Guide to Federal Corporate & Individual Taxation

ByDanny C. Santucci

The author is not engaged by this text, any accompanying electronic media, or lecture in the rendering of legal, tax, accounting, or similar professional services. While the legal, tax, and accounting issues discussed in this material have been reviewed with sources believed to be reliable, concepts discussed can be affected by changes in the law or in the interpretation of such laws since this text was printed. For that reason, the accuracy and completeness of this information and the author's opinions based thereon cannot be guaranteed. In addition, state or local tax laws and procedural rules may have a material impact on the general discussion. As a result, the strategies sug-gested may not be suitable for every individual. Before taking any action, all refer-ences and citations should be checked and updated accordingly.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert advice is required, the services of a com-petent professional person should be sought.

—-From a Declaration of Principles jointly adopted by a committee of the American Bar Association and a Committee of Publishers and Associations.

Copyright June 2021 Danny Santucci

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TABLE OF CONTENTS CHAPTER 1 - Individual Tax Elements .......................................................1-1

Federal Income Taxes: A Description ........................................................................................................ 1-1Application of U.S. Individual Income Tax.......................................................................................... 1-1

Gross Income ................................................................................................................................. 1-1Adjusted Gross Income (AGI) ................................................................................................. 1-2

Taxable Income ............................................................................................................................. 1-2Standard Deduction ................................................................................................................. 1-2Itemized Deduction .................................................................................................................. 1-2Personal Exemptions ............................................................................................................... 1-3Filing Status ............................................................................................................................. 1-3Rates & Tax Liability .............................................................................................................. 1-3Tax Credits .............................................................................................................................. 1-3

Rates, Tables, & Statutory Amounts .......................................................................................................... 1-4Income Tax Rates - §1 .......................................................................................................................... 1-4

Marriage Penalty - Mostly Gone ................................................................................................... 1-5Standard Deduction - §63 ..................................................................................................................... 1-6

Dependent Limit - §63(c)(5).......................................................................................................... 1-7Personal Exemptions & Phaseout (Suspended) - §151 ......................................................................... 1-7Limitation on Itemized Deductions - §68 ............................................................................................. 1-7Earned Income Tax Credit - §32 .......................................................................................................... 1-8

Disqualified Income - §32(i) ......................................................................................................... 1-8Means-Tested Programs ................................................................................................................ 1-8

Social Security & Self-Employment Earnings Base ............................................................................. 1-9Standard Mileage Rate .......................................................................................................................... 1-9Qualified Transportation Fringes .......................................................................................................... 1-9Passenger Automobile Depreciation Limits (“CAPS”) ........................................................................ 1-9Expensing Deduction - §179 ................................................................................................................ 1-10Self-Employed Health Insurance Deduction ........................................................................................ 1-10Corporate Income Tax Rates ................................................................................................................ 1-10

1993 Through 2017: ...................................................................................................................... 1-102018 & Later: 21% ........................................................................................................................ 1-10

Withholding & Estimated Tax ................................................................................................................... 1-12Estimated Tax - §6654 .......................................................................................................................... 1-12Social Security, Medicare & FUTA (or Payroll) Taxes ........................................................................ 1-13

FICA - §3111 & §3121 .................................................................................................................. 1-14Temporary Employee OASDI Cut ........................................................................................... 1-14

SECA - §1401 ............................................................................................................................... 1-14Temporary Sole Employer OASDI Cut ................................................................................... 1-14

Wage Base ..................................................................................................................................... 1-15Additional Hospital Insurance Tax On Certain High-Income Individuals .................................... 1-15

Final Regulations – TD 9645 ................................................................................................... 1-15FUTA - §3301 & §3306 ................................................................................................................ 1-15

Filing Status ............................................................................................................................................... 1-16Marital Status ........................................................................................................................................ 1-16

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Single Taxpayers ........................................................................................................................... 1-16Divorced Persons ..................................................................................................................... 1-16Sham Divorce .......................................................................................................................... 1-17Annulled Marriages ................................................................................................................. 1-17

Married Taxpayers ........................................................................................................................ 1-17Same-Sex Marriage ................................................................................................................. 1-17

Marriage Penalty - Mostly Gone ................................................................................................... 1-18Spouse’s Death ........................................................................................................................ 1-18Married Persons Living Apart ................................................................................................. 1-18Filing Jointly ............................................................................................................................ 1-18

Joint Liability ...................................................................................................................... 1-19Innocent Spouse Exception ............................................................................................. 1-19

Nonresident Alien ................................................................................................................ 1-22Filing Separately ............................................................................................................................ 1-22

Special Rules ....................................................................................................................... 1-23Joint Return after Separate Returns ..................................................................................... 1-23Separate Returns after Joint Return ..................................................................................... 1-23

Exception ........................................................................................................................ 1-23Head of Household ........................................................................................................................ 1-25

Advantages .............................................................................................................................. 1-25Requirements of §2(b) ............................................................................................................. 1-26

Considered Unmarried ......................................................................................................... 1-26Keeping Up a Home ............................................................................................................ 1-26Qualifying Person ................................................................................................................ 1-27

Summary .................................................................................................................................. 1-28Qualifying Widow(er) With Dependent Child .............................................................................. 1-28

Gross Income.............................................................................................................................................. 1-29Compensation ....................................................................................................................................... 1-29Fringe Benefits ..................................................................................................................................... 1-29Rental Income ....................................................................................................................................... 1-29

Advance Rent ................................................................................................................................ 1-30Security Deposits ........................................................................................................................... 1-30Payment for Canceling a Lease ..................................................................................................... 1-30

Social Security Benefits ........................................................................................................................ 1-30Taxability of Benefits .................................................................................................................... 1-31

Alimony & Spousal Support ................................................................................................................. 1-35Restrictions & Requirements Prior to 2019 ................................................................................... 1-35Pre-2019 Recapture ....................................................................................................................... 1-36Child Support ................................................................................................................................ 1-36

Prizes & Awards - §74 & §274 ............................................................................................................. 1-36Dividends & Distributions .................................................................................................................... 1-37

Ordinary Dividends ....................................................................................................................... 1-37Money Market Funds ............................................................................................................... 1-37Dividends on Capital Stock ..................................................................................................... 1-37Dividends Used to Buy More Stock ........................................................................................ 1-37

Qualified Dividends....................................................................................................................... 1-37Capital Gain Distributions ............................................................................................................. 1-38

Undistributed Capital Gains ..................................................................................................... 1-38Form 2439 ........................................................................................................................... 1-38

Basis Adjustment ..................................................................................................................... 1-38Real Estate Investment Trusts (REITs) .................................................................................... 1-39

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Nontaxable Distributions ............................................................................................................... 1-39Return of Capital...................................................................................................................... 1-39Basis Adjustment ..................................................................................................................... 1-39

Liquidating Distributions ............................................................................................................... 1-39Distributions of Stock and Stock Rights ........................................................................................ 1-40

Taxable Stock Dividends and Stock Rights ............................................................................. 1-40Discharge of Debt Income .................................................................................................................... 1-40

Exceptions from Income Inclusion ................................................................................................ 1-41Reduction of Tax Attributes .......................................................................................................... 1-41

Order of Reductions ................................................................................................................. 1-42Foreclosure .................................................................................................................................... 1-42

Nonrecourse Indebtedness ....................................................................................................... 1-42Recourse Indebtedness ............................................................................................................. 1-43Mortgage Relief Act of 2007 ................................................................................................... 1-44

Principal Residence ............................................................................................................. 1-44Qualified Principal Residence Indebtedness ....................................................................... 1-44Acquisition Indebtedness ..................................................................................................... 1-44

Bartering ............................................................................................................................................... 1-45Barter Exchange ............................................................................................................................ 1-46

Backup Withholding ................................................................................................................ 1-46Recoveries ............................................................................................................................................ 1-46

Itemized Deduction Recoveries ..................................................................................................... 1-48Recovery Limited to Deduction ............................................................................................... 1-48Recoveries Included in Income ................................................................................................ 1-49

Non-Itemized Deduction Recoveries ............................................................................................. 1-49Amounts Recovered for Credits .................................................................................................... 1-49Tax Benefit Rule ........................................................................................................................... 1-49

Children's Income ................................................................................................................................. 1-51Earned Income - §73 ..................................................................................................................... 1-52Unearned Income .......................................................................................................................... 1-52

"Kiddie" Tax - §1(g) ................................................................................................................ 1-52Application, Threshold & Impact ............................................................................................ 1-53

Election to Report on Parents’ Return - §1(g)(7)(A) [Form 8814] ................................................ 1-54Election Situations ................................................................................................................... 1-55

Definitions ..................................................................................................................................... 1-57AMT Exemption for Children - §59(j) .......................................................................................... 1-57

Exclusions from Income ............................................................................................................................. 1-58Educational Savings Bonds - §135 ....................................................................................................... 1-58

Income Exclusion .......................................................................................................................... 1-58Limitation ...................................................................................................................................... 1-58

MAGI....................................................................................................................................... 1-59Notice 90-7 .................................................................................................................................... 1-59

Education Expenses ................................................................................................................. 1-59Excludable Interest .................................................................................................................. 1-59Forms 8818 & 8815 ................................................................................................................. 1-59

Scholarships & Fellowships - §117 ...................................................................................................... 1-59Definitions ..................................................................................................................................... 1-59Work Learning Service Programs ................................................................................................. 1-60Scholarship Prizes ......................................................................................................................... 1-60Education Expenses ....................................................................................................................... 1-60

Education Assistance Programs - §127 .................................................................................... 1-60

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Employer Educational Trusts - §83 ......................................................................................... 1-61Qualified Tuition Programs (QTP) - §529............................................................................................ 1-61Gift & Inheritance Exclusion ................................................................................................................ 1-61

Subsequent Income ........................................................................................................................ 1-61Divorce .......................................................................................................................................... 1-61Business Gifts ................................................................................................................................ 1-62Employees ..................................................................................................................................... 1-62

Insurance............................................................................................................................................... 1-62Exceptions ..................................................................................................................................... 1-62

Purchase for Value ................................................................................................................... 1-62Installment Payments ............................................................................................................... 1-62

Specified Number of Installments ....................................................................................... 1-63Specified Amount Payable .................................................................................................. 1-63Installments for Life ............................................................................................................ 1-63

Personal Injury Awards - §104 ............................................................................................................. 1-65Personal Injury .............................................................................................................................. 1-66

Emotional Distress ................................................................................................................... 1-66Punitive Damages .......................................................................................................................... 1-66

Tax Benefit Rule - §111 ....................................................................................................................... 1-66Interest State & Local Obligations - §103 ............................................................................................ 1-66Foreign Earned Income Exclusion - §911 ............................................................................................ 1-66

Nonbusiness & Personal Deductions .......................................................................................................... 1-67Itemized Deductions ............................................................................................................................. 1-68

Limitation on Itemized Deductions Suspended - §68 .................................................................... 1-68Personal & Dependency Exemptions Suspended - §151 ...................................................................... 1-69

Deemed Personal Exemption for Related Incorporating Provisions ............................................. 1-69Personal Exemptions ..................................................................................................................... 1-70Dependency Exemptions ............................................................................................................... 1-70

Dependency Before 2005......................................................................................................... 1-70Dependency After 2004 & Before 2018 Suspension ............................................................... 1-70

Residency Test .................................................................................................................... 1-71Citizenship ...................................................................................................................... 1-71

Relationship Test ................................................................................................................. 1-71Age Test .............................................................................................................................. 1-71Joint Return Prohibition ...................................................................................................... 1-71

Exception ........................................................................................................................ 1-72Phaseout of Exemptions........................................................................................................... 1-72

