805

INDEX

A

Above the line deductions, 442 Accelerated cost recovery system (ACRS), 436

Acceptance of offer, 156 Accident benefits, taxability of, 418 Accommodation party, 242 Accounting methods

Tax, 427 Accrual basis, 428 Accumulated adjustments account, 651

Accumulated earnings and profits, 642, 651

Accumulated earnings tax, 645 Acquisition indebtedness, 450

Stock purchase treated as, 644 Active income, 435 Active participation, 436 Actual (compensatory) damages, 175 Adjusted gross income, 442, 447 Adjustments to AMTI, 462, 631 Adoption expenses

Credit for, 468 Paid by employer, 419

Adverse possession, 393 Affiliated corporations, 640 Age Discrimination in Employment Act, 352

Agency Agent

Characteristics of, 329 Obligations of, 331

Coupled with an interest, 330 Creation of, 331 Employer/employee relationships, 329, 347

Independent contractor, 329 Partnership relationships, 108, 112 Principal

Obligations of, 332 Termination of, 335

Notice of termination, 335 AICPA Content and Skills Specification Outlines, 27

Alcohol fuels credit, 464 Alimony recapture, 423 Alimony, tax treatment

Payments, 446 Receipts, 423

Alternate valuation date, 718 Alternative depreciation system (ADS), 437

Alternative minimum tax, 461, 631 Americans with Disabilities Act of 1990, 352, 465

Amortization, tax purposes, 440 Annuities

Taxability of, 417, 424 Antecedent debt, 289 Anticipatory breach, 174

Anticybersquatting Consumer Protection Act, 387

Arbitration, 176 Articles of copartnership, 109 Articles of Incorporation, 124 Artisan’s lien, 309 Assessments, tax, 449, 473 Assignment

For benefit of creditors, 310 Of contracts, 170 Of income, 417 Of negotiable instruments, 233 Of partnership interests, 112, 116

Assumption of liabilities Partnerships, 591 Sales and exchanges, 552

At-risk limitation, 434, 588, 650 Attachment

Of security interests, 267 Perfection by, 268 Writ of, 309

Auctions, 158 Audit and appeal procedures, 472, 729

Authorized stock, 124 Automatic expulsion from AICPA, 38 Automatic perfection, 268 Averaging convention, 437 Awards, taxability of, 425

B

Bad debt, deductibility of Business, 432, 637 Nonbusiness, 432

Bailment, 381 Banker’s acceptance, 243 Bankruptcy, 238, 284

Administration costs, 292 Alternatives to, 284 Assignment for benefit of creditors, 310

Automatic stay of other legal proceedings, 287

Chapter 7, 285, 287 Chapter 11, 295 Chapter 13, 296 Claims to debtor’s estate, 291

Filing of, 291 Priority of, 291 Proof of, 291

Discharge, 293 Nondischargeable debts, 293 Reaffirmation of, 294 Revocation of, 294

Equity sense vs. bankruptcy sense, 287

Exempt entities, 287 Involuntary bankruptcy petitions, 286 Preferential transfers, 290 Priority of claims, 291 Proceedings, 287 Receiverships, 284

Trustee in bankruptcy, 287 As a lien creditor, 272 Duties and powers of, 287, 288 Exceptions to trustee’s power to avoid preferential transfers, 290

Types of proceedings Business reorganizations, 295 Debt adjustment plans, 296 Liquidation, 287

Voluntary bankruptcy petitions, 285 Banks, 244 Bargain and sale deeds, 391 Basis

Nonliquidating distributions, 596 Basis of accounting

Accrual, 428 Cash, 427, 594

Basis of partnership interests, 590 Basis of property

Carryover, 643 Estate, 719 Exchanges, 551 Gifts, 548, 717 In general, 548 In liquidation, 643 Partnership, 587, 598

Battle of forms, 197 Bearer paper, 232, 234 Beneficiaries, tax treatment of, 721 Bequest, 420 Bill of lading, 200, 246 Blank endorsement, 233 Blue-sky laws, 91 Bonds

Corporate, 126 Surety, 319

Bonds, market discount, 556 Boot, 552, 628 Breach of contract, 39, 174, 237 Brother-sister corporations, 640 Business energy credit, 464 Business expenses, deductibility of

By employees, 442, 456 By proprietor, 430

Business gifts, 432 Business income, tax purposes, 422, 430

Business property, gains and losses on, 562, 565

Capital gains treatment, 562, 565 Classification of, 565 Ordinary, 562, 565 Recapture rules

Section 291, 565 Section 1245, 563 Section 1250, 564

Section 1231, 562, 565 Business reorganizations, 295 Business use of home, 434 Buyers in the ordinary course of business, 271

COPYRIG

HTED M

ATERIAL

806 Index

C

Callable (or redeemable) stock, 126 Canceled stock, 124 Capital assets, 559 Capital expenditures, 448 Capital gains and losses, 559

Carryovers, 560, 637 Corporate, 561, 637 Holding period, 559 Individual, 422, 454, 560 Netting of, 560 Rollover of capital gain

On securities, 556 Capital gains exclusion for small business stock, 556

Capital surplus, 125 Capitalization of interest, tax purposes, 431

Capitalization of interest cost Tax purposes, 431

Carryforwards/carrybacks Of capital gains and losses, 561, 637 Of net operating losses, 433, 637

Cash basis, 427, 594 Casualty gains and losses, 454, 561, 637

Charitable gifts, 717 Checks, 228

Types of, 244 Child support, tax treatment

Payments, 424 Receipts, 417, 424

Child tax credit, 468 Civil liability, 84, 88 Civil Rights Act, 351 Claims for refund, 473 Claims to debtor’s estate, 291 Clean Air Act, 356 Clean Water Act, 357 Closely held C corporation, 435, 436 Closing agreement, 473 Collateral, 266

