Table of Contents

Chapter 1 - Individual Tax Elements - Section 1. 1

Federal Income Taxes: A Description. 2

Application of U.S. Individual Income Tax. 2

Gross Income. 2

Adjusted Gross Income (AGI) 3

Taxable Income. 3

Standard Deduction. 3

Itemized Deduction. 3

Personal Exemptions. 3

Filing Status. 3

Rates & Tax Liability. 4

Tax Credits. 4

Rates, Tables, & Statutory Amounts. 4

Income Tax Rates - '1. 4

Marriage Penalty - Mostly Gone. 6

Standard Deduction - '63. 7

Dependent Limit - '63(c)(5) 7

Personal Exemptions & Phaseout (Suspended) - '151. 7

Limitation on Itemized Deductions - '68. 8

Earned Income Tax Credit - '32. 9

Disqualified Income - '32(i) 10

Means-Tested Programs. 10

Social Security & Self-Employment Earnings Base. 10

Standard Mileage Rate. 10

Qualified Transportation Fringes. 11

Passenger Automobile Depreciation Limits (CAPS) 11

Expensing Deduction - '179. 11

Self-Employed Health Insurance Deduction. 11

Corporate Income Tax Rates. 11

1993 Through 2017: 11

2018 & Later: 21%... 12

Chapter 1 - Section 1 Review Questions. 13

Chapter 1 - Individual Tax Elements - Section 2. 14

Withholding & Estimated Tax. 14

Estimated Tax - '6654. 14

Social Security, Medicare & FUTA (or Payroll) Taxes. 15

FICA - '3111 & '3121. 15

Temporary Employee OASDI Cut 16

SECA - '1401. 16

Temporary Sole Employer OASDI Cut 16

Wage Base. 16

Additional Hospital Insurance Tax On Certain High-Income Individuals. 16

Final Regulations TD 9645. 17

FUTA - '3301 & '3306. 17

Annulled Marriages. 18

Chapter 1 - Section 2 Review Questions. 19

Chapter 1 - Individual Tax Elements - Section 3. 21

Married Taxpayers. 21

Same-Sex Marriage. 21

Marriage Penalty - Mostly Gone. 21

Spouses Death. 22

Married Persons Living Apart 22

Filing Jointly. 22

Joint Liability. 22

Innocent Spouse Exception. 23

Nonresident Alien. 26

Filing Separately. 26

Special Rules. 26

Joint Return after Separate Returns. 27

Separate Returns after Joint Return. 27

Exception. 27

Head of Household. 27

Advantages. 28

Requirements of '2(b) 28

Considered Unmarried. 28

Keeping Up a Home. 29

Qualifying Person. 29

Summary. 30

Qualifying Widow(er) With Dependent Child. 30

Chapter 1 - Section 3 Review Questions. 32

Chapter 1 - Individual Tax Elements - Section 4. 33

Security Deposits. 34

Payment for Canceling a Lease. 34

Social Security Benefits. 34

Taxability of Benefits. 35

Alimony & Spousal Support to Change in 2019. 37

Requirements. 37

Recapture. 38

Child Support 38

Prizes & Awards - '74 & '274. 39

Dividends & Distributions. 39

Ordinary Dividends. 39

Money Market Funds. 39

Dividends on Capital Stock. 39

Dividends Used to Buy More Stock. 40

Qualified Dividends. 40

Capital Gain Distributions. 40

Undistributed Capital Gains. 40

Form 2439. 41

Basis Adjustment 41

Real Estate Investment Trusts (REITs) 41

Nontaxable Distributions. 41

Return of Capital 41

Basis Adjustment 41

Liquidating Distributions. 42

Distributions of Stock and Stock Rights. 42

Taxable Stock Dividends and Stock Rights. 42

Chapter 1 - Section 4 Review Questions. 44

Chapter 1 - Individual Tax Elements - Section 5. 45

Discharge of Debt Income. 45

Exceptions from Income Inclusion. 45

Reduction of Tax Attributes. 46

Order of Reductions. 46

Foreclosure. 46

Nonrecourse Indebtedness. 47

Recourse Indebtedness. 47

Mortgage Relief Act of 2007 (Expired) 48

Principal Residence. 48

Qualified Principal Residence Indebtedness. 49

Acquisition Indebtedness. 49

American Recovery & Reinvestment Act of 2009 Deferral (Expired) 49

Bartering. 49

Barter Exchange. 51

Backup Withholding. 51

Chapter 1 - Section 5 Review Questions. 52

Chapter 1 - Individual Tax Elements - Section 6. 53

Recoveries. 53

Itemized Deduction Recoveries. 54

Recovery Limited to Deduction. 54

Recoveries Included in Income. 55

Non-Itemized Deduction Recoveries. 55

Amounts Recovered for Credits. 55

Tax Benefit Rule. 55

Children's Income. 56

Earned Income - '73. 56

Unearned Income. 57

"Kiddie" Tax - '1(g) 57

Application, Threshold & Impact 58

Election to Report on Parents Return - '1(g)(7)(A) [Form 8814] 58

Election Situations. 59

Definitions. 61

AMT Exemption for Children - '59(j) 61

Exclusions from Income. 62

Educational Savings Bonds - '135. 62

Education Expenses. 63

Excludable Interest 63

Forms 8818 & 8815. 63

Scholarships & Fellowships - '117. 63

Definitions. 64

Work Learning Service Programs. 64

Scholarship Prizes. 64

Education Expenses. 64

Education Assistance Programs - '127. 64

Employer Educational Trusts - '83. 65

Qualified Tuition Programs (QTP) - '529. 65

Gift & Inheritance Exclusion. 65

Subsequent Income. 65

Purchase for Value. 66

Installment Payments. 67

Specified Number of Installments. 67

Specified Amount Payable. 67

Installments for Life. 68

Chapter 1 - Section 6 Review Questions. 69

Chapter 1 - Individual Tax Elements - Section 7. 71

Personal Injury Awards - '104. 71

Personal Injury. 71

Emotional Distress. 71

Punitive Damages. 71

Tax Benefit Rule - '111. 71