Interest Expense - §163 ........................................................................................................................ 1-73Personal Interest - §163(h)(1) ........................................................................................................ 1-73

Definition ................................................................................................................................. 1-73Deductibility ............................................................................................................................ 1-73

Investment Interest - §163(d) ........................................................................................................ 1-74Definitions ............................................................................................................................... 1-74Net Investment Income Limitation .......................................................................................... 1-75

Qualified Residence Interest - §163(h)(3) [Form 8598] ................................................................ 1-75Definitions ............................................................................................................................... 1-75Limitations ............................................................................................................................... 1-76

Acquisition Indebtedness Modified ..................................................................................... 1-76Home Equity Indebtedness Restricted ................................................................................. 1-76

Refinancing .............................................................................................................................. 1-77Home Improvements ............................................................................................................... 1-77

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Timing ................................................................................................................................. 1-78Alternative Minimum Tax Co-ordination ................................................................................ 1-78

Points ............................................................................................................................................. 1-81Home Purchase & Improvement Exception............................................................................. 1-81

Refinancing ......................................................................................................................... 1-82Huntsman Case ............................................................................................................... 1-82

Mortgage Interest Statement .................................................................................................... 1-82Business Interest - §163(j) ............................................................................................................. 1-82Allocation of Interest Expense ...................................................................................................... 1-83

Education Expenses .............................................................................................................................. 1-87Work-Related Education Prior to 2018 ......................................................................................... 1-87

Educational Transportation ...................................................................................................... 1-88Educational Travel ................................................................................................................... 1-90Meal Expenses ......................................................................................................................... 1-91

Work-Related Education After 2018 ............................................................................................. 1-91Higher Education Expense Deduction (Repealed) - §222 ............................................................. 1-91

Dollar Limitation & Phase Out ................................................................................................ 1-92Educator Expenses - §62 ............................................................................................................... 1-92

Medical Expense Deductions - §213 [Schedule A] .............................................................................. 1-93Items Deductible ............................................................................................................................ 1-93Items Not Deductible ..................................................................................................................... 1-93Medical Insurance Premiums ........................................................................................................ 1-94

Medicare Part A ....................................................................................................................... 1-94Medicare Part B ....................................................................................................................... 1-94Medicare Part D ....................................................................................................................... 1-94Prepaid Insurance Premiums ................................................................................................... 1-95

Meals & Lodging ........................................................................................................................... 1-95Expenses of Transportation ........................................................................................................... 1-95Permanent Improvements .............................................................................................................. 1-95Spouses, Dependents & Others ..................................................................................................... 1-96Reimbursement of Expenses ......................................................................................................... 1-96Long-Term Care Provisions .......................................................................................................... 1-96

Long-Term Care Payments - §7702B(d)(4) ............................................................................. 1-96Long-Term Care Premiums - §213(d)(10) ............................................................................... 1-97

IRA Withdrawals for Certain Medical Expenses .......................................................................... 1-97ABLE Accounts - §529A .............................................................................................................. 1-97

Contributions ........................................................................................................................... 1-98Charitable Contributions - §170 [Schedule A] ..................................................................................... 1-98

Requirements for Deductibility ..................................................................................................... 1-98Qualified Organizations ................................................................................................................. 1-98Limitations on Contributions ......................................................................................................... 1-99

Five-year Carryover ................................................................................................................. 1-99Contributions of Cash .................................................................................................................... 1-100

Benefits Received .................................................................................................................... 1-100Benefit Performances ............................................................................................................... 1-100Athletic Event Seating Rights Repealed .................................................................................. 1-100Raffle Tickets, Bingo, Etc. ....................................................................................................... 1-100Dues, Fees, or Assessments ..................................................................................................... 1-101

Contribution of Property ................................................................................................................ 1-101Clothing & Household Goods .................................................................................................. 1-101Ordinary Income or Short-Term Capital Gain Type Property ................................................. 1-101

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Exception ............................................................................................................................. 1-102Capital Gain Type Property ..................................................................................................... 1-102

Exceptions ........................................................................................................................... 1-102Conservation Easements ...................................................................................................... 1-102

Loss Type Property .................................................................................................................. 1-103Vehicle Donations ................................................................................................................... 1-103Fractional Interests ................................................................................................................... 1-104

Other Types of Contributions ........................................................................................................ 1-104Charitable Distributions from IRAs - §408.............................................................................. 1-104

Substantiation ................................................................................................................................ 1-105Cash Contributions .................................................................................................................. 1-105

Contributions Less Than $250............................................................................................. 1-105Contributions of $250 or More ............................................................................................ 1-105

Payroll Deduction Records .............................................................................................. 1-106Noncash Contributions ............................................................................................................ 1-106

Deductions of Less Than $250 ............................................................................................ 1-107Additional Records .......................................................................................................... 1-107

Deductions of At Least $250 But Not More Than $500 ...................................................... 1-107Deductions Over $500 But Not Over $5,000 ...................................................................... 1-108Deductions over $5,000.......................................................................................................1-109

Contributions over $75 Made Partly for Goods or Services .................................................... 1-109Deduction for Taxes - §164 [Schedule A] ............................................................................................ 1-109

Income Taxes ................................................................................................................................ 1-110Real Property Tax .......................................................................................................................... 1-110

Accrual Method Taxpayers ...................................................................................................... 1-111State & Local Sales Tax Deduction - §164 ................................................................................... 1-111Personal Property Tax ................................................................................................................... 1-111Other Deductible Taxes ................................................................................................................. 1-112Examples of Non-Deductible Taxes .............................................................................................. 1-112

Casualty & Theft Losses - §165 [Schedule A] ..................................................................................... 1-115Definitions ..................................................................................................................................... 1-116Proof of Loss ................................................................................................................................. 1-116Amount of Loss ............................................................................................................................. 1-116Insurance & Other Reimbursements .............................................................................................. 1-116Limitations..................................................................................................................................... 1-116Allocation for Mixed Use Property ............................................................................................... 1-117

2% Itemized Deductions Suspended - §67 [Schedule A] ..................................................................... 1-118Deductions - Subject to 2% Limit ................................................................................................. 1-118Deductions Not Subject To 2% Limit ........................................................................................... 1-120Nondeductible Expenses ............................................................................................................... 1-120

Moving Expenses Suspended - §217 .................................................................................................... 1-121Distance Test ................................................................................................................................. 1-121Time Test ....................................................................................................................................... 1-122

Time Test for Employees ......................................................................................................... 1-122Time Test for Self-employment ............................................................................................... 1-122

Deductible Expenses ..................................................................................................................... 1-122Travel Expenses ....................................................................................................................... 1-123Travel by Car ........................................................................................................................... 1-123

Location of Move .......................................................................................................................... 1-123Reporting ....................................................................................................................................... 1-124Reimbursements ............................................................................................................................ 1-124

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Credits ........................................................................................................................................................ 1-124Dependent Care Tax Credit - §21 [Form 2441] .................................................................................... 1-125

Eligibility ....................................................................................................................................... 1-125Employment Related Expenses ..................................................................................................... 1-125

Qualifying Out-of-the-home Expenses .................................................................................... 1-125Payments to Relatives .............................................................................................................. 1-125

Allowable Amount ........................................................................................................................ 1-126Dependent Care Assistance - §129 .......................................................................................... 1-126

Reporting ....................................................................................................................................... 1-126Earned Income Tax Credit - §32 [Form 1040] ..................................................................................... 1-126

Persons with Qualifying Children ................................................................................................. 1-127Persons without a Qualifying Child ............................................................................................... 1-128Computation .................................................................................................................................. 1-128Phaseout ........................................................................................................................................ 1-128Disqualified Income - §32(i) ......................................................................................................... 1-129Means-Tested Programs ................................................................................................................ 1-129

Adoption Credit - §23 & §137 .............................................................................................................. 1-131Qualified Adoption Expenses ........................................................................................................ 1-131Exclusion from Income for Employer Reimbursements - §137 .................................................... 1-132

Child Tax Credit - §24 .......................................................................................................................... 1-132Credit Amount ............................................................................................................................... 1-132

Qualifying Child ...................................................................................................................... 1-132$500 Credit for Certain Dependents - §24(h)(4)(A) ............................................................ 1-133

Phase-out ....................................................................................................................................... 1-133Refundable Child Care Credit Amount ......................................................................................... 1-133AMT & Child Tax Credit .............................................................................................................. 1-133American Rescue Plan Act Of 2021 (ARPA) Temporary Provisions ........................................... 1-134

Phaseout ................................................................................................................................... 1-134Advance Payments ................................................................................................................... 1-134

Hope & Lifetime Learning Credits - §25A ................................................................................................ 1-134Lifetime Learning Credit - §25A(c)...................................................................................................... 1-134

Phase Out - §25A(d)(1) ................................................................................................................. 1-134Hope (with American Opportunity modifications) Credit .................................................................... 1-134

Phase Out - §25A(d)(2) ................................................................................................................. 1-135Refundable..................................................................................................................................... 1-135

Ministers & Military - §107 ....................................................................................................................... 1-135Clergy ................................................................................................................................................... 1-135

Rental Value of a Home ................................................................................................................ 1-136Members of Religious Orders........................................................................................................ 1-136

Military & Veterans .............................................................................................................................. 1-137Wages - §61 ................................................................................................................................... 1-137

Nontaxable Income - §134 ....................................................................................................... 1-137Veterans’ Benefits - §134.............................................................................................................. 1-138

CHAPTER 2 - Property Transfers & Retirement Plans .............................2-1Sales & Exchanges of Property .................................................................................................................. 2-1

Sale or Lease ......................................................................................................................................... 2-1Easements ............................................................................................................................................. 2-1Capital Gains & Losses ........................................................................................................................ 2-2

Capital Assets - §1221 ................................................................................................................... 2-2

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Capital Gains & Qualified Dividends Rate – §1(h) ....................................................................... 2-2Holding Periods - (§1222 & §1223) .............................................................................................. 2-3Capital Losses - §1211 .................................................................................................................. 2-4Business Property .......................................................................................................................... 2-4Basis of Property ........................................................................................................................... 2-5

Basis Adjustments ................................................................................................................... 2-5Property Received as a Gift ..................................................................................................... 2-5Property Received by Inheritance ............................................................................................ 2-6Changes in Property Usage ...................................................................................................... 2-6Stocks & Bonds ....................................................................................................................... 2-6

Sale of Personal Residence - §121 ........................................................................................................ 2-9Two-Year Ownership & Use Requirements .................................................................................. 2-10

Tacking of Prior Holding Period ............................................................................................. 2-10Prorata Exception ..................................................................................................................... 2-10

Limitations on Exclusion ............................................................................................................... 2-11Reduced Home Sale Exclusion for Periods of Nonqualified Use ............................................ 2-11

Computation ........................................................................................................................ 2-11Nonqualified Use ................................................................................................................. 2-12Post-May 6, 1997 Depreciation ........................................................................................... 2-12

Surviving Spouse Home Sale Exclusion ....................................................................................... 2-12Installment Sales - §453 ....................................................................................................................... 2-12

General Rules ................................................................................................................................ 2-14Dealer Sales ................................................................................................................................... 2-14Unstated Interest ............................................................................................................................ 2-14Related Parties - §453(e) ............................................................................................................... 2-14Disposition of Installment Notes - §453B ..................................................................................... 2-15Determining Installment Income ................................................................................................... 2-15Pledge Rule.................................................................................................................................... 2-17Escrow Account ............................................................................................................................ 2-17Depreciation Recapture ................................................................................................................. 2-17Like-Kind Exchange ...................................................................................................................... 2-17