Types, 266 Collection from transferees and fiduciaries, 473

Combined corporations, 641 Common stock, 125 Compensation, taxability of, 422 Compensatory (actual) damages, 175 Composition agreement, 284, 310 Comprehensive Environmental, Compensation, and Liability Act, 358

Compromise, 473 Computer Matching and Privacy Act, 387

Computer technology rights, 382 Concurrent interest in real property, 389

Conduit, 585, 720 Consent dividends, 645 Consequential damages, 207 Consideration for contract, 160, 237 Consignments, 200, 270 Consolidations, 131 Consolidations, tax treatment, 653

Construction bonds, 319 Constructive eviction, 397 Constructive fraud, 41 Constructive receipt, 428 Constructive stock ownership, 557 Contingent expenses, deductibility of, 429

Contract price, 429 Contracts, 153

Acceptance of offer, 156 Against public policy, 164 Assignment of, 170 Battle of forms problem, 197 Consideration for, 160, 237 Delegation of, 170 Discharge of, 173 Essential elements of, 153, 154 Legal capacity, 163 Legality of, 164 Modification of, 162, 167, 198 Offer, 154

Auctions, 158 Termination of, 155

Online, 169 Parol evidence rule, 168 Performance, 173 Remedies for breach of contract, 175 Statute of Frauds, 165 Statute of limitations, 208 Types of, 154

Third-party beneficiary contracts, 171, 313

Uniform Commercial Code Rules, 195

Void/voidable contracts, 154, 163 Contribution, right of, 318 Contributions

Deductibility of Charitable

Corporate, 634 Individual, 452, 456 Nondeductible, 452 Qualified organizations, 452

To retirement plans By employer, 637 By self, 444

Contributory negligence, 41, 205 Controlled corporations, 640

Transfers to, 628 Controlled group, 558, 640 Controlled partnerships, transactions with, 592

Convertible stock, 126 Copyright law, 382 Copyrights, amortization of, 440 Corporate reorganizations, 653 Corporate taxation, 628, 725

Accumulated earnings tax, 645 Affiliated corporations, 640 Alternative minimum tax, 631 Calculation of tax, 637 Capital gains and losses, 559, 561, 637

Controlled corporations, 640 Transfers to, 628

Deductions, 633 Dividends and distributions, 641, 643

Dividends received deduction, 635 Earnings and profits, 642 Exempt organizations, 722 Filing and payment of tax, 630 Form 1120, 414, 630, 639 Individual taxation, variations from, 630

Liquidations, 643 Losses

Capital, 637 Net operating, 637 Ordinary, 636

Personal holding companies, 645 Reconciling book and tax income, 638

Reorganization, 653 Small business corporation stock (Sec. 1244), 629

Stock redemptions, 643 Tax rates, 630

Corporations Advantages of, 121 Articles of Incorporation, 123 Characteristics of, 121 Corporate structure

Substantial change in, 131 Directors, 127 Financial structure, 124 Formation of, 123 Officers, 127, 129 Promoters, 123 Stock

Classes of, 125 Definitions, 124 Marketing of, 126

Stockholders’ liability, 121, 131 Stockholders’ rights, 129 Types of, 122 Ultra vires acts, 127, 128

Cosureties, 318 Credit for the elderly and the disabled, 465

Creditor beneficiary, 171 Creditors’ agreement, 310 Credits, tax, 417, 463 Criminal liability, 48, 85, 88 Crummey trust, 716 Current earnings and profits, 642

D

Damages, 41, 45, 46, 175, 206 Mitigation of, 175, 207

Damages, taxability of, 419 De facto corporations, 123 De jure corporations, 123 De minimis fringes, 419 Death benefits, taxability of, 418 Debt

Discharge of Taxability of, 421

Discharge of indebtness, taxability, 421

Debt adjustment plans, 296 Debt-financed portfolio stock, 635 Debtor-creditor relationships, 309

Attachment, 309 Composition agreements, 310

Index 807

Construction bonds, 319 Contracts, surety and guaranty, 312 Cosureties, 318

Contribution, right of, 318 Discharge or release of, 319 Joint and several liability, 318

Creditors Assignment for the benefit of, 310 Composition agreement with, 310 Rights and remedies of, 314

Equal Credit Opportunity Act, 311 Exoneration, right of, 315, 319 Fair Credit Billing Act, 311 Fair Credit Reporting Act, 311 Fair Debt Collection Practices Act, 311

Fidelity bonds, 320 Garnishment, 310 Guarantor, 312

Capacity to act as, 314 Defenses, 315 Rights and remedies of, 315

Guaranty, 312 Contracts, 312

Homestead exemption, 311 Liens, 309 Performance bonds, 319 Reimbursement, right of, 315, 319 Rights and duties of, 309 Subrogation, right of, 315, 319 Surety, 312

Bonds, 319 Defenses of, 315 Rights and remedies of, 315

Truth-in-Lending Act, 311 Debts not discharged in bankruptcy, 293

Decedent, 425 Deductions from gross income

Corporate taxation, 633 Individual taxation, 417

Above the line, 442 Business, 430 Itemized, 447 Standard, 447

Partnership taxation, 587 Deed of trust, 396 Deeds, 391 Default, 272 Defined benefit pension plan, 637 Defined contribution pension plan, 637

Del credere, 330 Delegation of contracts, 170 Dental expenses, deductibility of, 447 Dependent care assistance, 419 Depletion, income tax purposes, 436, 440, 637