Interest State & Local Obligations - '103. 71

Foreign Earned Income Exclusion - '911. 72

Nonbusiness & Personal Deductions. 72

Itemized Deductions. 73

Limitation on Itemized Deductions Suspended - '68. 73

Personal & Dependency Exemptions Suspended - '151. 74

Personal Exemptions. 74

Dependency Exemptions. 74

Dependency Before 2005. 75

Dependency After 2004 & Before 2018 Suspension. 75

Joint Return Prohibition. 76

Exception. 76

Phaseout of Exemptions. 77

Interest Expense - '163. 77

Personal Interest - '163(h)(1) 78

Definition. 78

Deductibility. 78

Investment Interest - '163(d) 79

Definitions. 79

Net Investment Income Limitation. 79

Qualified Residence Interest - '163(h)(3) [Form 8598] 80

Definitions. 80

Limitations. 80

Acquisition Indebtedness Modified. 81

Home Equity Indebtedness Restricted. 81

Refinancing. 82

Home Improvements. 82

Timing. 83

Alternative Minimum Tax Co-ordination. 83

Points. 84

Home Purchase & Improvement Exception. 84

Refinancing. 85

Huntsman Case. 85

Mortgage Interest Statement 85

Allocation of Interest Expense. 86

Chapter 1 - Section 7 Review Questions. 90

Chapter 1 - Individual Tax Elements - Section 8. 92

Education Expenses. 92

Educational Transportation. 95

Educational Travel 95

Meal Expenses. 96

Investment Seminars. 96

Higher Education Expense Deduction (Expired) - '222. 97

Dollar Limitation & Phase Out 97

Educator Expenses - '62. 97

Medical Expense Deductions - '213 [Schedule A] 98

Items Deductible. 98

Items Not Deductible. 98

Medical Insurance Premiums. 99

Medicare Part A.. 99

Medicare Part B.. 99

Medicare Part D.. 100

Prepaid Insurance Premiums. 100

Meals & Lodging. 100

Expenses of Transportation. 100

Permanent Improvements. 100

Spouses, Dependents & Others. 101

Reimbursement of Expenses. 101

Long-Term Care Provisions. 101

Long-Term Care Payments - '7702B(d)(4) 102

Long-Term Care Premiums - '213(d)(10) 102

IRA Withdrawals for Certain Medical Expenses. 103

ABLE Accounts - '529A.. 103

Charitable Contributions - '170 [Schedule A] 103

Requirements for Deductibility. 103

Qualified Organizations. 103

Limitations on Contributions. 104

Five-year Carryover 105

Contributions of Cash. 105

Benefits Received. 105

Benefit Performances. 105

Athletic Event Seating Rights Repealed. 105

Raffle Tickets, Bingo, Etc. 106

Dues, Fees, or Assessments. 106

Contribution of Property. 106

Clothing & Household Goods. 106

Ordinary Income or Short-Term Capital Gain Type Property. 106

Exception. 107

Capital Gain Type Property. 107

Exceptions. 107

Conservation Easements. 107

Loss Type Property. 108

Vehicle Donations. 109

Fractional Interests. 109

Other Types of Contributions. 109

Charitable Distributions from IRAs - '408. 110

Substantiation. 110

Cash Contributions. 110

Contributions Less Than $250. 110

Contributions of $250 or More. 111

Payroll Deduction Records. 112

Noncash Contributions. 112

Deductions of Less Than $250. 112

Additional Records. 112

Deductions of At Least $250 But Not More Than $500. 113

Deductions Over $500 But Not Over $5,000. 113

Deductions over $5,000. 114

Contributions over $75 Made Partly for Goods or Services. 114

Deduction for Taxes - '164 [Schedule A] 115

Income Taxes. 115

Real Property Tax. 116

Accrual Method Taxpayers. 116

State & Local Sales Tax Deduction - '164. 116

Personal Property Tax. 117

Other Deductible Taxes. 117

Examples of Non-Deductible Taxes. 118

Chapter 1 - Section 8 Review Questions. 120

Chapter 1 - Individual Tax Elements - Section 9. 122

Casualty & Theft Losses Suspended - '165 [Schedule A] 122

Definitions. 122

Proof of Loss. 122

Amount of Loss. 122

Insurance & Other Reimbursements. 123

Limitations. 123

Allocation for Mixed Use Property. 124

2% Itemized Deductions Suspended - '67 [Schedule A] 124

Deductions - Subject to 2% Limit 125

Deductions Not Subject To 2% Limit 125

Nondeductible Expenses. 125

Moving Expenses Suspended - '217. 126

Distance Test 127

Time Test 127

Time Test for Employees. 127

Time Test for Self-employment 127

Deductible Expenses. 128

Travel Expenses. 128

Travel by Car 129

Location of Move. 129

Reporting. 129

Reimbursements. 129

Chapter 1 - Section 9 Review Questions. 131

Chapter 1 - Individual Tax Elements - Section 10. 133

Credits. 133

Dependent Care Tax Credit - '21 [Form 2441] 133

Eligibility. 133

Employment Related Expenses. 133

Qualifying Out-of-the-home Expenses. 134

Payments to Relatives. 134

Allowable Amount 134

Dependent Care Assistance - '129. 134

Reporting. 134

Earned Income Tax Credit - '32 [Form 1040] 134

Persons with Qualifying Children. 135

Persons without a Qualifying Child. 136

Computation. 136

Phaseout 137

Disqualified Income - '32(i) 137

Means-Tested Programs. 137

Adoption Credit - '23 & '137. 137

Qualified Adoption Expenses. 138

Exclusion from Income for Employer Reimbursements - '137. 138

Chapter 1 - Section 10 Review Questions. 139

Chapter 1 - Individual Tax Elements - Section 11. 140

Child Tax Credit - '24. 140

Credit Amount 140

Qualifying Child. 140

Phase out 140