Repossessions - §1038 .......................................................................................................................... 2-20Personal Property .......................................................................................................................... 2-20

Non- Installment Method Sales ............................................................................................... 2-20Basis of Installment Obligation ........................................................................................... 2-20Gain or Loss on Repossession ............................................................................................. 2-21

Installment Method Sales......................................................................................................... 2-21Basis of Installment Obligation ........................................................................................... 2-21Gain or Loss on Repossession ............................................................................................. 2-21

Basis of Repossessed Personal Property .................................................................................. 2-23Bad Debt .................................................................................................................................. 2-23

Real Property ................................................................................................................................. 2-23Conditions ................................................................................................................................ 2-23

Figuring Gain on Repossession ..................................................................................................... 2-24Limit on Taxable Gain ............................................................................................................. 2-24

Repossession Costs .............................................................................................................. 2-24Indefinite Selling Price .................................................................................................... 2-26

Character of Gain ................................................................................................................ 2-26Basis of Repossessed Real Property ........................................................................................ 2-26Holding Period for Resales ...................................................................................................... 2-27Bad Debt .................................................................................................................................. 2-27

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Seller’s Former Home Exception .................................................................................................. 2-27Involuntary Conversions - §1033 ......................................................................................................... 2-32

Condemnations .............................................................................................................................. 2-32Threat of Condemnation .......................................................................................................... 2-33

Reports of Condemnation .................................................................................................... 2-33Property Voluntarily Sold ........................................................................................................ 2-33Easements ................................................................................................................................ 2-34Condemnation Award .............................................................................................................. 2-34

Amounts Withheld From Award ......................................................................................... 2-34Net Condemnation Award ................................................................................................... 2-34Interest on Award ................................................................................................................ 2-35Payments to Relocate .......................................................................................................... 2-35

Severance Damages ................................................................................................................. 2-35Treatment of Severance Damages ....................................................................................... 2-36

Expenses of Obtaining an Award ............................................................................................ 2-36Special Assessment Withheld from Award ............................................................................. 2-36Severance Damages Included in Award .................................................................................. 2-37

Gain or Loss from Condemnations ................................................................................................ 2-37How to Figure Gain or Loss .................................................................................................... 2-38

Part Business or Part Rental ................................................................................................ 2-38Postponement of Gain ................................................................................................................... 2-38

Choosing to Postpone Gain ...................................................................................................... 2-38Cost Test .................................................................................................................................. 2-38Replacement Period ................................................................................................................. 2-39

Condemnation ..................................................................................................................... 2-39Replacement Property Acquired Before the Condemnation ................................................ 2-39Extension ............................................................................................................................. 2-40Time for assessing a deficiency ........................................................................................... 2-40

At Risk Limits for Real Estate - §465 ................................................................................................... 2-42Amount At Risk ............................................................................................................................. 2-43

Qualified Nonrecourse Financing ............................................................................................ 2-43Taxpayers Affected ....................................................................................................................... 2-44

Closely Held Corporation ........................................................................................................ 2-44Qualified Corporation Exception ......................................................................................... 2-44

Partner & S CorporationSharehholders ................................................................................... 2-44Partner ................................................................................................................................. 2-44S Corporation Shareholder .................................................................................................. 2-45

Section 1031 Like-Kind Exchanges ..................................................................................................... 2-45Statutory Requirements & Definitions .......................................................................................... 2-45

Qualified Transaction - Exchanges v. Sales ............................................................................. 2-45Held for Productive Use or investment .................................................................................... 2-46

Investment Purpose ............................................................................................................. 2-46Statutory Exclusions from §1031 ........................................................................................ 2-46

Like-Kind Property .................................................................................................................. 2-46Nature or Quality of Property .............................................................................................. 2-47

Like-Kind Status for Personal Property Repealed ........................................................... 2-47Real v. Personal Property .................................................................................................... 2-47

The Concept of “Boot” .................................................................................................................. 2-47Realized Gain .......................................................................................................................... 2-48Recognized Gain ...................................................................................................................... 2-48Limitation on Recognition of Gain under §1031 ..................................................................... 2-48

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The Definition of “Boot” ......................................................................................................... 2-48The Rules of “Boot” ...................................................................................................................... 2-48

Property Boot ........................................................................................................................... 2-48Mortgage Boot ......................................................................................................................... 2-48Netting “Boot” - The Rules of Offset ...................................................................................... 2-49

Property Boot Given Offsets Any Boot Received ............................................................... 2-49Mortgage Boot Given Offsets Mortgage Boot Received ..................................................... 2-49Mortgage Boot Given Does Not Offset Property Boot Received ........................................ 2-49Revenue Ruling 72-456 & Commissions ............................................................................ 2-49

Gain or Loss on Boot ............................................................................................................... 2-50Basis on Tax-Deferred Exchange .................................................................................................. 2-50

Allocation of Basis .................................................................................................................. 2-50Installment Reporting of Boot ................................................................................................. 2-50Exchanges Between Related Parties ........................................................................................ 2-51Reporting an Exchange ............................................................................................................ 2-51

Types of Exchanges ....................................................................................................................... 2-51Two-Party Exchanges .............................................................................................................. 2-51Three-Party “Alderson” Exchange .......................................................................................... 2-52Three-Party “Baird Publishing” Exchange .............................................................................. 2-53Delayed Exchanges .................................................................................................................. 2-53

45-Day Rule ........................................................................................................................ 2-54Method of Identification.................................................................................................. 2-56

180-Day Rule ...................................................................................................................... 2-56Final Regulations for Delayed (Deferred) Exchanges ................................................................... 2-56

Deferred (Delayed) Exchange Definition ................................................................................ 2-56Identification Requirements ..................................................................................................... 2-56

Identification & Exchange Periods ...................................................................................... 2-57Method of Identification ...................................................................................................... 2-57

Property Description ....................................................................................................... 2-57Revocation........................................................................................................................... 2-57Substantial Receipt .............................................................................................................. 2-58Multiple Replacement Properties ........................................................................................ 2-58

Actual & Constructive Receipt Rule ........................................................................................ 2-58Four Safe Harbors ............................................................................................................... 2-58

Safe Harbor #1 - Security ................................................................................................ 2-59Safe Harbor #2 - Escrow Accounts & Trusts .................................................................. 2-59Safe Harbor #3 - Qualified Intermediary ........................................................................ 2-60Safe Harbor #4 - Interest ................................................................................................. 2-60

Exchanges of Partnership Interests .......................................................................................... 2-60Retirement Plans ........................................................................................................................................ 2-64

Qualified Deferred Compensation ........................................................................................................ 2-64Qualified v. Nonqualified Plans .................................................................................................... 2-64Major Benefit ................................................................................................................................ 2-64

Current Deduction ................................................................................................................... 2-64Timing of Deductions .............................................................................................................. 2-66Part of Total Compensation ..................................................................................................... 2-66

Compensation Base ....................................................................................................................... 2-66Salary Reduction Amounts ...................................................................................................... 2-66

Benefit Planning ............................................................................................................................ 2-67Pension Protection Act of 2006 ..................................................................................................... 2-67Corporate Plans ............................................................................................................................. 2-68

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Advantages .............................................................................................................................. 2-68Current ................................................................................................................................. 2-68Deferred ............................................................................................................................... 2-68

Disadvantages .......................................................................................................................... 2-69Employee Costs ................................................................................................................... 2-69Comparison with IRAs & Keoghs ....................................................................................... 2-69

Basic ERISA Provisions ................................................................................................................ 2-69ERISA Reporting Requirements .............................................................................................. 2-69Fiduciary Responsibilities........................................................................................................ 2-70

Bonding Requirement .......................................................................................................... 2-70Prohibited Transactions ........................................................................................................... 2-70

Additional Restrictions ........................................................................................................ 2-71Fiduciary Exceptions ........................................................................................................... 2-71Loans ................................................................................................................................... 2-71

Employer Securities ................................................................................................................. 2-72Excise Penalty Tax .................................................................................................................. 2-72PBGC Insurance ...................................................................................................................... 2-73

Sixty-Month Requirement ................................................................................................... 2-73Recovery Against Employer ................................................................................................ 2-73

Termination Proceedings ......................................................................................................... 2-73Plans Exempt from PBGC Coverage ....................................................................................... 2-73

Basic Requirements for a Qualified Pension Plan ................................................................................ 2-74Written Plan ................................................................................................................................... 2-74

Communication........................................................................................................................ 2-74Trust .............................................................................................................................................. 2-75

Requirements ........................................................................................................................... 2-75Permanency ................................................................................................................................... 2-75Exclusive Benefit of Employees .................................................................................................... 2-76

Highly Compensated Employees ............................................................................................. 2-76Reversion of Trust Assets to Employer ................................................................................... 2-76

Participation & Coverage .............................................................................................................. 2-76Age & Service.......................................................................................................................... 2-76Coverage .................................................................................................................................. 2-77

Percentage Test .................................................................................................................... 2-77Ratio Test ............................................................................................................................ 2-78Average Benefits Test ......................................................................................................... 2-78Numerical Coverage ............................................................................................................ 2-78Related Employers .............................................................................................................. 2-79

Vesting .......................................................................................................................................... 2-81Full & Immediate Vesting ....................................................................................................... 2-81Minimum Vesting .................................................................................................................... 2-81Diversification Rights .............................................................................................................. 2-83Nondiscrimination Compliance ............................................................................................... 2-83

Contribution & Benefit Limits ...................................................................................................... 2-83Defined Benefit Plans (Annual Benefits Limitation) - §415.................................................... 2-83Defined Contribution Plans (Annual Addition Limitation) - §415 .......................................... 2-84Limits on Deductible Contributions - §404 ............................................................................. 2-84

Assignment & Alienation .............................................................................................................. 2-85Miscellaneous Requirements ......................................................................................................... 2-86

Basic Types of Corporate Plans ............................................................................................................ 2-86Defined Benefit ............................................................................................................................. 2-86

xii

Mechanics ................................................................................................................................ 2-86Defined Benefit Pension .......................................................................................................... 2-87

Defined Contribution ..................................................................................................................... 2-87Mechanics ................................................................................................................................ 2-87Discretion................................................................................................................................. 2-87Favorable Circumstances ......................................................................................................... 2-87

Types of Defined Contribution Plans ............................................................................................ 2-88Profit-sharing ........................................................................................................................... 2-88

Requirements for a Qualified Profit-sharing Plan ............................................................... 2-88Written Plan .................................................................................................................... 2-88Eligibility ........................................................................................................................ 2-88Deductible Contribution Limit ........................................................................................ 2-89Substantial & Recurrent Rule .......................................................................................... 2-89

Money Purchase Pension ......................................................................................................... 2-89Cafeteria Compensation Plan ................................................................................................... 2-91Thrift Plan ................................................................................................................................ 2-91Section 401(k) Plans ................................................................................................................ 2-91

Death Benefits ............................................................................................................................... 2-93Defined Benefit Plans .............................................................................................................. 2-93Money Purchase Pension & Target Benefit Plans ................................................................... 2-93

Employee Contributions ................................................................................................................ 2-94Non-Deductible........................................................................................................................ 2-94

Life Insurance in the Qualified Plan .............................................................................................. 2-94Return ...................................................................................................................................... 2-94Universal Life .......................................................................................................................... 2-94Compare ................................................................................................................................... 2-95

Plan Terminations & Corporate Liquidations ................................................................................ 2-9510-Year Rule ............................................................................................................................ 2-95Lump-Sum Distributions ......................................................................................................... 2-95Asset Dispositions ................................................................................................................... 2-95IRA Limitations ....................................................................................................................... 2-96