Depreciation Accelerated cost recovery system (ACRS), 436

Recapture, 430, 563 Depreciation, income tax purposes, 436, 637

Accelerated cost recovery system (ACRS), 436

Alternative depreciation system, 437

Modified accelerated cost recovery system (MACRS), 436

Derivative lawsuit, 130 Devises, 420 Digital Millennium Copyright Act, 387

Direct Public Offerings (DPO), 91 Disabled, credit for elderly and, 465 Disabled access credit, 464 Discharge

Of bankrupt, 293 Of contractual obligation, 173 Of liability on negotiable instrument, 242

Discharge of indebtedness, 421 Disciplinary systems, 38 Disclaimer of warranty, 204 Distributable net income, 721 Distributions, income tax purposes

From corporations, 641 Liquidations, 643 Stock redemptions, 643

From estates/trusts, 720 From partnerships, 595

Dividends, 130 Tax treatment

Payment of, 641 Receipt of

By corporations, 635 By individuals, 418, 420, 422, 429

By partnerships, 587 Doctrine of substantial performance, 173

Domestic corporation, 122 Donee beneficiary, 172 Drafts, 228, 243 Due diligence, 85 Due negotiation, 246 Dues, 432 Duress, 160

E

Earned income, 445 Earned income credit, 467 Earnings and profits, 643 Easement by prescription, 393 Economic effect, 589 Education expenses, tax treatment

Paid by self, 456 Paid via assistance, 419, 420, 717 Savings bonds for, 420

Education IRA, 445 Education loans

Deduction for interest on, 446 Embezzlement income, 426 Emergency Planning, and Community Right-to-Know Act, 359

Employee achievement awards, 426 Employee benefits, 350, 353 Employee benefits, taxability of, 418, 419

Employee business expenses, deductibility of, 442, 456

Employee discount, 419

Employee Retirement Income Security Act (ERISA), 354

Employee safety, 351 Employee stock purchase plan, 425 Employer social security credit, 465 Employer supplemental unemployment benefits, 425

Employer/employee relationships, 329, 347

Employer-provided child care credit, 465

Employment discrimination, 351 Empowerment zone employment credit, 465

Endangered Species Act, 359 Endorsement of negotiable instruments, 233

Entertainment expenses, deductibility of, 431

Environmental Compliance Audits, 359

Environmental liability, 355 Environmental Protection Agency (EPA), 356

Environmental regulation, 355 Clean Air Act, 356 Clean Water Act, 357 Comprehensive Environmental, Compensation, and Liability Act (CERCLA), 358

Emergency Planning, and Community Right-to-Know Act, 359

Endangered Species Act, 359 Federal Environmental Pesticide Control Act, 358

Federal Insecticide, Fungicide, and Rodenticide Act, 358

International protection of ozone layer, 359

Marine Protection, Research, and Sanctuaries Act, 359

National Environmental Policy Act, 356

Noise Control Act, 358 Nuclear Waste Policy Act, 359 Oil Pollution Act, 357 Pollution Prevention Act, 359 Resource Conservation and Recovery Act, 358

Safe Drinking Water Act, 357 Toxic Substance Control Act, 358

Equal Credit Opportunity Act, 311 Equal Employment Opportunity Commission, 353

Equal Pay Act, 352 Error, knowledge of, 54 E-SIGN Act, 169 Estate tax, 719

Alternate valuation date, 718 Basis of property, 719 Computation of, 718 Deductions, 719 Generation-skipping tax, 720 Gross estate, 718 Income in respect of a decedent, 425

808 Index

Property acquired from a decedent, 549

Estates Intestate succession, 380

Estates and trusts, taxation of Beneficiaries, 720 Computation of tax, 718 Termination of, 722

Estimated tax payments, 470 Estoppel

Promissory, 162 Exchanges, taxability of, 551 Exclusions from gross income, 417 Exculpatory clause, 165 Exempt organization, 722 Exempt securities, 82, 86 Exemptions, 457 Exoneration, right of, 315, 319 Expenses of Elementary and Secondary Teachers, 447

Express warranties, 203 Expulsion from AICPA, 38 Extraordinary dividend, 636

F

Fair Credit Billing Act, 311 Fair Credit Reporting Act, 311 Fair Debt Collection Practices Act, 311

Fair Labor Standards Act, 465 Family and Medical Leave Act, 353 Family Educational Rights and Privacy Act, 387

Family partnerships, 590 Federal Consolidated Budget Reconciliation Act, 354

Federal Counterfeit Access Device and Computer Fraud and Abuse Act, 385

Federal Employee Polygraph Protection Act, 355

Federal Environmental Pesticide Control Act, 358

Federal Fair Labor Standards Act, 353

Federal Insecticide, Fungicide, and Rodenticide Act, 358

Federal Insurance Contributions Act (FICA), 346

Federal Social Security Act, 345 Federal Unemployment Tax Act (FUTA), 346, 462

Fee simple, 388 Fellowships, taxability of, 421 FICA tax, 462 Fictitious name statutes, 109 Fictitious payee rule, 243 Fidelity bonds, 320 Fiduciary duty, 111, 128, 130 Field warehousing, 270 Fifty percent (50%) reduction rule, 431

Filing requirements Corporate taxation, 628 Estate tax, 718 Gift tax, 716

Individual taxation, 470 Filing status, 460 Financing statement, filing, 268 Fines, 430 Fitness for a particular purpose, warranty of, 204

Fixed amount, 230 Fixtures, 380 Foreign corporations, 122 Foreign Corrupt Practices Act, 89 Foreign earned income exclusion, 422 Foreign tax credit, 467 Foreseeable third party, 43 Foreseen third party, 43 Forgery, 238