Refundable Child Care Credit Amount 140

AMT & Child Tax Credit 141

Hope & Lifetime Learning Credits - '25A.. 141

Lifetime Learning Credit - '25A(a)(1) 141

Phase Out - '25A(d)(2) 141

Hope (with American Opportunity modifications) Credit 141

Phase Out - '25A(d)(2) 142

Refundable. 142

Ministers & Military - '107. 142

Clergy. 142

Rental Value of a Home. 142

Members of Religious Orders. 142

Military & Veterans. 143

Wages - '61. 143

Nontaxable Income - '134. 144

Veterans Benefits - '134. 145

Chapter 1 - Section 11 Review Questions. 146

Chapter 2 - Expenses, Deductions & Accounting - Section 12. 147

Landlord's Rental Expense. 148

Reporting Rental Property Expenses (Repealed) - '6041. 148

Repairs & Improvements. 149

Repairs. 149

Improvements. 149

Repair Regulations - Reg. '1.263(a)-3. 149

Application. 150

De Minimis Safe Harbor Election. 150

Making the Safe Harbor Election. 151

Analytical Framework for Repairs vs. Improvement 151

Alternatives To The Facts & Circumstances Analysis. 151

Safe Harbor Election For Small Taxpayers. 151

Safe Harbor For Routine Maintenance. 151

Election To Capitalize Repair & Maintenance Costs. 151

Change in Accounting Method & Form 3115. 152

Salaries & Wages. 152

Rental Payments for Property & Equipment 152

Insurance Premiums. 152

Local Benefit Taxes & Service Charges. 152

Travel & Local Transportation Expenses. 153

Tax Return Preparation. 153

Other Expenses. 153

Tenant's Rental Expense. 153

Rent Paid in Advance. 154

Lease or Purchase. 154

Determining the Intent 154

Taxes on Leased Property. 155

Cash Method. 155

Accrual Method. 155

Cost of Acquiring a Lease. 156

Option to Renew - 75% Rule. 156

Cost of a Modification Agreement 157

Commissions, Bonuses, & Fees. 157

Loss on Merchandise & Fixtures. 157

Improved Leased Property. 157

Construction Allowances Provided To Lessees - '110. 158

Assignment of a Lease. 158

Capitalizing Rent Expenses. 159

Chapter 2 - Section 12 Review Questions. 160

Chapter 2 - Expenses, Deductions & Accounting - Section 13. 161

Health Insurance Costs of Self-Employed Persons - '162(l) [Schedule C] 161

Requirements for Eligibility. 161

Amount Deductible. 161

Percentage. 161

Hobby Loss Rules - '183 [Schedule C] 162

Allowable Deductions. 162

Limited Deductions. 162

Profit Motive Presumptions. 163

Special Rule for Horse Breeding. 163

Other Factors. 163

Self-Employment Taxes - '3111 & '3121. 164

Home Office Deduction - '280A [Schedule C] 164

Requirements. 164

Deductible Expenses. 165

Employee's Home Leased To Employer 166

Residential Phone Service. 166

Allocations. 166

Room v. Square Footage. 166

R.P. 2013-13 Safe Harbor 166

Limitations. 167

Expanded Principal Place of Business Definition. 168

Business & Investment Credits. 170

Business Credit Carryback & Carryforward Rules - '39(a) 171

NOL Comparison - '172. 171

Chapter 2 - Section 13 Review Questions. 172

Chapter 2 - Expenses, Deductions & Accounting - Section 14. 173

Travel & Entertainment 173

Travel Expenses. 173

Determining a Tax Home - Travel Expenses. 174

Tax Home. 174

Regular Place of Abode in a Real & Substantial Sense. 174

Two Work Locations. 174

Temporary Assignment 175

Rigid One-Year Rule. 175

Away From Home - Travel Expenses. 176

Sleep & Rest Rule. 176

Substantial Period. 176

Chapter 2 - Section 14 Review Questions. 178

Chapter 2 - Expenses, Deductions & Accounting - Section 15. 179

Business Purpose - Travel Expense. 179

Categories of Expense. 179

Travel Costs. 179

Costs at Destination. 179

All or Nothing. 179

Time. 179

51/49 Rule. 179

Foreign Business Travel 180

Personal Pleasure. 180

Primarily Business. 180

Full Deduction Exception. 180

Limitations - Travel Expenses. 180

Meals & Lodging. 180

Domestic Conventions & Meetings. 181

Foreign Conventions & Meetings. 181

Cruise Ship Convention. 181

Chapter 2 - Section 15 Review Questions. 183

Chapter 2 - Expenses, Deductions & Accounting - Section 16. 185

Entertainment Expenses Repealed. 185

Former Test #1 - "Directly Related". 185

Former Test #2 - "Associated With". 186

Statutory Exceptions Still Good - '274(e) 186

Expense for Spouses Of Out Of Town Business Guests. 187

Entertainment Facilities. 188

Home Entertainment Expenses. 188

Percentage Reduction for Meals - '274(n)(1) 188

Exceptions. 188

Ticket Purchase Face Value Restriction. 188

Charitable Sports Events Exception. 188

Skyboxes. 189

One Event Rule. 189

Related Parties. 189

Food & Beverages. 189

Chapter 2 - Section 16 Review Questions. 190

Chapter 2 - Expenses, Deductions & Accounting - Section 17. 192

Substantiation - '274(d) 192

Travel Expense Substantiation. 192

Entertainment & Meal Expense Substantiation. 192

Business Gifts Expense Substantiation. 193

Substantiation Methods. 193

Adequate Records. 193

Sufficiently Corroborated Statements. 194

Exceptional Circumstances. 194

Retention of Records. 194

Exceptions to Substantiation Requirements. 195

Employee Expense Reimbursement & Reporting. 195

Family Support Act of 1988. 196