Self-Employed Plans - Keogh .............................................................................................................. 2-98Contribution Timing ...................................................................................................................... 2-98Controlled Business ....................................................................................................................... 2-99

General Limitations ................................................................................................................. 2-99Effect of Incorporation .................................................................................................................. 2-99

Mechanics ................................................................................................................................ 2-100Parity with Corporate Plans ................................................................................................. 2-101Figuring Retirement Plan Deductions For Self-Employed .................................................. 2-101

Self-Employed Rate ........................................................................................................ 2-101Determining the Deduction................................................................................................................... 2-102Individual Plans - IRA’s ....................................................................................................................... 2-103

Deemed IRA .................................................................................................................................. 2-103Mechanics ...................................................................................................................................... 2-103

Phase-out ................................................................................................................................. 2-103Special Spousal Participation Rule - §219(g)(1) ...................................................................... 2-104Spousal IRA ............................................................................................................................. 2-105

Eligibility ....................................................................................................................................... 2-105Contributions & Deductions .......................................................................................................... 2-106

Employer Contributions ........................................................................................................... 2-106Retirement Vehicles ...................................................................................................................... 2-106

xiii

Distribution & Settlement Options ................................................................................................ 2-107Life Annuity Exemption .......................................................................................................... 2-107Minimum Distributions ........................................................................................................... 2-107

Required Minimum Distribution ......................................................................................... 2-108Definitions ....................................................................................................................... 2-108Required Minimum Distributions during Owner’s Lifetime ........................................... 2-109Required Minimum Distributions in Year of the Owner's Death .................................... 2-110Beneficiaries - Distributions after Owner’s Death .......................................................... 2-111

Estate Tax Deduction .......................................................................................................... 2-116Charitable Distributions from IRAs - §408 ......................................................................... 2-116

Post-Retirement Tax Treatment of IRA Distributions ................................................................... 2-117Income In Respect of a Decedent ............................................................................................ 2-117Estate Tax Consequences ......................................................................................................... 2-117Losses on IRA Investments ..................................................................................................... 2-117

Prohibited Transactions ................................................................................................................. 2-118Effect of Disqualification ......................................................................................................... 2-118Penalties ................................................................................................................................... 2-118

Borrowing on an Annuity Contract ............................................................................................... 2-118Tax-Free Rollovers ........................................................................................................................ 2-119

Rollover from One IRA to Another ......................................................................................... 2-119Waiting Period between Rollovers ...................................................................................... 2-119Partial Rollovers .................................................................................................................. 2-120

Rollovers from Traditional IRAs into Qualified Plans ............................................................ 2-120Rollovers of Distributions from Employer Plans ..................................................................... 2-120

Withholding Requirement ................................................................................................... 2-120Waiting Period between Rollovers ...................................................................................... 2-121Conduit IRAs ....................................................................................................................... 2-121Keogh Rollovers .................................................................................................................. 2-121Direct Rollovers from Retirement Plans to Roth IRAs ....................................................... 2-121

Rollovers of §457 Plans into Traditional IRAs ........................................................................ 2-121Rollovers of Traditional IRAs into §457 Plans ........................................................................ 2-122Rollovers of Traditional IRAs into §403(B) Plans .................................................................. 2-122Rollovers from SIMPLE IRAs ................................................................................................ 2-122Nonspouse Rollovers ............................................................................................................... 2-122

Roth IRA - §408A ......................................................................................................................... 2-124Eligibility ................................................................................................................................. 2-124Contribution Limitation ........................................................................................................... 2-125

Roth IRAs Only ................................................................................................................... 2-125Roth IRAs & Traditional IRAs ............................................................................................ 2-125

Conversions ............................................................................................................................. 2-126AGI Limit Exception Repealed ........................................................................................... 2-127

Recharacterizations .................................................................................................................. 2-127Reconversions .......................................................................................................................... 2-127Taxation of Distributions ......................................................................................................... 2-128

No Required Minimum Distributions .................................................................................. 2-128Simplified Employee Pension Plans (SEPs) ......................................................................................... 2-128

Contribution Limits & Taxation .............................................................................................. 2-130SIMPLE Plans ...................................................................................................................................... 2-131

SIMPLE IRA Plan ......................................................................................................................... 2-131Employee Limit ....................................................................................................................... 2-131Other Qualified Plan ................................................................................................................ 2-132

xiv

Set up ....................................................................................................................................... 2-132Contribution Limits ................................................................................................................. 2-132

Salary Reduction Contributions ........................................................................................... 2-132Employer Matching Contributions ...................................................................................... 2-133

Deduction of Contributions ..................................................................................................... 2-133Distributions ............................................................................................................................ 2-133

SIMPLE §401(k) Plan ................................................................................................................... 2-133

CHAPTER 3 - Losses, AMT & Compliance .................................................3-1Passive Losses ............................................................................................................................................ 3-1

Prior Law .............................................................................................................................................. 3-1Passive Loss Rules ................................................................................................................................ 3-3

Application .................................................................................................................................... 3-3Active Losses ................................................................................................................................ 3-3Credits ........................................................................................................................................... 3-4

Calculating Passive Loss ...................................................................................................................... 3-4Categories of Income & Loss ............................................................................................................... 3-4

Passive ........................................................................................................................................... 3-4Portfolio ......................................................................................................................................... 3-5Material Participation .................................................................................................................... 3-6Self-Charged Interest Regulations ................................................................................................. 3-6

Passive Deduction - Portfolio Income ..................................................................................... 3-6Regulations .............................................................................................................................. 3-6

Suspension of Disallowed Losses ......................................................................................................... 3-9Fully Taxable Disposition ............................................................................................................. 3-9

Abandonment & Worthlessness ............................................................................................... 3-9Related Party Transactions ...................................................................................................... 3-10Credits ...................................................................................................................................... 3-10

Disallowance ....................................................................................................................... 3-10Increase Basis Election ........................................................................................................ 3-10

Entire Interest ................................................................................................................................ 3-10Partnership ............................................................................................................................... 3-11Grantor Trust ........................................................................................................................... 3-11

Other Transfers .............................................................................................................................. 3-11Transfer By Reason Of Death - §469(g)(2) ............................................................................. 3-11Transfer by Gift - §469(j)(6) .................................................................................................... 3-11Installment Sale - §469(g)(3) ................................................................................................... 3-12Activity No Longer Treated As Passive Activity - §469(f)(1) ................................................. 3-12Closely Held To Nonclosely Held Corporation- §469(f)(2) .................................................... 3-12Nontaxable Transfer ................................................................................................................ 3-13

Ordering of Losses ........................................................................................................................ 3-13Capital Loss Limitation ........................................................................................................... 3-14

Carryforwards ................................................................................................................................ 3-15Allocation of Suspended Losses .................................................................................................... 3-15

Taxpayers Affected ............................................................................................................................... 3-15Noncorporate Taxpayers ............................................................................................................... 3-15Regular Closely Held Corporations ............................................................................................... 3-15Personal Service Corporations ....................................................................................................... 3-15

Definition ................................................................................................................................. 3-15Real Estate Professionals ............................................................................................................... 3-16

xv

Activities............................................................................................................................................... 3-18Facts & Circumstances Test .......................................................................................................... 3-18

Relevant Factors ...................................................................................................................... 3-19Rental Activities ...................................................................................................................... 3-20Limited Partnership Activities ................................................................................................. 3-20Partnership & S Corporation Activities ................................................................................... 3-20

Consistency ................................................................................................................................... 3-21Regrouping .................................................................................................................................... 3-21Partial Dispositions ........................................................................................................................ 3-21

Alternative Minimum Tax - §55................................................................................................................. 3-22Computation ......................................................................................................................................... 3-22

Tentative Minimum Tax ................................................................................................................ 3-23AMT Exemption Amounts - §55(d) .............................................................................................. 3-23

AMT Exemption Phaseout ....................................................................................................... 3-23Regular Tax Deduction - §55(c) .................................................................................................... 3-24Tax Preferences & Adjustments .................................................................................................... 3-24

Preferences & Adjustments for All Taxpayers ........................................................................ 3-24Preferences & Adjustments for Noncorporate Taxpayers Only ............................................... 3-25

Preferences & Adjustments for Corporations Only Prior to 2018 ................................................. 3-25Adjustments - §56 ......................................................................................................................... 3-25

Itemized Deductions ................................................................................................................ 3-25Medical Expenses ................................................................................................................ 3-26Taxes ................................................................................................................................... 3-26Interest ................................................................................................................................. 3-26

Depreciation ............................................................................................................................. 3-27Alternative Depreciation System (ADS) ............................................................................. 3-27ADS Recovery Periods ........................................................................................................ 3-27Asset Placed in Service After 1998 ..................................................................................... 3-28

Mining Exploration and Development Costs ........................................................................... 3-28Basis .................................................................................................................................... 3-29Election ................................................................................................................................ 3-29

Long-Term Contracts ............................................................................................................... 3-29Home Construction Contracts ............................................................................................. 3-29

Pollution Control Facilities ...................................................................................................... 3-30Installment Sales ...................................................................................................................... 3-30Circulation Expenditures ......................................................................................................... 3-30Incentive Stock Options ........................................................................................................... 3-30

Credit for Prior Year Minimum Tax & ISOs ....................................................................... 3-30Research & Experimental Expenditures .................................................................................. 3-31Passive Farm Losses ................................................................................................................ 3-31

Definition ............................................................................................................................ 3-31Loss Disallowance ............................................................................................................... 3-32Allocation ............................................................................................................................ 3-32Same Activity Suspension ................................................................................................... 3-32

Passive Activity Losses ........................................................................................................... 3-32Corporate Business Untaxed Reported Profits (Pre-1990) ...................................................... 3-34Corporate ACE Adjustment (1990 to 2018) ............................................................................ 3-34Adjusted Current Earnings Regulations ................................................................................... 3-36

Tax Preferences - §57 .................................................................................................................... 3-37Depletion ................................................................................................................................. 3-37Intangible Drilling Costs .......................................................................................................... 3-38

xvi

Excess Drilling Costs .......................................................................................................... 3-38Accelerated Depreciation......................................................................................................... 3-38

Real Property ....................................................................................................................... 3-38Personal Property ................................................................................................................ 3-39

Private Activity Bond Interest ................................................................................................. 3-39Alternative Tax NOL Deduction ................................................................................................... 3-39

Carrybacks & Carryovers ........................................................................................................ 3-39Alternative Minimum Foreign Tax Credit ..................................................................................... 3-40

Foreign Tax Credit Carryback or Carryover ............................................................................ 3-40Tentative Minimum Tax ................................................................................................................ 3-40

Minimum Tax Credit ............................................................................................................................ 3-40Regular Income Tax Reduced ....................................................................................................... 3-41Carryforward of Credit .................................................................................................................. 3-41Other Credits ................................................................................................................................. 3-41

Compliance ................................................................................................................................................ 3-43Reporting Requirements ....................................................................................................................... 3-43

Real Estate Transactions [Form - 1099S] ...................................................................................... 3-43Independent Contractors ................................................................................................................ 3-44Cash Reporting [Form 8300] ......................................................................................................... 3-46

Exceptions ............................................................................................................................... 3-47Recipient’s Knowledge ............................................................................................................ 3-48Cash Reporting Rules - Attorneys ........................................................................................... 3-48

Sale of Certain Partnership Interests (Form 8308) ........................................................................ 3-48Tax Shelter Registration Number [Form 8271] ............................................................................. 3-49Asset Acquisition Statement [Form 8594] .................................................................................... 3-49

Accuracy-Related Penalties ........................................................................................................................ 3-51Negligence ............................................................................................................................................ 3-51