Fictitious payee rule, 243 Imposter rule, 242

Fraud, 39, 158, 238 Fringe benefits, taxability of, 419, 652 Future interest in real property, 389

G

Gains and losses, tax treatment Between related parties, 557, 592, 636

Personal casualty and theft, 454, 561, 637

Gambling winnings/losses, tax treatment, 426, 457

Garnishment, 310 General business credit, 463 Generation-skipping tax, 720 Gift tax

Annual exclusion, 716 Basis of property, 717 Computation of, 716 Exclusions, 717 Generation-skipping tax, 720

Gifts Basis of, 548 Deductibility of, 453

Business gifts, 432 Exempt organizations, 722 Taxability of, 420

Nontaxable gifts, 716 Gifts of property, 380 Gift-splitting, 717 Good faith, 173, 198, 236 Grant deeds, 391 Gross income

Individual, 417, 422 Of business, 430

Gross negligence, 41 Group-term life insurance, 418 Guaranteed payments, 590 Guarantor of debt, 432 Guaranty contracts, 166, 312

H

Head of household status, 461 Health benefits, taxability of, 418 Health Insurance Portability and Accountability Act, 353

Hobby-loss rules, 432 Holder in due course, 235

Rights of, 237

Holder through a holder in due course, 239

Holding period, 559, 586 Home equity indebtedness, 450 Homestead exemption, 311 Hope Scholarship credit, 468

I

Identification of goods, 207 Illegal income, taxability of, 426 Illegality

Of commercial paper, 238 Of contracts, 164

Implied warranties, 203 Imposter rule, 242 Imputed interest, 422 Incentive stock option, 425 Incidental beneficiary, 172 Income distribution deduction, 721 Income in respect of a decedent, 425 Income tax deductibility, 449 Income tax return preparers, 53 Income tax returns

Form 1040 (Individuals), 412 Form 1065 (Partnerships), 413, 585 Form 1120 (Corporations), 414, 630

Income taxes Corporate, 630 Estate, 718 Gift, 716 Individual, 417 Partnerships, 587 Property transactions, 548 Trusts, 720

Incompetence, 163 Indemnity contract, 314 Independent contractor, 329, 347 Individual Retirement Account (IRA), 444

Individual taxation, 417 Alternative minimum tax, 461 Calculation of tax, 459 Deductions, 417

Above the line, 442 Business, 430

At-risk limitation, 434 Itemized, 447 Standard, 447

Depreciation, depletion, and amortization, 436

Estimated tax payments, 470 Exclusions, 417 Exemptions, 457 Filing requirements, 470 Filing status, 460 Gross income, 417, 422

Of a business, 430 Passive activities, 435 Tax accounting methods, 427 Tax procedures, 472 Tax rate schedules, 459 Tax tables, 459

Infancy, 238 Inheritances

Basis of, 549 Holding period of, 560 Taxability of, 420

Index 809

Injunction, 175 Innkeeper’s lien, 309 Innocent misrepresentation, 159 Insiders, 80

Preferential transfers to, 289 Reporting requirements of, 89

Insolvency, bankruptcy vs. equity sense, 287

Insolvent financial institutions, 557 Installment sales method

Tax reporting, 429 Insurable interest, 208 Insurance

Insurable interest, 208 Malpractice insurance, 48

Insurance policies, exchange of, 555 Insurance premiums, tax treatment

Paid by employer, 418 Paid by self-employed individual, 443

Insurance proceeds, taxability of, 418 Intangible assets

Section 197, 441 Tax treatment, 441

Intellectual property rights, 382 Interest expense, deductibility of

Education loan, 446 Investment interest, 451 Personal interest, 450 Qualified residence interest, 450

Acquisition indebtedness, 450 Home equity indebtedness, 450

Interest income Nontaxable, 420 Taxable, 422

Interest on overpayment of tax, 473 Interests in real property, 388 Internal Revenue Code

Section 179, expense deduction, 438, 563, 587

Section 197 intangibles, 441 Section 267, related taxpayers, 553 Section 291 recapture, preference items, 430, 565

Section 332, liquidations of subsidiaries, 644

Section 338, stock purchases treated as acquisitions, 644, 649

Section 351 transfers to controlled corporations, 628, 643

Section 381, NOL carryovers in acquisitions, 654

Section 382, NOL carryforwards and built-in losses after ownership change, 655

Section 465, at-risk limitations, 588, 650

Section 469, passive activity loss limitations, 589, 650

Section 751, unrealized receivables or inventory items, 595

Section 1231, business assets, 454, 560, 562, 563, 565, 587, 642

Section 1244, small business stock, 629

Section 1245 recapture, depreciable property, 430, 563, 565, 586, 595

Section 1250 recapture, depreciable realty, 430, 562, 564, 586

Section 1252 recapture, farm land, 595

Section 1366, pass-through to shareholders, 650

Section 2503(c), trusts for minors, 716

International protection of ozone layer, 359

Intestate succession, 380 Inurement, 723 Invasion of privacy, 387 Inventory, 430 Investment interest, 451 Involuntary bankruptcy, 286 Involuntary conversions

Tax treatment, 553 Itemized deductions, 447

Casualty and theft losses, 454 Charitable contributions, 452 Interest expense, 450 Medical and dental expenses, 447 Miscellaneous, 456 Taxes, 449

J

Joint and several liability, 113, 358 Joint return, 458, 460 Joint tenancy, 389 Joint venture, 117, 585 Judgment lien, 310 Jury duty pay, deductibility of, 446

K

Keogh plans, 444 Kickbacks, 430

L

Leasehold improvements Cost recovery of, 438 Taxability of, 422

Leases, 208, 396 Legal capacity to contract, 163 Legality

Of commercial paper, 238 Of contracts, 164

Liabilities Assumption of

Partnerships, 591 Sales and exchanges, 551, 552

Liability of parties of negotiable instruments, 240

Liens, 272, 289, 309, 394 Life insurance proceeds, taxability of, 418

Life interest, 389 Lifetime learning credit, 468 LIFO recapture, 647 Like-kind exchange, 551, 560 Limited liability, 121 Limited liability companies (LLC), 118

Limited liability partnerships (LLP), 120

Limited partnerships, 115

Liquidated damage clause, 175 Liquidation (Chapter 7), 287 Liquidations, corporate, 643

Of subsidiary, 644 Long-term construction contracts

Tax rules, 430 Losses

Tax treatment Between related parties, 557, 592, 636

Net operating losses Corporate, 637 Individual, 433

On deposits in insolvent financial institutions, 557

Passive activity, 435 Personal casualty and theft, 454, 561, 637

Low-income housing credit, 464

M

Making work pay credit, 470 Malpractice, 48 Marine Protection, Research, and Sanctuaries Act, 359

Market discount bonds, 556 Material alteration of negotiable instruments, 238

Material participation, 435 Materialman’s lien, 309 Meals and lodging provided by employer, taxability of, 419

Meals expense, deductibility of, 431 Mechanic’s lien, 309 Medical expenses, deductibility of, 447

Medical savings account (MSA), 419 Merchant, 196 Merchantability, warranty of, 203 Mergers, 131

Tax treatment, 653 Midquarter convention, 437 Minimum tax credit, 462, 632 Minority, 163, 238 Miscellaneous itemized deductions, 456

Misrepresentation, 158 Mistake, 155, 160 Mitigation of damages, 175, 207 Model Business Corporation Act, 126 Modified Accelerated Cost Recovery System (MACRS), 436

Money order, 243 Mortgages, 394 Moving expenses, tax treatment

Paid by employer, 419 Paid by self, 443

Multiple support agreement, 458 Municipal bonds, 420 Mutual mistake, 160

N

National Environmental Policy Act, 356

National Labor Relations Act, 353 Negligence, 40, 204

810 Index

Negotiable instruments, 228 Ambiguities in, 232 Assignment of, 233 Banks, 244 Bearer paper, 232, 234 Certificates of deposit, 229 Checks, 228

Types of, 244 Discharge of parties, 242 Documents of title, 245, 247 Drafts, 228

Types of, 243 Endorsements, 233 Forgery, 238

Fictitious payee rule, 242 Imposter rule, 242

General concepts, 227 Holder in due course, 235, 239

Holder through a holder in due course, 239

Rights of, 237 Liability of parties, 240

Accommodation party, 242 Contractual liability, 240 For forged instruments, 242 Primary and secondary, 240 Warranty liability, 240

Material alteration of, 238 Negotiability, requirements of, 229 Negotiation, 233

By agent, 241 By endorsement, 233

Notes, 228 Order paper, 232, 233 Personal defenses, 237 Presentment, 241 Promissory notes, 228 Real defenses, 237, 238 Securities law and, 82 Shelter provision, 239 Stop payment orders, 245 Types of, 228 UCC Article 3, 228 Warranties, 241 Warranty liability, 241

Net operating losses Corporate, 637

Ninety (90)-day letter, 472 No additional-cost services, 419 Noise Control Act, 357 Nonbusiness bad debt, 432 Nonpossessory interests in land, 390 Non-pro-rata distributions, 597 Nonqualified stock option, 425 Nonrecourse financing, 434 Nontaxable exchanges, 551, 560 Novation, 123, 173, 395 Nuclear Waste Policy Act, 359

O

Occupational Safety and Health Act (OSHA), 351

Offer to contract, 154 Oil Pollution Act, 357 Online contracts, 169 Order paper, 232, 233 Ordinary and necessary expenses, 430

Outside salesman expenses, deductibility of, 456

P

Parent-subsidiary relationship, 640 Parol evidence rule, 168 Partnership agreement, 110 Partnership taxation, 585

Cash method, use of, 594 Continuation of partnership, 594 Controlled partnerships, transactions with, 592

Form 1065, 585 Partnership agreements, 589 Partnership distributions, 588, 595 Partnership formation, 586 Partnership income/loss, 587

At-risk limitations, 588 Calculation of, 588

Partnership interest Basis of, 590 Sale of, 595

Partnership property, basis of, 586, 598 Optional adjustment to, 598 Passive activities, 589

Taxable year, 593 Termination of partnership, 594

Partnerships, 108, 121, 122, 132 Admission of partners, 111, 112, 116 Agency relationship, 109 Characteristics of, 109 Fiduciary duty, 108, 111 Formation of, 109 Interests in, 110

Assignment of, 110 Joint and several liability, 113 Joint ventures, 117 Limited, 109, 115

Assignment of interest, 116 Creation of, 115 Termination of, 117

Limited liability companies, 118 Limited liability partnerships, 120 Nature of, 108 Partners

Capacity to be, 109 General

Authority of, 111 Liability of, 113 Rights of, 110, 116

Limited, 115 Liability of, 115 Rights of, 116

Partnership property, 110 Profits and losses, 111, 116 Relationship to third parties, 112 Termination of

Dissolution, 114, 117 Notice of, 115

Distribution of property, 114 Winding up, 117

Withdrawal of partner, 113 Passive activities, 435, 589, 650, 653

Credits, 435 Limitation rules, 436 Losses, 435 Rental, 436

Pass-through entity, 585, 648 Past consideration, 162 Patent law, 383 Patents, amortization of, 440 Penalties

Imposed on tax preparers, 56 On premature withdrawals, 446 Taxpayer, 473

Pensions, 354 Benefits, taxability of, 424 Employer’s contribution to, 637 Taxability of, 424

Percentage-of-completion method Tax reporting, 430

Perfecting a security interest, 267 By attachment, 268

Purchase money security interest in consumer goods, 268

By control of collateral, 268 By filing a financing statement, 268

Performance bonds, 319 Performance of contract, 173 Periodic tenancy, 396 Personal casualty and theft losses, 454, 561, 637

Personal defenses, 237 Personal exemptions, 458 Personal holding companies, 645 Personal interest, 450 Personal property, 437 Personal property taxes deductibility, 449

Piercing the corporate veil, 131 Political contributions, taxability of, 421

Political gifts, 717 Pollution control facilities cost, amortization of, 440

Pollution Prevention Act, 359 Portfolio income, 435 Preemptive right, 130 Preferences, tax, 462, 631 Preferential transfers in bankruptcy proceedings, 290

Preferred stock, 125 Pregnancy Discrimination Act, 352 Premature withdrawals, 446 Preparer (income tax), 53 Present interest, 716 Presentment warranty, 241 Principal (in agency relationship), 329

Obligations of, 331 Privacy Acts, 387 Private activity bonds, 420 Privileged communication, 46 Privity of contract, 39, 42, 205 Prizes, taxability of, 425 Pro rata distributions, 595 Product liability, 203

Negligance, 204 Strict liability, 205 Warranty liability, 203

Disclaimers, 204 Professional corporations, 122 Professional responsibilities, 37

Accountant’s legal liability, 39

Index 811

Common law liability To clients, 39 To nonclients, 42

Criminal liability, 48 Statutory liability to third parties

Securities Act of 1933, 44 Securities Exchange Act of 1934, 45

Disciplinary systems, 38 Legal considerations, 46 Standards for tax services, 53

Promissory estoppel, 162 Promissory notes, 228 Promoters of corporation, 123 Property, 379

Acquired by Finding, 380 Gift, 380 Intestate succession, 380 Will, 380

Adverse possession, 393 Bailment, 381 Concurrent interests, 389

Joint tenancy, 389 Tenancy by the entirety, 390 Tenancy in common, 389

Contracts for sale of land, 390 Copyright law, 382 Deeds

Executing, 391 Recording of, 392 Types of, 391

Easement by prescription, 393 Fixtures, 380 Future interests, 389

Remainder, 389 Reversion, 389

Intellectual, 382 Interests in real property, 388 Leases, 396

Lessee’s/lessor’s duties and rights, 396

Sublease, 397 Termination of, 397 Type of leaseholds, 396

Mortgages, 394 Patent law, 383 Personal property, 379, 380 Present interests, 388

Fee simple, 388 Life interest, 389

Real property, 379, 388 Semiconductor Chip Protection Act, 384

Title insurance, 392 Trade fixtures, 380 Trade Secrets Law, 384 Trademarks, 385

Property settlement, taxability of, 417 Property transactions, tax treatment

Basis computation, 548 Exchanges, 551 Gifts, 548 Inheritances, 549 Stock dividends, 550 Stock rights, 550

Gains and losses Business property, 562

Capital, 559 Capital GL treatment of business property, 562

Corporate, 561, 637 Individual, 560

On sale, 551 On taxable exchanges, 551 Personal casualty and theft, 454, 561, 637

Losses on deposits in insolvent financial institutions, 557

Nontaxable exchanges, 551, 560 Involuntary conversions, 553, 560 Like-kind exchange, 551, 560 Principal residence, 554 Transfers between spouses, 559

Related-party transactions, 557, 559 Sale or exchange, 422, 548

Prospectus, 81 Proxy solicitation, 87 Publicly traded securities

Rollover of capital gain on, 556 Punitive damages, 41, 42, 175 Purchase money security interest, 268 Purchase-money mortgage, 394

Q

Qualified adoption expenses, 419 Qualified charitable organizations, 452

Qualified domestic trust (QDT), 719 Qualified endorsement, 234 Qualified moving expense reimbursement, 419

Qualified organizations, 452 Qualified residence interest, 450 Qualified Subchapter S trust (QSST), 646

Qualified terminable interest property, 717, 719

Qualified transportation fringes, 419 Qualified tuition and related expenses, deductibility of, 446

Qualifying widow(er), 460 Quitclaim deeds, 391

R

Ratification Of contract by minor, 163

Reaffirmation of dischargeable debts, 294

Real defenses against a holder in due course, 237, 238

Real property, 379, 388, 437 Real property taxes deductibility, 449 Realistic possibility standard, 53 Reasonableness of compensation, 431 Recapture rules, 563, 647 Reconcile book and taxable income, 638

Recovery property, 436, 563 Refund claims, 473 Registration statement, 80 Regulation of employment, 345

Age discrimination, 352 Civil Rights Act, 351

Employee safety, 351 Employment discrimination, 351 Environmental regulation, 355 Equal Pay Act, 352 Family and Medical Leave Act, 353 Federal Consolidated Budget Reconciliation Act, 354

Federal Employee Polygraph Protection Act, 355

Federal Fair Labor Standards Act, 353

Federal Insurance Contributions Act (FICA), 346

Federal Social Security Act, 345 Federal Unemployment Tax Act (FUTA), 346

Health Insurance Portability and Accountability Act, 353

National Labor Relations Act, 353 Occupational Safety and Health Act (OSHA), 351

Pensions, 354 Pregnancy Discrimination Act, 352 Self-Employment Contributions Act, 346

Title VII, 351 Unemployment benefits, 348 Unemployment insurance (FUTA), 346, 348

Vietnam Era Veterans Readjustment Assistance Act, 352

Vocational Rehabilitation Act, 352 Wages, 347 Wagner Act, 353 Whistle-blower Protection Act, 353 Worker Adjustment and Retraining Notification Act, 355

Workers’ compensation, 349 Rehabilitation expense credit, 464 Reimbursed employee business expenses, 442

Reimbursement Right of, 315, 319

Rejection of offer Effectiveness of, 157

Related-party transactions Tax treatment

Constructive stock ownership rules, 557, 559

Corporations Distributions to related persons, 643

Sales and exchanges, 636 Losses, expenses, and interest between related parties, 557, 636

Partnerships, 592 Spouses, 559

Gift tax, 717 Remainder, 389 Remedies for breach of contract, 175, 206

Removal of structural barriers, 448 Rent

Tax treatment Expense, 442 Income, 422, 429 Passive activity rules, 436

Rental of vacation home, 442

812 Index

Reorganization, corporate, 653 Replacement property, 553 Replevin, 208 Rescission of contract, 175 Research and development costs, deductibility of, 441, 637

Residence, tax treatment Interest on, 450 Sale or exchange of, 422, 554

Resource Conservation and Recovery Act, 358

Restitution, 175 Restrictive endorsement, 234 Retained earnings, 125 Retirement plans

Education IRA, 445 Individual retirement accounts (IRA), 444

Keogh plans, 444 Roth IRA, 445 Savings incentive match plan for employees (SIMPLE), 446

Simplified employee pension (SEP) plan, 445

Return of capital, 417 Reversion, 389 Revised uniform limited partnership act (RULPA), 115

Revised uniform partnership act (RUPA), 113

Revocation of discharge, 294 Revocation of offer, 155

Effectiveness of, 156 RICO, 49 Right to Financial Privacy Act, 387 Rights of a holder in due course, 237 Rights of parties upon default of secured interests, 272

Rollover of capital gain On securities, 556

Roth IRA, 445 Royalties, taxability of, 422, 429

S

S corporations, 646 Basis of stock, 650 Distributions, 422, 651 Election, 646

Built-in gain, 652 Eligibility requirements, 646 LIFO recapture, 647 Losses, deductibility of, 650 Passive income, 653 Taxability of, 647 Termination of, 647

Safe Drinking Water Act, 357 Sales

Bailments, 381 Battle of forms, 197 Buyer’s remedies for breach of contract, 207

Consignment, 200, 270 Contracts

For sale of goods, 166, 195 For sale of land, 165

Documents of title, 200 Bill of lading, 200

Transfer of, 245 Warehouse receipt, 200

Express warranties, 203 Identification, 207 Implied warranties, 203 Merchant, 196 Product liability, 203

Negligence, 204 Strict liability, 205 Warranty liability, 203

Remedies, 206 Buyer’s, 207 Seller’s, 206

Seller’s remedies for breach of contract, 206

Statute of Frauds, 154, 165 Statute of limitations, 208 Strict liability, 205 UCC Article 2, 195 Warranty liability, 203

Disclaimers, 204 Express warranties, 203 Implied warranties, 203 Warranty of title, 203

Sales and exchanges, tax treatment Of property, 422, 548 Of residence, 422, 554 Of securities, 422, 556

Sarbanes-Oxley Act, 50, 89, 129 Savings bonds, taxability of, 420 Savings incentive match plan for employees (SIMPLE), 446

Schedules Tax purposes

Schedule A, 413 Schedules K and K-1, 413

Scholarships and fellowships, taxability of, 421

Scienter, 41, 45, 159 Secured transactions, 266

Attachment of security interests, 267 Consignments, 270 Perfecting a security interest, 267

By attachment, 268 Purchase money security interest in consumer goods, 268

By filing, 268 By possession, 268

Field warehousing, 270 Priority of claims, 270 Rights of parties upon default, 272

Securities Sale or exchange of, 556 Tax treatment

Passive income from, 435, 589, 650

Sale or exchange of, 422, 556 Securities Act of 1933

Intrastate issues, 82 Liability under, 84, 85 Rule 506, 84

Securities Exchange Act of 1934 Auditors’ defenses, 46 Foreign Corrupt Practices Act, 89 Private Securities Litigation Reform Act, 49, 50

Tender offers, 87 Securities law, 78

Blue-sky laws (state), 91 Securities Act of 1933, 44, 78

Antifraud provisions, 84 Auditors’ defenses, 46 Civil liability, 84 Controlling person, 79 Criminal liability, 85 Exempt securities, 82 Exempt transactions, 83 Insiders, 80 Postregistration transactions, 84 Prospectus, 81 Purposes of, 78 Registration requirements, 81 Registration statement, 80 Regulation D, 83 Securities

Definition of, 79 Sale of, 80

Small issues (Regulation A), 83 Underwriter, 80

Securities Exchange Act of 1934, 45, 46, 86 Antifraud provisions, 87 Exempt securities, 86 Liability under, 88 Proxy solicitation, 87 Purposes of, 86 Registration under, 87 Reporting requirements of insiders, 89

Required disclosures, 86 Sanctions available, 86

Security deposits, taxability of, 429 Self-employed individuals, tax treatment

Deductions, 443 Keogh plans, 444

Self-Employment Contributions Act, 346

Self-employment tax, 443, 463 Semiconductor Chip Protection Act, 384

Separate maintenance payments, 423, 446

Shelf registration, 82 Shelter provision, 239 Short-swing profits, 87 Sight draft, 243 Simplified employee pension (SEP) plan, 445

Small business corporation stock, 629 Capital gains exclusion, 556

Social security benefits, taxability of, 424

Social security taxes, 462 Sole proprietorships, 108 Special endorsement, 234 Specific performance, 175 Standard deduction, 447 State “blue-sky” laws, 91, 361 Statute of Frauds, 165

Agreements that cannot be performed within one year, 165

Promise to pay the debt of another, 166

Required writing, 167, 198

Index 813

Sales of goods, 166, 198 Sales of interests in land, 165

Statute of limitations for breach of contract, 208

Statutory liability to third parties, 44, 45

Stock Classes of, 125 Definitions, 124 Marketing of, 126

Stock dividends Basis of, 550 Taxability of, 420

Stock options Taxability of, 425

Stock purchase treated as an acquisition (tax), 644

Stock redemptions, tax treatment, 643

Stock rights Basis of, 550 Taxability of, 420

Stock subscriptions, 126 Stockholders’ equity

Common stock, 125 Preferred stock, 125

Stockholders’ liability, 121, 131 Stockholders’ rights, 129, 130 Stop payment orders, 245 Strict liability, 205, 349, 358 Strike benefits, 425 Subchapter C corporations, 121 Subchapter S corporation, 132 Subpart E trust, 646 Subrogation

Surety’s/guarantor’s right of, 315 Subsequent bona fide purchaser, 272 Subsidiaries

Liquidation of, 644 Substantial performance, 173 Superfund, 358 Surety bonds, 319 Suretyship contracts, 312 Surviving spouse, 460 Syndicate, 585

T

Tax accounting methods, 427, 594 Tax benefit rule, 426 Tax computation

Corporate, 637 Estate tax, 718 Estates and trusts, 720 Gift tax, 716 Individual, 459

Tax credits, 417, 463 Adoption credit, 468 Alcohol fuels credit, 464 Business energy credit, 464 Child care credit, 466 Child tax credit, 468 Credit for rehabilitation expenditures, 464

Credit for the elderly and disabled, 465

Disabled access credit, 464 Earned income credit, 467

Employer social security credit, 465 Empowerment zone employment credit, 465

Foreign tax credit, 467 General business credit, 463 Hope Scholarship credit, 468 Lifetime learning credit, 468 Low-income housing credit, 464 Minimum tax credit, 462 Passive activity credits, 435 Unified transfer tax credit, 715 Work opportunity credit, 463, 464

Tax preference items, 462, 631 Tax procedures, 472, 729 Tax rate schedules, 459, 630 Tax return preparers, 53 Tax tables, 459 Taxable exchanges, 551 Taxes, deductibility of, 448 Tax-exempt organizations, 722 Taxpayer penalties, 473 Telephone Consumer Protection Act, 360

Telephone line, 431 Tenancy

At sufferance, 396 At will, 396 By the entirety, 390 For a term, 396 In common, 389 Joint tenancy, 389 Periodic tenancy, 396

Tender offer, 87 Termination of offer, 155 Theft gains and losses, 454, 561, 636 Third-party beneficiary contracts, 171, 313

Thirty (30)-day letter, 472 Time deposits, 446 Time draft, 243 Tips, taxability of, 422 Title

Documents of, 200, 245 Insurance, 392 Marketable title, 391 Transfer of, 245 Warranty of, 203

Torts, 127 Toxic Substance Control Act, 358 Trade acceptance, 243 Trade fixtures, 380 Trade Secrets Law, 384 Trademarks, 385 Transfer of negotiable documents of title, 245

Transfer warranty, 241 Transportation fringes, 419 Travel expenses, deductibility of

Business, 431 For medical care, 448

Treasury stock, 124 Trustee

In bankruptcy, 272, 287 Truth-in-Lending Act, 311

U

Ultra vires, 127

Ultra vires acts, 127, 128 Ultramares Corp. vs. Touche, 42 Underwriters, 80 Undue influence, 160 Unearned income of children, 460 Unemployment benefits, taxability of, 426

Unemployment insurance (FUTA), 346, 348

Unemployment tax (FUTA), 462 Unified transfer tax credit, 715 Uniform capitalization rules, 431 Uniform Commercial Code

Commercial paper, 228 Contract rules, 195 Leases, 208 Sales of goods, 166, 195 Secured transactions, 266

Unilateral mistake, 160 Unliquidated debt, 161 Unreimbursed employee expenses, 457

Unrelated business income of exempt organizations, 724

Usury, 164

V

Vacation home, 442 Vietnam Era Veterans Readjustment Assistance Act, 352

Vocational Rehabilitation Act, 352 Void/voidable contracts, 154, 163 Voluntary bankruptcy, 285

W

Wagner Act, 353 Warehouse receipt, 200, 246 Warranties

Compared to guaranty, 314 Disclaimers, 204 In contract for sale of goods, 203

Express, 203 Implied, 203

Liability for, 203, 240 On negotiable instruments, 241

Warranty deeds, 391 Warranty of fitness for a particular purpose, 204

Warranty of merchantability, 203 Warranty of title, 203 Wash sales, 556 Watered stock, 126 Whistle-blower Protection Act, 353 Wills, 380 Work opportunity credit, 464 Worker Adjustment and Retraining Notification Act, 355

Workers’ Compensation Act, 349 Workers’ compensation, taxability of, 419

Working condition fringes, 419 Worthless securities, 557 Writ of attachment, 309 Writ of garnishment, 310