Remaining Above-The-Line Deduction. 197

Chapter 2 - Section 17 Review Questions. 198

Chapter 2 - Expenses, Deductions & Accounting - Section 18. 200

Accountable Plans. 200

Reasonable Period of Time. 201

Adequate Accounting. 201

Per Diem Allowance Arrangements. 202

Federal Per Diem Rate. 202

Related Employer 206

Meal Break Out 206

Partial Days of Travel 206

Usage & Consistency. 206

Unproven or Unspent Per Diem Allowances. 207

Travel Advance. 207

Reporting Per Diem Allowances. 207

Reimbursement Not More Than Federal Rate. 207

Reimbursement More Than Federal Rate. 208

Nonaccountable Plans. 208

Unreimbursed Employee Expenses. 209

Chapter 2 - Section 18 Review Questions. 210

Chapter 2 - Expenses, Deductions & Accounting - Section 19. 212

Local Transportation. 212

Assignments within Work Area. 212

Old Revenue Ruling 90-23 (Superseded) 212

Temporary Work Site Definition. 213

Reserve Units. 213

Revenue Ruling 99-7. 213

Automobile Deductions. 214

Eligible Expenses. 214

Apportionment of Personal & Business Use. 214

Actual Cost Method. 215

Depreciation & Expensing. 215

Placed in Service. 215

Half-year Convention. 215

Quarterly Convention Exception. 215

MACRS. 215

Double Declining Balance Method. 216

Depreciation "Caps". 216

Bonus (or Additional First-year) Depreciation - '168. 216

$25,000 SUV Limit 217

Expensing Limit 217

Chapter 2 - Section 19 Review Questions. 218

Chapter 2 - Expenses, Deductions & Accounting - Section 20. 220

Predominate Business Use Rule. 220

Qualified Business Use. 220

More Than 50% Use Test 220

Limitations. 220

Recapture. 220

ITC Recapture. 220

Excess Depreciation Recapture. 221

Leasing Restrictions. 221

Standard Mileage Method. 221

Limitations. 222

Alternating Use. 222

Switching Methods. 222

Charitable Transportation. 222

Medical Transportation. 223

Gas Guzzler Tax - '4064. 223

Automobiles. 223

Limousines. 224

Vehicles Not Subject To Tax. 224

Chapter 2 - Section 20 Review Questions. 225

Chapter 2 - Expenses, Deductions & Accounting - Section 21. 227

Fringe Benefits. 227

Excluded Fringe Benefits. 227

Prizes & Awards - '74. 227

Group Life Insurance Premiums - '79. 227

Personal Injury Payments - '104. 228

Employer Contributions to Accident and Health Plans - '106 & '105. 228

Partnerships & S Corporations - R.R. 91-26. 228

Health Insurance & FICA - Announcement 92-16. 228

Meals & Lodging - '119. 229

Cafeteria Plans - '125. 229

Educational Assistance Programs - '127. 230

Dependent Care Assistance - '129. 231

No-Additional-Cost Services - '132(b) 231

Qualified Employee Discounts - '132(c) 231

Working Condition Fringe Benefits - '132(d) 232

Transportation in Unsafe Areas - Reg.'1.132-5(m) 232

De Minimis Fringe Benefits - '132(e) 233

Employer-Provided Automobile. 233

Cents Per Mile Method. 234

Commuting Value Method. 234

Annual Lease Value Method. 234

Chapter 2 - Section 21 Review Questions. 237

Chapter 2 - Expenses, Deductions & Accounting - Section 22. 239

Methods of Accounting - '446. 239

Cash Method. 239

Constructive Receipt 239

Accrual Method. 239

Advance Payments. 239

Accrual Method Required. 240

Other Methods of Accounting. 240

Hybrid Methods. 240

Long-Term Contracts - '460. 240

Percentage of Completion. 240

Percentage of Completion - Capitalized Cost Method. 241

Look-back Rule. 241

Uniform Capitalization - '263A.. 241

Annual Sales Limit 241

Artist Exception. 241

Classification of Property. 241

Costs. 242

Self Constructed Assets. 242

Allocation Method. 242

Manufactured Products. 242

Interest 243

Change in Accounting Method. 243

Chapter 2 - Section 22 Review Questions. 244

Chapter 2 - Expenses, Deductions & Accounting - Section 23. 246

Accounting Periods. 246

Personal Service Corporations. 248

C Corporations. 248

Business Purpose Exception. 248

Section 444 Election. 248

Partnerships & S Corporations. 249

Personal Service Corporations. 249

Tiered Structures. 249

Expensing - '179. 249

Placed In Service. 249

Qualifying Property. 250

Section 1245 Property. 250

Qualified Real Property. 251

Property Used Primarily for Lodging. 251

Purchase Restrictions. 251

Deduction Limit 252

Maximum Dollar & Investment Limits. 252

Taxable Income Limit 253

Carryover of Unallowable Deduction. 253

Married Taxpayers Filing Separate Returns. 254

Passenger Automobiles. 254

Revocation of Election. 255

Figuring the Deduction. 255

Recapture of '179 Deductions. 256

Dispositions. 256

Installment Sales. 256

Depreciation & Cost Recovery - '167 & '168. 256

Personal Property. 256

ACRS - '168. 256

Applicable Percentage. 257

Straight-line Election. 257

MACRS. 257

Elections. 258

MACRS Conventions. 258

Mid-quarter Convention Exception. 259

Recapture - '1245. 259

Bonus (or Additional First-year) Depreciation - '168. 259

Qualified Property - '168(k)(2) 260

Depreciation Limits on Business Vehicles - '168(k)(2)(F)(iii) 261

Nonqualified Property. 261

Real Property. 267

ACRS. 267

MACRS. 274

Prior Law Leasehold Improvement, Retail Improvement & Restaurant Property - '168. 274

