Taxation for Decision Makers
2020 EDITION
Shirley Dennis-Escoffier and
Karen A. Fortin
VP AND EDITORIAL DIRECTOR Michael McDonald ACQUISITIONS EDITOR Lise Johnson EDITORIAL MANAGER Judy Howarth CONTENT MANAGEMENT DIRECTOR Lisa Wojcik CONTENT MANAGER Nichole Urban SENIOR CONTENT SPECIALIST Nicole Repasky PRODUCTION EDITOR Bharathy Surya Prakash COVER PHOTO CREDIT © Manit Plangklang/EyeEm/Getty Images
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To the memory of Marty Escoffier who was always
ready with a willing hand to help, a word of
encouragement as deadlines neared, and a sense of
humor that never failed to make us laugh when we
needed it most. His presence has been missed as we
have worked on this revision.
Shirley Dennis-Escoffier and Karen A. Fortin
v
Preface xx About the Authors xxv
PART I INTRODUCTION TO TAXATION AND ITS ENVIRONMENT
1 An Introduction to Taxation 2
2 The Tax Practice Environment 47
PART II INCOME, EXPENSES, AND INDIVIDUAL TAXES
3 Determining Gross Income 110
4 Employee Compensation 155
5 Deductions for Individuals and Tax Determination 209
PART II I BUSINESS AND PROPERTY CONCEPTS
6 Business Expenses 274
7 Property Acquisitions and Cost Recovery Deductions 324
PART IV PROPERTY DISPOSITIONS
8 Property Dispositions 360
9 Tax-Deferred Exchanges 407
PART V BUSINESS TAXATION
10 Taxation of Corporations 458
11 Sole Proprietorships and Flow- Through Entities 507
PART VI WEALTH TAXATION
12 Estates, Gifts, and Trusts 566
Appendix Selected Tax Tables for 2019 and 2018 609
Index 619
Brief Table of Contents
vii
Preface xx About the Authors xxv
PART I Introduction to Taxation and Its Environment
1 An Introduction to Taxation 2
Setting the Stage—An Introductory Case, 3
1.1. An Introduction to Taxes, 3
1.1.1. What Is a Tax?, 3
1.1.2. Evolution of the Federal Income Tax, 4
1.1.3. State and Local Income Taxes, 5
1.1.4. Employment Taxes, 7
1.1.5. Wealth Taxes, 8
1.1.6. Wealth Transfer Taxes, 9
1.1.7. Consumption Taxes, 10
1.1.8. Tariffs and Duties, 12
1.2. Types of Tax Rate Systems, 13
1.2.1. The Progressive Tax Rate System, 13
1.2.2. Proportional “Flat” Tax Rate, 15
1.2.3. Regressive Taxes, 15
1.3. Characteristics of a Good Tax, 16
1.3.1. Equity, 16
1.3.2. Economy, 17
1.3.3. Certainty, 18
1.3.4. Convenience, 18
1.4. The Taxing Units and the Basic Income Tax Model, 19
1.4.1. The Basic Tax Model, 20
1.4.2. Trusts and Estates, 29
1.5. Choice of Business Entity, 30
1.5.1. Sole Proprietorships, 32
1.5.2. Partnerships, 33
1.5.3. C Corporations, 36
Table of Contents
viii Table of Contents
1.5.4. S Corporations, 37
1.5.5. Comparing Business Entity Attributes, 38
Revisiting the Introductory Case, 40
Summary, 40
Key Terms, 41
Test Yourself, 41
Problem Assignments, 42
Answers to Test Yourself, 46
2 The Tax Practice Environment 47
Setting the Stage—An Introductory Case, 48
2.1. Tax Compliance, 48
2.1.1. Filing a Tax Return, 48
2.1.2. Selecting Returns for Audit, 51
2.1.3. Types of Audits, 52
2.1.4. The Appeals Procedure, 53
2.1.5. Taxpayer Noncompliance Penalties, 54
2.1.6. Collection Procedures, 55
2.2. Professional Responsibil ities and Ethics, 56
2.2.1. Avoidance versus Evasion, 56
2.2.2. Tax Preparer Registration, 56
2.2.3. Tax Preparer Penalties, 56
2.2.4. Tax Professionals’ Dual Responsibilities, 57
2.2.5. Sources of Professional Guidance, 58
2.3. Tax Planning, 61
2.3.1. Cash Flows and Present Value, 62
2.3.2. Significance of the Marginal Tax Rate, 63
2.3.3. Timing Income and Deductions, 63
2.3.4. Income Shifting, 66
2.3.5. Changing the Character of Income, 67
2.3.6. Other Factors Affecting Tax Planning, 68
2.4. Tax Research, 71
2.4.1. Gather the Facts and Identify the Issues, 72
2.4.2. Locate Relevant Authority, 72
2.4.3. Evaluate the Sources of Authority, 79
2.4.4. Communicate the Recommendations, 86
2.4.5. Keeping Up-to-Date, 86
2.4.6. Sample Research Problem, 87
Revisiting the Introductory Case, 91
Summary, 91
Table of Contents ix
Key Terms, 92
Test Yourself, 92
Problem Assignments, 92
Answers to Test Yourself, 99
Appendix: Authorities for Sample Research Problem, 99
PART II Income, Expenses, and Individual Taxes
3 Determining Gross Income 110
Setting the Stage—An Introductory Case, 111
3.1. What Is Income?, 111
3.1.1. Taxable versus Gross Income, 112
3.1.2. Tax versus Financial Accounting, 112
3.1.3. Return of Capital Principle, 113
3.2. When Is Income Recognized?, 114
3.2.1. The Tax Year, 115
3.2.2. Accounting Methods, 116
3.3. Who Recognizes the Income?, 120
3.3.1. Assignment of Income Doctrine, 120
3.3.2. Community Property Laws, 120
3.4. Sources of Income, 121
3.4.1. Interest Income, 121
3.4.2. Dividend Income, 126
3.4.3. Annuity Income, 128
3.4.4. Transfers from Others, 129
3.4.5. Discharge of Indebtedness, 134
3.4.6. Tax Benefit Rule, 135
3.4.7. System for Reporting Income, 135
3.5. Exclusions, 136
3.5.1. Gifts and Inheritances, 136
3.5.2. Insurance Proceeds, 137
3.5.3. Scholarships, 139
3.5.4. Other Exclusions, 140
3.6. Expanded Topics—Jurisdictional Issues, 141
3.6.1. International Issues, 141
3.6.2. Taxpayers Subject to U.S. Taxation, 141
Revisiting the Introductory Case, 144
Summary, 144
Key Terms, 145
x Table of Contents
Test Yourself, 145
Problem Assignments, 146
Answers to Test Yourself, 154
4 Employee Compensation 155
Setting the Stage—An Introductory Case, 156
4.1. Employee Compensation, 156
4.1.1. Payroll Taxes, 156
4.1.2. Employee versus Independent Contractor, 158
4.1.3. Timing of Compensation Deduction, 161
4.1.4. Reasonable Compensation, 161
4.2. Employee Fringe Benefits, 163
4.2.1. Group Term Life Insurance Premiums, 165
4.2.2. Health and Accident Insurance Premiums, 166
4.2.3. Child and Dependent Care Programs, 167
4.2.4. Cafeteria Plans and Flexible Spending Arrangements, 167
4.2.5. No-Additional-Cost Services, 169
4.2.6. Employee Purchase Discounts, 169
4.2.7. Employee Achievement Awards, 170
4.2.8. De Minimis Fringe Benefits, 170
4.2.9. Working Condition Fringe Benefits, 171
4.2.10. Education Expenses, 173
4.2.11. Employee Relocation Expenses, 174
4.2.12. Substantiating Business Expenses, 175
4.3. Employee Stock and Stock Options, 176
4.3.1. Restricted Stock, 176
4.3.2. Stock Options, 179
4.3.3. Phantom Stock and Stock Appreciation Rights, 181
4.4. Deferred Compensation and Retirement Planning, 182
4.4.1. Qualified Retirement Plans, 182
4.4.2. Types of Retirement Plans, 183
4.4.3. Contribution Limits, 185
4.4.4. Nonqualified Deferred Compensation Plans, 186
4.4.5. Individual Retirement Accounts, 187
4.5. Self-Employed Individuals, 190
4.5.1. Employment Tax Consequences, 190
4.5.2. Fringe Benefits Limited, 192
4.5.3. Retirement Plans, 193
4.6. Expanded Topics—Foreign Assignments, 194
4.6.1. Foreign Earned Income Exclusion, 194
4.6.2. Excess Housing Cost Exclusion, 196
Table of Contents xi
4.6.3. Credit for Foreign Taxes, 196
4.6.4. Tax Reimbursement Plans, 197
4.6.5. Tax Treaties, 197
Revisiting the Introductory Case, 198
Summary, 198
Key Terms, 199
Test Yourself, 200
Problem Assignments, 201
Answers to Test Yourself, 208
5 Deductions for Individuals and Tax Determination 209
Setting the Stage—An Introductory Case, 210
5.1. The Individual Tax Model, 210
5.2. Adjustments to Income, 212
5.2.1. Student Loan Interest Deduction, 213
5.2.2. Educator Expenses, 214
5.2.3. Health Savings Accounts, 214
5.2.4. Penalty on Early Withdrawal of Savings, 215
5.2.5. Other Adjustments to Income, 215
5.3. Standard Deduction, 216
5.3.1. Standard Deduction Amounts, 216
5.3.2. Married Filing Jointly, 218
5.3.3. Surviving Spouse, 218
5.3.4. Married Filing Separately, 219
5.3.5. Head of Household, 220
5.3.6. Single (Unmarried) Individual, 221
5.4. Itemized Deductions, 221
5.4.1. Medical Expenses, 222
5.4.2. Taxes, 223
5.4.3. Interest Expense, 224
5.4.4. Charitable Contributions, 227
5.4.5. Casualty Losses, 230
5.4.6. Miscellaneous Itemized Deductions, 231
5.5. Qualified Business Income Deduction, 233
5.6. Dependents, 235
5.6.1. Qualifying Child, 235
5.6.2. Qualifying Relatives, 236
5.7. Tax Credits, 238
5.7.1. Credits versus Deductions, 238
5.7.2. Child Tax Credit, 238
5.7.3. Education Credits, 239
xii Table of Contents
5.7.4. Dependent Care Credit, 241
5.7.5. Earned Income Credit, 242
5.7.6. Excess Payroll Tax Withheld, 243
5.7.7. Other Credits, 243
5.8. Computing the Tax, 244
5.8.1. Medicare Surtaxes, 246
5.8.2. Alternative Minimum Tax, 248
5.8.3. Other Taxes, 252
5.9. Payment of Tax and Filing the Return, 252
5.9.1. Payment of Tax, 252
5.9.2. NOL, 253
5.9.3. Who Must File a Return?, 253
Revisiting the Introductory Case, 258
Summary, 259
Key Terms, 259
Test Yourself, 260
Problem Assignments, 261
Answers to Test Yourself, 271
PART III Business and Property Concepts
6 Business Expenses 274
Setting the Stage—An Introductory Case, 275
6.1. Criteria for Deductibility, 275
6.1.1. General Provisions for Trade or Business Expenses, 275
6.1.2. Ordinary and Necessary, 276
6.1.3. Contrary to Public Policy, 277
6.1.4. Related to Tax-Exempt Income, 278
6.1.5. Accrued to Related Party, 278
6.1.6. Obligation of Another Taxpayer, 278
6.1.7. Substantiation, 279
6.2. Timing of Deductions, 279
6.2.1. Accrual Method, 280
6.2.2. Cash Method, 280
6.2.3. Restrictions on Prepaid Expenses, 282
6.2.4. Disputed Liabilities, 283
6.3. Costs of Starting a Business, 283
6.3.1. Business Investigation and Start-Up Expenses, 283
6.3.2. Organization Costs, 284
Table of Contents xiii
6.4. Operating Expenses, 285
6.4.1. Business Meals and Entertainment, 285
6.4.2. Travel and Transportation Expenses, 286
6.4.3. Combining Business with Pleasure Travel, 289
6.4.4. Bad Debt Expenses, 291
6.4.5. Insurance Premiums, 292
6.4.6. Interest Expense, 292
6.4.7. Legal Expenses, 293
6.4.8. Taxes, 293
6.5. Limited Expense Deductions, 294
6.5.1. Residential Rental Property, 294
6.5.2. Home Office Expenses, 297
6.5.3. Hobby Expenses, 300
6.6. Expanded Topics—Book/Tax Differences, 300
6.6.1. Accounting for Income Tax Expense, 300
6.6.2. UNICAP Rules and Inventory, 307
Revisiting the Introductory Case, 309
Summary, 311
Key Terms, 312
Test Yourself, 312
Problem Assignments, 313
Answers to Test Yourself, 323
7 Property Acquisitions and Cost Recovery Deductions 324
Setting the Stage—An Introductory Case, 325
7.1. Capital Expenditures, 325
7.1.1. Capitalize or Expense, 326
7.1.2. Basis of Property, 327
7.2. MACRS, 330
7.2.1. Averaging Conventions, 331
7.2.2. Year of Disposition, 335
7.2.3. Alternative Depreciation System (ADS), 336
7.3. Special Expensing Provisions, 337
7.3.1. Section 179 Expensing Election, 337
7.3.2. Bonus Depreciation, 339
7.4. Provisions Limiting Depreciation, 341
7.4.1. Mixed-Use Assets, 341
7.4.2. Limits for Passenger Vehicles, 342
7.5. Depletion, 344
xiv Table of Contents
7.6. Amortization, 345
7.6.1. Research and Experimentation Expenditures, 346
7.6.2. Software, 347
Revisiting the Introductory Case, 347
Summary, 348
Key Terms, 348
Test Yourself, 348
Problem Assignments, 349
Answers to Test Yourself, 357
PART IV Property Dispositions
8 Property Dispositions 360
Setting the Stage—An Introductory Case, 361
8.1. Determining Gain or Loss on Dispositions, 362
8.1.1. Property Dispositions and Cash Flow, 362
8.1.2. Types of Dispositions, 363
8.1.3. Amount Realized, 364
8.1.4. Realized versus Recognized Gain or Loss, 365
8.1.5. Holding Period, 365
8.1.6. Character of Gains and Losses, 367
8.1.7. Mixed-Use Assets, 369
8.2. Disposition of Capital Assets, 369
8.2.1. The Capital Gain and Loss Netting Process, 369
8.2.2. Tax Treatment of Net Capital Gains and Losses, 371
8.3. Disposition of Section 1231 Property, 377
8.3.1. Depreciation Recapture, 378
8.3.2. Unrecaptured Section 1250 Gains for Individuals, 381
8.3.3. Section 1231 Look-Back Rules, 382
8.4. Mixed-Use Property, 384
8.5. Special Rules for Small Business Stock, 385
8.5.1. Losses on Section 1244 Stock, 385
8.5.2. Section 1202 Gains on Qualified Small Business Stock, 386
8.5.3. Comparison of Sections 1244 and 1202, 387
8.6. Sale of Principal Residence—Section 121, 388
8.6.1. Debt Reductions, Short Sales, and Foreclosures, 391
8.7. Navigating Individual Capital Gains Tax Rates, 391
8.7.1. Determining the Long-Term Capital Gains Tax Rate, 392
8.7.2. Planning with Multiple Tax Rates, 393
Table of Contents xv
Revisiting the Introductory Case, 394
Summary, 395
Key Terms, 396
Test Yourself, 396
Problem Assignments, 397
Answers to Test Yourself, 406
9 Tax-Deferred Exchanges 407
Setting the Stage—An Introductory Case, 408
9.1. Basics of Tax-Deferred Exchanges, 408
9.1.1. Basis Adjustments, 409
9.1.2. Holding Period, 410
9.2. Like-Kind Exchanges—Section 1031, 410
9.2.1. Qualifying Properties, 411
9.2.2. Determining Realized Gain or Loss and the Effect of Boot, 411
9.2.3. Basis and Holding Period of Like-Kind Property, 413
9.2.4. Indirect Exchanges, 414
9.3. Involuntary Conversions, 415
9.3.1. Casualty and Theft Losses, 415
9.3.2. Gains on Involuntary Conversions—Section 1033, 421
9.3.3. Involuntary Conversion of a Principal Residence, 424
9.4. Other Tax-Deferred Exchanges or Dispositions, 424
9.4.1. Wash Sales, 424
9.4.2. Installment Sales, 425
9.4.3. Related-Party Sales, 426
9.4.4. Other Deferrals, 428
9.5. Asset Transfers to Businesses, 428
9.5.1. Transfers to Sole Proprietorships, 428
9.5.2. Transfers to Controlled Corporations—Section 351, 429
9.5.3. Transfers of Property to a Partnership, 434
9.5.4. Formation of a Limited Liability Company, 437
9.6. An Introduction to Corporate Reorganizations, 437
Revisiting the Introductory Case, 438
Summary, 438
Key Terms, 439
Test Yourself, 439
Problem Assignments, 440
Answers to Test Yourself, 449
Appendix: Corporate Reorganizations, 450
xvi Table of Contents
PART V Business Taxation
10 Taxation of Corporations 458
Setting the Stage—An Introductory Case, 459
10.1. Introduction to Corporations, 459
10.1.1. Corporate Advantages, 460
10.1.2. Disadvantages of the Corporate Form, 461
10.1.3. Capital Structure, 461
10.2. Taxation of C Corporations, 463
10.2.1. Dividend Received Deduction, 463
10.2.2. Charitable Contribution Deduction, 464
10.2.3. Capital Gains and Losses, 465
10.2.4. Net Operating Losses, 466
10.2.5. Computing the Corporate Income Tax, 466
10.2.6. Reconciling Book and Taxable Income, 467
10.2.7. Tax Credits, 471
10.2.8. Filing and Payment Requirements, 472
10.3. Corporate Dividend Distributions, 472
10.3.1. Tax Effects of Dividend Distributions, 473
10.3.2. Calculating Earnings and Profits, 473
10.3.3. Applying E&P to Distributions, 474
10.3.4. Property Distributions, 477
10.3.5. Stock Dividends, 478
10.4. Corporate Redemptions and Liquidations, 479
10.4.1. Redemption Sale Requirements, 479
10.4.2. Partial Liquidation, 481
10.4.3. Liquidating Distributions, 482
10.4.4. Dividend and Redemption Planning Issues, 482
10.5. Issues for Closely Held Corporations, 484
10.5.1. Constructive Dividends, 484
10.5.2. Penalty Taxes to Encourage Dividend Payments, 485
10.5.3. Controlled Corporate Groups, 486
10.6. Consolidated Returns, 488
10.6.1. Consolidated Net Income, 489
Revisiting the Introductory Case, 490
Summary, 491
Key Terms, 491
Test Yourself, 492
Problem Assignments, 492
Table of Contents xvii
Answers to Test Yourself, 502
Appendix: Exempt Organizations, 502
11 Sole Proprietorships and Flow- Through Entities 507
Setting the Stage—An Introductory Case, 508
11.1. Intro duction to Flow-Through Business Entities, 508
11.2. The Sole Pro prietorship, 509
11.2.1. Forming the Sole Proprietorship, 509
11.2.2. Operating the Sole Proprietorship, 511
11.2.3. Limitation on Excess Losses, 513
11.2.4. Qualified Business Income Deduction, 514
11.2.5. Self-Employment Taxes, 515
11.3. Partnerships, 516
11.3.1. Types of Partnerships, 516
11.3.2. Advantages and Disadvantages of Partnerships and LLCs, 517
11.3.3. Entity versus Aggregate Concepts, 517
11.3.4. Partnership Operations, 518
11.3.5. Partner’s Basis Account, 523
11.3.6. Loss Limitation Rules, 525
11.3.7. Guaranteed and Nonguaranteed Payments, 527
11.3.8. Partnership Distributions, 528
11.3.9. Selling a Partnership Interest, 532
11.3.10. Qualified Business Income Deduction, 533
11.4. S Corpo ration Char acteristics, 534
11.4.1. Eligibility Requirements for S Status, 535
11.4.2. Making the S Election, 536
11.4.3. Terminating the S Election, 536
11.4.4. S Corporation Operations, 537
11.4.5. Loss Limitations, 541
11.4.6. Tracking Basis, 541
11.4.7. Property Distributions, 542
11.4.8. The S Corporation Schedules M-1, M-2, and M-3, 542
11.4.9. The Accumulated Adjustments Account, 543
11.4.10. S Corporation Taxes, 544
11.4.11. Redemptions and Liquidations by S Corporations, 545
11.5. Expanded Topics—The Passive Deduction Limitations, 546
11.5.1. Material Participation, 547
11.5.2. Real Property Business Exception, 548
Revisiting the Introductory Case, 549
Summary, 550
Key Terms, 551
xviii Table of Contents
Test Yourself, 551
Problem Assignments, 552
Answers to Test Yourself, 564
PART VI Wealth Taxation
12 Estates, Gifts, and Trusts 566
Setting the Stage—An Introductory Case, 567
12.1. Overview of Wealth Transfer Taxation, 567
12.1.1. The Unified Transfer Tax, 567
12.1.2. Features of the Unified Transfer Tax, 569
12.1.3. Major Exclusions, 569
12.2. The Federal Gift Tax, 572
12.2.1. Transfers Subject to Gift Taxes, 572
12.2.2. Transfers Excluded from Gift Taxes, 575
12.2.3. Valuation of Gift Property, 576
12.2.4. Special Rules Affecting the Annual Gift Tax Exclusion, 576
12.2.5. Gift Tax Deductions, 579
12.3. Tax Consequences for Donees, 580
12.3.1. Kiddie Tax, 581
12.3.2. Special Education Savings Plans, 582
12.4. The Taxable Estate, 583
12.4.1. Identifying the Gross Estate, 584
12.4.2. Valuation Issues, 586
12.4.3. Estate Deductions, 587
12.4.4. Generation-Skipping Transfer Taxes, 587
12.5. Transfer Tax Planning, 588
12.5.1. Selecting the Right Property to Give, 588
12.5.2. Advantages of Making Lifetime Gifts, 589
12.5.3. Disadvantages of Lifetime Gifts, 591
12.6. Fiduciary Income Tax Issues, 591
12.6.1. The Decedent’s Final Tax Return, 591
12.6.2. Income Tax Consequences of Inherited Property, 592
12.6.3. Income Taxation of Trusts and Estates, 593
12.7. Expanded Topics—The Tax Calculations, 594
12.7.1. Computing the Gift Tax, 594
12.7.2. Computing the Estate Tax, 595
12.7.3. Computing the Fiduciary Income Tax, 596
Revisiting the Introductory Case, 598
Table of Contents xix
Summary, 598
Key Terms, 599
Test Yourself, 599
Problem Assignments, 600
Answers to Test Yourself, 607
Appendix Selected Tax Tables for 2019 and 2018 609
Corporate Tax Rates for 2019 and 2018, 609
Individual Income Tax Rate Schedules for 2019 and 2018, 609
Social Security and Medicare Taxes for 2019 and 2018, 611
Standard Deductions for 2019 and 2018, 612
Tax Rates for Estates, Gifts, and Trusts for 2019 and 2018, 612
Depreciation Tables, 613
Present Value and Future Value Tables, 615
Index 619
xx
FOCUS
This text is designed for a one-semester introductory tax course at either the undergraduate or graduate level. It is ideal for an MBA course or any program emphasizing a decision-making approach. This text introduces all tax topics on the CPA exam in only 12 chapters.
COMPREHENSIVE YET CLEAR AND CONCISE
This text covers basic taxation of all taxable entities—individuals, corporations, S corporations, partnerships, and fiduciary entities, emphasizing a balance between concepts and details. Tax concepts and applications are presented in a clear, concise, student-friendly writing style with sufficient technical detail to provide a foundation for future practice in taxation and consulting while not overwhelming the student with seldom-encountered details.
WHAT’S NEW THIS EDITION
This text has been completely updated for all law changes and pronouncements issued through the first four months of 2019. In addition to updating all chapters for these changes, Chapter 1 was modified to better introduce the taxation of corporations and flow-through businesses including an introductory discussion of the qualified business income deduction. Additional details are provided in Chapter 5 regarding reporting on the individual tax return and in Chapter 11 on the returns for the flow-through businesses. Chapter 5 was rewritten and new sample filled-in tax forms have been introduced in this chapter as well as in other several chap- ters of the text.
TAX PLANNING
The importance of tax planning is emphasized throughout the text. Margin icons are woven into each chapter to highlight planning opportunities. Tax planning strategies are introduced early in Chapter 2 along with the impact of taxes on cash flow.
LEARNING OBJECTIVES
Each chapter begins with learning objectives for that specific chapter as well as a basic introduction to the included topics, emphasizing why decision makers need to understand these topics. Each chapter is organized by learning objective making is easy to identify rele- vant topics.
SETTING THE STAGE—AN INTRODUCTORY CASE
Each chapter opens with a case that focuses on one or more key issues within the chapter to promote critical analysis and decision-making skills. The case is then revisited at the end of the chapter with a suggested solution to stimulate further class discussion.
Preface
Preface xxi
EXAMPLES
Rigorous topics are tackled through numerous simple but realistic examples.
KEY CASES
Key Cases bring real world applications into the classroom.
KEY CASES In 2008, actor Wesley Snipes was sentenced to 3 years in prison for willfully failing to file tax returns for years 1999–2004, a period in which he earned more than $38 million. Follow- ing an unsuccessful appeal, he served his sentence in a medium-security prison in Pennsylvania.
In December 2014, Representative Michael Grimm, who had just been re-elected to his third term in Congress, resigned from Congress after agreeing to plead guilty to felony tax fraud. The indictment alleged that he kept two sets of records for a restaurant he previously owned con- cealing more than $1 million in gross receipts and underreporting his employees’ wages to avoid federal and state taxes. He served 7 months in prison.
EXPANDED TOPICS
The Expanded Topics section included at the end of Chapters 3, 4, 6, 11, and 12 contains more advanced topics for instructors who wish to challenge their students. These advanced discussions relate to the other material within the chapters, but which our adopters and reviewers have indi- cated could be omitted to allow more time for the more critical material.
SUMMARY
Each chapter closes with a Summary of the most important topics introduced in the chapter, rein- forcing important concepts for students.
KEY TERMS
A list of Key Terms is included at the end of each chapter. They appear in bold print and are keyed to the first page on which the term is discussed.
TEST YOURSELF
Each chapter includes a Test Yourself section of five multiple-choice questions for students to assess their understanding of topics covered in the chapter. Answers to these questions follow the end-of-chapter materials.
Example 1.1When Alex Rodriguez, the former Texas Rangers shortstop, lived in Texas (a state with no individual income tax), he owed more than $271,000 to California (which assesses a nonresident income tax) for games he played in that state during baseball season. It was estimated that if the Rangers had played all their games at home, A-Rod’s state tax bill could have been reduced by more than half a million dollars a year. When A-Rod switched to the New York Yankees, his state and local tax burden increased dramatically. On the $155 million that A-Rod was to be paid over his initial seven-year contract, he was expected to owe $3.57 million to New York City and an additional $6.19 million to the State of New York for income taxes.
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PROBLEM ASSIGNMENTS
More than 60 problems are included at the end of each chapter. Check Your Understanding includes a wide variety of noncomputational questions that review the topics included in the chapter. Crunch the Numbers presents quantitative problems covering the computational aspects of chapter materials. Comprehensive problems integrate topics covered in several different chapters.
DEVELOP PLANNING SKILLS
Develop Planning Skills problems give students the opportunity to test their knowledge in planning situations. The tax planning suggestions integrated throughout the text continually remind students of the importance of developing appropriate planning strategies.
THINK OUTSIDE THE TEXT
For instructors wishing to challenge their students, Think Outside the Text questions develop critical thinking skills by requiring students to expand their thinking beyond the material covered in the chapter.
IDENTIFY THE ISSUES
Identify the Issues includes short scenarios designed to challenge the students to identify issues and formulate research questions. These scenarios, however, do not provide enough information to enable students to develop definitive solutions but are designed to help students practice the issue- identification step in the research process, a step that many new tax students consider the most difficult.
DEVELOP RESEARCH SKILLS
Develop Research Skills requires students to research the relevant authorities and present possible solutions. These can be solved using a subscription-based tax service or free Internet sources. Citations to relevant Internal Revenue Code sections, cases, and rulings are included only in the Instructor’s Manual along with solutions to these research problems, allowing each instructor to decide what, if any, hints should be given to students when a problem is assigned.
FILL-IN THE FORMS
Most of the chapters have problems that require completion of one of more tax forms in a Fill-in the Forms section. Some of these are very basic and may simply require completion of forms for earlier problems—usually one or two forms—and will assist in familiarizing the student with basic tax forms. There are, however, several chapters that have more comprehensive problems that require completion of a number of forms. These will present a challenge to the student and lend themselves to completion in small groups. These include returns for individuals and the four types of business entities covered. All or parts of these problems may be assigned when the instructor feels the students are ready for additional challenges presented in translating tax knowledge to form completion. The solutions for these problems are only included in the Instructor’s Manual.
CHAPTER APPENDICES
End-of-chapter appendices introduce topics not typically covered in a first tax course including corporate reorganizations and taxation of nonprofit entities. These materials are placed in chapter appendices to allow instructors the flexibility to include or omit them as deemed appropriate.
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UP-TO-DATE
This text has been completely updated for all recent legislation and for all IRS pronouncements available as of April 2019.
ORGANIZATION
This text is ideal for schools with only one required tax course. Its 12 chapters can be covered in one semester, with time for assessments, eliminating the need to omit chapters. The text empha- sizes tax planning to stimulate students’ thinking in terms of the effect taxation has on decisions for both individuals and entities.
There are two introductory chapters in Part I. The first chapter includes a brief introduction to the different types of taxes and introduces Adams Smith’s Canons of Taxation that can be used throughout the text to evaluate specific tax legislation. To emphasize to students the decision- making focus of this text, the first chapter introduces simple problems on the choice of business entity and provides an easily understood background for the more complex material to follow. The second chapter covers tax compliance issues, an introduction to tax planning, and the basics of tax research. A sample research problem (with sources included in an appendix) is included that can be used to guide students in performing basic tax research at any time during the course.
Part II has three chapters that cover income and expenses, as well as other topics needed for individual return preparation. Chapter 3 answers the question, “What is income?” by exploring the various facets of taxable and nontaxable income for entities as well as individuals. Chapter 4 introduces an example of a dual planning orientation (the two sides to any transaction) with the discussion of employee compensation, a subject often relegated to the end of a text where, unfor- tunately, many students are never introduced to it. This topic provides an opportunity for students to view transactions from an individual employee’s perspective (maximizing employee bene- fits while minimizing taxable income) and the employer’s perspective (designing an optimum compensation plans that combines salary and benefits to attract valuable employees). The chapter provides a broader view of income by including the perspective of the entity making the payments.
Chapter 5 includes deductions for individuals and the additional related information on credits and tax rates necessary to complete an individual tax return. This allows the assignment and completion of basic individual tax returns early in the term.
The focus in Parts III and IV turns primarily to business-related subjects covering general business expenses in Chapter 6 and then capital recovery through depreciation, depletion, and amortization in Chapter 7. Chapters 8 and 9 present discussions of taxable and nontaxable prop- erty dispositions, respectively.
With the completion of Chapters 6 through 9, the student is ready to apply the information to the basic business entities starting in Part V with the regular corporation in Chapter 10. The specifics of the sole proprietorship and the basic flow-through entities of partnerships and S cor- porations and their relationship to their owners are included in Chapter 11.
Part VI includes an introduction to wealth transfer taxes—estate and gift taxes. It also includes a discussion of income taxation of estates and trusts, the tax effects on beneficiaries, and the kiddie tax.
YOUR COURSE YOUR WAY
The organization of the text is designed primarily to respond to our adopters who have indicated that many students’ interest in taxation is delayed until they are introduced to the provisions affecting their own current or potential taxation. Chapters 3 through 5 now contain the primary information relevant to individual taxation (excluding property transactions) for instructors who prefer introducing individual taxation prior to taxation of entities. Alternatively, Chapter 3,
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selected topics from Chapter 4, and Chapter 6 may be covered in sequence with topics unique to individuals tackled later in the term along with entity taxation. The flexibility of this text makes it easy to change the sequence of chapters as well as the topics within the chapters. Sections of the chapters are easily identifiable allowing instructors to pick and choose those they deem more important for classroom coverage. We have emphasized the readability of the text so that instruc- tors feel comfortable simply assigning sections to be read by students outside of the class while spending their limited classroom time on more complex topics. This text also works particularly well for instructors who use a flipped-classroom approach to their course.
SUPPLEMENTS
Supplements include an author-prepared Solutions Manual, a separate Instructor’s Manual with solutions to the Research and Tax Return Problems, an extensive Test Bank, and PowerPoint slides.
COMMENTS AND SUGGESTIONS
We realize that it is almost impossible for a text to be completely free of technical errors or to include every relevant topic. We welcome comments and suggestions on how we can improve the next edition. Please email your comments and suggestions to sdennis@miami.edu.
ACKNOWLEDGMENTS
We wish to acknowledge and thank Saira Fida at the University of Miami for her extensive help in this edition. We are grateful to the entire Wiley team for their assistance.
Shirley Dennis-Escoffier and Karen A. Fortin
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Shirley Dennis-Escoffier is an associate professor at the University of Miami, where she teaches both graduate and undergraduate tax classes. She received her Ph.D. from the University of Miami and returned to UM after teaching at the University of Hawaii and California State University in Hayward. She is a Certified Public Accountant licensed to practice in Florida. She is a Past President of the American Taxation Association and remains actively involved in the association receiving the Outstanding Service Award. She is also involved with the American Institute of Certified Public Accountants. She has received several teaching awards including the University of Miami Excellence in Teaching Award and the Masters in Taxation Excellence in Teaching Award. She has published numerous articles in tax and accounting journals and is the recipient of an Ernst and Young Foundation tax research grant.
Karen A. Fortin retired from her position as Professor of Accounting and Taxation at the University of Baltimore, where she had been Department Chair and taught graduate and under- graduate tax classes in both the Business School and the Law School. She received her Ph.D. from the University of South Carolina and held teaching positions at the University of Wisconsin– Milwaukee and the University of Miami. She was a Wisconsin Certified Public Accountant and a recipient of a Sells Award. During her teaching years, she was active in the American Taxation Association and the American Accounting Association as an editor, reviewer, and chairperson for numerous events. As a member of the AICPA she served on several committees and task forces. She has published numerous articles in tax and accounting journals and has co-authored and edited a number of textbooks.
About the Authors
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