Substantial Understatement of Income Tax ................................................................................... 3-51Penalty on Carryover Year Return ........................................................................................... 3-52

Substantial Valuation Overstatements ........................................................................................... 3-52Substantial Estate & Gift Tax Valuation Understatements ............................................................ 3-53

Final Regulations .................................................................................................................................. 3-53Negligence or Disregard of Rules ................................................................................................. 3-53Substantial Understatement Penalty .............................................................................................. 3-54Adequate Disclosure ...................................................................................................................... 3-55

Information Reporting & Penalties - §6721 et al........................................................................................ 3-55Corrections Resulting in Reduced Penalties ......................................................................................... 3-56

Small Businesses ........................................................................................................................... 3-56Reasonable Cause ................................................................................................................................. 3-56

Penalty for Unrealistic Position .................................................................................................................. 3-56Realistic Possibility Standard ............................................................................................................... 3-57Adequate Disclosure ............................................................................................................................. 3-58Form 8275-R ........................................................................................................................................ 3-58

Statute of Limitations for Assessments ...................................................................................................... 3-59Three Year Assessment Periods ........................................................................................................... 3-59Six-Year Assessment Period ................................................................................................................. 3-59No Statute Of Limitations ..................................................................................................................... 3-59Extension of Statute Of Limitations ..................................................................................................... 3-59

Examination of Returns .............................................................................................................................. 3-59How Returns Are Selected.................................................................................................................... 3-59Arranging the Examination................................................................................................................... 3-60

xvii

Transfers ........................................................................................................................................ 3-60Representation ............................................................................................................................... 3-60Recordings ..................................................................................................................................... 3-60

Repeat Examinations ............................................................................................................................ 3-60Changes to Return ................................................................................................................................ 3-61Appealing Examination Findings ......................................................................................................... 3-61

Appeals Office ............................................................................................................................... 3-61Appeals to the Courts .................................................................................................................... 3-61

Court Decisions ....................................................................................................................... 3-62Recovering Litigation Expenses .............................................................................................. 3-62

Other Remedies .................................................................................................................................... 3-62Claims for Refund ......................................................................................................................... 3-62Cancellation of Penalties ............................................................................................................... 3-62Reduction of Interest ..................................................................................................................... 3-62

CHAPTER 4 - Business Forms & Characteristics .......................................4-1Sole Proprietorships ................................................................................................................................... 4-2

Advantages ........................................................................................................................................... 4-3Disadvantages ....................................................................................................................................... 4-3Self-Employment Taxes ....................................................................................................................... 4-3

Incorporation ................................................................................................................................. 4-4“S” Solution............................................................................................................................. 4-4

Estimated Tax Payments ...................................................................................................................... 4-420% Deduction ..................................................................................................................................... 4-4

Partnerships ................................................................................................................................................ 4-5Conduit Entity ...................................................................................................................................... 4-5Advantages ........................................................................................................................................... 4-5Disadvantages ....................................................................................................................................... 4-6Husband-Wife Partnerships .................................................................................................................. 4-6General Tax Aspects ............................................................................................................................. 4-6Limited Partnerships ............................................................................................................................. 4-7

Passive Presumption ...................................................................................................................... 4-7At-Risk Rules - §465 ............................................................................................................................ 4-7

Financing ....................................................................................................................................... 4-8Passive Loss Limitations - §469 ........................................................................................................... 4-10

Active/Passive Determination ....................................................................................................... 4-12Triggering Suspended Losses ........................................................................................................ 4-12

Limited Liability Companies ................................................................................................................ 4-12Estates & Trusts ......................................................................................................................................... 4-13

Income Distribution .............................................................................................................................. 4-13Business Trusts ..................................................................................................................................... 4-13

Unincorporated Associations ..................................................................................................................... 4-14Corporate Treatment ............................................................................................................................. 4-14

Corporation Defined ................................................................................................................................... 4-14Effect of State Laws ............................................................................................................................. 4-15Corporate Characteristics ..................................................................................................................... 4-15

Partnership Determinations ........................................................................................................... 4-15Trust Determinations ..................................................................................................................... 4-15Professional Associations .............................................................................................................. 4-16

Check-The-Box Regulations ................................................................................................................ 4-16

xviii

Subchapter S Corporations ......................................................................................................................... 4-17Ordinary “C” Corporations ........................................................................................................................ 4-18

Advantages ........................................................................................................................................... 4-18Disadvantages ....................................................................................................................................... 4-19

Personal Service Corporations - §441, §448, §469 .................................................................................... 4-19Testing Period ....................................................................................................................................... 4-19Personal Services .................................................................................................................................. 4-20Principal Activity & Substantial Performance ...................................................................................... 4-20Employee-Owner .................................................................................................................................. 4-20

Independent Contractor ................................................................................................................. 4-21Passive Loss Limitations - §469(a)(2) .................................................................................................. 4-21Qualified Personal Service Corporation - §448 .................................................................................... 4-21

Federal Corporate Income Taxation Overview .......................................................................................... 4-22Taxable Income .................................................................................................................................... 4-22

Allowable Deductions ................................................................................................................... 4-22Tax Credits .................................................................................................................................... 4-22

Corporate Tax Rates ................................................................................................................................... 4-23Tax Tables ............................................................................................................................................ 4-23

Current Rate - 21% ........................................................................................................................ 4-23Capital Gains ................................................................................................................................. 4-24Tax Return & Filing ...................................................................................................................... 4-24

Affiliated Group....................................................................................................................... 4-24Corporate Estimated Tax ............................................................................................................... 4-24

Alternative Minimum Tax Repealed .......................................................................................................... 4-26

CHAPTER 5 - Corporate Formation & Capitalization...............................5-1Incorporation - §351 ................................................................................................................................... 5-1

Basic Requirements .............................................................................................................................. 5-1Corporate Nonrecognition ............................................................................................................. 5-3

Property ................................................................................................................................................ 5-3Stock Solely For Services .............................................................................................................. 5-3

Impact on Recipient ................................................................................................................. 5-3Impact on Other Shareholders ................................................................................................. 5-3

Stock for Debt ............................................................................................................................... 5-4Stock ..................................................................................................................................................... 5-4

Notes .............................................................................................................................................. 5-4Control .................................................................................................................................................. 5-4Property Basis ....................................................................................................................................... 5-4Stock Basis ........................................................................................................................................... 5-5Liabilities .............................................................................................................................................. 5-5

Miscellaneous Trade & Technical Corrections Act - §351 ........................................................... 5-5Recourse Liability .................................................................................................................... 5-6Nonrecourse Liability .............................................................................................................. 5-6Basis ........................................................................................................................................ 5-6

Incorporation of a Partnership .............................................................................................................. 5-6Alternative #1 ................................................................................................................................ 5-6Alternative #2 ................................................................................................................................ 5-7Alternative #3 ................................................................................................................................ 5-7Tax Consequences - Alternative #1 ............................................................................................... 5-9Tax Consequences - Alternative #2 ............................................................................................... 5-9

xix

Tax Consequences - Alternative #3 ............................................................................................... 5-10Accounts Receivable ............................................................................................................................ 5-10

Continuing Partnership .................................................................................................................. 5-11Section 1244 Stock ..................................................................................................................................... 5-13

Maximum Ordinary Loss ...................................................................................................................... 5-13Original Issuance .................................................................................................................................. 5-13

Distributed Stock ........................................................................................................................... 5-13General Requirements .......................................................................................................................... 5-13

Start-Up Expenses ...................................................................................................................................... 5-14Covered Expenses................................................................................................................................. 5-14

Amortization .................................................................................................................................. 5-15Organizational Expenses ............................................................................................................................ 5-15

Definition .............................................................................................................................................. 5-15Stock Issuance & Syndication Expenses .............................................................................................. 5-16Amortization ......................................................................................................................................... 5-16

Start of Business ............................................................................................................................ 5-16Tax Recognition of the Corporate Entity ................................................................................................... 5-16

Tax Criteria ........................................................................................................................................... 5-16Nominee & Agency Corporations ................................................................................................. 5-17

Having Income Attributed to the Corporation ...................................................................................... 5-17Section 482 Reallocation ............................................................................................................... 5-17

Corporation & Shareholder ...................................................................................................... 5-17Goodwill .................................................................................................................................. 5-18Interest-Free Loans .................................................................................................................. 5-18

Section 269A ........................................................................................................................................ 5-18Capital Gains & Losses .............................................................................................................................. 5-18

Net Capital Loss Carryovers & Carrybacks - §1212 ............................................................................ 5-19S Corporation Status ...................................................................................................................... 5-19

Asset Types .......................................................................................................................................... 5-19Five-Step Characterization Process ...................................................................................................... 5-20Netting Capital Gains ........................................................................................................................... 5-20Netting Section 1231 Gains (Losses) .................................................................................................... 5-21

Character of Section 1231 Gains (Losses) ..................................................................................... 5-215 Year Averaging .......................................................................................................................... 5-21

NOL Carryback & Carryover - §172 .................................................................................................... 5-21Loss Computation .......................................................................................................................... 5-22Deduction Computation ................................................................................................................. 5-22

Dividends Received Deduction - §243 ....................................................................................................... 5-23Dividends from Domestic Corporations ............................................................................................... 5-23

65% Exception .............................................................................................................................. 5-23Ownership ............................................................................................................................................. 5-23Limitation ............................................................................................................................................. 5-23Denial of Deduction .............................................................................................................................. 5-24Debt-Financed Portfolio Stock ............................................................................................................. 5-24Property Dividends ............................................................................................................................... 5-24Change to Holding Period .................................................................................................................... 5-24

Charitable Contributions ............................................................................................................................ 5-27Timing of Deduction ............................................................................................................................ 5-27Limitation ............................................................................................................................................. 5-27Carryover of Excess Contribution ........................................................................................................ 5-27Charitable Contributions of Computer Equipment - Expired ............................................................... 5-28

xx

Collapsible Corporations - §341 (Repealed) .............................................................................................. 5-28Definition .............................................................................................................................................. 5-28

Presumption ................................................................................................................................... 5-29Covered Transactions ........................................................................................................................... 5-29

Personal Holding Companies - §541 .......................................................................................................... 5-29Penalty Tax ........................................................................................................................................... 5-30

Professional Corporations ............................................................................................................. 5-30Named Professionals ..................................................................................................................... 5-30Avoidance of PHC Status .............................................................................................................. 5-30

Accumulated Earnings Tax Trap - §531..................................................................................................... 5-30Imposition of Penalty Tax .................................................................................................................... 5-31

Computation .................................................................................................................................. 5-31Accumulated Earnings Credit ........................................................................................................ 5-31

Application of Credit to Controlled Groups ............................................................................ 5-32Reasonable Accumulations ................................................................................................................... 5-32

Working Capital ............................................................................................................................ 5-32Service Corporations ............................................................................................................... 5-33

Minority Stock Redemptions ......................................................................................................... 5-33Majority Stock Redemptions ......................................................................................................... 5-33

Stockholder Harmony .............................................................................................................. 5-33Tax Exempt Income ................................................................................................................................... 5-33Accounting Periods & Methods ................................................................................................................. 5-35

Accounting Periods ............................................................................................................................... 5-35Section 444 Election ...................................................................................................................... 5-35Business Purpose Tax Year ........................................................................................................... 5-36

25% Test .................................................................................................................................. 5-36Length of Accounting Period ........................................................................................................ 5-37

Short Tax Year ......................................................................................................................... 5-37Not in Existence Entire Year ............................................................................................... 5-37Change in Accounting Period .............................................................................................. 5-37

Election of Accounting Period ...................................................................................................... 5-38Changing Accounting Periods ....................................................................................................... 5-38Changes Without IRS Consent ...................................................................................................... 5-38