Qualified 15-Year Leasehold Improvement Property - '168(e)(3)(E)(iv) 275

Qualified Leasehold Improvement Property. 275

Qualified 15-Year Retail Improvement Property - '168(e)(E)(ix) 275

Qualified Retail Improvement Property. 276

15-Year Restaurant Improvement Property - '168(e)(3)(E)(v) 276

Qualified Restaurant Property. 276

Expensing & Bonus Depreciation Permitted. 276

Expensing - '179. 276

Bonus Depreciation - 168. 277

Recapture Considerations - '1245 & '1250. 277

Qualified Improvement Property - 2018 and Later - '168(e)(6)(A) 277

Recapture - '1250 & '1245. 282

Section 1245. 282

Full Recapture. 282

Section 1250. 282

Partial Recapture. 282

MACRS Recapture Exception for Real Property. 282

Alternative Depreciation System - '168(g) 282

Mandatory Application. 282

Method. 283

Amortization. 283

Costs Eligible for Amortization. 283

Trademarks & Trade Names - '167(r) 283

Methods & Periods for Amortization. 283

Partnership & Corporate Organization Costs - '709 & '248. 284

Business Start-Up Costs - '195. 284

Depletion - '613. 284

Other Assets. 284

Chapter 2 - Section 23 Review Questions. 285

Chapter 3 - Property Transfers & Retirement Plans - Section 24. 287

Sales & Exchanges of Property. 288

Sale or Lease. 288

Easements. 288

Capital Gains & Losses. 288

Capital Assets - '1221. 288

Capital Gains & Qualified Dividends Rate '1(h) 289

Holding Periods - ('1222 & '1223) 290

Capital Losses - '1211. 291

Business Property. 291

Basis of Property. 291

Basis Adjustments. 291

Property Received as a Gift 292

Property Received by Inheritance. 292

Changes in Property Usage. 292

Stocks & Bonds. 292

Chapter 3 - Section 24 Review Questions. 294

Chapter 3 - Property Transfers & Retirement Plans - Section 25. 295

Sale of Personal Residence - '121. 295

Two-Year Ownership & Use Requirements. 295

Tacking of Prior Holding Period. 295

Prorata Exception. 296

Limitations on Exclusion. 296

Reduced Home Sale Exclusion for Periods of Nonqualified Use. 296

Computation. 297

Nonqualified Use. 297

Post-May 6, 1997 Depreciation. 297

Surviving Spouse Home Sale Exclusion. 297

Installment Sales - '453. 297

General Rules. 297

Dealer Sales. 298

Unstated Interest 298

Related Parties - '453(e) 298

Disposition of Installment Notes - '453B.. 300

Determining Installment Income. 300

Pledge Rule. 302

Escrow Account 302

Depreciation Recapture. 302

Like-Kind Exchange. 302

Chapter 3 - Section 25 Review Questions. 303

Chapter 3 - Property Transfers & Retirement Plans - Section 26. 305

Repossessions - '1038. 305

Personal Property. 305

Non- Installment Method Sales. 305

Basis of Installment Obligation. 305

Gain or Loss on Repossession. 306

Installment Method Sales. 306

Basis of Installment Obligation. 306

Gain or Loss on Repossession. 306

Basis of Repossessed Personal Property. 307

Bad Debt 307

Real Property. 308

Conditions. 308

Figuring Gain on Repossession. 308

Limit on Taxable Gain. 308

Repossession Costs. 309

Indefinite Selling Price. 310

Character of Gain. 310

Basis of Repossessed Real Property. 310

Holding Period for Resales. 311

Bad Debt 311

Sellers Former Home Exception. 312

Chapter 3 - Section 26 Review Questions. 315

Chapter 3 - Property Transfers & Retirement Plans - Section 27. 317

Involuntary Conversions - '1033. 317

Condemnations. 317

Threat of Condemnation. 317

Reports of Condemnation. 317

Property Voluntarily Sold. 318

Easements. 318

Condemnation Award. 318

Amounts Withheld From Award. 318

Net Condemnation Award. 319

Interest on Award. 319

Payments to Relocate. 319

Severance Damages. 319

Treatment of Severance Damages. 320

Expenses of Obtaining an Award. 320

Special Assessment Withheld from Award. 320

Severance Damages Included in Award. 321

Gain or Loss from Condemnations. 321

How to Figure Gain or Loss. 321

Part Business or Part Rental 321

Postponement of Gain. 322

Choosing to Postpone Gain. 322

Cost Test 322

Replacement Period. 322

Condemnation. 322

Replacement Property Acquired Before the Condemnation. 322

Extension. 323

Time for assessing a deficiency. 324

Chapter 3 - Section 27 Review Questions. 325

Chapter 3 - Property Transfers & Retirement Plans - Section 28. 327

At-Risk Limits for Real Estate - '465. 327

Amount At Risk. 327

Qualified Nonrecourse Financing. 327

