or prevent illegal behavior. Nonetheless, by allowing
deductions from income, our federal tax system does encourage certain behaviors like
charitable contributions, retirement savings, and research and development. Thus, we
can view it as discouraging other legal behavior. For example, sin taxes impose rela-
tively high surcharges on alcohol and tobacco products.2 Another example is the shared-
responsibility payment introduced by the Affordable Care Act (see the nearby box). This
payment was declared to be a “tax” by the Supreme Court. The tax is imposed on those
who do not have minimum essential health care coverage.3

TAXES IN THE REAL WORLD Affordable Care Act

The Affordable Care Act requires individuals to
be covered by a health insurance plan or to pay
a tax—which is paid on the individual’s income
tax return. The adult annual dollar amount was
phased in as follows: $95 in 2014; $325 in
2015; $695 in 2016 and is indexed by inflation
thereafter. The Congressional Budget Office
and the Joint Committee on Taxation jointly esti-
mated that 5.9 million Americans will be subject
to the penalty in 2016 and the provision will
raise $6.9 billion in revenue in that year.
You may recall that one question the
­Supreme Court had to rule on was whether this
provision is a “penalty” or a “tax.” The Supreme
Court held that the provision is a tax and an-
swered as follows: “The payment is not so high
that there is really no choice but to buy health
insurance; the payment is not limited to willful
­violations, as penalties for unlawful acts often
are; and the payment is collected solely by the
(Internal Revenue Service) through the normal
means of taxation,” Chief Justice John Roberts
wrote in the decision.
Source: National Federation of Independent Business v.
Sebelius, 132 S. Ct. 2566 (2012).

Key components of the definition of a tax are that the payment is:
∙ Required (it is not voluntary);
∙ Imposed by a government agency (federal, state, or local); and
∙ Not tied directly to the benefit received by the taxpayer.
This last point is not to say that taxpayers receive no benefits from the taxes they pay.
They benefit from national defense, a judicial system, law enforcement, government-
sponsored social programs, an interstate highway system, public schools, and many other
government-provided programs and services. The distinction is that taxes paid are not directly
related to any specific benefit received by the taxpayer. For example, the price of admission to
Yellowstone National Park is a fee rather than a tax because a specific benefit is received.
Can taxes be assessed for special purposes, such as a 1 percent sales tax for educa-
tion? Yes. Why is an earmarked tax, a tax that is assessed for a specific purpose, still
considered a tax? Because the payment made by the taxpayer does not directly relate to
the specific benefit received by the taxpayer.

2
Sin taxes represent an interesting confluence of incentives. On the one hand, demand for such products as
alcohol, tobacco, and gambling is often relatively inelastic because of their addictive quality. Thus, taxing
such a product can raise substantial revenues. On the other hand, one of the arguments for sin taxes is fre-
quently the social goal of reducing demand for such products.
3
For details on the computation of the shared-responsibility payment see Reg. §1.5000A-4.
 CHAPTER 1 An Introduction to Tax 1-5

Example 1-1
Margaret travels to Birmingham, Alabama, where she rents a hotel room and dines at several restau-
rants. The price she pays for her hotel room and meals includes an additional 2 percent city surcharge
to fund roadway construction in Birmingham. Is this a tax?
Answer: Yes. The payment is required by a local government and does not directly relate to a specific
benefit that Margaret receives.

Example 1-2
Margaret’s parents, Bill and Mercedes, recently built a house and were assessed $1,000 by their
county government to connect to the county sewer system. Is this a tax?
Answer: No. The assessment was mandatory and it was paid to a local government. However, the
third criterion was not met since the payment directly relates to a specific benefit (sewer service)
­received by the payees. For the same reason, tolls, parking meter fees, and annual licensing fees are
also not considered taxes.

HOW TO CALCULATE A TAX LO 1-3

In its simplest form, the amount of tax equals the tax base multiplied by the tax rate:

Eq. 1-1 Tax = Tax Base × Tax Rate

The tax base defines what is actually taxed and is usually expressed in monetary
terms, whereas the tax rate determines the level of taxes imposed on the tax base and is THE KEY FACTS
usually expressed as a percentage. For example, a sales tax rate of 6 percent on a purchase How to Calculate a Tax
of $30 yields a tax of $1.80 ($1.80 = $30 × .06). • Tax = Tax base × Tax rate
Federal, state, and local jurisdictions use a large variety of tax bases to collect tax. • The tax base defines what
Some common tax bases (and related taxes) include taxable income (federal and state is actually taxed and is
income taxes), purchases (sales tax), real estate values (real estate tax), and personal ­usually expressed in
­monetary terms.
property values (personal property tax).
• The tax rate determines
Different portions of a tax base may be taxed at different rates. A single tax applied the level of taxes imposed
to an entire base constitutes a flat tax. In the case of graduated taxes, the base is divided on the tax base and is
into a series of monetary amounts, or brackets, and each successive bracket is taxed at a usually expressed as a
different (gradually higher or gradually lower) percentage rate. percentage.
Calculating some taxes—income taxes for individuals or corporations, for ­example— • Different portions of a
can be quite complex. Advocates of flat taxes argue that the process should be simpler. But tax base may be taxed
at ­different rates.
as we’ll see throughout the text, most of the difficulty in calculating a tax rests in determin-
ing the tax base, not the tax rate. Indeed, there are only three basic tax rate ­structures (pro-
portional, progressive, and regressive), and each can be mastered without much difficulty.

DIFFERENT WAYS TO MEASURE TAX RATES

Before we discuss the alternative tax rate structures, let’s first define three different tax
rates that will be useful in contrasting the different tax rate structures: the marginal,
­average, and effective tax rates.
The marginal tax rate is the tax rate that applies to the next additional increment of
a taxpayer’s taxable income (or deductions). Specifically,

Marginal Tax Rate =

ΔTax* (New Total Tax − Old Total Tax)
Eq. 1-2 =
ΔTaxable Income (New Taxable Income − Old Taxable Income)
*Δ means change in.
1-6 CHAPTER 1 An Introduction to Tax

where “old” refers to the current tax and “new” refers to the revised tax after incorporat-
ing the additional income (or deductions) in question. In graduated income tax systems,
additional income (deductions) can push a taxpayer into a higher (lower) tax bracket, thus
changing the marginal tax rate.

Example 1-3
Margaret’s parents, Bill and Mercedes, file a joint tax return. They have $160,000 of taxable income
this year (after all tax deductions). Assuming the following federal tax rate schedule applies, how much
federal income tax will they owe this year?4

Married Filing Jointly (and Surviving Spouses)

Not over $18,650 10% of taxable income

$18,650 to $75,900 $1,865 + 15% of taxable income in excess of $18,650
$75,900 to $153,100 $10,462.50 + 25% of taxable income in excess of $75,900
$153,100 to $233,350 $29,752.50 + 28% of taxable income in excess of $153,100
$233,350 to $416,700 $52,222.50 + 33% of taxable income in excess of $233,350
$416,700 to $470,700 $112,728 + 35% of taxable income in excess of $416,700
Over $470,700 $131,628 + 39.6% of taxable income in excess of $470,700

Answer: Bill and Mercedes will owe $31,684.50 computed as follows:

$31,684.50 = $29,752.50 + 28% ($160,000 − $153,100)

Note that in this graduated tax rate structure, the first $18,650 of taxable income is
taxed at 10 percent, the next $57,250 of taxable income (between $18,650 and $75,900)
is taxed at 15 percent, and the next $77,200 of taxable income (between $75,900 and
$153,100) is taxed at 25 percent. Bill and Mercedes’s last $6,900 of taxable income
­(between $153,100 and $160,000) is taxed at 28 percent.
Many taxpayers incorrectly believe that all their income is taxed at their marginal rate.
This mistake leads people to say, “I don’t want to earn any additional money because it
will put me in a higher tax bracket.” Bill and Mercedes are currently in the 28 percent
marginal tax rate bracket, but notice that not all their income is taxed at this rate. Their
marginal tax rate is 28 percent. This means that small increases in income will be taxed at
28 percent, and small increases in tax deductions will generate tax savings of 28 percent.
If Bill and Mercedes receive a large increase in income (or in deductions) such that they
would change tax rate brackets, we cannot identify their marginal tax rate by simply
­identifying their current tax bracket.

Example 1-4
Bill, a well-known economics professor, signs a publishing contract with an $80,000 royalty advance.
Using the rate schedule from Example 1-3, what would Bill and Mercedes’s marginal tax rate be on this
additional $80,000 of taxable income?
Answer: 28.42 percent, computed as follows:

Description Amount Explanation

(1) Taxable income with additional $240,000.00 $80,000 plus $160,000 taxable income
$80,000 of taxable income (Example 1-3)
(2) Tax on $240,000 taxable income $ 54,417.00 Using the rate schedule in Example 1-3,
$54,417.00 = $52,222.50 + 33% ×
($240,000 − $233,350)

4
The tax rate schedules for single, married filing jointly, married filing separately, and head of household are
included in Appendix D.
 CHAPTER 1 An Introduction to Tax 1-7

Description Amount Explanation

(3) Taxable income before additional $160,000.00 Example 1-3

$80,000 of taxable income
(4) Tax on $160,000 taxable income $ 31,684.50 Example 1-3
ΔTax
Marginal tax rate on additional 28.42% = [ (2) − (4)]∕[ (1) − (3)]
ΔTaxable income
$80,000 of taxable income

Note that Bill and Mercedes’s marginal tax rate on the $80,000 increase in taxable income rests
­between the 28 percent and 33 percent bracket rates because a portion of the additional
­income ($233,350 − $160,000 = $73,350) is taxed at 28 percent with the remaining income
($240,000 − $233,350 = $6,650) taxed at 33 percent.

Example 1-5
Assume now that, instead of receiving a book advance, Bill and Mercedes start a new business that
loses $60,000 this year (it results in $60,000 of additional tax deductions). What would be their
­marginal tax rate for these deductions?
Answer: 25.26 percent, computed as follows:

Description Amount Explanation

(1) Taxable income with additional $100,000.00 $160,000 taxable income

$60,000 of tax deductions (Example 1-3) less $60,000
(2) Tax on $100,000 taxable income $ 16,487.50 Using the rate schedule in Example 1-3,
$100,000 − $75,900 = $24,100 × 25%
= $6,025 + $10,462.50
(3) Taxable income before additional $160,000.00 Example 1-3
THE KEY FACTS
$60,000 of tax deductions Different Ways to
Measure Tax Rates
(4) Tax on $160,000 taxable income $ 31,684.50 Example 1-3
• Marginal tax rate
ΔTax
Marginal tax rate on additional 25.33% = [ (2)− (4)]∕[ (1) − (3)] • The tax that applies to
ΔTaxable income
$60,000 of tax deductions the next increment of
income or deduction.
ΔTax
Bill and Mercedes’s marginal tax rate on $60,000 of additional deductions (25.33 percent) differs • =
ΔTaxable income
from their marginal tax rate on $80,000 of additional taxable income (28.42 percent) in these scenar- • Useful in tax planning.
ios because the relatively large increase in deductions in Example 1-5 causes some of their income to
• Average tax rate
be taxed in a lower tax rate bracket, while the relatively large increase in income in Example 1-4
• A taxpayer’s average
causes some of their income to be taxed in a higher tax rate bracket. Taxpayers often will face the
level of taxation on each
same ­marginal tax rates for small changes in income and deductions.
dollar of taxable income.
Total tax
• =
Taxable income
• Useful in budgeting tax
The marginal tax rate is particularly useful in tax planning because it represents the expense.
rate of taxation or savings that would apply to additional taxable income (or tax deduc- • Effective tax rate
tions). In the Tax Planning Strategies and Related Limitations chapter, we discuss basic • A taxpayer’s average
tax planning strategies that use the marginal tax rate. rate of taxation on each
The average tax rate represents a taxpayer’s average level of taxation on each dollar dollar of total income
of taxable income. Specifically, (taxable and nontaxable
income).
Total Tax • =
Total tax
Eq. 1-3 Average Tax Rate = Total income
Taxable Income • Useful in comparing the
relative tax burdens of
The average tax rate is often used in budgeting tax expense as a portion of income (i.e, taxpayers.
determining what percent of taxable income earned is paid in tax).
1-8 CHAPTER 1 An Introduction to Tax

The effective tax rate represents the taxpayer’s average rate of taxation on each
d­ ollar of total income (sometimes referred to as economic income), including taxable and
nontaxable income. Specifically,

Total Tax
Eq. 1-4 Effective Tax Rate =
Total Income

Relative to the average tax rate, the effective tax rate provides a better depiction of a tax-
payer’s tax burden because it depicts the taxpayer’s total tax paid as a ratio of the sum of
both taxable and nontaxable income earned.

Example 1-6
Assuming Bill and Mercedes have $160,000 of taxable income and $10,000 of nontaxable income,
what is their average tax rate?
Answer: 19.80 percent, computed as follows:

Description Amount Explanation

(1) Taxable income $160,000.00

(2) Tax on $160,000 taxable income $ 31,684.50 Example 1-3
Total tax
Average tax rate 19.80% = (2)∕(1)
Taxable income

We should not be surprised that Bill and Mercedes’s average tax rate is lower than
their marginal tax rate because, although they are currently in the 28 percent tax rate
bracket, not all of their taxable income is subject to tax at 28 percent. The first $18,650
of their taxable income is taxed at 10 percent, their next $57,250 is taxed at 15 per-
cent, their next $77,200 is taxed at 25 percent, and only their last $6,900 of taxable
income is taxed at 28 percent. Thus, their average tax rate is considerably lower than
their marginal tax rate.

Example 1-7
Again, given the same income figures as in Example 1-6 ($160,000 of taxable income and $10,000 of
nontaxable income), what is Bill and Mercedes’s effective tax rate?
Answer: 18.64 percent, computed as follows:

Description Amount Explanation

(1) Total income $170,000.00 $160,000 taxable income plus

$10,000 in nontaxable income
(Example 1-6)
(2) Tax on $160,000 taxable income $ 31,684.50 Example 1-3
Total tax
Effective tax rate 18.64% = (2)∕(1)
Total income

Should we be surprised that the effective tax rate is lower than the average tax rate?
No, because except when the taxpayer has more nondeductible expenses (such as fines or
penalties) than nontaxable income (such as tax-exempt interest), the effective tax rate will
be equal to or less than the average tax rate.
Another random document with
no related content on Scribd:
[Inhoud]
 ZEVENDE HOOFDSTUK.

Ouë Gerrit zat ingedommeld, lichtelijk-besuft in de loom-soezerige

stilte van stal en achterend op z’n gemakstoel te peinzen. Hij had
weer eens wat bemachtigd. Als ie dat zoet-zalige niet had, was het
ook heelemaal niets waard z’n leven, in al die beroerdigheid. Hij had
op Kerst drie mooie gladde planken, Nieuwjaarsmiddag een toet
tabak en nou weer ’n prachtig rood kindermutsje gekaapt.

Daar zat ie nou soezerig van na te genieten, met zware oogleden en

zaligzacht murmelde en zangde dat stil geluk om ’m heen, soms
opstijgend in z’n uiterlijk zoo stille borst, tot een roes van hartstocht
die ’m naar de keel sloeg, wegstormde zwarte zorgdingen, anders
strak en zwaar tegen ’m aangedrukt. De staartklok galmde plechtig
negen uur, dreigend in radgeraas even bij elken nieuwen slag. En
alles om ’m hoorde ie vaag vergalmen, versuizen in iets zalig
onbewusts, diep verdoken in z’n eigen verrukking. Vannacht most ie
z’n boel zien met z’n eigen oogen. Die begeerte brandde nou als ’n
wond in ’m. De duivel met z’n moer zou ’t ’m niet beletten. Op den
dag kwam er toch nooit niks van, was ie bang, dat ze ’m snappen
zouen, kon ie zich niet heelemaal geven.

Vrouw Hassel zat op verfrommeld krantje te staren, onder groezelen

lampschijn in halve gezichtsduistering. Als ze de krant uit had, kon
ze regel voor regel weer beginnen, zonder ooit te weten wat er in
stond.

Guurt bracht de pap òp en van alle kanten scharrelden ze naar tafel,

rond de groote schaal. Alleen ouë Gerrit at, roerde zich niet. Hij was
te vol, te vol. Vanavond zou ie z’n boel zien, zién. [181]
Een voor een, schoffelden ze van tafel zonder dat Gerrit de dingen
om zich heen zag gebeuren. Er zat slaperigheid in het zakkende
petroleumlampje, dat karig kringde in ’t halfduister van kamerke. Hij
zou naar bed gaan. Vlug z’n broek los, stond ie mager, lichtelijk
gebogen in z’n roodbaaien broek-borstrok, z’n bisschoppelijke
zilverbaard op het beulig-rood van z’n lijf, dat even flauw door de
kamer bloedde. Guurt rilde van kou. Dat zou me’n vroegertje
worden. De klefferige bordjes, leeggesmakkerd, vaalden
steenbleekig in het zakkende licht, en de stille hoofden van Piet en
Dirk, om beurten zwaar geeuwend, stil-grimmigden van verveling.

Guurt begon ’r jurk los te haken, in ritsende scheurgeluidjes. Het

heele gezin sliep in de woonkamer, in hoek-bedsteeën, benauwd. De
jongens tegen het beschot naar den stal; Gerrit en vrouw Hassel in
een donkerig-laag bedsteedje tegenover het raam. Alleen Guurt op
’n slaapstoel in de kamer, elken avond opgezet. Vroeger had daar ’n
dienstmeid gelegen, maar dat gaf schandstukken met de jongens. Al
drie meiden waren er zwanger weggegaan, dat moest uit zijn had de
Ouë gezegd, met ’n bons op de tafel.

Gerrit, in z’n rooie onderbroek, sjokte nog rond, brommerig

verwijtend aan Guurt, dat ze ’t lampje niet zóó zou zetten dat ’t op de
bedsteedeur scheen; hij wou het niet op z’n gezicht hebben, als ie ’s
nachts of ’s morgens op de klok ging kijken of als het broeide en
moeder woelde zóó, dat ie de deuren open moest hebben. En toch
mocht ’t niet heelemaal donker zijn. Voortbrommend, half-luisterend
naar Guurt, die nijdig zei waarom ie eigenlijk dat slapen met licht niet
afwende, wipte ie strompelig op het bed-randje, tuimelde het
donkere slaapholletje in, duisterde z’n magere lijf, met z’n zilveren
glanskop plots in de diepte. Met ’n bons had ie de bedsteedeurtjes
achter zich dichtgeslagen..
Guurt met bloote armen, slanker nu in ’r kort dameshemd, zat op
den slaapstoel aan d’r achterhoofd te peuteren, in moeilijken
armwrong, wat haarspelden in den mond vastgebeten. In ’n draai
ringde ze los ’r haar, dat golf-zwaar [182]neerspreidde langs blank-
vollen hals, over naakte schouders, sprookjes-achtig ragblond
beschemerd, èven in zachten lampjes-gloed. Haar fijn princesse-
gezichtje stond jeugdig op korpulent onderlijf, en zware armen-
vleeschweelde blank en woelig van lijn, zwol òp, met ’t beweeg van
’r groote werkhanden, tusschen het zacht-wondere glanshaar; statig
beweeg van princessekopje, neergedrukt op heupig boerinnelijf,
zwaar en zinnelijk-zwellend onder ’r verkreukt hemd-blank;
schuchter kopje, met droom-oogen, teer mondje en neusjes-scherpe
aristokratie, boven rijpe vrouwe-borsten, uierend-zwellend, en lomp
de rauwe handen woelend tegen het geweldige vleeschlijf.

—Kristis moak toe, schreeuwde Guurt, haar naakten borst

bedekkend, naar Dirk die de voordeur uit opstapte de kroeg in.

—Moeder, nou effe et vuurskutje van de stal.. hoal jai ’t?—

Al ’n half uur zat vrouw Hassel, stom-suf op punt van d’r stoel haar
rokken los te frommelen, die wegzakten slap onder haar beenen uit,
toen ze opstond op de vraag van Guurt. Ze hoorde wel, maar
begrijpen deed ze niks, niks vanavond. Er was allemaal zwarte
dofnis in ’r kop, stil gegil, gesuis en gedruk. Maar besef had ze d’r
niet veel van. Alleen angst, jagende angst, angst als ze’r naam maar
hoorde. Dan duizelde ontzetting in d’r, waarop onmiddellijk weer
dofte plofte, grauwig-zwart alles voor d’r oogen, zonder besef.

Onrustig gerammel en gehijg dofte uit de bedstee van ouën Gerrit,

die draaide en woelde; geschuur van nagels langs de beddeplank
kraste zacht er doorheen. Ouë Gerrit grabbelde naar z’n lucifers in
donker, voor vannacht.
Vrouw Hassel ging mee naar bed, omdat ze ’t zag duisteren om ’r
heen en stil worden. Maar slaap had ze niet. Al jaren sliep ze slecht,
in angstdroomen, die ’r overeind krampten, ’r deden gillen met ontzet
gezicht. Loom had ze zich, krabbend steekmuts van het hoofd
gelicht en kwijl-mond droog-geveegd met beef-hand. In den
lampschemer grauwde ’r gele tronie, ouelijker nu zonder bedekking,
met het kaalplekkige hoofd, groezelig-dun haar, als was ze plotseling
ver-skelet. [183]Spichtig oud-vrouwtjesachtig magerde ’r lijf bochelig
door het vertrekje. Onder d’r vuil-zwart onderrokje slingerden kuit-
sjovele beenen en wezenloos-sjokkerig liep ze naar de bedstee,
grabbelend naar d’r slaapmuts.…

Gerrit gromde en vloekte uit z’n hoek, dat ie ’t licht weer op z’n snoet
kreeg. Ze hoorde en grabbelde door, niet merkend dat ze d’r
slaapmuts al opgezet had.

—Is da nou dàan, hee! bulderde Gerrit uit het donker.

Vrouw Hassel sidderde, ze wist niet goed meer wat ze deed,

waarom ze zoo grabbelde. Guurt koepelde ’n doek over de korf van
duifje.

—Wa soek je moeder, je mus?.… sit ommers al op je kop te maffe!

Plots opgedrongen, éven tegen ’r aanstaand sprong Guurt op zij, ’n

vies gezicht trekkend.

—Kristis moeder wa’ stink je.… Is d’r weer.… hai je weer fuil dàan?

Een huilschok krampte door haar ingebogen lijf. Voor de bedstee

stond Vrouw Hassel met half doorgezakte knieen in ’r bobbelige,
wije, ruwe onderbroek, waaruit stank opsloeg. Zonder het te weten
had ze zich bevuild.… Nou, an ’r lijf voelde ze ’t.… Ze rilde, rilde. In
bed kruipen plots wou ze van schaamte, maar Gerrit duwde ’r terug,
krijsch-heesch.

—Zoo komp je ’r nie in waif, gain stap!

Bij haar borst smeet ie ’r achteruit. Ze kermde en snikte. Met ’r

grauwe skelethanden aan de beddeplank geklauwd, zenuwklampte
zij zich vast in verbijstering, tot Guurt ’r terugtrok en dwong schoon
goed aan te doen.

—Je ken d’r tog nie soo mi die swaind’rai ’r in.

—F’r wa.… nie?.… huilde ze zonder te weten wat ze zei.

—Om da’ niet-en-ken.… Om da’ niet-en-ken, stampte Guurt driftig

op den grond uit.

Vrouw Hassel was weer vergeten waarvoor d’r dochter zoo dreigde.
Uit het kastje slierde Guurt ’r ’n hemd en broek toe, die ze rillend
over ’r goor lijf liet zakken, in kakenbibbering.

—Mo’ je j’aige nie wasse? vroeg Guurt, nijdig om de moeite. [184]

Moeder Hassel hoorde niet meer, staarde besefloos voor zich uit,
krabbend ’r hoofd, onder smalle schuifbanden van ’r puntige
kromgekreukte slaapmuts.

Guurt had de heele pan op ’n stoel gesmeten, alleen het vuile stank-
walmende hemd naar het achterend geschopt, grommend en
vloekend op ’r moeder, dat se puur daas leek. Vrouw Hassel stond
verschoond, beef-grienerig, goorder in ’r schoon wit hemd en broek,
sjokte huil-schokkend nog, op bedderandje, in langzame onzekere
tasting verdwijnend in donker, naast den Ouë, in d’r slaapkuil. In eng
ruimtetje lagen stille oogen van twee menschen te turen in het
duister, klaar wakker. Op ’r peluw snikte ze dóór, lang niet meer
beseffend waarom, uitkroppend ’n kramp van smart die door d’r
borst en beenen schokte.

Guurt stond nog in ’r hemd wat te beredderen. Kwaadaardig bekeek

ze bij het nachtlichtje ’n paar wratjes op ’r pink, zich woedend
voelend op ’r grove werkhanden. De hanglamp had ze heelemaal
uitgeblazen en donker nu in zachte rust vloeiden schaduwen en stille
glanzen om ’r heen in het kamerke. Langs het kleine lampje,
schimmig in ’r hemd, blankte ze voorbij, met den goudschemer van ’r
harenpracht op rug- en schouer-vleesch. Om er ooren kroesden
enkele krullige haarsprongetjes als gouden spinneweb, verfladderd
wat. Net wou ze in bed stappen, toen ’r rammeling gromde aan de
deurkruk, de hond bassend-ontsteld aansloeg op het erf.

—Koest.… koest! dreigde stem van Piet die thuis kwam, wat vroeger
dan Dirk na de paar weken gedwongen rust met z’n beenen. De
hond buiten bromde nog zacht.

—Koest, snof’rjenne, ke’ je de boas nie, sloddervos! Is d’r nog wa’ te

slikkerbikke Guurt?

—Waa’n meelsak, nou weer bikke, driftte Guurt uit ’r bed stappend.

—Ik bin soo kout aas ’n botje.… legge de ouën al?

—Stil!.… joa.… moeder hep weer fuil dàan!

In ’r dameshemd liep ze, met nachtlampje in ’r hand ’t keukentje

door, grabbelend in den broodtrommel. Bidderend [185]kwam ze
terug, het lichtje voorzichtig neerzettend in het kamerke, dat glijend,
als een schaduw-hal voor d’r openen ging.

—Droog? f’rek, da mag jai frete.

—Nou.… loop nou noar de bliksem.… doen ’t dan selfers, ik goan d’r
in!

—Wa’ f’r werk he’ jai doar an je hemmitje hange? potdikke Abram.…
Prikkie!

Met z’n hand wees ie naar Guurt’s borst waar strikjes om laag-
uitgesneden kantbaan pronkten.

—F’r jou ’n froag f’r main ’n weut,—bitste ze terug, met één hand ’r
borsten bedekkend en gauw op ’r slaapstoel onder de dekens
woelend. Piet bromde nog wat in zichzelf, van ’n luiwammes.… wat
’n maid-meroàkel.… niks van bloed-beuling had, draaide ook
langzaam uit naar z’n bed.

[Inhoud]

II.

Het sloeg één uur, trillend zangerige klankgalm door de nachtstilte.

Ouë Gerrit lag oogen-wijd wakker, in z’n donker slaapholletje,
opgedrukt met z’n gezicht naar den muur, dat z’n warme adem
terugwaasde op oogen en mond. Z’n vrouw hoorde ie doffig snorken,
met kermende geluidjes uit d’r keel, en puffende blaas van ’r lippen,
zóó erg, dat ’t ’m soms benauwde. Daar lag ie nou, in donker,
stikdonker, met ’n groenigen schemer in de verte. Boe! wa’ stonk ’t
waif nog, wa’ benauwing! Moar fe’nacht, fe’nacht most ’et beure!

Doodstil lag ie, toch hartebons hamerde raak door z’n lijf. Z’n kop en
handen gloeiden en binnen-in zanikte weer ’n lekker angstig gevoel
rond, dat ie altijd had als ie bang was betrapt te worden.…
Moar fe’nacht most et.… Sachies an moar Ouë.… soo aa’s je sain
dâ altaid lapt.… sekuur an.… fain werk.…—Zacht had ie zich
overeind gewurmd. Plots rammelden uit den stal, stooten van koe-
ringen tegen het rem, dof-bonzend. [186]En klagelijk vanuit stemme-
diepte loeide koegeschrei òp, akelig in de starende nacht-stilte.

Ouë Gerrit schrok, wurmde weer even onhandig terug en keek in het
donker of ie z’n vrouw’s oogen kon zien.… Da’ f’rfloekte beest!.…
daa’s nou puur de heule weuk, dattie skreeuwt ’s nachts.… aa’s tie
hullie wakker moakt goan ’t weer nie.… gòan ’t weèr nie.…

Maar vrouw Hassel bleef snurken, met ’n stilstand telkens in ’r

ademhaling en sterker lippen-gepuf dat ’m benauwde. Net was ’t of
ze’m wat zeggen wou, maar niet kòn. Nou voelde ie klamte op z’n
kop trekken.…

—Fain werk.… fain werk. bromde ie, zonder naar zichzelf te

luisteren, angstig wèg al met z’n gedachten in den kelder. Met z’n
gezicht kwam ie weer even áánloeren op den duisteren kop van z’n
vrouw. Nog meer bukte ie in.… Nou rook ie ’r warmen adem, niks
zag ie van ’r.… alleen hoorde ie ’r snurk-gekerm, dat z’n mond
indrong en vreemd als uit ’r neus opschraapte.… Neenet.… neenet,
ze snurkte.… allegoar larie, ’t kon sain ook niks meer skele.… hai
mos, mòs se boel sien.… Godskristis, s’n spulle.…

Winterige nachtkilte huiverde door z’n lijf, in zoete narilling

achterhaald door wild genot dat al te tintelen begon in z’n beenen,
zacht schroeide z’n lijf; ontembaar genot, dat opkroop naar z’n buik,
al maar opkroop, dat ie zacht duizelde in heerlijk heet plezier.… Wa
kon ’m nou sain pacht skele?.… gain duut ha ie.… nou, nou da’
moar gain duut.… pachtgrond.. wa? watte?.… neenet.… nou sebiet
se goed sien hoho!.… da’ was je woare.… godskristis sou ie ’t kenne
uithoue?.… Sou ie niet gille aa’s tie ’t sag, aa’s tie d’r was in sain
kelder. Sou Guurt het lampie op toàfel set hewwe.… nie feur ’t
bed.…

Zacht nu woelde ie op, òver z’n vrouw heen. Boe! wa’ stank.… wa’
donker.… dondersjin, ’t skol nie veul of ie trapte ’t waif op d’r
beene.… soo.… kràk!.…

Nu zat ouë Gerrit heelemaal losgewoeld van de dekens, overeind op

z’n peluw. Telkens schrok ie even, als koeienloei [187]weer uit den
stal opschreide, bang en lang aangehouen als klacht van
gemartelde. Maar gauw suste het in ’m dat ze toch niet wakker
zouen worden. Langzaam uit z’n zit sloop ie òp, deed bukkend en
beef-zwaar ’n grooten stap over z’n wijf heen, tot ie op ’t bedrandje
stond, schuivend nog met z’n nagels langs de deurtjes, die ie
langzaam openduwde. Een beving van geluk overhuiverde ’m toen
ie zag dat het lampje vóór Guurt’s bed stond. Nou kon z’n wijf niet
wakker schrikken van het licht. Dat had ie netjes berekend..
Donderemint, doar glipte ie …

Ritst, krak-kràk, gingen de deurtjes. Even bleef ie in hangstand

stil.… stil.… Z’n hart bonkte en wilder gloeiden z’n oogen in z’n
grijzen glanskop.… Het lichtje schemerde wat gouïg waas op z’n
gezicht vol schaduw, en z’n ingekrompen, stramme lijf, in z’n rooie
ondergoed, bloedde donker in den zwakken kamerschijn. Guurt sliep
door, alleen vrouw Hassel had zich even na het gekraak achter ’m
opgericht. Hij voelde ’t, voelde ’t, zònder te kijken.—Maar in één
stand bleef ie staan, met z’n stillen rug ’r bezwerend, dat ze’m niet
zien zou. En snel doorflitste ’m de gedachte.… „Noa de plee mo’ je
zegge.… noar de plee mo’ je segge aa’s se vroagt”. Even zanikte
slaap-stem van vrouw Hassel achter ’m op, idioterige slaapklanken
murmelend, verward het donkere bedholletje uit. Toen plots stilte.….
Ze lag weer.
Nou voort! ijl-drang zat ’m in z’n beenen, maar daar gaf ie niet aan
toe, verzette ie zichzelf tegen.… làng-zaàm àn, làng-zàam àn.… zei
ie zichzelf, in maatgang.

Het lampje had ie in z’n hand genomen en zacht afgedraaid, dat het
vlam-spetterde, dood-strijd van ’t pitje. Even spiesten bleeke
lichtpijltjes op het slaapgezicht van Guurt, dat zwàklijk oplichtte en
weer wegdoezelde in de duisternis. Het lampje eerst uit, dat wou ie
nou eenmaal, zoodat ie niemand zien kon. Dan voelde hij zich ook
zekerder.… Nou had ie ’t.… nou zacht.… zacht ’t achterend
inschuifelend, precies tast-wetend hoe ie langs het beschot te gaan
had. Daar ’n drempeltje, daar ’n stoel.… dan ’n inham, nou de
dorsch, d’r achter langs.. sachies an, mooi.… da’ gong, da’ gong.
[188]

Er begon weer wilde jubeling en ijl-drang door z’n lijf te gloeien, maar
hij dwong zich kalm te zijn, kalm. Nou stond ie voor het luik.… Doar
had ie f’navend al ’n blokkie hout onder set.… ’t kroakte aêrs aastie
ophieuw!.… Soo.… soo.… heere! wa’ donker.… stikke,
stikkedonker.….. Wacht!.… gong da’ nies?.… hoorde ie doar nies in
de bedstee?.… neenet.… hoho! de jonges ronkte aas varkes, konne
’t huis omhakke, hoorde sullie nog nies.

Juist stram-bukte ie naar het blokje hout vóór het kelderluik, tast-
schurend met z’n hand langs den grond, toen diepe koeien-loei door
den nacht schreien kwam, uit den donkeren stal, met ’n onderdrukt-
bang nagehuil, dat hangen bleef in het duister. Bonk-stooten van
ringen tegen ’t rem klonken nà.

Nou skrok ie nie meer.… loa moar skreeuwe.… ronke tùg deur.…
tjonge, tjonge woar da blokkie tug sit?.… o joa hardstikke
middenin.… Ouë paa’s op, Ouë! paa’s op.… ’t lampie.… f’r wa’ hat ie
self tùg nie ’n lampie kocht?.… bài s’n rommel,.… nee gong nie.…
gong nie.… rooit na’ niks.… most ie fulle en weer fulle en dan ruike
sullie.… neenet da’ gong nie.

Zacht had ie ’t luik opgetild en vastgehaakt, geluidloos. Sluip-licht

ging ie ’t keldertrapje af, waar ’n kou-stroom plots om z’n naakte
voeten zoog en dompige lucht, vunzig opwoei.

Nou luik sachies toe.… boofe se test.… tredje veur tredje..

oppasse.… wa’ genot.… stil.… wacht.… joa, da gong.… hai was t’r
t’met.… mi-sonder hurrie.… stil.… eerst lampie weer an.…

Nou, in de stik-duistere kelder-laagte, nou ie ’r stond en niemand ’m

meer hooren kon, begon ’t al in ’m te jubelen, ’n hevig-zalig zwoel
gevoel, dat ie ’r was, bij al z’n spullen, bij al den rommel van hem,
van hèm. Lucifers had ie van de bedplank afgegrabbeld en in z’n
onderbroek gestopt, onder z’n buikband. Met ’n snelle lichtstreep
vlamde ie ’t lucifertje aan, en bevend met z’n genothanden, lichtte ie
’t glaasje van ’t lampje. Zoo, nou kon ie zien. Schuw keek ie even
naar ’t lage kelderraampje of ’t luikje ’r wel voor stond. Maar [189]alles
was dicht, potdicht. Nou wou ie zich inéén op z’n rommel smakken,
d’r op, d’r op, woest d’r op! Maar eerst hooger het lampje.… en dan
langzaam an.… làng-zàam an.… rekke.… rekke, ging ’et weer in
’m.… Een twee, een twee, in maatgang. In wilde roggeling van
woest-gierend verlangen brandde z’n strot, joeg wild tegen z’n
kalmte òp. Zien-begeeren krijschte door z’n een twee, een twee-
maatgang in, dat benauwing zwol om z’n kop en om z’n maag.

Daar was ie nou bij al z’n rijkdom, en niemand die ’t wist, hij.… hij.…
alleen.… van hem.… van hem.…

Hooger draaide ie ’t lampje òp. Ingekneld stond ie tusschen duister-

stillen kelder-rommel, groote vaten, die scherpe pekellucht
uitzuurden. Boven z’n hoofd in ’n hoek, reuzeworsten als
kabellussen, door elkaar gehaakt; daartusschen hij, ingebukt,
schuifelend stap-vaag, door ’t opgeschikt kelderduister. Het lampje
had ie op den bodem van omgekeerden karner bevend neergezet en
versuft van hevige aandoening, met zwaar verlammingsgevoel in z’n
voeten was ie op ’n brok handkar, die schuin tegen vaten opstond,
gaan zitten, het wiel scheef onder z’n beenen gekneld. Het lampje
koolde, maar de ouë maniak, waanzinnig bevangen door z’n
duizelenden hartstocht, zàg niet. Hij keek maar in de vlam, met
gekke, diepe oogen, hevig in brand staand van hartstocht, wijd-open
en strak, en z’n zilveren haarlokken kluwden over z’n nek op z’n
rooie borstrokhemd, dat beulig-verlicht bloedde in het fel-kleine
schijnsel. Zoo bleef ie staren, z’n kindergezicht pal in ’t licht, z’n
zilveren baard verglanzend boven het helle, angstige rood van z’n
verbeuld lijf. En tègen z’n ingekrompen gestalte, de kille
kelderduistering, zwaar dreigend om ’m, met d’r verschrikten
nachtrommel, goud-schichtig verlicht, in gril van lampjes-schijn.
Roerloos zoo, bleef ie zacht hijgen, z’n adem als gouden damp uit
z’n mond verstoomend. Langzaam kwam zwijmel bij, viel de kou om
’m, al voelde ie ’r nog niks van. Nou alleen onderging ie bewuster, in
roerloos genot, dat daar, iets verder, in dien vuilen spinraghoek,
waar nooit ’n sterveling kwam, dat dáár, achter dat beskot z’n spullen
lagen. En altijd [190]vóór ie ’r was, doorrilde ’m die zwijmel, die
ontroering.… angst, dat ze d’r niet meer waren, dat ze’m hadden
bestolen, beloerd, gevolgd, en zachtjes an z’n rommel
weggeganneft. Rauw joeg ’t in ’m, de drift om te zien, dadelijk,
dadelijk, en toch ging ie niet.… Teruggehouen door den zweet-angst,
dat ’t er niet meer wàs zooals hij ’t bewaard had. Hij.… àlles.…
Godskristus, dan zou ie gek worde, moorde, skreeuwe, slaan. Nou
mòar kaike.… Langerst was ’t nie uit te houe.… hai most, moest
durrefe.…

Met ’t lampje, èven voor zich uit, boven z’n grijzen kop, die nu strak
stond en wit van hevigen hartstocht, in fellen gloed, schoof ie langs
de groezelende stil-morrende kelder-dingen, die schuw in
voortkruipende glanzing òplichtten in stilte-angst, uit hun vuilen,
zwarten slaap van eeuwig-vunzen nacht. Voort schoof ie, tusschen
vaten, touw, manden en turfstapels, lijf-ingebukt, met z’n hoofd de
zoldering rakend, overal rondom, rossige adem verdampend. Zacht
stapvoets vooruit, verdrong ie den huivernacht in den diepen kelder,
met z’n licht, z’n bloedrood ondergoed, met z’n zware haararmen, uit
opgestroopte mouwen fel beschenen, tot ie eindelijk pal bij z’n
spullen stond.

Sidder-ontroering rilde door ’m.…

Nou, nou.… nou sou ie ’t sien.… sien!.… Waa’s d’r? waa’s d’r?.…
allegoar?.…

Even ’t lampje op den grond. Wild nu joeg licht om z’n eerst donkere
beenen over killen vloer. Fel bloedde pijpenrood van z’n broek en
smerig z’n plompe voeten lichtten òp, in vervuiling van de lange
roetige nagels. In donkeren val zwenkte ’t licht van de wanden op
groezelgrond en lage rommel-stapels, dreig-schaduws tuimelden,
trillende lichtkringen boorden zoldering in. En angstig, de dingen
stonden in nieuwen lichtglans weer. Groot-zwaar verdeukt, reuzigde
’t schaduw-lijf van Gerrit in donkere vlakken tusschen vaten en
mandjes, afgebroken, met gekneusde beenen, verplet hoofd en
verminkte armen.… Dreigend silhouetteerde één reuzige arm en
kabballistische schaduw-hand, in woest gebaar tegen de stomme
dingen [191]van kelder in. Plots was Ouë Gerrit ingehurkt, graaiden
z’n belichte handen en haar-armen in de laagte, op de steenen. En
z’n kop, gloeide vlak bij de lamp-vlam, dat z’n baard in zilveren brand
stond, z’n rooie schonken bloedden, z’n vingers grabbelden in beef-
gretigen hartstocht, tusschen molm-vuil, boven z’n gestolen rommel
rondgestrooid.

Telkens zag ie wàt blootkomen.… de schoentjes, gespjes..

parasolknoppen.… lepeltjes.… de groote armband.… alles. In
waanzin greep ie, huilde, viel er op, lachte, huilde.… wou ie
schreeuwen, gillen, onderdrukt; moest ie in stikkende ontroering, er
geknield voor blijven staren. Gek zou die d’r van worden!.… Puur
daas, nou ie ’t doar allegoar legge sag.…

Z’n borstrokhemd trok ie los van boven, uit benauwing, snakkend

naar lucht, dat z’n verbronsde halsvel, ongewasschen, bloot kwam.
Dichter schoof ie ’t lampje naar zich toe, dat z’n spullen in glanzen
tegen ’m òplachten. En overal rondom, met weggeschuif van licht,
engen keldernacht in, stáárde schrikstilte en schaduwangst. Op ’n
turfstapel, achter z’n hok, ’n eind van z’n rommel af, had ie zich
eindelijk neergezet.… Zware tranen van woest genot zwollen z’n
oogen in.… Zichzelf zei ie, dat ie niks nou denken mocht.…

Kaike.… kaike.… nies aa’s kaike en effe voele moar!.… en nou

beseffe daa’t allegoar van sain waa’s.… Dattie dàt ganneft had, toen
ouë vrouw Bekkema juist uit de kamer gonge was.… enne dit.… van
d’r nichie, die d’r f’rlesjeerd had.… en.… en.… Neenet.… neenet.…
nie denke.… nie denke.… kaike.… allainig kaike moar!.… doar.…
doalik weer.… En niemand-nie die ’t wist.… soo tussche de sakke en
muiserommel.… en mit de skoomoak hài d’r bai.… effetjes.… om se
boel swerfe.… in dien diepen stikdonkeren hoek, woar z’n smerig
waif en Guurt nooit-nie ’n hand an dàan hadde.… Soo òpe de
rommel en tug nooit nie sien.… soo.… tussche spinrag en
molmvuil.…

Weer beef-greep ie naar z’n lampje, zette ’t neer op den vloer, lichtte
bij, pal op den rommel, dat ie àlles, alles zien kon.

Kaik de oàrmband skaine!.. puur goud.… sóó legge moar.. [192]nie

ankomme.… soàlig!.… kaik die knoppies poarlmoer.… niks doen!.…
soo legge.… godskristus.… van sàin!.… gain sterveling die ’t wist.—
Waanzinnig in genot, stormde blijheid en angstgeluk naar z’n keel,
dat ie schreide, schreide van spanning, lang, heel lang. In gretigen
buk wrong z’n rood lijf vol kreukels, in begeeropslurping; wreef ie z’n
begloeide haar-armen langzaam in verrukking, drukte ie op z’n
hoofd, graaide door z’n baard, stonden z’n naakte voeten
ingeklauwd in hun vergroeide vuile vingers, tusschen ’t molm, krom
en driftig van passie. Dàn ging ie zitten er van af, met de lamp aan
z’n voeten, dàn weer sprong ie op, plots met ’t licht op z’n spullen,
dat ’r telkens woeste schaduws rond ’m instortten, in donkeren
tuimel, zonder geluid, stomme schaduwmoorden, stil in keldernacht.
Zoo bleef ie staren naar z’n waar, ’t licht aan z’n morsige voeten, z’n
ingebukt lijf; z’n stil-dreigend verkneusd silhouet reuzig er achter, op
muur en rommel, meedoend elk waanzin-gebaar van grijsaard-
maniak met z’n zilveren glanshoofd en kindergezicht; z’n baard,
zwaar van levenskracht, geweldig beborstelend z’n rooie borst.—
Zoo staarde ie, omdromd van donker stil geweld en zwijgstand der
dingen uit keldernacht, die ijzigden rondom.—En bloeddonker in ’t
licht, z’n beenpijpen rood begloeid als droop z’n lijf tot bloed, sloop ie
telkens in verrukkingsgreep naar ’t lampje, op z’n boel af.… En dan
wéér terug op z’n zitje, van angst, als de hartstocht ’m te hevig werd
en plette z’n kop.… Terug dan, met z’n lijfhoogte de lage
kelderduistering beheerschend, ver van z’n spullen, z’n vurige adem
verdwijnend in ’t licht, satanisch, rillend op ’n turfstapel, als
krankzinnig roofdier, opgesloten en gesard, dat nu en dan uit z’n hol
opsloop, stil-vergramd ronddreigend in de kelderengte, wild zoekend
naar lucht, ruimte, licht.… Zoo bleef ie ’r uren, hoorde ie den
nachttijd niet om hem heen verruischen, wèg in z’n staar, z’n tast, z’n
zalig genot.—De kou had ’m eindelijk zoo beet, dat ie bibberde en
langzaam uit z’n eerste verrukking oplevend, hoorde ie òm zich
rattengespring en stil nachtgeknaag van muizen, in klein-sarrend
gewroet. [193]
Neenet.… neenet.… bang waa’s-tie heulegoar nie.… niks
niemendal.… moar.… nou.… aa’s tie ’r nou moar eerst uit was.

Stil graaide z’n hand weer molm en vuil over de spullen.

—F’rjenne.… wa’ waa’s tie nou moei.… dood op.… en roar in s’n
kop.… moar nou terug.… godskristis Ouë!.… f’rsichtig.

Zacht draaide ie ’t lampje af, heel laag, dat ’t blauwig spetterde in

doodendans en gretig nu, uit den lichtval, diepte de kelder terug in
stikke-donker, als had ie Gerrit opgeslokt met zwarten muil.

Bij ’t trapje stond ie even.… Plots viel ’m in dat de muizen weer

leelijk aan z’n rommel geknaagd hadden en dat.… t’r veul
beskimmeld was.… Moar stil.… nou nie an denke.… nou eerst d’r
uut.… ’t Lampje zette ie op ’t treedje. Zachtjes ’t luik duwde ie òp,
meenemend ’t lichtje.

Geraasloos kroop ie òp in donker achterend, even angstig luisterend

of de koeien nog huilden. Maar geen zuchtje was er te hooren uit
den stal.… Weer ’n endje beurde ie knielend ’t lampje verder. Angst
klauterde tegen z’n keel, zakte weg in z’n knieën, in licht-makende
duizeling, en zwaar-bang genoot ie weer, dat ie nou door ’t gevaar
moest, langs de slapenden.… Blij was ie dat ie z’n kousen in bed
uitgemorreld had.… dat was lucht.… lucht.… Klaar spitsten z’n
zinnen zich op ieder licht geluidje. Even bonkten weer uit den stal
donkere ringstooten. Nou stil.… Met de pit iets hooger, stond ie op
vloersteenen achterend. Z’n voeten klompten als ijs.… Nou voelde ie
’t.… Nou zag ie alles.… nou, ’t licht even voor ’m uit!—

Op ’t drempeltje van kamerdeur, waar ze sliepen, keek ie op de

klok.… Bij vieren.… Waa’s tie d’r drie uur weg weest!.
Zwaar geronk gromde uit de bedstee van Dirk en Piet. Nou was ie ’r.
Niemand had sain meer kenne pakke.… ’t Gevaar was ie vlak te
bove.… Gesmoord-wild gejubel brandde in ’m op.… Nooit.… nooit
zouen ze ’m snappen.… nooit.… D’r was t’met nie één soo sluw aa’s
hai. [194]

Zacht schoof ie de kamer in, vóór Guurtjes bed.… Even gleed licht
over z’n slaapholletje.… Nou zou ie ’t lampie neersette in ’t
vochtkringetje, woar ’t stoàn had, op vloer.… En nou d’r in.… d’r
in.… aa’s ’n aisklomp sain bast.… en nou effe nog denke.… an.…
alles.… alles.…

Plots schrok ie òp.… Nou zag ie eerst dat ie de deurtjes van z’n
bedstee had laten openstaan. Godskristis.… da’ ha je’t!.…

’n Angst sidderde door ’m heen.… dat z’n wijf ’m gezien had.…

Gauw, recht op ’t bed aan, liep ie, zag ie pal op ’t grauw-strakke
idioten-hoofd van z’n vrouw, die ’m stom aanstaarde. Ze had allang
wakker gelegen, maar niets had ze gezien of gevoeld. Niet eens dat
’r man weg was, of dat de deurtjes van de bedstee openstonden.
Gesuft had ze uit angstdroom, in ’t donker.…

Plots was ’t lampjeslicht de kamer ingekringd.… d’r duistere oogen

voorbij geflitst en had ze ’t rooie lijf van ouë Gerrit gezien, zonder te
beseffen wie ’t zijn kon.…

Stomme ontzetting was ’r in de leden gehamerd. In één had ze

Hassel op ’r zien aankomen, vergroot in z’n rood ondergoed.… en
met ’n sidderschok door ’r lijf gilde ze schor-mal:

—De duufel!.… de duufel!.… hai komp main hoàle.…

Rauwe angstklanken, schor en ontzet van schrik, galmden kermend-

gerekt door de nachtstilte. Overeind zat ze, vrouw Hassel, met
handen vooruitgestrekt, krombeenig ingehurkt, schreeuw-gillend
tegen ouë Gerrit, die niet meer wist wat ie doen, wat ie zeggen zou.
Toch wou ie ’r verdringen, in bed springen, maar plots bonkte ze,
met heviger krachtstooten en rukken, in zenuwangst z’n beenen van
’t plankje.—Op z’n knieën strompelde ie neer, scheurend z’n
schenen langs ’t bed, z’n handen nog glibberig-onzeker vast aan ’t
randje. En heviger furiede vrouw Hassel òp. Zwaar, met verkronkeld
lijf, bleek-grauw-wild gezicht over beddeplank gebukt, wrong zich
haar angstkop uit ’t donker òp, stáárden haar krankzinnige oogen
schitter-dol en vermetel. Haar slaapmuts was ’r van ’t hoofd gezakt
en losjes fladderden wat bleeke haren over ’r [195]angstgezicht,
onkenbaar vermummied. Als waanzinnige, hysterische heks
rochelde ’r stem, krijschte duivel-angst door ’r kermen héén. Ouë
Gerrit kroop over den vloer telkens probeerend in ’n woesten sprong
’r tegen ’t peluw neer te smakken en plat te drukken met z’n hand
beverig naar ’r spuwmond tastend, om ’t gil-kermen te smoren. Maar
sterker, wilder sloeg ze z’n beenen weg van bedrandje, dat ie
schuurde z’n kinnebak, neerbonsde tegen de plank, vloekend van
pijn en benauwing. Guurt was in halven slaapduizel en schrik in ’r
hemd opgesprongen naar ’t bed toe, zonder te weten wat er
gebeurde, achter ’r vader áán.

—De duufel!.… de duufèll!.… móó-óórd, gilde vrouw Hassel,

trampelend nu met ’r magere beenen tegen de beddeplank, dwars
achteruit in ’t donker, ’r hoofd op de peluw afduwend, dan inéén
overend, in woest-stil geloer, afwerend aanvallen van Gerrit, die
weer op z’n beenen stond, telkens inbukte met z’n kop en handen ’t
duisterende slaapgat in.

—Waif!.… waif.… hou je smoel.… hoho!.… je bin dààs.… puur

stoàpel.… ikke bin ’t.… hou je bek.…—Voort bulderde de Ouë, die
niet begreep waarom ze hèm den duufel skold, en vannacht
tienmaal sterker was dan hij.—
Guurt ’n beetje bij, van den eersten schrik, wist nog niet wat er
gebeurde, hoe ’r vader uit bed kwam en waarom d’r moeder zoo
krijschte en kermde. Door ’t gebulder van ouë Gerrit, en ’t schrei-
gegil, waren de jongens dommelig wakker geworden. In zware,
woedende slagen bonsden ze hun bedsteedeurtjes open, stonden
ze in hun ondergoed, achter het worstelende lijf van ouë Gerrit, die
zonder verklaring maar doorbulderde:

—Hou je bek waif!.. waif!.. of ik snai je de strot af!..

Maar vrouw Hassel rochelde en gilde dóór, kromde zich woester

overeind, sloeg razend in ’t donkere holletje om ’r heen, schuimig
speeksel tegen gezicht van Gerrit spuwend, dat ie besmet stond van
valsch mondvuil.

Plots had ze d’r man herkend.… en wilder nu rochelde ze door met

rauw-schreeuwerig stem-geluid. [196]

—Moord!.… moord!.… hai wil main joàpe.… moord!.. moord!.…

Dirk was woest vooruitgesprongen, had z’n vader ’n trap in de zij

gegeven, dat ie waggelde, greep de tang-sterke armen beet van z’n
moeder, smeet ’r in ruwen ruk achteruit met ’r gezicht half op de
peluw en smoorde in dekenkronkels zwaar òver vergrauwden
haarkop gepropt, ’r angstgehuil.

—S’is puur daas, rilde Piet, en Guurt stond paars-bleek te bibberen

van angst en kou.

—Stoàpel.… puur.… stoa.. pel, rilde ze na, met ’r slaap-oogen op

achterlijf van in bed gehurkten Dirk starend, schuddend ’r gouddos
op ’r koue bloote schouers.

—Komp hier Ouë.… rauwde Dirk, met z’n grooten, wreeden kop de
bedstee uitgedraaid naar Gerrit toe,—sai begin weer strak-en àn!.…