Accounting Methods ............................................................................................................................. 5-39Methods Available ........................................................................................................................ 5-39

Cash Method............................................................................................................................ 5-39Limitation ............................................................................................................................ 5-39

Accrual Method ....................................................................................................................... 5-40Economic Performance Rule ............................................................................................... 5-40

Special Methods ....................................................................................................................... 5-41Combination (Hybrid) Method ................................................................................................ 5-41Accounting for Long-term Contracts ....................................................................................... 5-41

Changing the Accounting Method ................................................................................................. 5-41Inventories .................................................................................................................................................. 5-42

Identification Methods .......................................................................................................................... 5-42Specific Identification Method ...................................................................................................... 5-42FIFO Method................................................................................................................................. 5-42LIFO Method................................................................................................................................. 5-43

Valuation Methods ............................................................................................................................... 5-43Cost Method .................................................................................................................................. 5-43

Uniform Capitalization Rules - §263A .................................................................................... 5-44

xxi

Lower of Cost or Market Method .................................................................................................. 5-44Multiple Corporations ................................................................................................................................ 5-44

Controlled Group Restrictions .............................................................................................................. 5-45Definition ...................................................................................................................................... 5-45

Parent-Subsidiary Groups ........................................................................................................ 5-45Brother-Sister Groups .............................................................................................................. 5-46

Consolidated Returns ............................................................................................................................ 5-46Definition ...................................................................................................................................... 5-46

Corporate Liquidations & Distributions ..................................................................................................... 5-46The Old General Utilities Doctrine ....................................................................................................... 5-47

Loss Limitations ............................................................................................................................ 5-47

CHAPTER 6 - Corporate Principals & Employees .....................................6-1Employee Status of Active Shareholders ................................................................................................... 6-1

Payroll Tax Withholding & Reporting ................................................................................................. 6-1Form 941 ....................................................................................................................................... 6-2

Deposit Rules ........................................................................................................................... 6-2Lookback Period .................................................................................................................. 6-2

Monthly Depositor .......................................................................................................... 6-3Semi-Weekly Depositor .................................................................................................. 6-3One-Day Rule ................................................................................................................. 6-3

Form W-4 ...................................................................................................................................... 6-3Whistle-Blowing (Repealed) ................................................................................................... 6-4

Form W-2 ...................................................................................................................................... 6-4Form W-3 ...................................................................................................................................... 6-5

Social Security’s Payroll Tax or FICA - §3111 & §3121 ..................................................................... 6-5Rates .............................................................................................................................................. 6-5Deduction ...................................................................................................................................... 6-6

Federal Unemployment (FUTA) Tax - §3301 & 3306 ......................................................................... 6-6Form 940 ....................................................................................................................................... 6-6

Employee Labor Laws .......................................................................................................................... 6-7Minimum Wage Requirement ....................................................................................................... 6-7Overtime ........................................................................................................................................ 6-7Fair Employment Laws ................................................................................................................. 6-7Child Labor Laws .......................................................................................................................... 6-7Immigration Law ........................................................................................................................... 6-8Workers’ Compensation Insurance ............................................................................................... 6-8State Disability Insurance (SDI) .................................................................................................... 6-8OSHA ............................................................................................................................................ 6-8

Employee vs. Contractor Status ................................................................................................................. 6-8Factors .................................................................................................................................................. 6-9

Unreasonable Compensation ...................................................................................................................... 6-10Overall Limitation ................................................................................................................................ 6-10

Allowance of Deduction................................................................................................................ 6-11Publicly Traded Corporation Limitation .................................................................................. 6-11

Limitation on Accrual Deduction .................................................................................................. 6-11Employment Contracts .................................................................................................................. 6-11

Scope of Examination ........................................................................................................................... 6-11Officer’s Compensation ................................................................................................................. 6-11

Factors .................................................................................................................................................. 6-12

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Employee’s Qualifications ............................................................................................................ 6-12Size of the Business ....................................................................................................................... 6-12Employee’s Compensation History ............................................................................................... 6-12

Unreasonably Low Salaries ..................................................................................................... 6-12Services Performed by the Employee ............................................................................................ 6-12Past Service ................................................................................................................................... 6-12Reasonable Dividends ................................................................................................................... 6-13

Bonuses as Constituting Dividends ......................................................................................... 6-13Payback Agreements ..................................................................................................................... 6-13Miscellaneous Factors ................................................................................................................... 6-13

Income Splitting ......................................................................................................................................... 6-14Gift & Redemption ............................................................................................................................... 6-14Hire the Kids & Spouse ........................................................................................................................ 6-14

Buy Sell Agreements .................................................................................................................................. 6-16Definition .............................................................................................................................................. 6-16Professional Corporations ..................................................................................................................... 6-17Marketability Problems ........................................................................................................................ 6-17Controlled Disposition .......................................................................................................................... 6-17Entity & Cross-Purchase Agreements .................................................................................................. 6-17

Stepped-Up Basis .......................................................................................................................... 6-19Resulting Equity Ownership .......................................................................................................... 6-19Attribution & Constructive Ownership Rules ............................................................................... 6-19Estate Tax Valuation ..................................................................................................................... 6-19

Using the Buy-Sell Agreement to Set Value ........................................................................... 6-20Section 2703 Restrictions .................................................................................................... 6-20

Exceptions to §2703 ........................................................................................................ 6-21Arms-Length Bargain...................................................................................................... 6-21

Enforcement of Contract Price ...................................................................................................... 6-21Joint Ownership ............................................................................................................................. 6-21

Funding the Buy-Sell Agreement ......................................................................................................... 6-21Term vs. Whole Life ...................................................................................................................... 6-22Policy Ownership .......................................................................................................................... 6-22Premium Payment ......................................................................................................................... 6-22

Purchase Price ...................................................................................................................................... 6-23S Corporations ...................................................................................................................................... 6-23Sole Shareholder Planning .................................................................................................................... 6-23

Complete Liquidations .................................................................................................................. 6-24Alternative Dispositions .......................................................................................................... 6-24Use of Life Insurance ............................................................................................................... 6-24Estate Valuation ....................................................................................................................... 6-24

One-Way Buy-Outs ....................................................................................................................... 6-24Recapitalization .......................................................................................................................................... 6-25

In General ............................................................................................................................................. 6-25Valuation of Stock ................................................................................................................................ 6-25Estate Freeze Provisions ....................................................................................................................... 6-26Stock Dividends .................................................................................................................................... 6-26Section 306 Tainted Stocks .................................................................................................................. 6-26

§306 Exceptions ............................................................................................................................ 6-26

CHAPTER 7 - Basic Fringe Benefits .............................................................7-1

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Concept ...................................................................................................................................................... 7-1Definition of Income - §61 ................................................................................................................... 7-1Deductions without Taxable Income .................................................................................................... 7-2

Benefit Mechanics ...................................................................................................................................... 7-2Old Dichotomy - Statutory v. Nonstatutory .......................................................................................... 7-2

Fringe Benefit Provisions .............................................................................................................. 7-3TRA ‘84 - §132 ........................................................................................................................ 7-3Discrimination ......................................................................................................................... 7-3Only Statutory Benefits Remain .............................................................................................. 7-3

No-Additional-Cost Services - §132(b) ................................................................................................ 7-3Covered Employees ....................................................................................................................... 7-4Line of Business Requirement ....................................................................................................... 7-4

Definition ................................................................................................................................. 7-4Qualified Employee Discounts - §132(c) ............................................................................................. 7-4

Manner of Discount ....................................................................................................................... 7-5Real Estate & Investment Property Exclusion ......................................................................... 7-5

Amount of Discount ...................................................................................................................... 7-5Working Condition Fringes - §132(d) .................................................................................................. 7-5

Covered Employees ....................................................................................................................... 7-5Exceptions ..................................................................................................................................... 7-6Substantiation ................................................................................................................................ 7-6

De Minimis Fringes - §132(e) .............................................................................................................. 7-6Subsidized Eating Facilities .......................................................................................................... 7-6

Employee Achievement Awards - §74(c) & §274(j) ............................................................................ 7-6Exclusion ....................................................................................................................................... 7-7Definition of Employee Achievement Awards .............................................................................. 7-7Qualified Plan Award .................................................................................................................... 7-7Employer Deduction Limits .......................................................................................................... 7-8

Aggregation Limit ................................................................................................................... 7-8Special Partnership Rule .......................................................................................................... 7-8Employee Impact ..................................................................................................................... 7-8

Group Term Life Insurance - §79 ......................................................................................................... 7-8Dependent Care Assistance - §129 ....................................................................................................... 7-12

Amount of Assistance.................................................................................................................... 7-12Requirements ................................................................................................................................. 7-12Conflict with Dependent Care ....................................................................................................... 7-12

Cafeteria Plans - §125........................................................................................................................... 7-13Definition ...................................................................................................................................... 7-13Qualified Benefits .......................................................................................................................... 7-13

Non-Qualified Benefits ............................................................................................................ 7-13Controlled Group Rules ................................................................................................................. 7-13Salary Reduction Plans .................................................................................................................. 7-14Nondiscrimination ......................................................................................................................... 7-14

Meals & Lodging - §119 ...................................................................................................................... 7-14Income Exclusion .......................................................................................................................... 7-14

Convenience of Employer ....................................................................................................... 7-14Self-Insured Medical Reimbursement Plans - §105 ............................................................................. 7-15

Allowable Expenses ...................................................................................................................... 7-15Requirements ................................................................................................................................. 7-15Benefits .......................................................................................................................................... 7-15Exposure ........................................................................................................................................ 7-15

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Employee Educational Assistance Programs - §127 ............................................................................ 7-16Employer-Provided Automobile - §61 & §132 .................................................................................... 7-16

General Valuation Method ............................................................................................................ 7-16Annual Lease Value Method ......................................................................................................... 7-16

Computation ............................................................................................................................ 7-18Cents Per Mile Method .................................................................................................................. 7-18Commuting Value Method ............................................................................................................ 7-18

Interest-Free & Below-Market Loans - §7872 ...................................................................................... 7-19Permissible Discrimination ...................................................................................................... 7-19Employee Needs ...................................................................................................................... 7-19

Imputed Interest ............................................................................................................................. 7-19Types of Loans .............................................................................................................................. 7-20

Demand Loans ......................................................................................................................... 7-20Term Loans .............................................................................................................................. 7-20

Application of §7872 and Rate Determinations ............................................................................ 7-20Summary ....................................................................................................................................... 7-21

Moving Expenses - §217 ...................................................................................................................... 7-21Employer-Provided Retirement Advice & Planning - §132 ................................................................. 7-21Financial Planning - §67 & §212 .......................................................................................................... 7-22

Popularity ...................................................................................................................................... 7-22Taxation ......................................................................................................................................... 7-22

Tax Planning - §67 & §212 .................................................................................................................. 7-22Taxation ......................................................................................................................................... 7-22

Estate Planning - §67 & §212 ............................................................................................................... 7-23Death Benefit Payment - §101(b) (Repealed) ....................................................................................... 7-23On-premises Athletic Facility - §132(j)(4)(B) ...................................................................................... 7-23Home Office - §280A ........................................................................................................................... 7-23

Carryforward ................................................................................................................................. 7-24Renting Space to Employer ........................................................................................................... 7-24

Fringe Benefit Plans for S Corporations..................................................................................................... 7-24Insurance............................................................................................................................................... 7-24

Basis .............................................................................................................................................. 7-24Permanent Policies ........................................................................................................................ 7-25