Section 1031 Like-Kind Exchanges. 328

Statutory Requirements & Definitions. 328

Qualified Transaction - Exchanges v. Sales. 328

Held for Productive Use or investment 328

Investment Purpose. 329

Statutory Exclusions from '1031. 329

Like-Kind Property. 329

Nature or Quality of Property. 329

Like-Kind Status for Personal Property Repealed. 329

Real v. Personal Property. 329

Chapter 3 - Section 28 Review Questions. 331

Chapter 3 - Property Transfers & Retirement Plans - Section 29. 332

The Concept of Boot. 332

Realized Gain. 332

Recognized Gain. 332

Limitation on Recognition of Gain under '1031. 332

The Definition of Boot. 332

The Rules of Boot. 333

Property Boot 333

Mortgage Boot 333

Netting Boot - The Rules of Offset 333

Property Boot Given Offsets Any Boot Received. 333

Mortgage Boot Given Offsets Mortgage Boot Received. 333

Mortgage Boot Given Does Not Offset Property Boot Received. 334

Revenue Ruling 72-456 & Commissions. 334

Gain or Loss on Boot 334

Basis on Tax-Deferred Exchange. 334

Allocation of Basis. 334

Installment Reporting of Boot 334

Exchanges Between Related Parties. 335

Reporting an Exchange. 335

Types of Exchanges. 335

Two-Party Exchanges. 335

Three-Party Alderson Exchange. 336

Three-Party Baird Publishing Exchange. 337

Delayed Exchanges. 338

45-Day Rule. 338

Method of Identification. 338

180-Day Rule. 338

Chapter 3 - Section 29 Review Questions. 340

Chapter 3 - Property Transfers & Retirement Plans - Section 30. 341

Final Regulations for Delayed (Deferred) Exchanges. 341

Deferred (Delayed) Exchange Definition. 341

Identification Requirements. 341

Identification & Exchange Periods. 341

Method of Identification. 341

Property Description. 342

Revocation. 342

Substantial Receipt 342

Multiple Replacement Properties. 342

Actual & Constructive Receipt Rule. 342

Four Safe Harbors. 343

Safe Harbor #1 - Security. 343

Safe Harbor #2 - Escrow Accounts & Trusts. 343

Safe Harbor #3 - Qualified Intermediary. 344

Safe Harbor #4 - Interest 344

Exchanges of Partnership Interests. 344

Chapter 3 - Section 30 Review Questions. 346

Chapter 3 - Property Transfers & Retirement Plans - Section 31. 347

Retirement Plans. 347

Qualified Deferred Compensation. 347

Qualified v. Nonqualified Plans. 347

Major Benefit 349

Current Deduction. 349

Timing of Deductions. 349

Part of Total Compensation. 349

Compensation Base. 349

Salary Reduction Amounts. 349

Benefit Planning. 350

Pension Protection Act of 2006. 350

Comparison with IRAs & Keoghs. 352

Basic ERISA Provisions. 352

ERISA Reporting Requirements. 352

Fiduciary Responsibilities. 353

Bonding Requirement 353

Prohibited Transactions. 353

Additional Restrictions. 353

Fiduciary Exceptions. 353

Loans. 354

Employer Securities. 354

Excise Penalty Tax. 355

PBGC Insurance. 355

Sixty-Month Requirement 355

Recovery Against Employer 355

Termination Proceedings. 355

Plans Exempt from PBGC Coverage. 356

Chapter 3 - Section 31 Review Questions. 357

Chapter 3 - Property Transfers & Retirement Plans - Section 32. 359

Basic Requirements of a Qualified Pension Plan. 359

Exclusive Benefit of Employees. 360

Highly Compensated Employees. 360

Reversion of Trust Assets to Employer 360

Participation & Coverage. 360

Average Benefits Test 362

Numerical Coverage. 362

Related Employers. 363

Vesting. 363

Full & Immediate Vesting. 363

Minimum Vesting. 363

Diversification Rights. 365

Nondiscrimination Compliance. 365

Contribution & Benefit Limits. 365

Defined Benefit Plans (Annual Benefits Limitation) - '415. 365

Defined Contribution Plans (Annual Addition Limitation) - '415. 366

Limits on Deductible Contributions - '404. 366

Assignment & Alienation. 366

Miscellaneous Requirements. 367

Basic Types of Corporate Plans. 367

Defined Benefit 368

Mechanics. 368

Defined Benefit Pension. 368

Defined Contribution. 368

Mechanics. 368

Discretion. 369

Favorable Circumstances. 369

Chapter 3 - Section 32 Review Questions. 370

Chapter 3 - Property Transfers & Retirement Plans - Section 33. 372

Types of Defined Contribution Plans. 372

Profit Sharing. 372

Requirements for a Qualified Profit Sharing Plan. 372

Written Plan. 372

Eligibility. 372

Deductible Contribution Limit 373

Substantial & Recurrent Rule. 373

Money Purchase Pension. 373

Cafeteria Compensation Plan. 375

Thrift Plan. 375

Section 401(k) Plans. 376

Death Benefits. 377

Defined Benefit Plans. 377

Money Purchase Pension & Target Benefit Plans. 378

Employee Contributions. 378

Non-Deductible. 378

Life Insurance in the Qualified Plan. 378

Return. 378

Universal Life. 379

Compare. 379

Plan Terminations & Corporate Liquidations. 379

10-Year Rule. 379

Lump-Sum Distributions. 379

Asset Dispositions. 380

IRA Limitations. 380

Chapter 3 - Section 33 Review Questions. 381

Chapter 3 - Property Transfers & Retirement Plans - Section 34. 382

Self-Employed Plans - Keogh. 382

Contribution Timing. 382

Controlled Business. 382

General Limitations. 383

Effect of Incorporation. 383

Mechanics. 384

Parity with Corporate Plans. 384

Figuring Retirement Plan Deductions For Self-Employed. 384

Self-Employed Rate. 384

Determining the Deduction. 386

Individual Plans - IRAs. 386

Deemed IRA.. 387

Mechanics. 387

Phase-out 387

Special Spousal Participation Rule - '219(g)(1) 387

Spousal IRA.. 389

Eligibility. 389

Contributions & Deductions. 390

Employer Contributions. 390

Retirement Vehicles. 390

Distribution & Settlement Options. 391

Life Annuity Exemption. 391

Minimum Distributions. 391

Required Minimum Distribution. 391

Definitions. 392

Distributions during Owners Lifetime & Year of Death after RBD.. 392

Sole Beneficiary Spouse Who Is More Than 10 Years Younger 394

Distributions after Owners Death. 394

Inherited IRAs. 396

Estate Tax Deduction. 397

Charitable Distributions from IRAs - '408. 397

Post-Retirement Tax Treatment of IRA Distributions. 397

Income In Respect of a Decedent 398

Estate Tax Consequences. 398

Losses on IRA Investments. 398

Prohibited Transactions. 398

Effect of Disqualification. 399

Penalties. 399

Borrowing on an Annuity Contract 399

Chapter 3 - Section 34 Review Questions. 400

Chapter 3 - Property Transfers & Retirement Plans - Section 35. 401

Tax-Free Rollovers. 401

Rollover from One IRA to Another 401

Waiting Period between Rollovers. 401

Partial Rollovers. 402

Rollovers from Traditional IRAs into Qualified Plans. 402

Rollovers of Distributions from Employer Plans. 402

Withholding Requirement 402

Waiting Period between Rollovers. 402

Conduit IRAs. 403

Keogh Rollovers. 403

Direct Rollovers from Retirement Plans to Roth IRAs. 403

Rollovers of '457 Plans into Traditional IRAs. 403

Rollovers of Traditional IRAs into '457 Plans. 404

Rollovers of Traditional IRAs into '403(B) Plans. 404

Rollovers from SIMPLE IRAs. 404

Nonspouse Rollovers. 404

Roth IRA - '408A.. 406

Eligibility. 406

Contribution Limitation. 406

Roth IRAs Only. 406

Roth IRAs & Traditional IRAs. 406

Conversions. 408

AGI Limit Exception Repealed. 408

Recharacterizations. 408

Reconversions. 409

Taxation of Distributions. 409

No Required Minimum Distributions. 409

Simplified Employee Pension Plans (SEPs) 410

Contribution Limits & Taxation. 412

SIMPLE Plans. 412

SIMPLE IRA Plan. 413

Employee Limit 413

Other Qualified Plan. 413

Set up. 413

Contribution Limits. 414

Salary Reduction Contributions. 414

Employer Matching Contributions. 414

Deduction of Contributions. 414

Distributions. 414

SIMPLE '401(k) Plan. 415

Chapter 3 - Section 35 Review Questions. 416

Chapter 4 - Losses, AMT & Compliance - Section 36. 417

Passive Losses. 417

Prior Law.. 418

Passive Loss Rules. 420

Application. 420

Active Losses. 420

Credits. 421

Calculating Passive Loss. 421

Categories of Income & Loss. 421

Passive. 421

Portfolio. 422

Material Participation. 422

Self-Charged Interest Regulations. 423

Passive Deduction - Portfolio Income. 423

Regulations. 423

Chapter 4 - Section 36 Review Questions. 426

Chapter 4 - Losses, AMT & Compliance - Section 37. 427

Suspension of Disallowed Losses. 427

Fully Taxable Disposition. 427

Abandonment & Worthlessness. 427

Related Party Transactions. 427

Credits. 428

Disallowance. 428

Increase Basis Election. 428

Transfer By Reason Of Death - '469(g)(2) 429

Transfer by Gift - '469(j)(6) 429

Installment Sale - '469(g)(3) 429

Activity No Longer Treated As Passive Activity - '469(f)(1) 430

Closely Held To Nonclosely Held Corporation- '469(f)(2) 430

Nontaxable Transfer 430

Ordering of Losses. 432

Capital Loss Limitation. 433

Carryforwards. 433

Allocation of Suspended Losses. 433