Effect of Premium Payment ..................................................................................................... 7-25Key Employee Insurance ............................................................................................................... 7-25Medical Insurance ......................................................................................................................... 7-25Retirement Plans ............................................................................................................................ 7-25Summary ....................................................................................................................................... 7-25

ERISA Compliance .................................................................................................................................... 7-26Welfare Plans ........................................................................................................................................ 7-26

Additional Requirements ............................................................................................................... 7-26

CHAPTER 8 - Business Entertainment ........................................................8-1Pre-2018 Entertainment .............................................................................................................................. 8-2

Former Directly Related Test ............................................................................................................... 8-2Clear Business Setting Presumption .............................................................................................. 8-2

Former Associated Test ........................................................................................................................ 8-3Substantial Business Discussion .................................................................................................... 8-3Timing ........................................................................................................................................... 8-3Conventions ................................................................................................................................... 8-4

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Statutory Exceptions ............................................................................................................................. 8-4Miscellaneous Former Entertainment Provisions ................................................................................. 8-4

Home Entertainment Expenses ...................................................................................................... 8-4Expense for Spouses Of Out Of Town Business Guests ............................................................... 8-4Ticket Purchase Face Value Restriction ........................................................................................ 8-4

Charitable Sports Events Exception ......................................................................................... 8-4Skyboxes ....................................................................................................................................... 8-5

One Event Rule ........................................................................................................................ 8-5Related Parties ......................................................................................................................... 8-5Food & Beverages ................................................................................................................... 8-5

Employee Business Expenses ........................................................................................................ 8-5Post-2018 Entertainment ............................................................................................................................ 8-5

Statutory Exceptions - §274(e) ............................................................................................................. 8-6Food and Beverages for Employees .............................................................................................. 8-6Expenses Treated as Compensation .............................................................................................. 8-7Reimbursed Expenses .................................................................................................................... 8-7Recreational Expenses for Employees........................................................................................... 8-7Employee, Stockholder, and Business Meetings ........................................................................... 8-7Trade Association Meetings .......................................................................................................... 8-7Items Available to Public .............................................................................................................. 8-7Entertainment Sold to Customers .................................................................................................. 8-8Expenses Includible in Income of Non-employees ....................................................................... 8-8

Lavish or Extravagant Restriction ........................................................................................................ 8-8Ordinary & Necessary Requirement ..................................................................................................... 8-8Percentage Reduction for Meals - §274(n)(1) ...................................................................................... 8-8

Application of Reduction Rule ...................................................................................................... 8-8Exceptions - §274(n)(2) ................................................................................................................. 8-9

Employee Business Expenses Subject to 2% Floor Suspended ............................................................ 8-9Form 2106 Restricted .................................................................................................................... 8-10

Entertainment Facilities ........................................................................................................................ 8-10Exceptions ..................................................................................................................................... 8-10Covered Expenses ......................................................................................................................... 8-11Club Dues ...................................................................................................................................... 8-11

OBRA '93 & TCJA .................................................................................................................. 8-11Sales Incentive Awards ................................................................................................................. 8-12

Substantiation & Record Keeping - §274(d) .............................................................................................. 8-14Documentation ..................................................................................................................................... 8-14

Payback Agreements ..................................................................................................................... 8-14Employee Expense Reimbursement & Reporting ...................................................................................... 8-15

TRA '86 - Unreimbursed Expenses Become Itemized Deductions ...................................................... 8-15Family Support Act - Reimbursement Without Accounting Is Income ................................................ 8-16

Accountable Plans ......................................................................................................................... 8-17Reasonable Period of Time ...................................................................................................... 8-17

Fixed Date Safe Harbor - #1 ................................................................................................ 8-17Period Statement Safe Harbor - #2 ...................................................................................... 8-18

Adequate Accounting .............................................................................................................. 8-18Per Diem Allowance Arrangements .................................................................................... 8-18

Federal Per Diem Rate .................................................................................................... 8-19Related Employer Restriction ......................................................................................... 8-23Usage & Consistency ...................................................................................................... 8-23Unproven or Unspent Per Diem Allowances .................................................................. 8-23

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Reporting Per Diem Allowances ............................................................................................. 8-24Reimbursement Not More Than Federal Rate ..................................................................... 8-24Reimbursement More Than Federal Rate ............................................................................ 8-25

Nonaccountable Plans .............................................................................................................. 8-25Self-Employed Persons .............................................................................................................................. 8-26

Expenses Related to Taxpayer's Business ............................................................................................ 8-26Reimbursed Expenses Incurred on Behalf of a Client .......................................................................... 8-26

With Adequate Accounting ........................................................................................................... 8-26Without Adequate Accounting ................................................................................................ 8-27

Employers .................................................................................................................................................. 8-27When Can an Expense Be Deducted? ................................................................................................... 8-27

Economic Performance Rule ......................................................................................................... 8-28Nondeductible Meals ............................................................................................................................ 8-28Employer-Provided Auto ...................................................................................................................... 8-28

CHAPTER 9 - Insurance ................................................................................9-1Company Paid Insurance ............................................................................................................................ 9-2

Popularity ............................................................................................................................................. 9-2Types of Life Insurance .............................................................................................................................. 9-2

Group Term Life ................................................................................................................................... 9-2Requirements ................................................................................................................................. 9-2“Key Employee” Defined .............................................................................................................. 9-3

Popularity and Application ................................................................................................................... 9-3Coverage & Premiums .......................................................................................................................... 9-3Medical Examination ............................................................................................................................ 9-5Regulations ........................................................................................................................................... 9-5

Spouse & Dependent Insurance ............................................................................................... 9-5Computation .................................................................................................................................. 9-5Tax Liability .................................................................................................................................. 9-6Reporting ....................................................................................................................................... 9-6Discrimination ............................................................................................................................... 9-6

Eligibility & Benefits ............................................................................................................... 9-6Excluded Employees ............................................................................................................... 9-6

Policy Requirements ...................................................................................................................... 9-7Ten Employee Rule ....................................................................................................................... 9-7

Less Than Ten Employees ....................................................................................................... 9-7Permanent Benefits ........................................................................................................................ 9-8Nondiscrimination Requirements .................................................................................................. 9-8

Retired Lives Reserve ........................................................................................................................... 9-8Revenue Ruling 68-577 ................................................................................................................. 9-8Taxation ......................................................................................................................................... 9-9Advantages .................................................................................................................................... 9-9Comparison With Other Programs ................................................................................................ 9-9

Executive Bonus ...................................................................................................................... 9-9Split-Dollar .............................................................................................................................. 9-10

Disadvantages ................................................................................................................................ 9-10Reserve Account ............................................................................................................................ 9-10Revenue Rulings ............................................................................................................................ 9-10Qualified Trusts ............................................................................................................................. 9-11

Nonqualified Trusts ................................................................................................................. 9-11

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Deductibility of Contributions ....................................................................................................... 9-11Separate Account for Key Employees ........................................................................................... 9-11

Disqualified Benefit ................................................................................................................. 9-11Effective Date .......................................................................................................................... 9-12

Revenue Procedure 93-3 ................................................................................................................ 9-12Estate Planning Considerations ............................................................................................................ 9-12

Policy Assignments ....................................................................................................................... 9-12Split-Dollar Life ................................................................................................................................... 9-14

Low-Cost Term Insurance ............................................................................................................. 9-17Regulatory Requirements .............................................................................................................. 9-17Taxation ......................................................................................................................................... 9-17Revenue Ruling 64-328 ................................................................................................................. 9-17Johnson Case ................................................................................................................................. 9-17

Business Travel Accident Insurance ..................................................................................................... 9-18Medical & Dental Insurance ................................................................................................................. 9-18

Premiums ....................................................................................................................................... 9-18Disability Income Insurance ................................................................................................................. 9-18

Interest Limitation on Policy Loans - §264A ............................................................................................. 9-19Disallowance of Interest Deduction ...................................................................................................... 9-19Impact ................................................................................................................................................... 9-19Limit on Deductibility of Premiums & Interest .................................................................................... 9-20

Key Person Life Insurance ......................................................................................................................... 9-20Closely Held Corporations ................................................................................................................... 9-20Sole Shareholder Applications ............................................................................................................. 9-21

COBRA ...................................................................................................................................................... 9-21Affected Employers ....................................................................................................................... 9-21

VEBAs - §501(c)(9) Trusts ........................................................................................................................ 9-21Section 419 ........................................................................................................................................... 9-22Self Insurance ....................................................................................................................................... 9-22Severance Pay ....................................................................................................................................... 9-22Post-Retirement Medical Benefits ........................................................................................................ 9-22VEBA Taxation on Earnings ................................................................................................................ 9-23Nondiscrimination Rules Applied ........................................................................................................ 9-23

Uniform Application ..................................................................................................................... 9-23Controlled Groups ................................................................................................................................ 9-23Termination .......................................................................................................................................... 9-23Disqualified Benefits ............................................................................................................................ 9-23Conclusion............................................................................................................................................ 9-24

CHAPTER 10 - Nonqualified Deferred Compensation ...............................10-1Postponement of Income ............................................................................................................................ 10-1

Advantages ........................................................................................................................................... 10-2IRS Scrutiny & Approval .............................................................................................................. 10-2Nondiscrimination ......................................................................................................................... 10-2

ERISA ...................................................................................................................................... 10-2Funding .......................................................................................................................................... 10-2

No Immediate Cash Outlay...................................................................................................... 10-2Annual Report ............................................................................................................................... 10-2

Notice Requirement ................................................................................................................. 10-3Purposes & Benefits ................................................................................................................................... 10-3

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Benefit Formula .................................................................................................................................... 10-3Incentive ........................................................................................................................................ 10-3Deferred Bonuses .......................................................................................................................... 10-3

Contractual Arrangement...................................................................................................................... 10-4Necessary Provisions ..................................................................................................................... 10-4

Tax Status ............................................................................................................................................. 10-4Service’s Position .......................................................................................................................... 10-4

Rationale .................................................................................................................................. 10-5Congressional Moratorium ............................................................................................................ 10-5

No Ruling or Regulation Policy ............................................................................................... 10-5Constructive Receipt ............................................................................................................................. 10-6

Beyond Actual Receipt .................................................................................................................. 10-6Simple Set-Asides Are Not Possible ........................................................................................ 10-6

Revenue Ruling 60-31 ......................................................................................................... 10-6Regulations .......................................................................................................................... 10-6

Time & Control Concept ............................................................................................................... 10-6Control ..................................................................................................................................... 10-7Timing ..................................................................................................................................... 10-7After-the-Fact Contract ............................................................................................................ 10-7Amendment to Existing Contract............................................................................................. 10-8

Economic Benefit ................................................................................................................................. 10-8Has Something of Value Been Transferred? ................................................................................. 10-8

Insurance Coverage Has a Calculable Value ........................................................................... 10-8Segregated Funds Have Immediate Economic Value .............................................................. 10-8

Value v. Control ............................................................................................................................ 10-9Revenue Ruling 60-31 ................................................................................................................... 10-9

Situation 1 ................................................................................................................................ 10-9Situation 2 ................................................................................................................................ 10-9Situation 3 ................................................................................................................................ 10-9Situation 4 ................................................................................................................................ 10-10Situation 5 ................................................................................................................................ 10-10

General Principles ......................................................................................................................... 10-10Unfunded Bare Contractual Promise Plan - Type I .............................................................................. 10-13

Risk................................................................................................................................................ 10-15Funded Company Account Plan - Type II ............................................................................................ 10-15

Ownership & Segregation ............................................................................................................. 10-15Bookkeeping Reserve or Separate Account .................................................................................. 10-16Employee Still Bears Economic Risk ............................................................................................ 10-16