Taxpayers Affected. 433

Noncorporate Taxpayers. 433

Regular Closely Held Corporations. 434

Personal Service Corporations. 434

Definition. 434

Real Estate Professionals. 434

Activities. 435

Facts & Circumstances Test 435

Relevant Factors. 435

Rental Activities. 436

Limited Partnership Activities. 436

Partnership & S Corporation Activities. 438

Consistency. 438

Regrouping. 438

Partial Dispositions. 438

Chapter 4 - Section 37 Review Questions. 440

Chapter 4 - Losses, AMT & Compliance - Section 38. 442

Alternative Minimum Tax - '55. 442

Computation. 442

Tentative Minimum Tax. 443

AMT Exemption Amount - '55(d) 443

AMT Exemption Phaseout 443

Regular Tax Deduction - '55(c) 444

Tax Preferences & Adjustments. 444

Preferences & Adjustments for All Taxpayers. 444

Preferences & Adjustments for Noncorporate Taxpayers Only. 445

Preferences & Adjustments for Corporations Only Prior to 2018. 445

Adjustments - '56. 445

Itemized Deductions. 445

Medical Expenses. 445

Taxes. 445

Interest 446

Depreciation. 446

Alternative Depreciation System (ADS) 447

ADS Recovery Periods. 447

Asset Placed in Service After 1998. 448

Mining Exploration and Development Costs. 448

Basis. 448

Election. 448

Long-Term Contracts. 449

Home Construction Contracts. 449

Pollution Control Facilities. 449

Installment Sales. 449

Circulation Expenditures. 449

Incentive Stock Options. 450

Credit for Prior Year Minimum Tax & ISOs. 450

Research & Experimental Expenditures. 450

Passive Farm Losses. 451

Definition. 451

Loss Disallowance. 451

Allocation. 451

Same Activity Suspension. 451

Passive Activity Losses. 452

Corporate Business Untaxed Reported Profits (Pre-1990) 453

Corporate ACE Adjustment (1990 to 2018) 454

Adjusted Current Earnings Regulations. 455

Tax Preferences - '57. 456

Depletion. 456

Intangible Drilling Costs. 457

Excess Drilling Costs. 457

Accelerated Depreciation. 457

Real Property. 457

Personal Property. 457

Private Activity Bond Interest 458

Alternative Tax NOL Deduction. 458

Carrybacks & Carryovers. 458

Alternative Minimum Foreign Tax Credit 458

Foreign Tax Credit Carryback or Carryover 459

Tentative Minimum Tax. 459

Minimum Tax Credit 459

Regular Income Tax Reduced. 459

Carryforward of Credit 459

Other Credits. 459

Chapter 4 - Section 38 Review Questions. 460

Chapter 4 - Losses, AMT & Compliance - Section 39. 462

Compliance. 462

Reporting Requirements. 462

Real Estate Transactions [Form - 1099S] 462

Independent Contractors. 463

Cash Reporting [Form 8300] 464

Exceptions. 465

Recipients Knowledge. 466

Cash Reporting Rules - Attorneys. 466

Sale of Certain Partnership Interests (Form 8308) 466

Tax Shelter Registration Number [Form 8271] 467

Asset Acquisition Statement [Form 8594] 467

Chapter 4 - Section 39 Review Questions. 468

Chapter 4 - Losses, AMT & Compliance - Section 40. 470

Accuracy-Related Penalties. 470

Negligence. 470

Substantial Understatement of Income Tax. 470

Penalty on Carryover Year Return. 471

Substantial Valuation Overstatements. 471

Substantial Estate & Gift Tax Valuation Understatements. 472

Final Regulations. 472

Negligence or Disregard of Rules. 472

Substantial Understatement Penalty. 473

Adequate Disclosure. 473

Information Reporting & Penalties - '6721 et al 474

Corrections Resulting in Reduced Penalties. 474

Small Businesses. 474

Reasonable Cause. 474

Penalty for Unrealistic Position. 475

Realistic Possibility Standard. 475

Adequate Disclosure. 476

Form 8275-R.. 476

Statute of Limitations for Assessments. 477

Three Year Assessment Periods. 477

Six-Year Assessment Period. 477

No Statute Of Limitations. 477

Extension of Statute Of Limitations. 477

Examination of Returns. 477

How Returns Are Selected. 477

Arranging the Examination. 478

Transfers. 478

Representation. 478

Recordings. 478

Repeat Examinations. 478

Changes to Return. 479

Appealing Examination Findings. 479

Appeals Office. 479

Appeals to the Courts. 479

Court Decisions. 480

Recovering Litigation Expenses. 480

Other Remedies. 480

Claims for Refund. 480

Cancellation of Penalties. 480

Reduction of Interest 480

Chapter 4 - Section 40 Review Questions. 481

Answers & Explanations. 482

Glossary. 614

Index of Keywords & Phrases. a

CPE Exam Answer Sheet l

Final Examination. o