Limited Protection ................................................................................................................... 10-16Investment of Deferred Amounts ........................................................................................ 10-16Life Insurance ...................................................................................................................... 10-17Premiums ............................................................................................................................. 10-18Third Party Guarantees ........................................................................................................ 10-18

Segregated Asset Plan - Type III .......................................................................................................... 10-19Section 83 Approach ..................................................................................................................... 10-19Tight Rope Format ........................................................................................................................ 10-19Transferable or Not Subject To A Risk of Substantial Forfeiture ................................................. 10-20

Substantial Restrictions............................................................................................................ 10-20Redemption or Forfeiture .................................................................................................... 10-20Condition Related to a Purpose of the Transfer ................................................................... 10-20Noncompetition ................................................................................................................... 10-21

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Consultation......................................................................................................................... 10-21Time Alone is Not Enough .................................................................................................. 10-21

Realization & Taxation.................................................................................................................. 10-2130-Day Election Period ................................................................................................................. 10-21Deduction Allowed ........................................................................................................................ 10-21Timing ........................................................................................................................................... 10-22

Withholding ............................................................................................................................. 10-22Tax Consequences ...................................................................................................................................... 10-22

Reciprocal Taxation/Deduction Rule ............................................................................................ 10-22No Difference for Cash or Accrual .......................................................................................... 10-23

Separate Accounts for Two or More Participants .......................................................................... 10-23Employer Deduction Traps ............................................................................................................ 10-23Income Tax on Employer Held Assets .......................................................................................... 10-23Inclusion in Income Under §409A ................................................................................................ 10-24State Tax Issues ............................................................................................................................. 10-25

Accounting ........................................................................................................................................... 10-25Two Sets of Rules .......................................................................................................................... 10-25

Financial Accounting Rules ..................................................................................................... 10-25IRS Rules ................................................................................................................................. 10-26

Estate Planning Considerations ............................................................................................................ 10-26Death During Deferral ................................................................................................................... 10-26

Income Tax Consequences ...................................................................................................... 10-27Estate Tax Consequences ......................................................................................................... 10-27Gift Tax Consequences ............................................................................................................ 10-27

Withholding, Social Security & IRAs .................................................................................................. 10-27Other Payroll Taxes ....................................................................................................................... 10-27Social Security Benefits ................................................................................................................ 10-28IRA’s ............................................................................................................................................. 10-28

CHAPTER 11 - S Corporations .....................................................................11-1Introduction ................................................................................................................................................ 11-1

Advantages ........................................................................................................................................... 11-2Planning ......................................................................................................................................... 11-4

Disadvantages ....................................................................................................................................... 11-4Passthrough Entities - 20% Deduction ................................................................................................. 11-5

Becoming an S Corporation ....................................................................................................................... 11-5S Corporation Status ............................................................................................................................. 11-7

Number of Shareholders ................................................................................................................ 11-7Individuals Only ............................................................................................................................ 11-7

Estates ...................................................................................................................................... 11-7Grantor Trusts .......................................................................................................................... 11-7Voting Trusts ........................................................................................................................... 11-8Testamentary Trust .................................................................................................................. 11-8Qualifying Simple Trusts ......................................................................................................... 11-8Electing Small Business Trusts ................................................................................................ 11-8Aliens ....................................................................................................................................... 11-9C Corporations ......................................................................................................................... 11-9Tax-Exempt Entities ................................................................................................................ 11-9

Exception for S Corporation ESOP - §512 .......................................................................... 11-9One Class of Stock ........................................................................................................................ 11-9

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Affiliated Groups & Subsidiaries .................................................................................................. 11-12Prior Law ................................................................................................................................. 11-12Current Law ............................................................................................................................. 11-12

Domestic Corporation ................................................................................................................... 11-14Election Requirement ........................................................................................................................... 11-14

Making the Election ...................................................................................................................... 11-15Form 2553 ................................................................................................................................ 11-15

Invalid S Elections ............................................................................................................... 11-17Extension ............................................................................................................................. 11-17

S Corporation Termination ......................................................................................................................... 11-19Revoking the Election .......................................................................................................................... 11-20

Procedure ....................................................................................................................................... 11-20Effective Date ................................................................................................................................ 11-22

Ceasing to Qualify ................................................................................................................................ 11-22Effective Date ................................................................................................................................ 11-22

Passive Income - §1362........................................................................................................................ 11-22Effective Date ................................................................................................................................ 11-23

S Termination Year .............................................................................................................................. 11-23Pro-Rata Allocation ....................................................................................................................... 11-23Allocation Based On Normal Accounting Rules ........................................................................... 11-24Annualization of 1120 Short Year ................................................................................................. 11-24

Taxation of S Corporations ........................................................................................................................ 11-25S Corporation Income & Expense ........................................................................................................ 11-25

Separately Stated Items ................................................................................................................. 11-25Nonseparately Stated Items ........................................................................................................... 11-26Interest Expense on Debt-Financed Distributions ......................................................................... 11-26Tax Exempt Income ...................................................................................................................... 11-27Net Operation Losses .................................................................................................................... 11-27Carryover of C Corporation NOLs ................................................................................................ 11-27

Reduction of Pass-Thru Items .............................................................................................................. 11-28Built-In Gain - §1374 ........................................................................................................................... 11-28

Net Recognized Built-In Gain ....................................................................................................... 11-29Recognized Built-In Gains ....................................................................................................... 11-29Recognized Built-In Loss ........................................................................................................ 11-30

Deduction Items .................................................................................................................. 11-30Amount of Tax .............................................................................................................................. 11-30

Credits ...................................................................................................................................... 11-31Net Operating Loss Carryovers ............................................................................................... 11-31

Treatment of Certain Property ....................................................................................................... 11-31Transfer of Assets .......................................................................................................................... 11-31

Passive Income - §1375........................................................................................................................ 11-31Gross Receipts ............................................................................................................................... 11-32

Sales or Exchanges of Stock or Securities ............................................................................... 11-32Passive Investment Income ........................................................................................................... 11-32

Royalties .................................................................................................................................. 11-33Rents ........................................................................................................................................ 11-33Interest ..................................................................................................................................... 11-33

Figuring the Tax on Excess Net Passive Income ........................................................................... 11-34Net Passive Income .................................................................................................................. 11-34Excess Net Passive Income ...................................................................................................... 11-34Special Provisions .................................................................................................................... 11-34

xxxi

Waiver of Tax ................................................................................................................................ 11-35Tax Preference Items ............................................................................................................................ 11-35LIFO Recapture Tax ............................................................................................................................. 11-36Capital Gains Tax ................................................................................................................................. 11-36

Reducing Corporate Capital Gains ................................................................................................ 11-36Figuring Corporate Taxable Income .............................................................................................. 11-36

Recapture of Investment Credit ............................................................................................................ 11-37Estimated Corporate Tax Payments ...................................................................................................... 11-37Basis of Stock & Debts ......................................................................................................................... 11-39

Adjustments to Basis ..................................................................................................................... 11-39Limitation on Loss Deductions ...................................................................................................... 11-41

Basis Limit ............................................................................................................................... 11-41Adjustments to Stock Basis ................................................................................................. 11-41

Increases .......................................................................................................................... 11-41Decreases ........................................................................................................................ 11-41

Adjustments to Debt Basis .................................................................................................. 11-42Restoring Basis of Loans................................................................................................. 11-42Loan Repayments ............................................................................................................ 11-42

Guarantees ............................................................................................................................... 11-43At-Risk Rules - §465 ............................................................................................................... 11-43

Reasonable Compensation .................................................................................................................... 11-44Related Party Rules .............................................................................................................................. 11-44

Definition of Related Party ............................................................................................................ 11-44Stock Attribution Rules ................................................................................................................. 11-44Business Expenses & Interest ........................................................................................................ 11-45

Distributions ......................................................................................................................................... 11-45Earnings & Profits ......................................................................................................................... 11-45

Accumulated Adjustments Account (AAA) ............................................................................ 11-48Dividend Election ................................................................................................................ 11-48Post-Termination Distributions ........................................................................................... 11-48

Transition Period ............................................................................................................. 11-48Order of Distribution ............................................................................................................... 11-49

No Earnings & Profits ................................................................................................................... 11-50Appreciated Property Distributions ............................................................................................... 11-50

Taxable Year ........................................................................................................................................ 11-51Business Purpose ........................................................................................................................... 11-51Change of Tax Year ....................................................................................................................... 11-51

Form 1120S .......................................................................................................................................... 11-52Extension ....................................................................................................................................... 11-52Late Filing ..................................................................................................................................... 11-52

Reasonable Cause .................................................................................................................... 11-52Schedule K-1 ................................................................................................................................. 11-53

Shareholder’s Treatment Of S Corporation Items ................................................................... 11-53Pro Rata Share ......................................................................................................................... 11-53Optional 10-year Write-Off of Tax Preferences ...................................................................... 11-54

Fringe Benefits ........................................................................................................................................... 11-54Health Insurance Premiums .................................................................................................................. 11-55

Reporting Requirements ................................................................................................................ 11-55Medical Deduction ........................................................................................................................ 11-55

Entity Tax Comparison .............................................................................................................................. 11-57

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CHAPTER 12 - Business Dispositions & Reorganizations ..........................12-1Starting a New Business ............................................................................................................................. 12-1

Organization Costs ............................................................................................................................... 12-1Start-up Costs ....................................................................................................................................... 12-2Syndication Costs ................................................................................................................................. 12-2

Buying an Existing Business ...................................................................................................................... 12-2Finding a Business for Sale .................................................................................................................. 12-3Tax Considerations ............................................................................................................................... 12-4

Stock Acquisitions ......................................................................................................................... 12-5Section 338 Election ................................................................................................................ 12-5

Asset Acquisitions ......................................................................................................................... 12-5Allocation of Purchase Price to Assets .......................................................................................... 12-5

Allocation Regulations ............................................................................................................ 12-6Practical Considerations ....................................................................................................................... 12-7

Reorganizations - §368............................................................................................................................... 12-7Types of Reorganizations ..................................................................................................................... 12-8Type 1 Reorganizations ........................................................................................................................ 12-9

Benefits and Considerations .......................................................................................................... 12-10Boot ......................................................................................................................................... 12-10Limitation ................................................................................................................................ 12-10

Type 2 Reorganizations ........................................................................................................................ 12-1080% Control Requirement ............................................................................................................. 12-10Voting Stock as Sole Consideration .............................................................................................. 12-10Shareholder Action ........................................................................................................................ 12-10

Type 3 Reorganizations ........................................................................................................................ 12-11Consideration ................................................................................................................................. 12-11Transfer of Assets .......................................................................................................................... 12-11

90/70 Test ................................................................................................................................ 12-11Liquidation of Acquired Corporation ...................................................................................... 12-11

Type 4 Reorganizations ........................................................................................................................ 12-11Asset Distributions ........................................................................................................................ 12-12Continuity of Business .................................................................................................................. 12-12

Boot ......................................................................................................................................... 12-12Type 5 Reorganizations ........................................................................................................................ 12-12Type 6 Reorganizations ........................................................................................................................ 12-12Type 7 Reorganizations ........................................................................................................................ 12-12Bona Fide Business Purpose ................................................................................................................. 12-12

Test ................................................................................................................................................ 12-13Carryover of Corporate Tax Attributes ...................................................................................................... 12-13

Mandatory Carry-Over ......................................................................................................................... 12-13Effect of Carry-Over on Acquisition ............................................................................................. 12-13Application of Rules to Subsidiary Liquidations ........................................................................... 12-13Loss or Tax Credit Carryovers ...................................................................................................... 12-13

Learning Objectives

After reading Chapter 1, participants will be able to: