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2018
INDIVIDUAL
INCOME TAXES
General Editors
William H. Hoffman, Jr. James C. Young William A. Raabe
J.D., Ph.D., CPA Ph.D., CPA Ph.D., CPA
David M. Maloney Annette Nellen
Ph.D., CPA J.D., CPA, CGMA
Contributing Authors
James H. Boyd Steven L. Gill Mark B. Persellin W. Eugene Seago

Ph.D., CPA Ph.D., CPA Ph.D., CPA, CFP J.D., Ph.D., CPA
Arizona State University San Diego State University St. Mary’s University Virginia Polytechnic Institute
Gregory Carnes William H. Hoffman, Jr. William A. Raabe and State University
Ph.D., CPA J.D., Ph.D., CPA Ph.D., CPA James C. Young
University of North Alabama University of Houston Milton, Wisconsin Ph.D., CPA
D. Larry Crumbley David M. Maloney Debra L. Sanders Northern Illinois University
Ph.D., CPA Ph.D., CPA Ph.D., CPA Kristina Zvinakis
Louisiana State University University of Virginia Washington State Ph.D.
Steven C. Dilley Annette Nellen University, Vancouver The University of Texas
J.D., Ph.D., CPA J.D., CPA, CGMA at Austin
Michigan State University San Jose State University
ª 2018, 2017 Cengage Learning
South-Western Federal Taxation: Individual
Income Taxes, 2018 Edition Unless otherwise noted, all content is ª Cengage
William H. Hoffman, Jr., James C. Young, ALL RIGHTS RESERVED. No part of this work covered by the copyright herein
William A. Raabe, David M. Maloney, may be reproduced or distributed in any form or by any means, except as
Annette Nellen permitted by U.S. copyright law, without the prior written permission of the
copyright owner.
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Printed in the United States of America

Print Number: 01 Print Year: 2017
Preface
COMMITTED TO EDUCATIONAL SUCCESS
S outh-Western Federal Taxation (SWFT) is the

most trusted and best-selling series in college
taxation. We are focused exclusively on providing the
streamlined to make it more accessible to stu-
dents, and difficult concepts have been clarified,
all without losing the substance that makes up
most useful, comprehensive, and up-to-date tax texts, the South-Western Federal Taxation series.
online study aids, tax preparation tools, and research • Developing professional skills. SWFT excels
tools to help instructors and students succeed in their in bringing students to a professional level in
tax courses and beyond. their tax knowledge and skills, to prepare them
SWFT is a comprehensive package of teaching and for immediate success in their careers. In this
learning materials, significantly enhanced with each regard, we include development of speaking
edition to meet instructor and student needs and to add and writing communications skills, the use of
overall value to learning taxation. tax preparation and tax research software, ori-
Individual Income Taxes, 2018 Edition provides a entation toward success on the CPA exam, con-
dynamic learning experience inside and outside of the sideration of the time value of money in the tax
classroom. Built with resources and tools that have been planning process, and facility with advanced
identified as the most important, our complete learning applications of spreadsheet construction.
system provides options for students to achieve success.
• CengageNOWv2 as a complete learning
Individual Incomes Taxes, 2018 Edition provides
system. Cengage Learning understands that
accessible, comprehensive, and authoritative coverage
digital learning solutions are central to the class-
of the relevant tax code and regulations as they pertain
room. Through sustained research, we continually
to the individual taxpayer, as well as coverage of all
refine our learning solutions in CengageNOWv2
major developments in Federal Taxation.
to meet evolving student and instructor needs.
CengageNOWv2 fulfills learning and course man-
In revising the 2018 Edition, we focused on:
agement needs by offering a personalized study
• Accessibility. Clarity. Substance. The text plan, video lectures, auto-graded homework, auto-
authors and editors made this their mantra as graded tests, and a full eBook with features and
they revised the 2018 edition. Coverage has been advantages that address common challenges.
iii
Learning Tools and Features to Help Students Make the Connection
FULL- COLOR DESIGN: We understand that students struggle with learning difficult tax code
concepts and applying them to real-world scenarios. The 2018 edition uses color to bring the text to life, capture student
attention, and present the tax code in a simple, yet logical format.
■ Selected content is streamlined

to guide students in focusing
on the most important concepts
for the CPA Exam while still
providing in-depth coverage of
topics.
■ Examples are clearly labeled and

directly follow concepts to assist with
student application. An average of
over 40 examples in each chapter
use realistic situations to illustrate the
complexities of the tax law and allow
students to integrate chapter concepts
with illustrations and examples.
iv
COMPUTATIONAL EXERCISES: Students need lots of practice in areas such as computing
tax return problems and adjusting rates. We have developed these exercises to give students practice in calculating the
solutions they need to make business decisions.
■ Found in end-of-chapter section of the textbook
■ CengageNOWv2 provides algorithmic versions of these problems
ROGER CPA EXAM REVIEW QUESTIONS: The SWFT series continues to provide
the most in-depth coverage of tax concepts, and selected Roger CPA Exam Review Questions are included to further
prepare students for success on the CPA Exam.
■ Located in selected end-of-chapter

sections
■ Tagged by concept in
CengageNOWv2
■ Similar questions to what

students would actually
find on the CPA Exam
See how the SWFT series helps students understand the big picture and
the relevancy behind what they are learning.
THE BIG PICTURE: Tax Solutions for the Real

World. Taxation comes alive at the start of each chapter
as The Big Picture Examples give a glimpse into the
lives, families, careers, and tax situations of typical filers.
Students will follow this one family, individual, or other
taxpayer throughout the chapter showing students how
the concepts they are learning play out in the real world.
Finally, to solidify student comprehension, each
chapter concludes with a Refocus on the Big
Picture summary and tax planning scenario. These
scenarios apply the concepts and topics from the
chapter in a reasonable and professional way.
FRAMEWORK 1040:
Fitting it all Together.
This chapter-opening feature
demonstrates how topics within
Individual Income Taxes fit
together, using the Income Tax Use this chapter-opening
Framework 1040, which
Formula for Individuals as the shows the topics as they
framework. The framework appear in the individual
tax formula, to
helps students organize their understand where on
Form 1040 these chapter
understanding of the chapters topics would appear.
and topics to see how they relate
to the basic tax formula and
then identify where these items
are reported on Form 1040.
Framework 1040 helps students
navigate topics by explaining
how tax concepts are organized.
vi
FINANCIAL DISCLOSURE INSIGHTS:
Tax professionals need to understand how
taxes affect the income statement and balance
sheet. Financial Disclosure Insights,
appearing throughout the text, use current data
about existing taxpayers to highlight book-tax
reporting differences, effective tax rates, and
trends in reporting conventions.
ETHICS & EQUITY: Most issues do not

have just one correct answer. Ethics &
Equity features will spark critical thinking
and invite classroom discussion, enticing
students to evaluate their own value system.
Suggested answers to Ethics & Equity
scenarios appear in the Solutions Manual.
TAX PLANNING: Chapters include

a separate section calling attention to
how the tax law can be applied to
reach the taxpayer’s goals. Tax planning
applications and suggestions also appear
throughout each chapter.
GLOBAL TAX ISSUES: The Global

Tax Issues feature gives insight into
the ways in which taxation is affected
by international concerns and illustrates
the effects of various events on tax
liabilities across the globe.
vii
Take your students from Motivation to Mastery with CengageNOWv2
CengageNOWv2 is a powerful course management tool and online homework

resource that elevates student thinking by providing superior content designed with
the entire student workflow in mind.
■ MOTIVATION: engage students and better prepare them for class
■ APPLICATION: help students learn problem-solving behavior and skills
to guide them to complete taxation problems on their own
■ MASTERY: help students make the leap from memorizing concepts to
actual critical thinking
Motivation —
Many instructors find that students
come to class unmotivated and
unprepared. To help with engagement
and preparedness, CengageNOWv2
for SWFT offers:
■ “Tax Drills” test students on key
concepts and applications. With
three to five questions per learning
objective, these “quick-hit” questions
help students prepare for class
lectures or review prior to an exam.
Application —
Students need to learn problem-solving
behavior and skills, to guide them to
complete taxation problems on their own.
However, as students try to work through
homework problems, sometimes they
become stuck and need extra help. To rein-
force concepts and keep students on the
right track, CengageNOWv2 for SWFT offers
the following.
■ End-of-chapter homework from the
text is expanded and enhanced to follow
the workflow a professional would use
to solve various client scenarios. These
enhancements better engage students
and encourage them to think like a tax
professional.
viii
■ Algorithmic versions of end-of-chapter homework are available for computational exercises and at least
15 problems per chapter.
■ “Check My Work” Feedback. Homework questions include immediate feedback so students can learn as they
go. Levels of feedback include an option for “check my work” prior to submission of an assignment.
■ Post-Submission Feedback. After submitting an assignment, students receive even more extensive feedback
explaining why their answers were incorrect. Instructors can decide how much feedback their students receive
and when, including the full solution.
■ Built-in Test Bank for online assessment.
Mastery —
■ NEW! Tax Form Problems have been
added to the 2018 edition. Students can
now complete the Cumulative H&R Block
Problems and other homework items found
in the end-of-chapter manually or in a
digital environment.
■ “What-If” Questions allow students to

develop a deeper understanding of the
material as they are challenged to use their
prior knowledge of the tax situations and
critically think through new attributes to
determine how the outcome will change.
■ An Adaptive Study Plan comes complete

with an eBook, practice quizzes, crossword
puzzle, glossary, and flashcards. It is
designed to help give students additional
support and prepare them for the exam.
CengageNOWv2 Instant Access Code ISBN:

978-1-337-38950-1
Contact your Cengage Learning Consultant

about different bundle options.
ix
x PREFACE
EXTENSIVELY REVISED. DEFINITIVELY UP TO DATE.

Each year the South-Western Federal Taxation series • Unified the chapter sections on tax structure
is updated with thousands of changes to each text. Some and tax principles into “Tax System Design.”
of these changes result from the feedback we receive Added an exhibit illustrating how to analyze a
from instructors and students in the form of reviews, focus tax proposal using principles of good
groups, web surveys, and personal e-mail correspondence tax policy.
to our authors and team members. Other changes come
• Updated and expanded the chapter section
from our careful analysis of the evolving tax environment.
on proposed U.S. taxes to include brief
We make sure that every tax law change relevant
explanations of the carbon and financial
to the introductory taxation course was considered,
transaction taxes.
summarized, and fully integrated into the revision
of text and supplementary materials. • Streamlined coverage throughout the chapter.
The South-Western Federal Taxation authors
• Added two internet research exercises (one
have made every effort to keep all materials up to date
on tax policy and one helping students gain
and accurate. All chapters contain the following general
awareness of the taxes they pay).
changes for the 2018 Edition.
• Updated materials to reflect changes made by Chapter 2
Congress through legislative action.
• Streamlined chapter content (where applicable) • Revised and clarified chapter materials.
to clarify material and make it easier for students • Updated references and citations throughout the
to understand. chapter.
• Revised numerous materials as the result of
• Updated discussion of taxation on the CPA exam
changes caused by indexing of statutory amounts.
to reflect 2017 exam changes.
• Revised Problem Materials, Computational
Exercises, and CPA Exam problems.
Chapter 3
• Updated Chapter Outlines to provide an over-
view of the material and to make it easier to • Updated chapter materials to reflect inflation
locate specific topics. adjustments.
• Revised Financial Disclosure Insights and Global • Revised and clarified materials throughout the
Tax Issues as to current developments. chapter; added multiple examples to illustrate
In addition, the following materials are available online. concepts.
• An appendix that helps instructors broaden and • Reorganized materials on filing status and related
customize coverage of important tax provisions filing requirements.
of the Affordable Care Act. (Instructor Companion • Added a Form 1040 to the chapter for easy
Website at www.cengage.com/login) reference.
• The Depreciation and the Accelerated Cost
Recovery System (ACRS) appendix. (Instructor Chapter 4
Companion Website at www.cengage.com/
login) • Added the new taxable prize exception for
• The Taxation in the Real World weekly blog posts Olympic and Paralympic medals and prizes.
for instructors. (https://community.cengage.
com/t5/Taxation-in-the-Real-World-Blog/bg-p/ Chapter 5
taxationintherealworldblog)
• Updated chapter materials to reflect inflation
Chapter 1 adjustments.
• “Approaching the Study of Taxation” is now the • Added § 139F on damages received for wrongful
first section of the chapter and includes topics incarceration, enacted in 2015.
on defining “taxation,” exploring the many ways
taxes affect our lives, explaining the relevance of
taxation to accounting and finance professionals,
and offering tips for studying taxation.
PREFACE xi
Chapter 6 Chapter 10
• Streamlined coverage throughout the chapter; • Enhanced the presentation of the chapter
added multiple examples to illustrate text material. coverage in the Framework 1040: Tax Formula
for Individuals.
• Added a discussion of executive compensation
to Tax Planning section. • Clarified the language concerning the medical
deduction AGI floor that applies to taxpayers
• Added a new tax form problem on hobby
65 years of age and older.
losses (the completion of Form 1040 and
Schedule A). • Added a new tax form problem [the completion
of a Schedule A (Form 1040)].
• Updated comprehensive tax return problems for
inflation adjustments. • Streamlined coverage throughout the chapter;
refined the discussion of Health Savings
Chapter 7 Accounts.
• Rewrote a Global Tax Issues feature with a
• Revised and clarified discussion of “other
focus on the recent earthquake in central Italy.
casualties” and disaster area losses; added and
modified several examples to clarify the rules. • Updated chapter materials for inflation
adjustments.
• Reduced coverage of unique rules related to NOL
carrybacks for casualty losses and farming losses.
Chapter 11
• Revised end-of-chapter materials for annual
inflation adjustments. • Streamlined coverage throughout the chapter.
• Adjusted the relevant interest rates and pro-
Chapter 8 jected rates of return in the Big Picture and
the associated examples to reflect the current
• Streamlined coverage throughout the chapter;
environment.
revised the Big Picture examples.
• Clarified the discussion relating to investment
• Expanded discussion of § 179 (including several
expenses under the investment interest discussion.
new examples), revised order of § 179 expense
and additional first-year (bonus) depreciation • Added a new tax form problem (the completion
(covering § 179 before bonus depreciation), of a Form 4952).
and added new materials on using § 179 and
bonus depreciation effectively (including a new Chapter 12
Concept Summary).
• Revised discussion of the medical expense
• Updated materials to reflect inflation adjustment
deduction for AMT purposes.
to § 179 amounts.
• Added example on the AMT consequences of a
• Added a new tax form problem (the completion
state tax refund.
of a Form 4562).
• Added discussion regarding the utilization of the
Chapter 9 minimum tax credit.
• Improved the discussion of AMT net operating
• Revised the Big Picture examples to highlight the
loss provisions.
“gig economy.”
• Streamlined coverage throughout the chapter; Chapter 13
added multiple examples illustrating text materials.
• Updated chapter materials for inflation
• Updated standard mileage amounts, related
adjustments.
examples, and end-of-chapter materials.
• Streamlined and clarified coverage throughout
• Added a new tax form problem (the completion
the chapter.
of a Form 3903).
• Updated Affordable Care Act materials.
• Added new research problems on Form 1099–K
related to the “gig economy.”
xii PREFACE
Chapter 14 Chapter 17
• Revised and clarified chapter materials; added • Updated the chapter tax return example, linking
multiple examples to illustrate concepts. the example computations to placement on the
various tax forms [Form 4797 and Schedule D
• Added a new Concept Summary on realized
(Form 1040)].
gains and losses and expanded discussion on
this topic. • Added a new tax form problem (the completion
of a Form 4797).
• Added a new tax form problem [the
completion of a Form 8949 and a Schedule D • Added present value and spreadsheet compo-
(Form 1040)]. nents to end-of-chapter materials.
• Streamlined and clarified coverage throughout
Chapter 15 the chapter.
• Revised and clarified chapter materials; added
multiple examples to illustrate concepts. Chapter 18
• Restructured § 121 materials to focus on general • Updated Research Problem on contingent lia-
rules first, followed by a discussion of the relief bilities for the Third Circuit decision and IRS
provision available if the two-year rules are not non-acquiescence in Giant Eagle.
met.
• Removed summary material on other nonrec- Chapter 19
ognition provisions (§§ 1032, 1035, 1036, 1038,
• Amounts updated for inflation.
1041, and 1044).
• Added a new tax form problem (the completion Chapter 20
of a Form 8824 for a like-kind exchange).
• Added new Learning Objective 1, Entity Choice.
Chapter 16 • Added new text on entity choice and check-the-
box.
• Updated the chapter tax return example
[including the Form 8949, Schedule D • Added new Exhibit 20.1 (Cash Method for
(Form 1040), and the capital gains worksheet]. Inventory Exceptions Flowchart).
• Streamlined and clarified coverage throughout • Introduced corporate tax table with lower
the chapter. bracket taxes included.
• Added a new tax form problem (the completion • Revised constructive dividend section.
of a Form 8949).
• Added new materials on distributions from S cor-
• Added present value and spreadsheet porations.
components to end-of-chapter materials.
• Added new materials on LLCs and qualified joint
ventures in the partnership section.
TAX LAW OUTLOOK

From your SWFT Series Editors:
Concerns about complexity, income inequity, job creation, and international competitiveness will keep
income tax issues at the forefront of tax-related discussions throughout 2017 and 2018. Congress is reviewing
tax proposals on middle-class tax relief and tax changes for the wealthy. Federal tax treatments of income
from overseas sources will also be considered, including converting from a worldwide system to a territorial
one. Changes to the Affordable Care Act (ObamaCare) also are being considered. If major tax legislation is
passed that affects this text, the SWFT editors will provide an update for adopters.
PREFACE xiii
SUPPLEMENTS SUPPORT STUDENTS AND INSTRUCTORS

Built around the areas students and instructors have identified as the most important, our integrated supplements
package offers more flexibility than ever before to suit the way instructors teach and students learn.
Online and Digital Resources • Worry-free Audit Support™ and tax advice from
an H&R Block® tax professional.
for Students
Online access to H&R Block® Premium & Business
software is offered with each NEW copy of the text-
book—at no additional cost to students.*
CengageNOWv2 is a powerful course management and
online homework tool that provides robust instructor Students can use
control and customization to optimize the student CengageBrain.com
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CengageNOWv2 Instant Access Code ISBN: format and giving them a better chance of success in
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Online Student Resources

Checkpoint® Student Students can go to www.cengagebrain.com for free
Edition from Thomson resources to help them study as well as the opportunity
Reuters is the leading to purchase additional study aids. These valuable free
online tax research database used by professionals. study resources will help students earn a better grade:
There are three simple ways Checkpoint® helps intro-
duce students to tax research: • Flashcards use chapter terms and definitions to
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• Intuitive web-based design makes it fast and chapter.
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• Online glossary for each chapter provides terms
• Checkpoint® provides a comprehensive collection and definitions from the text in alphabetical
of primary tax law, cases, and rulings along with order for easy reference.
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• Learning objectives can be downloaded for each
• Checkpoint® has built-in productivity tools such chapter to help keep students on track.
as calculators to make research more efficient—a
resource more tax pros use than any other. • Tax tables used in the textbook are download-
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Six months’ access to Checkpoint® Student Edition
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NEW copy of the textbook.*
Looseleaf Edition (978-1-337-38593-0)
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xiv PREFACE
Comprehensive Supplements Support Each test item is tagged with its Estimated Time to
Complete, Level of Difficulty, and Learning Objective(s),
Instructors’ Needs as well as the AACSB’s and AICPA’s core c ompetencies—
for easier instructor planning and test item selection.
The 2018 Test Bank is available in Cengage’s test gen-
erator software, Cognero.
CengageNOWv2 is a powerful course management and Cengage Learning Testing Powered by Cognero is a
online homework tool that provides robust instructor flexible, online system that allows you to:
control and customization to optimize the student learn- • author, edit, and manage Test Bank content from
ing experience and meet desired outcomes. In addition to multiple Cengage Learning solutions
the features and benefits mentioned earlier for students, • create multiple test versions in an instant
CengageNOWv2 includes these features for instructors: • deliver tests from your LMS, your classroom, or
• Learning Outcomes Reporting and the ability wherever you want
to analyze student work from the gradebook. • create tests from school, home, the coffee
Each exercise and problem is tagged by topic, shop—anywhere with internet access
learning objective, level of difficulty, estimated (No special installs or downloads needed.)
completion time, and business program stan-
Test Bank files in Word format as well as versions to
dards to allow greater guidance in developing
import into your LMS are available on the Instructor
assessments and evaluating student progress.
Companion Website. Cognero Test Banks available
• Built-in Test Bank for online assess- via single sign-on (SSO) account at www.cengage.
ment. The Test Bank files are included in com/login.
CengageNOWv2 so that they may be used as
additional homework or tests. Other Instructor Resources
All of the following instructor course materials
Solutions Manual (978-1-337-38944-0)
are available online at www.cengage.com/login.
Written by the South-Western Federal Taxation Once logged into the site, instructors should select this
editors and authors, the Solutions Manual features textbook to access the online Instructor Resources.
solutions arranged in accordance with the sequence of
• Instructor Guide
chapter material.
Solutions to all homework items are tagged with their • Edition-to-edition correlation grids by chapter
Estimated Time to Complete, Level of Difficulty, and • Detailed answer feedback for the end-of-chapter
Learning Objective(s), as well as the AACSB’s and AICPA’s Roger CPA Review Questions in Word format
core competencies—-giving instructors more control than (Lettered answers only are available in the
ever in selecting homework to match the topics covered. Solutions Manual.)
The Solutions Manual also contains the Solutions to • An appendix that helps instructors broaden and
Appendix E: Comprehensive Tax Return Problems and customize coverage of important tax provisions
lettered answers (only) to the end-of-chapter Roger CPA of the Affordable Care Act
Review Questions. Available in print and on Instructor • The Depreciation and the Accelerated Cost
Companion Website at www.cengage.com/login. Recovery System (ACRS) appendix
PowerPoint® Lectures with Notes Custom Solutions
The Instructor PowerPoint® Lectures contain more than Cengage Learning Custom Solutions develops person-
30 slides per chapter, including outlines and instructor alized solutions to meet your taxation education needs.
guides, concept definitions, and key points. Available on Consider the following for your adoption of South-
Instructor Companion Website at www.cengage. Western Federal Taxation 2018 Edition.
com/login.
• Remove chapters you do not cover or rearrange
Test Bank their order to create a streamlined and efficient text.
Written by the South-Western Federal Taxation • Add your own material to cover new topics or
editors and authors, the Test Bank contains approximately information.
2,200 items and solutions arranged in accordance with • Add relevance by including sections from
the sequence of chapter material. Sawyers/Gill’s Federal Tax Research or your
state’s tax laws and regulations.
PREFACE xv
ACKNOWLEDGMENTS
We want to thank all the adopters and others who participated in numerous online surveys as well as the follow-
ing individuals who provided content reviews and feedback in the development of the South-Western Federal
Taxation 2018 titles.
William H. Hoffman, Jr. / James C. Young / William A. Raabe / David M. Maloney / Annette Nellen
Lindsay G. Acker, University of Wisconsin- Dwight E. Denman, Newman University Carol Hughes, Asheville-Buncombe
Madison James M. DeSimpelare, Ross School of Technical Community College
Deborah S. Adkins, Nperspective, LLC Business at the University of Michigan Helen Hurwitz, Saint Louis University
Mark P. Altieri, Kent State University John Dexter, Northwood University Richard R. Hutaff, Wingate University
Amy An, University of Iowa James Doering, University of Wisconsin – Zite Hutton, Western Washington
Susan E. Anderson, Elon University Green Bay University
Henry M. Anding, Woodbury University Michael P. Donohoe, University of Illinois Brad Van Kalsbeek, University of Sioux
Jennifer A. Bagwell, Ohio University at Urbana Champaign Falls
George Barbi, Lanier Technical College Deborah A. Doonan, Johnson & Wales John E. Karayan, Woodbury University
Terry W. Bechtel, Texas A&M University – University Carl Keller, Missouri State University
Texarkana Monique O. Durant, Central Connecticut Cynthia Khanlarian, Concord University
Chris Becker, LeMoyne College State University Bob Kilpatrick, Northern Arizona University
John G. Bell Wayne L. Edmunds, Virginia Gordon Klein, Lecturer, UCLA Anderson
Tamara Berges, UCLA Commonwealth University School
Ellen Best, University of North Georgia Rafi Efrat, California State University, Taylor Klett, Sam Houston State University
Tim Biggart, Berry College Northridge Aaron P. Knape, Peru State College
Rachel Birkey, Illinois State University Charles R. Enis, The Pennsylvania State Cedric Knott, Colorado State University –
Patrick M. Borja, Citrus College / California University Global Campus
State University, Los Angeles Frank J. Faber, St. Joseph’s College Ausher M. B. Kofsky, Western New
Dianne H. Boseman, Nash Community A. Anthony Falgiani, University of South England University
College Carolina, Beaufort Emil Koren, Saint Leo University
Cathalene Bowler, University of Northern Jason Fiske, Thomas Jefferson School of Law Jack Lachman, Brooklyn College – CUNY
Iowa John Forsythe, Eagle Gate College Richard S. Leaman, University of Denver
Madeline Brogan, Lone Star College – Alexander L. Frazin, University of Adena LeJeune, Louisiana College
Montgomery Redlands Gene Levitt, Mayville State University
Darryl L. Brown, Illinois Wesleyan University Carl J. Gabrini, College of Coastal Georgia Teresa Lightner, University of North Texas
Timothy G. Bryan, University of Southern Kenneth W. Gaines, East-West University, Sara Linton, Roosevelt University
Indiana Chicago, Illinois Roger Lirely, The University of Texas at
Robert S. Burdette, Salt Lake Community Carolyn Galantine, Pepperdine University Tyler
College Sheri Geddes, Hope College Jane Livingstone, Western Carolina
Ryan L. Burger, Concordia University Alexander Gelardi, University of St. Thomas University
Nebraska Daniel J. Gibbons, Waubonsee Community Heather Lynch, Northeast Iowa Community
Lisa Busto, William Rainey Harper College College College
Julia M. Camp, Providence College Martie Gillen, University of Florida Michael J. MacDonald, University of
Al Case, Southern Oregon University Charles Gnizak, Fort Hays State University Wisconsin-Whitewater
Machiavelli W. Chao, Merage School of J. David Golub, Northeastern University Mabel Machin, Florida Institute of
Business University of California, George G. Goodrich, John Carroll Technology
Irvine University Maria Alaina Mackin, ECPI University
Eric Chen, University of Saint Joseph Marina Grau, Houston Community Anne M. Magro, George Mason University
Christine Cheng, Louisiana State University College – Houston, TX Richard B. Malamud, California State
James Milton Christianson, Southwestern Vicki Greshik, University of Jamestown University, Dominguez Hills
University and Austin Community College Harold J. Manasa, Winthrop University
College Jeffrey S. Haig, Santa Monica College Barry R. Marks, University of Houston –
Wayne Clark, Southwest Baptist University Marcye S. Hampton, University of Central Clear Lake
Ann Burstein Cohen, University at Buffalo, Florida Dewey Martin, Husson University
The State University of New York June Hanson, Upper Iowa University Anthony Masino, East Tennessee State
Ciril Cohen, Fairleigh Dickinson University Donald Henschel, Benedictine University University
Dixon H. Cooper, University of Arkansas Susanne Holloway, Salisbury University Norman Massel, Louisiana State University
Rick L. Crosser, Metropolitan State Susan A. Honig, Herbert H. Lehman College Bruce W. McClain, Cleveland State
University of Denver Jeffrey L. Hoopes, The Ohio State University University
John P. Crowley, Castleton University Christopher R. Hoyt, University of Missouri Allison M. McLeod, University of North
Richard G. Cummings, University of (Kansas City) School of Law Texas
Wisconsin-Whitewater Marsha M. Huber, Youngstown State Meredith A. Menden, Southern New
Susan E. M. Davis, South University University Hampshire University
xvi PREFACE
Robert H. Meyers, University of John S. Repsis, University of Texas at Martin Stub, DeVry University
Wisconsin-Whitewater Arlington James Sundberg, Eastern Michigan
John G. Miller, Skyline College John D. Rice, Trinity University University
Tracie L. Miller-Nobles, Austin Jennifer Hardwick Robinson, Trident Kent Swift, University of Montana
Community College Technical College Robert L. Taylor, Lees-McRae College
Jonathan G. Mitchell, Stark State College Shani N. Robinson, Sam Houston State Francis C. Thomas, Richard Stockton
Richard Mole, Hiram College University College of New Jersey
Lisa Nash, CPA, MA, Vincennes University Donald Roth, Dordt College Randall R. Thomas, Upper Iowa University
Mary E. Netzler, Eastern Florida State Richard L. Russell, Jackson State University Ronald R. Tidd, Central Washington
College Robert L. Salyer, Northern Kentucky University
Joseph Malino Nicassio, Westmoreland University MaryBeth Tobin, Bridgewater State
County Community College Rhoda Sautner, University of Mary University
Mark R. Nixon, Bentley University Bunney L. Schmidt, Keiser University James P. Trebby, Marquette University
Garth Novack, Pantheon Heavy Industries Eric D. Schwartz, LaRoche College James M. Turner, Georgia Institute of
& Foundry Tony L. Scott, Norwalk Community College Technology
Claude R. Oakley, DeVry University, Randy Serrett, University of Houston – Anthony W. Varnon, Southeast Missouri
Georgia Downtown State University
Al Oddo, Niagara University Wayne Shaw, Southern Methodist University Adria Palacios Vasquez, Texas A&M
Sandra Owen, Indiana University – Paul A. Shoemaker, University of Nebraska – University – Kingsville
Bloomington Lincoln Terri Walsh, Seminole State College of
Vivian J. Paige, Old Dominion University Kimberly Sipes, Kentucky State University Florida
Carolyn Payne, University of La Verne Georgi Smatrakalev, Florida Atlantic Marie Wang
Ronald Pearson, Bay College University Natasha R. Ware, Southeastern University
Thomas Pearson, University of Hawaii at Randy Smit, Dordt College Mark Washburn, Sam Houston State
Manoa Leslie S. Sobol, California State University University
Nichole L. Pendleton, Friends University Northridge Bill Weispfenning, University of
Chuck Pier, Angelo State University Marc Spiegel, University of California, Jamestown (ND)
Lincoln M. Pinto, DeVry University Irvine Andrew L. Whitehair
Sonja Pippin, University of Nevada – Reno Teresa Stephenson, University of Wyoming Kent Williams, Indiana Wesleyan University
Steve Platau, The University of Tampa Beth Stetson, Oklahoma City University Candace Witherspoon, Valdosta State
Walfyette Powell, Strayer University Debra Stone, Eastern New Mexico University University
Dennis Price, Samford University Frances A. Stott, Bowling Green State Sheila Woods, DeVry University, Houston, TX
Darlene Pulliam, West Texas A&M University Xinmei Xie, Woodbury University
University Todd S. Stowe, Southwest Florida College Thomas Young, Lone Star College –
Tomball
SPECIAL THANKS
We are grateful to the faculty members who have diligently worked through the problems and test questions to
ensure the accuracy of the South-Western Federal Taxation homework, solutions manuals, test banks, and com-
prehensive tax form problems. Their comments and corrections helped us focus on clarity as well as accuracy and
tax law currency. We also thank Thomson Reuters for its permission to use Checkpoint® with the text.
Sandra A. Augustine, Hilbert College Ray Rodriguez, Murray State Raymond Wacker, Southern Illinois
Bradrick M. Cripe, Northern Illinois University University, Carbondale
University George R. Starbuck, McMurry University Michael Weissenfluh, Tillamook Bay
Stephanie Lewis, The Ohio State University Donald R. Trippeer, State University of Community College;
Kate Mantzke, Northern Illinois University New York College at Oneonta
The South-Western Federal Taxation Series
To find out more about these books, go to www.cengagebrain.com.
INDIVIDUAL INCOME TAXES, 2018 EDITION

(HOFFMAN, YOUNG, RAABE, MALONEY, NELLEN, Editors)
provides accessible, comprehensive, and authoritative coverage
of the relevant tax code and regulations as they pertain to
the individual taxpayer, as well as coverage of all major
developments in Federal taxation.
(ISBN 978-1-337-38588-6)
CORPORATIONS, PARTNERSHIPS, ESTATES

& TRUSTS, 2018 EDITION
(HOFFMAN, RAABE, YOUNG, NELLEN, MALONEY, Editors)
covers tax concepts as they affect corporations, partnerships, estates,
and trusts. The authors provide accessible, comprehensive, and
authoritative coverage of relevant tax code and regulations, as well
as all major developments in Federal income taxation. This market-
leading text is intended for students who have had a previous course
in tax.
(ISBN 978-1-337-38594-7)
xvii
xviii PREFACE
COMPREHENSIVE VOLUME, 2018 EDITION

(MALONEY, HOFFMAN, RAABE, YOUNG, Editors)
Combining the number one individual tax text with the number
one corporations text, Comprehensive Volume, 2018 Edition
is a true winner. An edited version of the first two South-
Western Federal Taxation textbooks, this book is ideal for
undergraduate or graduate levels. This text works for either a
one-semester course in which an instructor wants to integrate
coverage of individual and corporate taxation or for a two-
semester sequence in which the use of only one book is desired.
(ISBN 978-1-337-38600-5)
ESSENTIALS OF TAXATION: INDIVIDUALS &

BUSINESS ENTITIES, 2018 EDITION
(RAABE, YOUNG, NELLEN, MALONEY, Editors)
emphasizes tax planning and the multidisciplinary aspects of
taxation. Formerly titled Taxation of Business Entities, this text
is designed with the AICPA Model Tax Curriculum in mind,
presenting the introductory Federal taxation course from a
business entity perspective. Its Tax Planning Framework
helps users fit tax planning strategies into an innovative
pedagogical framework. The text is an ideal fit for programs
that offer only one course in taxation where users need to be
exposed to individual taxation, as well as corporate and other
business entity taxation. This text assumes no prior course in
taxation has been taken.
(ISBN 978-1-337-38617-3)
FEDERAL TAX RESEARCH, 11E

(SAWYERS AND GILL) Federal Tax Research, Eleventh Edition,
offers hands-on tax research analysis and fully covers computer-
oriented tax research tools. Also included in this edition is
coverage on international tax research, a review of tax ethics, and
many new real-life cases to help foster a true understanding of
Federal tax law.
(ISBN 978-1-337-28298-7)
PREFACE xix
ABOUT THE EDITORS
William H. Hoffman, Jr. the National Tax Journal, The Journal of the American
earned B.A. and J.D. Taxation Association, and Tax Notes. Jim is a Northern
degrees from the University Illinois University Distinguished Professor, received the
of Michigan and M.B.A. Illinois CPA Society Outstanding Accounting Educator
and Ph.D. degrees from Award in 2012, and has received university teaching
The University of Texas. awards from Northern Illinois University, George Mason
He was a licensed CPA University, and Michigan State University.
and attorney in Texas.
His teaching experience William A. Raabe, Ph.D.,
included The University CPA, was the Wisconsin
of Texas (1957–1961), Distinguished Professor
Louisiana State University (1961–1967), and the of Taxation. He taught at
University of Houston (1967–1999). Professor Hoffman Ohio State, Arizona State,
addressed many tax institutes and conferences and pub- the Capital University
lished extensively in academic and professional jour- (OH) Law School, and
nals. His articles appeared in The Journal of Taxation, the Universities of
The Tax Adviser, Taxes—The Tax Magazine, The Journal Wisconsin – Milwaukee
of Accountancy, The Accounting Review, and Taxation and Whitewater. A grad-
for Accountants. uate of Carroll University
(Wisconsin) and the University of Illinois, Dr. Raabe’s
James C. Young is the teaching and research interests include international
Crowe Horwath Professor and multistate taxation, technology in tax education,
of Accountancy at personal financial planning, and the economic impact of
Northern Illinois University. sports teams and fine arts groups. Dr. Raabe also writes
A graduate of Ferris State the PricewaterhouseCoopers Tax Case Studies. He has
University (B.S.) and written extensively about book-tax differences in finan-
Michigan State University cial reporting. Dr. Raabe has been a visiting tax faculty
(M.B.A. and Ph.D.), Jim’s member for a number of public accounting firms, bar
research focuses on taxpay- associations, and CPA societies. He has received numer-
er responses to the income ous teaching awards, including the Accounting Educator
tax using archival data. His of the Year award from the Wisconsin Institute of CPAs.
dissertation received the He has been the faculty adviser for student teams in the
PricewaterhouseCoopers/American Taxation Association Deloitte Tax Case Competition (national finalists at three
Dissertation Award and his subsequent research has different schools) and the PricewaterhouseCoopers
received funding from a number of organizations, Extreme Tax policy competition (national finalist). For
including the Ernst & Young Foundation Tax Research more information about Dr. Raabe, visit BillRaabeTax.
Grant Program. His work has been published in a vari- com and BillRaabeTax on YouTube and Twitter.
ety of academic and professional journals, including
xx PREFACE
David M. Maloney, Annette Nellen,

CPA,
Ph.D., CPA, is the Carman CGMA, Esquire, directs
G. Blough Professor of San José State University’s
Accounting Emeritus at graduate tax program
the University of Virginia’s (MST) and teaches courses
McIntire School of in tax research, tax
Commerce. He completed fundamentals, accounting
his undergraduate work at methods, property trans-
the University of Richmond actions, state taxation,
and his graduate work at employment tax, ethics,
the University of Illinois at and tax policy. Professor
Urbana-Champaign. Upon joining the Virginia faculty Nellen is a graduate of CSU Northridge, Pepperdine
in January 1984, Dr. Maloney taught Federal taxation (MBA), and Loyola Law School. Prior to joining SJSU
in the graduate and undergraduate programs and was in 1990, she was with a Big 4 firm and the IRS. At
a recipient of major research grants from the Ernst SJSU, Professor Nellen is a recipient of the Outstanding
& Young and KPMG Foundations. Dr. Maloney has Professor and Distinguished Service Awards. Professor
published work in numerous professional
journals, Nellen is an active member of the tax sections of the
including Journal of Taxation, The Tax Adviser, Tax AICPA and American Bar Association. In 2013, she
Notes, Corporate Taxation, Accounting Horizons, received the AICPA Arthur J. Dixon Memorial Award,
Journal of Taxation of Investments, and Journal of the highest award given by the accounting profes-
Accountancy. sion in the area of taxation. Professor Nellen is the
author of BloombergBNA Tax Portfolio, Amortization
of Intangibles, and the BloombergBNA Internet Law
Resource Center, Overview of Internet Taxation Issues.
She has published numerous articles in the AICPA Tax
Insider, Tax Adviser, State Tax Notes, and The Journal
of Accountancy. She has testified before the House
Ways & Means and Senate Finance Committees and
other committees on Federal and state tax reform.
Professor Nellen maintains the 21st Century Taxation
website and blog (www.21stcenturytaxation.com) as
well as websites on tax reform and state tax issues
(www.sjsu.edu/people/annette.nellen/).
PREFACE xxi
William H. Hoffman, Jr. Bill consistently recruited new contributors, creat-

ing the strongest author team for business school
On May 1, 2016, our found-
tax texts.
ing editor, valued colleague,
and co-author Bill Hoffman, • Bill was recognized in the profession as a
passed away after a brief ill- dynamic and engaging teacher and was involved
ness. Bill was born in Casper, extensively in professional development seminars
Wyoming, in 1929 and across the country.
also lived in both Belgium • For me, Bill was many things, including profes-
and Argentina during his sor, dissertation chair, mentor, editor, drinking
youth, before moving to buddy, and friend. One of my favorite memories
Port Arthur, Texas. He of Bill is catching him at his desk, poring over a
earned both undergraduate BNA Daily Tax Report, something he did unfail-
and law degrees from the ingly. I will miss our conversations and his keen
University of Michigan before serving in the Korean War tax insights.
as an officer in the U.S. Army’s Judge Advocate General • Bill was an innovator in the development of
Corps. Following his return from military service, he com- a new breed of textbooks that enabled pro-
pleted both an MBA and a PhD at The University of Texas fessors to present taxation in a new and more
at Austin. Bill began his academic career at Louisiana State relevant way. That pedagogy included espe-
University, where he served as a professor of accounting cially the extensive use of teaching examples,
and taxation, before moving to the University of Houston forms problems, and advanced topics, so that
in 1967. Bill remained at Houston for the rest of his aca- the professor could tailor a course to local
demic career, retiring in 1999. needs.
During his time at Houston, Bill served as a profes-
• Bill was a real pioneer in our field. His wit and
sor, mentor, and doctoral advisor to countless students
enthusiasm were constant sources of amazement
and colleagues. Desiring to help his students under-
to me. He was always a mentor, and he shaped
stand the intricacies of entity taxation (corporations,
my academic career.
partnerships, and estates and trusts), he envisioned a
new textbook for a second tax course in Houston’s • He demanded excellence . . . and receiving a
accounting program and brought together a team note affirming your work was truly something
of authors to create the text in 1977. South-Western special.
Federal Taxation: Corporations, Partnerships, Estates • As my tax professor at LSU, Bill was the catalyst
and Trusts—now in its forty-first edition—remains for my early development in tax research and
the market leader while continuing to evolve to meet the writing. I owe a great deal of my success to Bill
needs of twenty-first century faculty and students. The Hoffman’s early advice, direction, and help. He
Individual and Comprehensive volumes followed shortly was a tremendous writer, and he changed the
after the release of the Corporations volume, and the teaching of taxation forever.
Essentials volume was added to the SWFT Series in 1997. • He was a “giant” . . . he will be missed.
Over the past several months, we have heard from
many former students and colleagues, who spoke of Although Bill loved the SWFT Series and the process
Bill’s commitment to them, both in the classroom and in of writing and creating its content, his first love was
their lives, and to the tax profession at large. Here are Bonnie, his wife of 64 years, and his family (which
a few of those comments. included five children and a number of grandchildren
and great-grandchildren). Bonnie also made significant
• Through his writing and teaching, he was able to contributions to the South-Western Federal Taxation
bring “to life” what could be a very challenging Series through the years (including keeping Bill “in line”
topic to many. as best she could). Together, they were an outstanding
• The creation of the Corporations volume was creative and editorial team.
driven by the fact that Bill needed material for We will miss Bill’s sharp wit, his ability to clearly
his own class. This volume allowed many schools explain tax law (both verbally and in writing), the
to create a second tax course and changed how creativity he brought to his work, the scope of his tax
accounting students prepared for a career in tax. knowledge, and his wonderful laugh. He truly enjoyed
• Bill brought together an author team of both fac- the competition created by rival textbooks, as he knew
ulty and practitioners (both CPAs and attorneys); it would lead to a better SWFT Series. We will honor Bill
this created a unique tax series that emphasized by upholding the standards of excellence he demanded,
both the law and its application. Over the years, as the SWFT Series continues to evolve.
Brief Contents
PART 1: INTRODUCTION AND BASIC TAX MODEL
CHAPTER 1 AN INTRODUCTION TO TAXATION AND

UNDERSTANDING THE FEDERAL TAX LAW 1-1
CHAPTER 2 WORKING WITH THE TAX LAW 2-1
CHAPTER 3 TAX FORMULA AND TAX DETERMINATION;
AN OVERVIEW OF PROPERTY TRANSACTIONS 3-1
PART 2: GROSS INCOME
CHAPTER 4 GROSS INCOME: CONCEPTS AND INCLUSIONS 4-1

CHAPTER 5 GROSS INCOME: EXCLUSIONS 5-1
PART 3: DEDUCTIONS
CHAPTER 6 DEDUCTIONS AND LOSSES: IN GENERAL 6-1

CHAPTER 7 DEDUCTIONS AND LOSSES: CERTAIN
BUSINESS EXPENSES AND LOSSES 7-1
CHAPTER 8 DEPRECIATION, COST RECOVERY, AMORTIZATION,
AND DEPLETION 8-1
CHAPTER 9 DEDUCTIONS: EMPLOYEE AND
SELF-EMPLOYED-RELATED EXPENSES 9-1
CHAPTER 10 DEDUCTIONS AND LOSSES: CERTAIN
ITEMIZED DEDUCTIONS 10-1
CHAPTER 11 INVESTOR LOSSES 11-1
PART 4: SPECIAL TAX COMPUTATION METHODS,

PAYMENT PROCEDURES, AND TAX CREDITS
CHAPTER 12 ALTERNATIVE MINIMUM TAX 12-1

CHAPTER 13 TAX CREDITS AND PAYMENT PROCEDURES 13-1
XXIII
XXIV BRIEF CONTENTS
PART 5: PROPERTY TRANSACTIONS
CHAPTER 14 PROPERTY TRANSACTIONS: DETERMINATION

OF GAIN OR LOSS AND BASIS CONSIDERATIONS 14-1
CHAPTER 15 PROPERTY TRANSACTIONS: NONTAXABLE EXCHANGES 15-1
CHAPTER 16 PROPERTY TRANSACTIONS: CAPITAL
GAINS AND LOSSES 16-1
CHAPTER 17 PROPERTY TRANSACTIONS: § 1231
AND RECAPTURE PROVISIONS 17-1
PART 6: ACCOUNTING PERIODS, ACCOUNTING

METHODS, AND DEFERRED COMPENSATION
CHAPTER 18 ACCOUNTING PERIODS AND METHODS 18-1

CHAPTER 19 DEFERRED COMPENSATION 19-1
PART 7: CORPORATIONS AND PARTNERSHIPS
CHAPTER 20 CORPORATIONS AND PARTNERSHIPS 20-1
Contents
Part 1: Introduction and Basic Statute of Limitations

Interest and Penalties
1-24
1-24
Tax Model Tax Practice 1-25
Global Tax Issues: Outsourcing of Tax Return Preparation 1-26
CHAPTER 1
AN INTRODUCTION TO TAXATION AND UNDERSTANDING THE FEDERAL TAX LAW 1-27
UNDERSTANDING THE FEDERAL TAX LAW 1-1 Revenue Needs 1-27
The Big Picture: Family and Taxes—A Typical Year 1-1 Economic Considerations 1-27
Social Considerations 1-28
APPROACHING THE STUDY OF TAXATION 1-2 Equity Considerations 1-29
What Is Taxation? 1-2 Political Considerations 1-31
Taxation in Our Lives 1-2 Influence of the Internal Revenue Service 1-32
The Relevance of Taxation to Accounting and Finance Influence of the Courts 1-33
Professionals 1-3
Summary 1-34
How to Study Taxation 1-4
Refocus on the Big Picture: Family and Taxes—A Typical Year 1-35
Concept Summary: Individuals and Taxes 1-4
A BRIEF HISTORY OF U.S. TAXATION 1-5 CHAPTER 2

Early Periods 1-5
WORKING WITH THE TAX LAW 2-1
The Big Picture: Importance of Tax Research 2-1
Revenue Acts 1-5
Historical Trends 1-5
TAX SOURCES 2-2
TAX SYSTEM DESIGN 1-6 Statutory Sources of the Tax Law 2-2
Legal Foundation 1-6 Administrative Sources of the Tax Law 2-6
The Basic Tax Formula 1-7 Ethics & Equity: Reporting Tax Fraud 2-7
Tax Principles 1-7 Judicial Sources of the Tax Law 2-10
Concept Summary: Federal Judicial System: Trial Courts 2-12
MAJOR TYPES OF TAXES 1-8 Concept Summary: Judicial Sources 2-15
Property Taxes 1-9 Other Sources of the Tax Law 2-17
Transaction Taxes 1-11
Ethics & Equity: Making Good Use of Out-of-State Relatives 1-12 WORKING WITH THE TAX LAW—TAX RESEARCH TOOLS 2-18
Taxes on Transfers at Death 1-13 Commercial Tax Services 2-18
Gift Taxes 1-14 Using Electronic (Online) Tax Services 2-19
Income Taxes 1-15 Noncommercial Electronic (Online) Tax Services 2-19
Employment Taxes 1-17
Other U.S. Taxes 1-18 WORKING WITH THE TAX LAW—TAX RESEARCH 2-20
Concept Summary: Overview of Taxes in the United States 1-19 Identifying the Problem 2-22
Proposed U.S. Taxes 1-20 Refining the Problem 2-22
Global Tax Issues: VAT in USA? 1-21 Locating the Appropriate Tax Law Sources 2-23
Assessing the Validity of Tax Law Sources 2-23
TAX ADMINISTRATION 1-21 Financial Disclosure Insights: Where Does GAAP Come From? 2-26
Internal Revenue Service 1-21 Arriving at the Solution or at Alternative Solutions 2-26
The Audit Process 1-21 Communicating Tax Research 2-27
XXV
XXVI CONTENTS
WORKING WITH THE TAX LAW—TAX PLANNING 2-28 GAINS AND LOSSES FROM PROPERTY
Nontax Considerations 2-29 TRANSACTIONS— IN GENERAL 3-34
Components of Tax Planning 2-30
Tax Avoidance and Tax Evasion 2-31 GAINS AND LOSSES FROM PROPERTY
TRANSACTIONS—CAPITAL GAINS AND LOSSES 3-35
Follow-Up Procedures 2-31
Definition of a Capital Asset 3-35
Tax Planning—A Practical Application 2-31
Determination of Net Capital Gain 3-35
TAXATION ON THE CPA EXAMINATION 2-32 Treatment of Net Capital Loss 3-36
Preparation Blueprints 2-32 Taxation of Net Capital Gain 3-36
Regulation Section 2-33
TAX PLANNING 3-37
Maximizing the Use of the Standard Deduction 3-37
CHAPTER 3
Dependency Exemptions 3-37
TAX FORMULA AND TAX
Taking Advantage of Tax Rate Differentials 3-38
DETERMINATION; AN OVERVIEW
Income of Certain Children 3-39
OF PROPERTY TRANSACTIONS 3-1 Refocus on the Big Picture: A Divided Household 3-39
The Big Picture: A Divided Household 3-1
TAX FORMULA 3-2

Concept Summary: Tax Formula for Individuals Part 2: Gross Income
(Components Integrated into the Text) 3-3
Components of the Tax Formula 3-3
CHAPTER 4
Tax Formula—Correlation with Form 1040 3-8
GROSS INCOME: CONCEPTS AND
STANDARD DEDUCTION 3-11 INCLUSIONS 4-1
The Big Picture: Calculation of Gross Income 4-1
Basic and Additional Standard Deduction 3-11
Individuals Not Eligible for the Standard Deduction 3-12
GROSS INCOME—WHAT IS IT? 4-2
Special Limitations on the Standard Deduction for Dependents 3-12
Definition 4-2
PERSONAL EXEMPTIONS 3-13 Global Tax Issues: From ‘‘All Sources’’ Is a Broad Definition 4-3
Recovery of Capital Doctrine 4-3
DEPENDENCY EXEMPTIONS 3-13 Economic and Accounting Concepts 4-3
Qualifying Child 3-13 Comparison of the Timing of Income Rules for Tax and Accounting 4-4
Concept Summary: Tiebreaker Rules for Claiming Qualified Child 3-15 Form of Receipt 4-5
Qualifying Relative 3-15
Ethics & Equity: Discovering Lost Dependency Exemptions 3-18 YEAR OF INCLUSION 4-6
Other Rules for Dependency Exemptions 3-19 Taxable Year 4-6
Comparison of Categories for Dependency Exemptions 3-19 Accounting Methods 4-6
Concept Summary: Tests for Dependency Exemption 3-20 Special Rules Applicable to Cash Basis Taxpayers 4-8
Phaseout of Exemptions 3-20 Ethics & Equity: Should the Tax Treatment of Government
Ethics & Equity: Whose Qualifying Child Is He? 3-21 Bonds and Corporate Bonds Be Different? 4-11
Child Tax Credit 3-21 Exceptions Applicable to Accrual Basis Taxpayers 4-11
Global Tax Issues: Tax Credit Neutralizes Foreign Income Taxes 4-12
FILING STATUS AND FILING REQUIREMENTS 3-22
Filing Status 3-22 INCOME SOURCES 4-13
Global Tax Issues: Filing a Joint Return 3-23 Personal Services 4-13
Ethics & Equity: Abandoned Spouse? 3-26 Income from Property 4-13
Filing Requirements 3-26 Global Tax Issues: Do Dividends from Foreign Corporations
Warrant Special Treatment? 4-15
TAX DETERMINATION 3-27 Income Received by an Agent 4-16
Tax Rates 3-28 Income from Partnerships, S Corporations, Trusts, and Estates 4-16
Computation of Net Taxes Payable or Refund Due 3-29 Concept Summary: Taxation of Income and Distributions 4-17
Kiddie Tax—Unearned Income of Children Taxed at Parents’ Rate 3-30 Income in Community Property States 4-17
TAX RETURN FILING PROCEDURES 3-32 ITEMS SPECIFICALLY INCLUDED IN GROSS INCOME 4-18
Selecting the Proper Form 3-32 Alimony and Separate Maintenance Payments 4-19
The E-File Approach 3-33 Concept Summary: Tax Treatment of Payments and Transfers
When and Where to File 3-33 Pursuant to Divorce Agreements and Decrees 4-20
Modes of Payment 3-34 Imputed Interest on Below-Market Loans 4-20
CONTENTS XXVII
Concept Summary: Effect of Certain Below-Market Loans on EMPLOYEE FRINGE BENEFITS 5-15
the Lender and Borrower 4-22 Specific Benefits 5-15
Concept Summary: Exceptions to the Imputed Interest Rules Cafeteria Plans 5-16
for Below-Market Loans 4-23
Flexible Spending Plans 5-16
Ethics & Equity: Taxing ‘‘Made-Up’’ Income 4-23
General Classes of Excluded Benefits 5-17
Income from Annuities 4-23
Prizes and Awards 4-26
FOREIGN EARNED INCOME 5-20
Group Term Life Insurance 4-27
Concept Summary: Employee Fringe Benefits 5-21
Unemployment Compensation 4-28
Global Tax Issues: Benefits of the Earned Income Exclusion Are
Social Security Benefits 4-28 Questioned 5-22
TAX PLANNING 4-30

INTEREST ON CERTAIN STATE AND LOCAL
Tax Deferral 4-30 GOVERNMENT OBLIGATIONS 5-22
Reporting Conflicts 4-32
Shifting Income to Relatives 4-32 CORPORATE DISTRIBUTIONS TO SHAREHOLDERS 5-23
Accounting for Community Property 4-33 General Information 5-23
Alimony 4-33 Stock Dividends 5-24
Refocus on the Big Picture: Calculation of Gross Income 4-34
EDUCATIONAL SAVINGS BONDS 5-24
CHAPTER 5
GROSS INCOME: EXCLUSIONS 5-1 EDUCATION SAVINGS PROGRAMS (§ 529 AND
The Big Picture: Exclusions 5-1 § 530 PLANS) 5-25
Qualified Tuition Program 5-25
STATUTORY AUTHORITY 5-2 Coverdell Education Savings Account 5-26
GIFTS AND INHERITANCES 5-3 QUALIFIED ABLE PROGRAMS (§ 529A PLANS) 5-26
Legislative Intent 5-3
Employer Payments to Employees 5-3 TAX BENEFIT RULE 5-26
Employee Death Benefits 5-4
INCOME FROM DISCHARGE OF INDEBTEDNESS 5-27
LIFE INSURANCE PROCEEDS 5-4
General Rule 5-4 TAX PLANNING 5-28
Accelerated Death Benefits 5-5 Life Insurance 5-28
Ethics & Equity: Should the Terminally Ill Pay Social Security Taxes? 5-6 Employee Fringe Benefits 5-28
Transfer for Valuable Consideration 5-6 Investment Income 5-29
Refocus on the Big Picture: Exclusions 5-30
SCHOLARSHIPS 5-7
General Information 5-7
Timing Issues 5-8
Part 3: Deductions
COMPENSATION FOR INJURIES AND SICKNESS 5-8
Damages 5-8 CHAPTER 6
Ethics & Equity: Tax Treatment of Damages Not Related to DEDUCTIONS AND LOSSES: IN GENERAL 6-1
Physical Personal Injury 5-9 The Big Picture: Calculation of Deductible Expenses 6-1
Concept Summary: Taxation of Damages 5-9
Ethics & Equity: Classifying the Amount of the Claim 5-10 CLASSIFICATION OF DEDUCTIBLE EXPENSES 6-2
Wrongful Incarceration 5-10 Classifying Deductions 6-3
Workers’ Compensation 5-10 Authority for Deductions 6-3
Accident and Health Insurance Benefits 5-10 Deduction Criteria for § 162 and § 212 6-5
Personal Expenses 6-6
EMPLOYER-SPONSORED ACCIDENT AND Business and Nonbusiness Losses 6-6
HEALTH PLANS 5-11 Reporting Procedures 6-7
Medical Reimbursement Plans 5-11
Long-Term Care Insurance Benefits 5-12 DEDUCTIONS AND LOSSES—TIMING OF EXPENSE
RECOGNITION 6-8
MEALS AND LODGING 5-13 Importance of Taxpayer’s Method of Accounting 6-8
General Rules for the Exclusion 5-13 Cash Method Requirements 6-8
Ethics & Equity: Employee Meals 5-14 Accrual Method Requirements 6-9
Other Housing Exclusions 5-14 Time Value of Tax Deductions 6-10
XXVIII CONTENTS
DISALLOWANCE POSSIBILITIES 6-11 Statutory Framework for Deducting Losses of Individuals 7-13
Public Policy Limitation 6-11 Concept Summary: Statutory Framework for Deducting Losses of
Global Tax Issues: Overseas Gun Sales Result in Large Fines 6-12 Individuals 7-13
Ethics & Equity: Medical Marijuana: Trade or Business Activity
or Illegal Operation? 6-13 RESEARCH AND EXPERIMENTAL EXPENDITURES 7-13
Political Contributions and Lobbying Activities 6-13 Expense Method 7-14
Excessive Executive Compensation 6-14 Deferral and Amortization Method 7-14
Investigation of a Business 6-15
Concept Summary: Costs of Investigating a Business 6-16 DOMESTIC PRODUCTION ACTIVITIES DEDUCTION 7-15
Hobby Losses 6-16 Operational Rules 7-15
Concept Summary: Common Questions from the IRS Concerning Eligible Taxpayers 7-16
Hobbies/Business with Losses 6-18
Rental of Vacation Homes 6-19 NET OPERATING LOSSES 7-17
Concept Summary: Vacation/Rental Home 6-20 Carryback and Carryover Periods 7-17
Expenditures Incurred for Taxpayer’s Benefit or Taxpayer’s Computation of the Net Operating Loss 7-18
Obligation 6-23 Concept Summary: Computation of Net Operating Loss 7-19
Disallowance of Personal Expenditures 6-23 Recomputation of Tax Liability for Year to Which Net Operating
Ethics & Equity: Personal or Business Expenses? 6-24 Loss Is Carried 7-21
Disallowance of Deductions for Capital Expenditures 6-24 Calculation of the Remaining Net Operating Loss 7-22
Transactions between Related Parties 6-26
Substantiation Requirements 6-27
TAX PLANNING 7-22
Small Business Stock (§ 1244 Stock) Losses 7-22
Expenses and Interest Relating to Tax-Exempt Income 6-27
Casualty Losses 7-23
TAX PLANNING 6-28 Net Operating Losses 7-23
Vacation Homes 6-28 Refocus on the Big Picture: Losses 7-23
Hobby Losses 6-28
Concept Summary: Classification of Expenses 6-29 CHAPTER 8
Do Deduction Limits Affect Executive Compensation? 6-30 DEPRECIATION, COST RECOVERY,
Refocus on the Big Picture: Calculation of Deductible AMORTIZATION, AND DEPLETION 8-1
Business Expenses and Tax Planning 6-31 The Big Picture: Calculating Cost Recovery Deductions 8-1
Concept Summary: Depreciation and Cost Recovery: Relevant
CHAPTER 7 Time Periods 8-3
DEDUCTIONS AND LOSSES: CERTAIN
BUSINESS EXPENSES AND LOSSES 7-1 DEPRECIATION AND COST RECOVERY 8-3
The Big Picture: Losses 7-1 Nature of Property 8-3
Placed in Service Requirement 8-3
BAD DEBTS 7-2 Cost Recovery Allowed or Allowable 8-3
Specific Charge-Off Method 7-3 Cost Recovery Basis for Personal Use Assets Converted to
Concept Summary: The Tax Treatment of Bad Debts Using Business or Income-Producing Use 8-4
the Specific Charge-Off Method 7-4
Business versus Nonbusiness Bad Debts 7-4 MODIFIED ACCELERATED COST RECOVERY SYSTEM
Loans between Related Parties 7-5 (MACRS): GENERAL RULES 8-4
Concept Summary: Bad Debt Deductions 7-5 Concept Summary: MACRS: Class Lives, Methods, and Conventions 8-5
Personalty: Recovery Periods and Methods 8-5
WORTHLESS SECURITIES AND SMALL BUSINESS Financial Disclosure Insights: Tax and Book Depreciation 8-6
STOCK LOSSES 7-6 Concept Summary: Statutory Percentage Method under MACRS 8-6
Worthless Securities 7-6 Realty: Recovery Periods and Methods 8-8
Small Business Stock (§ 1244 Stock) Losses 7-6 Straight-Line Election 8-9
Concept Summary: Straight-Line Election under MACRS 8-9
LOSSES OF INDIVIDUALS 7-7
Events That Are Not Casualties 7-7 MODIFIED ACCELERATED COST RECOVERY
Theft Losses 7-7 SYSTEM (MACRS): SPECIAL RULES 8-10
When to Deduct Casualty Losses 7-8 Election to Expense Assets (§ 179) 8-10
Measuring the Amount of Loss 7-9 Ethics & Equity: Section 179 Limitation 8-14
Ethics & Equity: Is Policy Cancellation an Escape Hatch? 7-9 Additional First-Year Depreciation (Bonus Depreciation) 8-14
Personal Casualty Gains and Losses 7-11 Using § 179 and Bonus Depreciation Effectively 8-15
Concept Summary: Casualty Gains and Losses 7-12 Concept Summary: Using both § 179 and Bonus Depreciation 8-16
CONTENTS XXIX
Business and Personal Use of Automobiles and Other ENTERTAINMENT AND MEAL EXPENSES 9-22
Listed Property 8-17 Overall Limit (The 50 Percent Rule) 9-22
Concept Summary: Listed Property Cost Recovery 8-21 Types of Entertainment Expenses 9-23
Alternative Depreciation System (ADS) 8-22 Restrictions on Deductibility 9-24
Ethics & Equity: Your Turn or Mine? 9-24
REPORTING PROCEDURES 8-23
OTHER EMPLOYEE EXPENSES 9-26
AMORTIZATION 8-26
Office in the Home 9-26
DEPLETION 8-27 Miscellaneous Employee Expenses 9-30
Intangible Drilling and Development Costs (IDCs) 8-27
Depletion Methods 8-28 CONTRIBUTIONS TO RETIREMENT ACCOUNTS 9-31
Employee IRAs 9-31
TAX PLANNING 8-30 Self-Employed Keogh (H.R. 10) Plans 9-32
Cost Recovery 8-30
Amortization 8-31 CLASSIFICATION OF EMPLOYEE EXPENSES 9-32
Cost Recovery Tables 8-31 Accountable Plans 9-32
Refocus on the Big Picture: Calculating Cost Recovery Deductions 8-36 Nonaccountable Plans 9-33
Reporting Procedures 9-34
CHAPTER 9 Improving the Tax Position of Employees 9-34
DEDUCTIONS: EMPLOYEE AND
SELF-EMPLOYED-RELATED EXPENSES 9-1 LIMITATIONS ON ITEMIZED DEDUCTIONS 9-35
The Big Picture: The First Job 9-1 Miscellaneous Itemized Deductions Subject to the
2 Percent Floor 9-35
EMPLOYEE VERSUS INDEPENDENT CONTRACTOR 9-2 Miscellaneous Itemized Deductions Not Subject to the
2 Percent Floor 9-35
Concept Summary: Employee versus Independent Contractor 9-4
TAX PLANNING 9-36

EMPLOYEE EXPENSES—IN GENERAL 9-5
Employment Status 9-36
TRANSPORTATION EXPENSES 9-5 Implications of Misclassifying Workers 9-36
Qualified Expenses 9-5 Transportation and Travel Expenses 9-37
Computation of Automobile Expenses 9-7 Education Expenses 9-38
Refocus on the Big Picture: The First Job 9-38
TRAVEL EXPENSES 9-10
Definition of Travel Expenses 9-10 CHAPTER 10
Away-from-Home Requirement 9-10 DEDUCTIONS AND LOSSES: CERTAIN
Restrictions on Travel Expenses 9-12 ITEMIZED DEDUCTIONS 10-1
Combined Business and Pleasure Travel 9-13 The Big Picture: Impact of Itemized Deductions on
Major Purchases 10-1
MOVING EXPENSES 9-14
Distance Test 9-14 MEDICAL EXPENSES 10-3
Concept Summary: Meeting and Not Meeting the Distance Test 9-15 Medical Expenses Defined 10-3
Time Test 9-15 Capital Expenditures for Medical Purposes 10-4
Concept Summary: Qualifying for the Moving Expense Deduction 9-16 Medical Expenses Incurred for Spouse and Dependents 10-5
Treatment of Moving Expenses 9-16 Transportation, Meal, and Lodging Expenses for
Medical Treatment 10-6
EDUCATION EXPENSES 9-18 Amounts Paid for Medical Insurance Premiums 10-6
General Requirements 9-18 Year of Deduction 10-7
Employer or Legal Requirements to Keep a Job 9-18 Reimbursements 10-7
Maintaining or Improving Existing Skills 9-18 Health Savings Accounts 10-8
Global Tax Issues: Expatriates and the Moving Expense
Deduction 9-19 TAXES 10-10
Concept Summary: Condition for Deducting Regular Education Deductibility as a Tax 10-10
Expenses 9-19 Property Taxes 10-11
What Expenses Are Allowed? 9-20 State and Local Income Taxes and Sales Taxes 10-12
Deduction for Qualified Tuition and Related Expenses 9-20
Other Provisions Dealing with Education 9-21 INTEREST 10-13
Concept Summary: Tax Consequences of Provisions Dealing with Allowed and Disallowed Items 10-13
Education 9-22 Restrictions on Deductibility and Timing Considerations 10-16
XXX CONTENTS
Classification of Interest Expense 10-16 Concept Summary: Passive Activity Loss Rules: Key Issues
Concept Summary: Deductibility of Personal, Student Loan, and Answers 11-22
Mortgage, and Investment Interest 10-17 Computation of Allowable Deduction 11-23
CHARITABLE CONTRIBUTIONS 10-17 OTHER INVESTMENT LOSSES 11-23

Criteria for a Gift 10-17 Concept Summary: Common Investment Loss Limitation Rules 11-24
Qualified Organizations 10-19 TAX PLANNING 11-24
Ethics & Equity: An Indirect Route to a Contribution Deduction 10-19 Using Passive Activity Losses 11-24
Time of Deduction 10-19 Planning with the Investment Interest Limitation 11-26
Record-Keeping and Valuation Requirements 10-20 Effect of the Additional Tax on Net Investment Income 11-26
Concept Summary: Documentation and Substantiation Refocus on the Big Picture: Investor Loss Limitations
Requirements for Charitable Contributions 10-20 Can Significantly Affect Investment Returns 11-27
Global Tax Issues: Choose the Charity Wisely 10-21
Limitations on Charitable Contribution Deduction 10-21
Concept Summary: Determining the Deduction for
Contributions of Appreciated Property by Individuals 10-24
Part 4: Special Tax
Computation Methods,
MISCELLANEOUS ITEMIZED DEDUCTIONS 10-24
Payment Procedures, and
OTHER MISCELLANEOUS DEDUCTIONS 10-25 Tax Credits
COMPREHENSIVE EXAMPLE OF SCHEDULE A 10-25
CHAPTER 12
OVERALL LIMITATION ON CERTAIN ITEMIZED ALTERNATIVE MINIMUM TAX 12-1
DEDUCTIONS 10-27 The Big Picture: The Presence or Absence of the AMT 12-1
INDIVIDUAL ALTERNATIVE MINIMUM TAX 12-2

TAX PLANNING 10-28
Alternative Minimum Taxable Income (AMTI) 12-3
Effective Use of Itemized Deductions 10-28
Ethics & Equity: Accelerating Expenses in an AMT Year 12-4
Use of Medical Deductions 10-28
AMT Formula: Other Components 12-5
Timing the Payment of Deductible Taxes 10-29
AMT Adjustments 12-6
Protecting the Interest Deduction 10-29
Concept Summary: Summary of AMT Adjustment Provisions 12-17
Ensuring the Charitable Contribution Deduction 10-30
AMT Preferences 12-17
Refocus on the Big Picture: Itemized Deductions Can
Ethics & Equity: Large Families and the AMT 12-20
Reduce the After-Tax Cost of Major Purchases 10-31
Illustration of the AMT Computation 12-20
AMT Credit 12-21
CHAPTER 11 Concept Summary: Summary of AMT Preference Provisions 12-23
INVESTOR LOSSES 11-1 Concept Summary: AMT Adjustments and Preferences for
The Big Picture: Investor Loss Limitations Affect the Viability Individuals 12-23
of Certain Investment Opportunities 11-1
CORPORATE ALTERNATIVE MINIMUM TAX 12-24
THE TAX SHELTER PROBLEM 11-2 Small Corporations and the AMT 12-24
AMT Adjustments 12-25
AT-RISK LIMITS 11-4
AMT Preferences 12-26
Concept Summary: Calculation of At-Risk Amount 11-5
Exemption Amount 12-26
PASSIVE ACTIVITY LOSS LIMITS 11-5 Other Aspects of the Corporate AMT 12-27
Classification and Impact of Passive Activity Income and Losses 11-5
TAX PLANNING 12-27
Taxpayers Subject to the Passive Activity Loss Rules 11-9
Avoiding Preferences and Adjustments 12-27
Rules for Determining Passive Activities 11-10
Controlling the Timing of Preferences and Adjustments 12-28
Concept Summary: Tests to Determine Material Participation 11-14
Other AMT Tax Planning Strategies 12-28
Interaction of the At-Risk and Passive Activity Loss Limits 11-15
Refocus on the Big Picture: The Presence or Absence of
Special Passive Activity Rules for Real Estate Activities 11-16 the AMT 12-28
Concept Summary: Treatment of Losses Subject to the At-Risk
and Passive Activity Loss Limitations 11-17 CHAPTER 13
Ethics & Equity: Punching the Time Clock at Year-End 11-18 TAX CREDITS AND PAYMENT
Dispositions of Passive Interests 11-20 PROCEDURES 13-1
The Big Picture: Education Tax Credits 13-1
INVESTMENT INTEREST LIMITATION 11-21
Limitation Imposed 11-21 TAX POLICY CONSIDERATIONS 13-3
CONTENTS XXXI
OVERVIEW AND PRIORITY OF CREDITS 13-4 Recognized Gain or Loss 14-8

Refundable versus Nonrefundable Credits 13-4 Concept Summary: Realized and Recognized Gain or Loss 14-8
General Business Credit 13-5 Nonrecognition of Gain or Loss 14-9
Treatment of Unused General Business Credits 13-5
BASIS CONSIDERATIONS 14-9
SPECIFIC BUSINESS-RELATED TAX CREDITS 13-6 Determination of Cost Basis 14-9
Tax Credit for Rehabilitation Expenditures 13-6 Gift Basis 14-12
Work Opportunity Tax Credit 13-7 Inherited Property 14-13
Research Activities Credit 13-8 Disallowed Losses 14-15
Low-Income Housing Credit 13-10 Concept Summary: Wash Sale Rules 14-17
Disabled Access Credit 13-11 Conversion of Property from Personal Use to Business or
Income-Producing Use 14-18
Credit for Small Employer Pension Plan Startup Costs 13-11
Credit for Employer-Provided Child Care 13-12 Summary of Basis Adjustments 14-19
Concept Summary: Adjustments to Basis 14-20
OTHER TAX CREDITS 13-12
TAX PLANNING 14-21
Earned Income Credit 13-12
Cost Identification and Documentation Considerations 14-21
Tax Credit for Elderly or Disabled Taxpayers 13-14
Selection of Property for Making Gifts 14-21
Foreign Tax Credit 13-14
Selection of Property for Inheritances 14-21
Adoption Expenses Credit 13-15
Disallowed Losses 14-22
Child Tax Credit 13-16
Ethics & Equity: Washing a Loss Using an IRA 14-22
Credit for Child and Dependent Care Expenses 13-16
Refocus on the Big Picture: Proposed Sale of a House and
Ethics & Equity: Is This the Right Way to Use the Credit
Other Property Transactions 14-23
for Child and Dependent Care Expenses? 13-18
Education Tax Credits 13-18
Energy Credits 13-20
CHAPTER 15
Credit for Certain Retirement Plan Contributions 13-20
PROPERTY TRANSACTIONS:
Concept Summary: Tax Credits 13-21
NONTAXABLE EXCHANGES 15-1
The Big Picture: Alternative Uses of Property 15-1
PAYMENT PROCEDURES 13-23
GENERAL CONCEPT OF A NONTAXABLE EXCHANGE 15-2
Employers 13-23
Self-Employed Taxpayers 13-27 LIKE-KIND EXCHANGES—§ 1031 15-3
Like-Kind Property 15-4
AFFORDABLE CARE ACT PROVISIONS 13-30
Exchange Requirement 15-5
Individual Shared Responsibility Payment 13-31
Concept Summary: Delayed § 1031 Exchange 15-6
Premium Tax Credit 13-31
Ethics & Equity: A Delayed § 1031 Like-Kind Exchange:
Additional Medicare Taxes on High-Income Individuals 13-32 If At First You Don’t Succeed, Try Again 15-6
Boot 15-7
TAX PLANNING 13-34 Basis and Holding Period of Property Received 15-8
Foreign Tax Credit 13-34
Reporting Considerations 15-10
Credit for Child and Dependent Care Expenses 13-34
Adjustments to Increase Withholding 13-35 INVOLUNTARY CONVERSIONS—§ 1033 15-11
Adjustments to Avoid Overwithholding 13-36 Involuntary Conversion Defined 15-12
Refocus on the Big Picture: Education Tax Credits 13-36 Computing the Amount Realized 15-12
Replacement Property 15-12
Concept Summary: Involuntary Conversions: Replacement
Property Tests 15-13
Part 5: Property Transactions Time Limitation on Replacement 15-14
Nonrecognition of Gain 15-14
CHAPTER 14 Reporting Considerations 15-15
PROPERTY TRANSACTIONS:
DETERMINATION OF GAIN OR SALE OF A RESIDENCE—§ 121 15-16
LOSS AND BASIS CONSIDERATIONS 14-1 Principal Residence 15-16
The Big Picture: Proposed Sale of a House and Other Property Requirements for Exclusion Treatment 15-16
Transactions 14-1 Calculation of the Exclusion Amount 15-18
Exceptions to the Two-Year Rules 15-19
DETERMINATION OF GAIN OR LOSS 14-2 Involuntary Conversion and Using §§ 121 and 1033 15-21
Realized Gain or Loss 14-2
Concept Summary: Realized Gain or Loss 14-3 TAX PLANNING 15-21
XXXII CONTENTS
Like-Kind Exchanges 15-21 Global Tax Issues: Capital Gain Treatment in the United
Involuntary Conversions 15-22 States and Other Countries 16-35
Sale of a Principal Residence 15-22 Effect of Capital Asset Status in Transactions Other Than Sales 16-35
Refocus on the Big Picture: Alternative Uses of Property 15-24 Stock Sales 16-36
Maximizing Benefits 16-36
CHAPTER 16 Year-End Planning 16-37
PROPERTY TRANSACTIONS: CAPITAL Refocus on the Big Picture: Managing Capital Asset Transactions 16-37
GAINS AND LOSSES 16-1
The Big Picture: Managing Capital Asset Transactions 16-1 CHAPTER 17
PROPERTY TRANSACTIONS: § 1231
GENERAL SCHEME OF TAXATION 16-3 AND RECAPTURE PROVISIONS 17-1
The Big Picture: Depreciation Recapture 17-1
CAPITAL ASSETS 16-3
Definition of a Capital Asset (§ 1221) 16-4 SECTION 1231 ASSETS 17-3
Ethics & Equity: Sculpture as a Capital Asset 16-6 Relationship to Capital Assets 17-3
Effect of Judicial Action 16-6 Property Included 17-4
Statutory Expansions 16-6 Property Excluded 17-4
Special Rules for Certain § 1231 Assets 17-4
SALE OR EXCHANGE 16-8 General Procedure for § 1231 Computation 17-6
Worthless Securities and § 1244 Stock 16-8 Concept Summary: Section 1231 Netting Procedure 17-7
Special Rule—Retirement of Corporate Obligations 16-8
SECTION 1245 RECAPTURE 17-10
Options 16-9
Section 1245 Property 17-12
Concept Summary: Options: Consequences to the Grantor
and Grantee 16-11 Observations on § 1245 17-12
Patents 16-11
SECTION 1250 RECAPTURE 17-13
Franchises, Trademarks, and Trade Names (§ 1253) 16-12
Section 1250 Recapture Situations 17-13
Concept Summary: Franchises: Consequences to the
Franchisor and Franchisee 16-13 Concept Summary: Comparison of § 1245 and
§ 1250 Depreciation Recapture 17-14
Lease Cancellation Payments 16-14
Unrecaptured § 1250 Gain (Real Estate 25% Gain) 17-14
Ethics & Equity: The Sale of a ‘‘Cost-Segregated’’ Building 17-15
HOLDING PERIOD 16-14
General Rules 16-14 CONSIDERATIONS COMMON TO §§ 1245
Special Holding Period Rules 16-15 AND 1250 17-16
Special Rules for Short Sales 16-16 Exceptions 17-16
Concept Summary: Short Sales of Securities 16-17 Other Applications 17-17
Concept Summary: Depreciation Recapture and
TAX TREATMENT OF CAPITAL GAINS AND § 1231 Netting Procedure 17-18
LOSSES OF NONCORPORATE TAXPAYERS 16-19 Global Tax Issues: Depreciation Recapture in
Capital Gain and Loss Netting Process 16-19 Other Countries 17-19
Qualified Dividend Income 16-23
Alternative Tax on Net Capital Gain and Qualified Dividend SPECIAL RECAPTURE PROVISIONS 17-19
Income 16-24 Special Recapture for Corporations 17-19
Concept Summary: Income Layers for Alternative Tax on Gain from Sale of Depreciable Property between Certain
Capital Gain Computation 16-25 Related Parties 17-19
Treatment of Net Capital Losses 16-26 Intangible Drilling Costs 17-19
Concept Summary: Final Results of the Capital Gain and
Loss Netting Process and How They Are Taxed 16-27 REPORTING PROCEDURES 17-20
Reporting Procedures 16-28 Ethics & Equity: Incorrect Depreciation and Recognized Gain 17-22
TAX TREATMENT OF CAPITAL GAINS AND TAX PLANNING 17-27

LOSSES OF CORPORATE TAXPAYERS 16-34 Timing of § 1231 Gain 17-27
Timing of Recapture 17-27
TAX PLANNING 16-34 Postponing and Shifting Recapture 17-28
Importance of Capital Asset Status 16-34 Avoiding Recapture 17-28
Planning for Capital Asset Status 16-34 Refocus on the Big Picture: Depreciation Recapture 17-28
CONTENTS XXXIII
Part 6: Accounting Periods, CHAPTER 19

DEFERRED COMPENSATION 19-1
Accounting Methods, and The Big Picture: A Taxpayer Who Saves 19-1
Deferred Compensation
QUALIFIED PENSION, PROFIT SHARING, STOCK
BONUS, AND CASH BALANCE PLANS 19-3
CHAPTER 18
Types of Plans 19-3
ACCOUNTING PERIODS AND METHODS 18-1
Concept Summary: Defined Benefit Plan and Defined
The Big Picture: Accounting Period and Method 18-1
Contribution Plan Compared 19-4
ACCOUNTING PERIODS 18-2 Ethics & Equity: Uneven Compensation Playing Field 19-5
Specific Provisions for Partnerships, S Corporations, and Qualification Requirements 19-6
Personal Service Corporations 18-3 Tax Consequences to the Employee and Employer 19-10
Ethics & Equity: Who Benefits from the Change in Tax Year? 18-5 Limitations on Contributions to and Benefits from
Selecting the Tax Year 18-6 Qualified Plans 19-11
Changes in the Accounting Period 18-6 Section 401(k) Plans 19-13
Taxable Periods of Less Than One Year 18-7
RETIREMENT PLANS FOR SELF-EMPLOYED
Mitigation of the Annual Accounting Period Concept 18-9
INDIVIDUALS AND THEIR EMPLOYEES 19-16
Ethics & Equity: Special Tax Relief 18-10
Coverage Requirements 19-16
Contribution Limitations 19-16
ACCOUNTING METHODS 18-10
Permissible Methods 18-10
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS) 19-17
Cash Receipts and Disbursements Method—Cash Basis 18-11
General Rules 19-17
Global Tax Issues: Tax Accounting Methods as Well as Tax
Concept Summary: Keogh Plan and SEP Compared 19-20
Rates in Foreign Countries Are Important Considerations 18-13
Penalty Taxes for Excess Contributions 19-21
Accrual Method 18-13
Taxation of Benefits 19-22
Concept Summary: Accruals Under the Economic
Performance Test 18-14 Concept Summary: Comparison of IRAs 19-23
Financial Disclosure Insights: Tax Deferrals from Reserves 18-16
NONQUALIFIED DEFERRED COMPENSATION PLANS 19-24
Hybrid Method 18-16
Underlying Rationale for Tax Treatment 19-24
Change of Method 18-17
Tax Treatment to the Employer and Employee 19-25
Ethics & Equity: Change in Accounting Method 18-19
Ethics & Equity: The ‘‘Jock Tax’’ Is Spreading 19-28
SPECIAL ACCOUNTING METHODS 18-19
RESTRICTED PROPERTY PLANS 19-28
Installment Method 18-19
Substantial Risk of Forfeiture 19-29
Concept Summary: Interest on Installment Sales 18-24
Special Election Available 19-29
Disposition of Installment Obligations 18-25
Employer Deductions 19-30
Interest on Deferred Taxes 18-26
Electing Out of the Installment Method 18-26 STOCK OPTIONS 19-31
Long-Term Contracts 18-27 Incentive Stock Options 19-31
Financial Disclosure Insights: Accounting for Executive
INVENTORIES 18-30 Compensation 19-33
Determining Inventory Cost 18-31
Nonqualified Stock Options 19-33
Global Tax Issues: Inventory Acquired from a Foreign Subsidiary 18-32
Ethics & Equity: Preserving the LIFO Reserve 18-35 TAX PLANNING 19-34
The LIFO Election 18-36 Deferred Compensation 19-34
Special Inventory Methods Relating to Farming and Ranching 18-36 Qualified Plans 19-35
Self-Employed Retirement Plans 19-35
TAX PLANNING 18-36 Individual Retirement Accounts 19-35
Taxable Year 18-37
Comparison of § 401(k) Plan with IRA 19-35
Cash Method of Accounting 18-37
Concept Summary: Section 401(k) Plan and IRA Compared 19-36
Installment Method 18-37
Nonqualified Deferred Compensation (NQDC) Plans 19-36
Completed Contract Method 18-37
Stock Options 19-37
Inventories 18-37
Concept Summary: Incentive Stock Options and Nonqualified Stock
Refocus on the Big Picture: Accounting Period and Method 18-38 Options Compared 19-37
XXXIV CONTENTS
Flexible Benefit Plans 19-37 Concept Summary: A Comparison of Some of the Attributes of S and C
Liquidating Retirement Assets 19-38 Corporations 20-32
Refocus on the Big Picture: A Taxpayer Who Saves 19-41 Partnership Formation and Basis 20-32
Partnership Operation 20-34
TAX PLANNING 20-37

Part 7: Corporations and Corporate versus Noncorporate Forms of Business Organization 20-37
Partnerships Regular Corporation versus S Status 20-38
Use of an Entity to Reduce the Family Income Tax Burden 20-39
CHAPTER 20 Refocus on the Big Picture: Choice of Business Entity 20-40
CORPORATIONS AND PARTNERSHIPS 20-1
The Big Picture: Choice of Business Entity 20-1
CHOICE OF ENTITY 20-2 APPENDIXES

Nontax Considerations 20-2
Concept Summary 20-4
General Tax Consequences of Different Forms of Business Entities 20-4 TAX RATE SCHEDULES AND TABLES A-1
Check-the-Box Election 20-5
TAX FORMS B-1
CORPORATIONS 20-6
Corporate Legal Concerns 20-6 GLOSSARY C-1
Individuals and Corporations Compared—An Overview 20-7
Specific Provisions Compared 20-10 TABLE OF CODE SECTIONS CITED D-1
Deductions Available Only to Corporations 20-14
Determination of Corporate Tax Liability 20-16 TABLE OF REGULATIONS CITED D-11
Corporate Filing Requirements 20-17
Reconciliation of Corporate Taxable Income and Accounting
TABLE OF REVENUE PROCEDURES
Income 20-18 AND REVENUE RULINGS CITED D-14
Concept Summary: Summary of Income Tax Consequences 20-19
PRACTICE SET ASSIGNMENTS—
FORMING THE CORPORATION 20-21 COMPREHENSIVE TAX RETURN PROBLEMS E-1
Transfers to Controlled Corporations 20-21
Capital Contributions 20-22 TABLE OF CASES CITED F-1
Ethics & Equity: Selective Incorporation 20-23
TAX FORMULAS G-1
OPERATING THE CORPORATION 20-23
Dividend Distributions 20-23 PRESENT VALUE AND FUTURE VALUE TABLES H-1
Global Tax Issues: Transferring Assets to Foreign
Corporations—Forget § 351? 20-24 INDEX I-1
Other Corporate Considerations 20-26
THE S ELECTION 20-26

Qualification for S Status 20-26
Online Appendixes
Operational Rules 20-28
Ethics & Equity: Income Tax Basis That Does Not Change? 20-31
DEPRECIATION AND THE ACCELERATED COST
RECOVERY SYSTEM (ACRS)
PARTNERSHIPS 20-31
Nature of Partnership Taxation 20-31 AFFORDABLE CARE ACT PROVISIONS
PART
1
INTRODUCTION AND
BASIC TAX MODEL
CHAPTER 1
An Introduction to Taxation and Understanding the Federal Tax Law
CHAPTER 2
Working with the Tax Law
CHAPTER 3
Tax Formula and Tax Determination; An Overview of Property
Transactions
Part 1 provides an introduction to taxation in the United States. Although this text focuses on income
taxation, other types of taxes are also briefly discussed. The purposes of the Federal tax law are
examined, and the legislative, administrative, and judicial sources of Federal tax law, including their
application to the tax research process, are analyzed. Part 1 concludes by introducing the basic tax
model for the individual taxpayer and providing an overview of property transactions.
C H A P T E R An Introduction to Taxation
1 and Understanding the
Federal Tax Law
L E A R N I N G O B J E C T I V E S : After completing Chapter 1, you should be able to:
Explain the importance of taxation. Explain the administration of the tax law, including
LO.1 LO.5
the audit process utilized by the IRS.
Describe some of the history and trends of the Evaluate some of the ethical guidelines involved in
LO.2 LO.6
Federal income tax. tax practice.
Describe and apply principles and terminology Recognize the economic, social, equity, and political
LO.3 LO.7
relevant to the design of a tax system. considerations that justify various aspects of the tax
Identify the different taxes imposed in the United law.
LO.4
States at the Federal, state, and local levels. Describe the role played by the IRS and the courts in
LO.8
the evolution of the Federal tax system.
CHAPTER OUTLINE
1-1 Approaching the Study of Taxation, 1-2 1-4e Income Taxes, 1-15
1-1a What Is Taxation? 1-2 1-4f Employment Taxes, 1-17
1-1b Taxation in Our Lives, 1-2 1-4g Other U.S. Taxes, 1-18
1-1c The Relevance of Taxation to Accounting and 1-4h Proposed U.S. Taxes, 1-20
Finance Professionals, 1-3
1-5 Tax Administration, 1-21
1-1d How to Study Taxation, 1-4
1-5a Internal Revenue Service, 1-21
1-2 A Brief History of U.S. Taxation, 1-5 1-5b The Audit Process, 1-21
1-2a Early Periods, 1-5 1-5c Statute of Limitations, 1-24
1-2b Revenue Acts, 1-5 1-5d Interest and Penalties, 1-24
1-2c Historical Trends, 1-5 1-5e Tax Practice, 1-25
1-3 Tax System Design, 1-6 1-6 Understanding the Federal Tax Law, 1-27
1-3a Legal Foundation, 1-6 1-6a Revenue Needs, 1-27
1-3b The Basic Tax Formula, 1-7 1-6b Economic Considerations, 1-27
1-3c Tax Principles, 1-7 1-6c Social Considerations, 1-28
1-6d Equity Considerations, 1-29
1-4 Major Types of Taxes, 1-8
1-6e Political Considerations, 1-31
1-4a Property Taxes, 1-9
1-6f Influence of the Internal Revenue Service, 1-32
1-4b Transaction Taxes, 1-11
1-6g Influence of the Courts, 1-33
1-4c Taxes on Transfers at Death, 1-13
1-6h Summary, 1-34
1-4d Gift Taxes, 1-14
THE BIG PICTURE CORBIS/SUPERSTOCK
FAMILY AND TAXES—A TYPICAL YEAR
Travis and Amy Carter are married and live in a state that imposes both a sales tax and an income tax. They
have two children, April (age 17) and Martin (age 18). Travis is a mining engineer who specializes in land
reclamation. After several years with a mining corporation, Travis established a consulting practice that
involves a considerable amount of travel. Amy is a registered nurse who, until recently, was a homemaker.
In November of this year, she decided to reenter the job market and accepted a position with a medical
clinic. The Carters live only a few blocks from Ernest and Mary Walker, Amy Carter’s parents. The Walkers
are retired and live on interest, dividends, and Social Security benefits.
Various developments occurring during the year with possible tax ramifications are summarized below.
• The ad valorem property taxes on the Carters’ residence are increased, while those on the Walkers’ resi-
dence are lowered.
• When Travis registers an automobile purchased last year in another state, he is required to pay a sales
tax to his home state.
• As an anniversary present, the Carters gave the Walkers a recreational vehicle (RV).
• When Travis made a consulting trip to Chicago, the client withheld Illinois state income tax from the pay-
ment made to Travis for his services.
• Travis employs his children to draft blueprints and prepare scale models for use in his work. Both April
and Martin have had training in drafting and topography.
• Early in the year, the Carters are audited by the state on an income tax return filed a few years ago. Later
in the year, they are audited by the IRS on a Form 1040 they filed for the same year. In each case, a tax
deficiency and interest were assessed.
• The Walkers are audited by the IRS. Unlike the Carters, they did not have to deal with an agent, but
settled the matter by mail.
Explain these developments and resolve the issues raised.
Read the chapter and formulate your response.
1-1
1-2 PART 1 Introduction and Basic Tax Model
T
he primary objective of this chapter is to provide an overview of the Federal tax
system. Among the topics discussed are the following:
• The importance and relevance of taxation and how to study taxation.

• A brief history of the Federal income tax.
• The types of taxes imposed at the Federal, state, and local levels.
• Some highlights of tax law administration.
• Tax concepts that help explain the reasons for various tax provisions.
• The influence the Internal Revenue Service (IRS) and the courts have had in the
evolution of current tax law.
LO.1 1-1 APPROACHING THE STUDY OF TAXATION

Explain the importance of
taxation. 1-1a What Is Taxation?
“Taxes are what we pay for civilized society.”
This is a famous quote from U.S. Supreme Court Justice Oliver Wendell Holmes, Jr.
(1841 to 1935).1 It is engraved on the government building at 1111 Constitution Avenue
in Washington, DC—headquarters of the Internal Revenue Service (IRS). This quote elo-
quently sums up the primary purpose of taxation—to raise revenue for government
operations. Governments at all levels—national, state, and local—require funds for
defense, protection (police and fire), education, roads, the court system, social services,
and more. Various types of taxes provide the resources to pay for government services.
In addition, taxation is often used as a tool to influence the behavior of individuals
and businesses. For example, an income tax credit (which reduces a taxpayer’s tax bill)
may be designed to encourage people to purchase a fuel-efficient car. A tobacco excise
tax may discourage individuals from smoking by increasing the cost of tobacco prod-
ucts. The tax system can also be used to provide direct benefits to taxpayers, such as to
help pay for health insurance.
1-1b Taxation in Our Lives

“Nothing is certain, except death and taxes.”
Most people attribute this quote to Benjamin Franklin (1706 to 1790). Taxes permeate
our society. Various types of taxes, such as income, sales, property, and excise taxes
(discussed in text Section 1-4), come into play in many of the activities of individuals,
businesses, nonprofit entities (like charitable organizations), and even governments.
Most directly, individuals are affected by taxes by paying them. Taxes may be paid
directly or indirectly. A direct tax is paid to the government by the person who pays the
tax. Examples include the personal income tax, which is paid by filing a personal
income tax return (Form 1040 at the Federal level), and property taxes on one’s home
(paid to the local government). Individuals also pay many taxes indirectly. For example,
most states impose sales tax on the purchase of tangible goods such as clothes. While
this tax is collected and remitted to the government by the seller, the buyer is charged
the tax along with the purchase price of the goods or services. Taxes also can be
imposed indirectly when embedded in the prices charged by the seller. For example,
when you buy gasoline for your car, the price you pay likely includes some of the
income taxes and the gasoline excise taxes owed by the oil company.
Ultimately, all taxes are paid by individuals. The corporate income tax, for example, is
paid directly by the corporation, but is really paid by individuals in their capacity as cus-
tomers, investors (owners), or employees. Economists and others often study this topic to
estimate the percentage of the corporate income tax borne by individuals in these
1
Compania General De Tabacos De Filipinas v. Collector of Internal Reve-
nue, 275 U.S. 87, 100 (1927), dissenting opinion.
CHAPTER 1 An Introduction to Taxation and Understanding the Federal Tax Law 1-3
different capacities. It is not easy to measure, but it is known that taxes are passed along
to individuals through higher prices, lower wages, and/or lower dividends.
Taxes also affect the lives of individuals via the ballot box. Federal, state, and local
elections often include initiatives that deal with taxation, such as whether state income
taxes should be raised (or lowered), whether a new tax should be imposed on soda, or
whether the sales tax rate should be changed. Candidates running for office often have
positions on tax changes they would like to make, if elected.
Given the pervasiveness of taxation—in our roles as both direct and indirect payers of
taxes, as well as citizens/voters—it is important that we understand how the tax system
operates.
1-1c The Relevance of Taxation to Accounting and Finance

Professionals
The top U.S. corporate income tax rate is 35 percent. State income taxes can easily constitute,
on average, an additional 5 percent. So a large corporation such as a Fortune 500 company
may have to devote up to 40 percent of its net income to pay income taxes. In addition, busi-
nesses are subject to employment taxes, property taxes, sales taxes, and various excise taxes.
Corporations with international operations also are subject to taxation in other countries.
Small businesses are also subject to a variety of taxes that affect profits and cash flows.
Given its significance, taxation is a crucial topic for accounting and finance professionals.
They must understand the various types of business taxes to assist effectively with:
• Compliance: Ensure that the business files all tax returns and makes all tax pay-
ments on time. Mistakes will lead to penalties and interest expense.
• Planning: Help a business to apply favorable tax rules, such as income deferral
and tax credits, to minimize tax liability (and maximize owner wealth). The time
value of money concept is also important here, as is coordinating tax planning
with other business goals to maximize earnings per share.
• Controversy: This term refers to interaction a taxpayer may have with a tax agency
such as the IRS. The IRS and state and local tax agencies regularly audit tax returns
that have been filed to verify that taxes were properly computed and paid.
• Cash management: Taxes must be paid on time to avoid penalties and interest.
Income taxes must be estimated and paid quarterly and reconciled on the annual
return. Other taxes may be due weekly, monthly, or semiannually. Businesses
must be sure they have the funds ready when the taxes are due and have proce-
dures to track due dates.
These tasks are also relevant to professionals such as CPAs who advise business and
individual clients.
The level and depth of tax knowledge needed for any accounting or tax professional
depends on his or her specific job. The vice president of tax for a company clearly
needs thorough knowledge in all areas of taxation; the same is true of a partner in a
CPA firm. In contrast, the corporate treasurer likely focuses more on cash management,
working closely with the company’s tax advisers.
Ultimately, much of taxation is transaction-based. How a transaction is structured (e.g.,
as a sale or a lease) has varying tax consequences that must be considered. Even the pur-
chase of a home can result in significant change—the new mortgage interest and property
tax deductions will likely mean that an individual itemizes her deductions (using Schedule
A of Form 1040) rather than using the standard deduction. And life events such as mar-
riage (and divorce) will change an individual’s tax situation. Similar “life events” can also
affect a corporation (e.g., acquiring a different corporation or spinning off a subsidiary).
It is essential in working with taxation to maintain a balanced perspective. A corpora-
tion that is deciding where to locate a new factory does not automatically select the city
or state that offers the most generous tax benefits. Nor does the person who is retiring
to a warmer climate pick Belize over Arizona because the former has no income tax
while the latter does. Tax considerations should not control decisions, but they remain
one of many factors to be considered (and often, one of the most significant).
1-1d How to Study Taxation

The goal of studying taxation is being able to recognize issues (or transactions) that have
tax implications and, when possible, trying to understand the justification for them. Sup-
pose, for example, that you come upon a situation that involves a discharge of indebted-
ness. If you know that forgiveness of debt results in income but there are exceptions to
this rule, the battle is won! The issue has been identified, and the outcome (i.e., when an
exception applies) can be resolved through research. A variety of commercial and free
tools and resources are available to help you research and reach a conclusion.
You may have heard that tax is a difficult subject because of the many rules, excep-
tions, and definitions. You even may have heard that taxation is boring. Taxation is a
challenging topic, but it is certainly not boring. Taxation is an important and exciting
topic due to constant change by the three branches of our Federal government (as well
as changes by state and local governments), the significance of taxes to the bottom line
of a company and an individual’s finances, and the impact on our economy and society.
Tax professionals tend to find enjoyment in their chosen field due to the intellectual
challenge of dealing with tax rules for compliance and planning purposes, the opportunity
to interact with colleagues or clients to help them understand the effect of taxes, and the
knowledge that their work affects the financial well-being of individuals and businesses.
In studying taxation, focus on understanding the rules and the why(s) behind them
(rather than memorizing the many isolated or disconnected rules and terms). The rules
become more meaningful by thinking about why they exist for the particular type of
tax. For example, why does the individual income tax allow for a casualty loss deduc-
tion? Why is tax depreciation different from that used for financial reporting? Also con-
sider how the rules apply to different types of taxpayers (like employees, sole
proprietors, corporations, investors, children, and retirees). Also think about how the
rules apply to taxpayers of varying income levels and sophistication of transactions
(a homeowner versus someone who owns assets in several countries). Aiming for
understanding, rather than memorization, will make your journey into the world of taxa-
tion interesting and meaningful and will prepare you well for dealing with taxation in
your accounting or finance career.
Concept Summary 1.1 illustrates the various ways that individuals deal with, and are
affected by, taxes.
Concept Summary 1.1

Individuals and Taxes
The diagram to the right illustrates the many ways individuals

interact with taxes. For example, as shown in the outer circle,
individuals pay taxes and file tax returns (tax compliance). They
Ta
ce
xP
n
also engage in tax planning as part of their desire to maximize l/ Em

lia
lan
na r plo
p
after-tax wealth. If their tax return is audited, or they do not pay so me ye

om
n in
e r u e
P ns Personal
g
xC
their taxes, taxpayers will deal with the IRS or their state tax C o Responsibilities
Ta
agency (tax controversy). Individuals deal with tax rules and

planning in their roles as consumers, employees, investors, and
business owners. Tax law is designed around these various tax-
Re
payer activities. Finally, as shown by the inner circle, individuals

era al
sp
Individual
cy
Lit anci
Civ ibil
on
have a personal responsibility to comply with tax laws and pay

i c itie
s
Fin
any taxes due. Individuals also have a civic responsibility to

r
sto
Bu
understand taxes in their role as citizens and voters. And, indi-

ve
s
sin
In
viduals need to understand how taxes affect their personal cash

es
s
flows, consumption, and savings.

Use this diagram as you study the materials in this text, con-
sidering where in the circle various rules fit. Tax Controversy
1-2 A BRIEF HISTORY OF U.S. TAXATION LO.2

Describe some of the history
1-2a Early Periods and trends of the Federal
An income tax was first enacted in 1634 by the English colonists in the Massachusetts income tax.
Bay Colony, but the Federal government did not adopt an income tax until 1861. In fact,
both the Federal Union and the Confederate States of America used the income tax to
raise funds to finance the Civil War.
When the Civil War ended, the need for additional revenue disappeared and the
income tax was repealed. Once again the Federal government was able to finance its
operations almost exclusively from customs duties (tariffs).
When a new Federal income tax on individuals was enacted in 1894, its opponents
were prepared to successfully challenge its constitutionality. In Pollock v. Farmers’ Loan
and Trust Co., the U.S. Supreme Court found that taxes on the income of real and per-
sonal property were the legal equivalent of a tax on the property involved and, there-
fore, required apportionment based on the population of the United States, as required
by Article I, Section 8 of the Constitution.2
A Federal corporate income tax, enacted by Congress in 1909, fared better in the judi-
cial system. The U.S. Supreme Court found this tax to be constitutional because it was
treated as an excise tax.3 In essence, it was a tax on the right to do business in the cor-
porate form. So it was viewed as a form of the franchise tax.4 Since the corporate form
of doing business had been developed in the late nineteenth century, it was unknown
to the framers of the U.S. Constitution. Because a corporation is an entity created under
law, jurisdictions possess the right to tax its creation and operation. Using this rationale,
many states still impose franchise taxes on corporations.
The ratification of the Sixteenth Amendment to the U.S. Constitution in 1913 sanc-
tioned both the Federal individual and corporate income taxes and, as a consequence,
neutralized the continuing effect of the Pollock decision.
1-2b Revenue Acts

After the Sixteenth Amendment was ratified by the states, Congress enacted the Revenue
Act of 1913. Under this Act, the first Form 1040 was due on March 1, 1914. The law
allowed various deductions and personal exemptions of $3,000 for a single individual and
$4,000 for married taxpayers. These large exemptions excluded all but the more wealthy
taxpayers from the new income tax.5 Rates ranged from a low of 2 percent to a high of 6
percent. The 6 percent rate applied only to taxable income in excess of $500,000!6
Various revenue acts were passed between 1913 and 1939. In 1939, all of these reve-
nue laws were codified (arranged in a systematic manner) into the Internal Revenue
Code of 1939. In 1954, a similar codification took place. The Internal Revenue Code of
1986, which largely carries over the provisions of the 1954 Code, is our current law. Tax
law changes occur almost every year (how this happens is discussed in Chapter 2).
1-2c Historical Trends

The income tax is a major source of revenue for the Federal government. Exhibit 1.1
shows the tax revenue sources7 and the importance of the income tax. Income tax col-
lections from individuals and corporations amount to 61 percent of the total receipts.
One revenue source missing from the Exhibit 1.1 pie chart is borrowing to cover the
deficit, which in recent years has represented between 10 to 40 percent of total govern-
ment revenues.
The need for revenues to finance the war effort during World War II converted the
income tax into a mass tax. In 1939, less than 6 percent of the U.S. population was
2 6
3 AFTR 2602, 15 S.Ct. 912 (USSC, 1895). See Chapter 2 for an explanation of This should be contrasted with the highest 2017 tax rate of 39.6%, which
the citations of judicial decisions. applies once taxable income exceeds $418,400 for single taxpayers and
3
Flint v. Stone Tracy Co., 3 AFTR 2834, 31 S.Ct. 342 (USSC, 1911). $470,700 for married taxpayers filing a joint return.
7
4
See the discussion of state franchise taxes later in text Section 1-4g. Revenue data can be found at www.cbo.org and www.whitehouse.
5 gov/omb. The instruction booklet for Form 1040 includes a revenue pie
A $3,000 exemption in 1913 would be about $73,000 today, while a $4,000
chart that includes borrowing to cover the deficit, as well as a pie chart that
exemption would be about $97,000.
shows government spending in broad categories.
E X H I B I T 1.1 Federal Tax Revenues (Estimated) Fiscal Year 2017
2% 1% 1%
Individual Income Taxes
Corporate Income Taxes

35% Payroll Taxes
51% Excise Taxes
Customs Duties
10% Estate and Gift Taxes
subject to the Federal income tax. By 1945, more than 74 percent of the population was
subject to the Federal income tax.8
Certain tax law changes are important to understand. In 1943, Congress passed the
Current Tax Payment Act, which provided for a pay-as-you-go tax system. A pay-as-
you-go income tax system requires employers to withhold a specified portion of an
employee’s wages and remit them to the government to cover the worker’s income
taxes. Persons with income from other than wages may have to make quarterly pay-
ments to the IRS for estimated taxes due for the year.
Recently, the increasing complexity of the Federal income tax laws is causing con-
cern. Congress has added to this complexity by frequently changing the tax laws, often
adding new deductions or tax credits. This complexity forces many taxpayers to seek
assistance in preparing their income tax returns. According to estimates, more than one-
half of individual taxpayers who file a return pay a preparer, and one-third purchase tax
software.9
LO.3 1-3 TAX SYSTEM DESIGN

Describe and apply principles
and terminology relevant to 1-3a Legal Foundation
the design of a tax system.
Article I, Section 8 of the U.S. Constitution states in part: “The Congress shall have
power to lay and collect taxes.” The Constitution also provided some limits on this tax-
ing power, which led to enactment of the Sixteenth Amendment to allow for an income
tax (discussed in text Section 1-2a). This history lesson is important for a legislature or
an electorate that wants to change a tax system. The jurisdiction’s underlying governing
documents (whether a country, state, or city) must be reviewed to determine whether
they impose any restriction relevant to taxation.
For example, the California Constitution (Article 13A) states that the maximum tax
rate for real property taxation is 1 percent. The Florida Constitution (Section 5) specifies
limits on the imposition of income taxes on natural persons. Also, state law may impose
limitations on the types or amounts of taxes that cities and counties can impose.
Thus, the governing documents of a jurisdiction must be considered as part of any
effort to modify that jurisdiction’s tax system to make sure the change is permissible. If a
change is not permissible but desired, then the governing document must be amended,
as was done with the addition of the Sixteenth Amendment to the U.S. Constitution.
8 9
Richard Goode, The Individual Income Tax (Washington, D.C.: The Brook- The Tax Foundation estimates that individual taxpayers spend over $20 bil-
ings Institution, 1964), pp. 2–4. lion and devote about 1.35 billion hours in preparing their tax returns.
1-3b The Basic Tax Formula

The basic formula for any tax is:
Tax base X Tax rate = Tax liability
Tax Base
A tax base is the amount to which the tax rate is applied. In the case of the Federal
income tax, the tax base is taxable income. As noted later in the chapter (Exhibit 1.3), tax-
able income is gross income reduced by certain deductions (both business and personal).
Tax Rates
Tax rates are applied to the tax base to determine a taxpayer’s liability. The tax rates
may be proportional or progressive. A tax is proportional if the rate of tax remains con-
stant for any given income level. Examples of proportional taxes include most excise
taxes, general sales taxes, and employment taxes (FICA and FUTA).
Assume that a jurisdiction applies a 30% tax rate to all taxable income. If Bill has $10,000 of taxable
income, he will pay a tax of $3,000. If Sam has taxable income of $50,000, he will pay a tax of EXAMPLE
$15,000. If this constant rate is applied throughout the rate structure, the tax is proportional. 1
A tax is progressive if a higher rate of tax applies as the tax base increases. The Fed-
eral income tax, Federal gift and estate taxes, and most state income tax rate structures
are progressive.
If Bill and Cora, a married couple filing jointly, have taxable income of $15,000, their Federal
income tax for 2017 is $1,500 for an average tax rate of 10%. If, however, Bill and Cora’s taxable EXAMPLE
income is $80,000, their Federal income tax will be $11,478 for an average tax rate of 14.3%. 2
The tax is progressive because higher rates are applied to greater amounts of taxable income (see
Appendix A to confirm these calculations, and note how progressivity is built into the Federal
income tax).
The basic tax formula is relevant for both computing taxes and planning to reform a tax
system. For example, if a legislator wants to lower tax rates but generate the same amount
of tax revenues, the tax base must be increased. However, if she wants to increase tax rev-
enues, the tax base can be increased or tax rates can be increased (or both can be
increased). Changes to the tax base will depend on how it is constructed. For example, the
income tax base is taxable income (income minus income exclusions minus deductions).
To increase this tax base, income exclusions could be eliminated or deductions could be
limited. The details of the income tax base are discussed in later chapters. Tax system
changes also involve canons (or principles) of taxation, discussed next.
1-3c Tax Principles

In the late 1700s Adam Smith identified the following canons (or principles) of taxation,
which are still considered today when evaluating a particular tax structure:10
• Equity. Each taxpayer enjoys fair or equitable treatment by paying taxes in propor-
tion to his or her income level. Ability to pay a tax is one of the measures of how
equitably a tax is distributed among taxpayers.
• Certainty. A tax should be certain rather than arbitrary. Taxpayers need to be able
to understand how tax rules work so that they understand the effect of the rules
on various transactions and can comply.
10
The Wealth of Nations (New York: Dutton, 1910), Book V, Chapter II,
Part II.
• Convenience of payment. Taxes should be imposed in a manner that involves a

convenient time for payment. An advantage of the existing withholding system
(pay-as-you-go) is its convenience for taxpayers.
• Economy in collection. A good tax system involves only nominal collection costs
by the government and minimal compliance costs on the part of the taxpayer.
The American Institute of Certified Public Accountants (AICPA) has issued sugges-
tions to guide tax reform and policy activities. Titled Guiding Principles of Good Tax
Policy: A Framework for Evaluating Tax Proposals, the monograph identifies 12 principles
that are commonly used as indicators of desirable tax policy. The first four principles are
adapted from Adam Smith’s The Wealth of Nations. The complete list follows.11
1. Equity and Fairness. Tax similarly situated taxpayers in a similar manner.
2. Certainty. Taxpayers should have certainty rather than ambiguity as to when and
how a tax is paid, as well as how to calculate it.
3. Convenience of Payment. A tax should be due at a time and manner that is most
convenient for the taxpayer.
4. Effective Tax Administration. Tax compliance and administrative costs should be
kept to a minimum.
5. Information Security. Taxpayer information must be protected from improper
disclosure.
6. Simplicity. Tax rules should be simple so that taxpayers understand them and can
follow them in a cost-efficient manner.
7. Neutrality. The effect of tax rules on taxpayer decision making should be kept to a
minimum.
8. Economic Growth and Efficiency. The tax system should not harm economic
growth or distort economic effects among different activities and investments.
9. Transparency and Visibility. Taxpayers should know that a tax exists and how
and when it applies to them.
10. Minimum Tax Gap. A tax should be structured to minimize noncompliance.
11. Accountability to Taxpayers. Taxpayers should have access to information on
taxes, as well as proposed law changes and their rationale.
12. Appropriate Government Revenues. Tax rules should enable the government to
predict the amount and timing of revenue production.
Exhibit 1.2 provides an application of these principles to a proposed tax law change.
LO.4
Identify the different taxes
imposed in the United States
1-4 MAJOR TYPES OF TAXES
at the Federal, state, and local Why does a text devoted primarily to the Federal individual income tax discuss state
levels.
and local taxes? A simple illustration demonstrates the importance of non-Federal taxes.
Rick is employed by Flamingo Corporation in San Antonio, Texas, at a salary of $74,000. Rick’s
EXAMPLE employer offers him a chance to transfer to its New York City office at a salary of $94,000.
3 Although Rick must consider many nontax factors before he decides on a job change, he should
also evaluate the tax climate. How do state and local taxes compare? For example, neither Texas nor
San Antonio imposes an income tax, but New York State and New York City do. A quick computation
indicates that the additional income taxes (Federal, state, and local) involve approximately $12,000.
Consequently, what appears to be a $20,000 pay increase is actually only about $8,000 when
the additional $12,000 of income taxes are taken into account. Other taxes and costs (e.g., sales
taxes, property taxes, food, utilities, transportation) will also have to be factored into a decision.
11
AICPA, Guiding Principles of Good Tax Policy: A Framework for Evaluat- criteria,” the GAO lists “equity; economic efficiency; and a combination of
ing Tax Proposals, 2017. Similarly, see GAO, Understanding the Tax simplicity, transparency, and administrability.”
Reform Debate: Background, Criteria, & Questions, 2005. As “long-standing
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The Project Gutenberg eBook of Op die delwerye
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Title: Op die delwerye

Vyf sketse uit die lewe
Author: P. I. Hoogenhout
Release date: November 13, 2023 [eBook #72114]
Language: Afrikaans
Original publication: Cape Town: Maskew Miller, 1925
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*** START OF THE PROJECT GUTENBERG EBOOK OP DIE

DELWERYE ***
OP DIE DELWERYE
VYF SKETSE UIT DIE LEWE
OP DIE DELWERYE
VYF SKETSE UIT DIE LEWE
DEUR
IMKER HOOGENHOUT
MASKEW MILLER BEPERK
KAAPSTAD
VOORWOORD.
Die Delwerye! wat roep dit voor ons oog?
Armoede! Ellende! Ontaarding! Sedeloosheid!
Dis wat die meeste mense, met g’n bekendheid daarvan, dink.
Die Delwerye! daar lê skatte begrawe—en die mense stroom van
al die dele van Suid-Afrika daarheen in die mening dat dié skatte
hulle uit hulle armoede sal red en hulle ellende sal laat ophou, dog
teleurstelling wag die meeste, en teleurstelling bring bitterheid van
gevoel teen die samelewing, teen die Kerk en soms teen God.
Die Delwerye! daar lê skatte begrawe,—skatte van menselewens,
van mensekrag, van mensemateriaal. Skatte vir die Staat, vir die
Kerk, vir die Letterkunde. Die Staat moet rekening hou met die
Delwerye, want tevergeefs sal ons die Russiese Bolsjewisme buite
ons grense probeer hou, terwyl ons die gees van daardie kwaad
kweek in ons eie midde. Die Kerk moet planne beraam om die Troos
en Krag wat die Evangelie alleen kan gee, meer gereeld en gedurig
te bring aan dié wat anders hulle troos sal soek in wêreldse middels:
brandewyn en ydel vermake. Die skrywers kan gerus hulle aandag
wy aan die opeengehoopte mensemateriaal wat skatte inhou wat
ons opbloeiende letterkunde tot groter heerlikheid sal bring.
Die Skrywer van die „Delwerysketse” doen baanbrekerswerk—
prospekteerwerk. Hier en daar, soos sy opvoedkundige werk hom
toegelaat het en in aanraking met die delwersgemeenskap gebring
het, het hy gate gemaak en orals het hy bewyse gekry van
diamanthoudende grond. Hy het gesien watter skatte daar verborge
lê en het gedronge gevoel om dit aan die wêreld van Staat en Kerk
en Letterkunde bekend te stel. Vir dié ontdekking sal ons hom altyd
dankbaar bly, en ons sal altyd sy „Ontdekkersregte” in ag neem en
respekteer.
Delwerswerk is op die oog morsig—in die stowwerige aarde en in
die morsige klei moet gegrawe word. Hope waardelose „rof” word
deur die „bebe” afgeskud voor ’n mens met die wassery kan begin.
Die wassery is ’n eentonige besigheid, en dis tog ’n kuns—nie te
vinnig nie, ook nie te stadig moet die masjien draai nie, en die
„porrel” moet steeds dieselfde dikte hou. Jou klere en gesig word
meesal vuil bespat en gee vir die meeste ’n afkeer van die werk. Al
die kante van die delwerswerk word deur die Skrywer getoon: die
„rof”—die vloeker en drinker; die „porrel”—die mengelmoes-
gemeenskap wat deur die lewensmasjien deurmekaar gedraai word,
’n ondeursigtige moddermassa; die sif, waarmee die „gravitating”
geskied en die egte diamant sy karakter bewys deur bo te lê as die
sif omgekeer word. Die egte diamant word maar hier en daar gekry;
’n geoefende oog is nodig om, as die sif omgekeer word, uit die
miljoene blink klippies die ware diamant te sien, maar as die
edelgesteente in ons hand lê en ons bewonder sy skoonheid, dan
vergeet ons die harde werk, die vuil klere en al die waardelose
weggekrapte „was” in ons blydskap oor die skat wat ons uitgehaal
het.
In die hoop dat dit die Skrywer mag geluk om deur sy sketse by
ons Volk op te wek ’n groter belangstelling in en groter liefde vir die
skatte wat begrawe lê in die delwerye, beveel ons die lesing daarvan
van harte aan by almal wat Suid-Afrika en sy Volk liefhet.
E. J. J. van der HORST.
Wolmaransstad, 26 Februarie 1925.
ANNIE LOSPER.
I.
Die taak van die onderwyser op die delwerye is seker nie een van
ongemengde genot nie. Die hele atmosfeer van die diekens, soos
die delwers sal sê, is nie juis bereken om skoolhou ’n plesier te
maak nie. Die toestande waaronder die kinders opgroei, is so
hemeltergend benard dat dit ’n wonder is dat daar nog van een iets
teregkom. Die woning bestaan gewoonlik net uit een lokaaltjie, wat
so klein is dat ’n groot man hom moeilik tussen die paar kaste en
bankies waaruit die huisraad bestaan, kan beweeg. In hierdie
kamertjie word gekook en geëet en geslaap en, moenie skrik nie,
babetjies gebore. Dat baie kindertjies dus opgroei sonder enige
gevoel van skaamte of kiesheid of reinheid, kan niemand bevreem
nie.
Maar wat die werk van die onderwyser nog die meeste bemoeilik,
is die ondervoeding waaraan so baie delwerskinders ly. As ’n mens
die bleek gesiggies en die maer beentjies sien, dan bloei jou hart vir
hulle, en in die winter gaan dit eers swaar. Ek het meisies gesien wat
net ’n dun linnerokkie aan het sonder enige onderklere, en seuns
wat byna nakend loop. En op die kaal vlaktes waar die delwerye
meesal gevind word, kan dit raak koud word.
Die sanitêre reëling is uiters primitief, en epidemies van
maagkoors of ander besmetlike siektes is glad geen uitsondering
nie. Die wonder is dat daar nie meer mense jaarliks aan aansteeklike
siektes op die delwerye omkom nie, en temeer as verder in gedagte
gehou word dat daar geen enkele hospitaal op die diekens te vind is
nie!
Toe, leer nou kinders wat so sonder tug opgroei en daarby nog
gedurig honger ly. En tog verseker die goeie onderwyser(es) my dat
die delwerskinders gou aan tug en gesag gewend word. ’n Paar
meesters beweer selfs dat hulle liewer hierdie natuurkinders van
meet af aan in hulle klas wil hê as hulle meer-bevoorregte boeties en
sussies. Hoe dit ook al sy, ek het baie respek vir die onderwyser wat
’n sukses van sy werk in die delwerskool maak en daar aanbly, en
nie die eerste die beste geleentheid te baat neem om daarvandaan
te vlug nie.
Dis opmerklik hoe gou die delwer die goeie meester van sy
swakker kollega onderskei en dan vir laasgenoemde die lewe op die
delwery onmoontlik maak.
„Waarom stuur julle hierdie nuwe onderwyser nie liewers terug
normaalskool-toe nie?” vra ’n delwer eendag aan my.
„En wat is daar dan verkeerd met hom?”
„Kyk, Meneer, ’n meester wat heeldag sy keel hees skree voor ’n
klas, kan nie alte veel beteken nie. As ek die hele liewe dag my
kaffers moet rondskree, dan sou hulle later nie na my luister as ek
ordentlik met hulle praat nie. En dis mos darem nie nodig om soos ’n
mal mens te kere te gaan as jy iets aan ’n kind wil duidelik maak nie.
Party seuns sê die meester is gek, terwyl ’n paar dogters dit weer so
op hulle senuwees kry dat hulle weier om langer skool-toe te gaan.
My kind, wat aanstaande jaar in sy klas moet kom, huil nou al as sy
daaraan dink. Julle moet die vent wegvat, anders raak hy een van
die dae goed opgedons. Ek weet van ’n hele paar delwers wat lus
voel vir sy vel.”
Nou redeneer nou met so ’n man, temeer daar hy reg is. Wat skeel
dit hom dat hy die wet sal oortree as hy vir Meester opdons? Die
natuurmens redeneer nie, hy tree handelend op, en dis wonderlik
hoe fyn sy gevoel van reg en onreg ontwikkel is.
Soms egter kry Meester dit opdraand, omdat een of ander
voorman op die diekens ’n ander sienswyse oor aanvanklike
leermetodes toegedaan is.
„Jy moet die kinders die A, B, C leer,” het ’n vader die
onderwyseres een môre in die skool-lokaal voor al die kinders kom
teregwys. „Wat vir ’n gemors is daardie klank-affêre? As ek vir my
Kosie saans laat woorde spel, kan ek hom nie volg nie. My kind
moet net soos sy pape voor hom geleer word!” En toe die
onderwyseres haar hieraan nie steur nie, moes sy voor die
skoolkommissie verskyn en wou hierdie opvoedkundige liggaam
haar met alle geweld dwing om Gert Janse se metodiek te volg en in
die toekoms toe te pas. Die kwessie is selfs na die Skoolraad verwys
en, moenie lag nie, ’n deputasie moes uitgestuur word om die
skoolkommissie tot ander insigte te beweeg.
Dieselfde onderwyseres het later deur haar ywer en toewyding so
die harte van die delwers gesteel, dat hulle stilletjies ’n paar lede van
die Skoolkommissie na die Onderwys-departement afgevaardig het
om beleefd te vra dat haar salaris met £100 per jaar sou verhoog
word, mits sy op Syferlaagte aanbly en nie binne tien jaar sou trou
nie. En toe die Departement aan hierdie vriendelike versoek geen
gehoor gee nie, het die Kommissie my „kaalkop die waarheid vertel
en verseker dat beide ek en die Departement net ’n blooming wash-
out was en deur generaal Kemp moes uitgeskop word!” „En doen ou
Kempie dit nie, dan sal ons so wragtiewaar nie weer vir hom stem
nie!”
II.
Die skoolgebou op Syferlaagte was skaars geskik vir ’n koeistal; ja
ek twyfel of ’n ryk boer sou bereid gewees het om sy volbloed vee
daarin te huisves, en in so ’n lokaal moes ondervoede en onderklede
kinders aldag vyf uur deurbring. Oorspronklik was die gebou bedoel
gewees vir ’n koeliewinkel, waar so min lig en lug as moontlik vereis
word, want dit is nie in die belang van die verkoper dat sy kliënt alte
goed die ware wat hy koop, moet kan besigtig nie. Die hele gebou
het twee klein venstertjies en ’n deur gehad. Die sinkmure was van
binne nie met hout uitgevoer nie; daar was geen plafon nie, en die
vloer was van grond.
In die hartjie van die somer het die sink so warm geword dat ’n
mens dit nie met jou kaal hand kon aanraak nie; voeg nou daarby
nog die asempies van 62 leerlinge wat almal in die een lokaal
ingeprop is, en dan sal jy ’n flou denkbeeld kry van hoe die lug so
teen twaalfuur in die skoolgebou moet wees.
Buite kry ’n mens net die uitgegrawe kleims en die hope dooie
grond en gruis. ’n Boom is ’n onbekende iets. Maar stof, as die wind
waai, hang soos ’n bruin sluier oor die delwerye en verpes die
atmosfeer in die skool nog meer. En, leser, hierdie beskrywing is nie
uit die duim gesuie nie; dis getrou aan die waarheid.
Onder sulke omstandighede moet die onderwyseres onderrig gee
en moet die kinders opgevoed word!
En die outoriteite is nie altoos te blameer nie, want ’n delwery is
iets wat dikwels in ’n dag se tyd ontstaan en soms binne ’n jaar se
tyd verlate is. Inteendeel, dis prysenswaardig dat daar tog ’n poging
aangewend word om onderwys te verskaf aan die honderde
kindertjies wat anders vir kwaadgeld sou rondloop.
„Toe, begin maar,” sê ek aan die onderwyseres by die aanvang
van die skool, „en gaan voort net soos gewoonlik.”
Sy open met gebed en laat toe sing: „Heer, waar dan heen” en wat
daar op volg, wat my nogal as heeltemal treffend voorgekom het. Ja,
ek weet nie van nog ’n gesang wat so toepaslik is vir die delwerye
nie.
Daarna het sy die sondvloed met die leerlinge behandel; en al het
sy dit nou nie juis altyd streng ortodoks gedoen nie, tog het sy
meesterlik daarin geslaag om dit interessant voor te dra en die
kinders se aandag te boei.
Na afloop van die les sê sy: „Nou, kinders, kan julle vrae stel oor
enigiets wat julle nie duidelik is nie.”
„Juffrou,” en agter in die klas gaan ’n vuil handjie omhoog, „het
Noag vlieë en vlooie ook in die ark geneem?”—Hierdie insektetjies is
vreeslik lastig op die diekens.
„Ek dink seker, Kosie,” antwoord die onderwyseres.
„Maar hoor dis jammer dat die ding nie vergaan het nie,” weer van
Kosie.
„Maar, Kosie, dan sou die mense en die diere ook mos saam
verongeluk het, en dan sou geeneen van ons mos vandag hier
gewees het nie,” herneem Juffrou.
„Ja, dis ook weer waar,” sê Kosie. Dog op sy gesiggie is ’n
onverskillige uitdrukking duidelik leesbaar, en dis nie moeilik om te
ontsyfer wat in sy breintjie omgaan nie: As die mens moes gespaar
gebly het om sy lewe op die delwerye te slyt, dan was die redding
van Noag en sy kroos ’n groot fout.
„Juffrou,” en vlak voor haar word ’n handjie omhoog gehou van ’n
meisietjie met groot blou kykers en ’n maer gesiggie wat van
ondervoeding getuig, „Juffrou, glo Juffrou alles wat in die Bybel
staan?”
„Hoekom vra jy dit, Miemie?” sê die onderwyseres sonder om
haarself te kompromiteer.
„Omdat my pa sê dis somar alles kaf, maar Mammie sê weer dis
alles die heilige waarheid. En al glo ek vir my mammie, want sy is so
goed, tog wil ek graag weet wat Juffrou dink.”
„Ek stem saam met jou mammie,” bevestig Juffrou.
Hier val ek in: „Waar is jou ouer sustertjie, Miemie?”
„Sy is siek, Meneer, baie siek. Sy laat groete weet en sal tog so
bly wees as Meneer net vir haar ’n oomblikkie wil kom besoek
voordat Meneer wegry. Sy het so vorentoe gekyk na die inspeksie,
maar nou...” en hier swem klein Miemie se oë in die trane.
„Nou goed. Sê vir Annie ek kom haar vanmiddag besoek en sy
moet gou gesond word.”
Dis snaaks dat ek vir Annie Losper so goed onthou het. Ek kon
sedert my vorige besoek nooit haar gesiggie uit my geheue verban
nie. Uit ’n allerarmoedigste huisgesin, het tog haar oë en die soet
uitdrukking van die gesiggie somar dadelik ’n mens getref. In haar
klas was sy maklik nommer een in elke opsig, en die onderwyseres,
iemand van lang ervaring, het my verseker dat sy nog nooit van te
vore so ’n kind in haar klas gehad het nie. Haar opmerking verlede
jaar was dan ook snaaks genoeg: „Ek glo nie sy is vir hierdie wêreld
nie!”
Eindelik was die inspeksie afgeloop en kon die skool vir die dag
sluit. Die werk was baie bevredigend, en die juffrou en die kinders
het ’n pluimpie gekry.
Nou wag daar nog ’n paar lede van die Skoolkommissie; maar ook
hulle moeilikhede is ten laaste opgelos, en nou was ek net haastig
om weg te kom.
Onder al die werksaamhede van die dag het ek Annie glad
vergeet.
III.
Die delwer het heelwat goeie hoedanighede, en as ’n mens geleer
het om sy minder beskaafde karaktertrekke nie raak te sien nie, dan
begin jy hom werklik liefkry.
Dit was al na drie toe ek kon vertrek, en ek het nog nie eers die
tyd kon vind om te eet nie. Ek het my derhalwe gehaas om by die
huis te kom. Voordat ek egter die delwery uit was, bars daar ’n
vreeslike onweer los wat my verplig om in die eerste die beste huisie
skuiling te soek. My gasheer was ’n man van sowat dertig somers en
ongetroud. Aan alles in die hutjie kon ’n mens merk dat hy beter dae
geken het. Sy opmerking by my binnekoms was dan ook vreemd
genoeg: „Jy het seker gedink toe jy by my deur instap:
„Man wants but little here below,

Nor wants that little long!”
„Jy het reg geraai,” antwoord ek, „maar wat soek jy hier op die
delwery?”
„My naam is Fanie Renier en ek is ’n teruggekeerde soldaat wat
vir reg en geregtigheid onskadelik gemaak is,” sê hy op ’n bitter toon,
„en wat toe na die delwerye gestuur is met £20 om hier te kom
vrek!... Maar het jy al geëet?”
„Nee, ou broer, maar moenie moeite maak nie; kos is seker by jou
nie alte volop nie.”
Sonder om hom aan my te steur steek hy ’n Primus-stofie op, bak
gou ’n paar eiers, braai ’n stukkie vleis en sit vir my dit voor met ’n
stukkie droë brood en koffie.... Ek het later uitgevind dat hy my sy
laaste leeftog voorgesit het en dat hy die volgende dag sonder kos
moes bly. Vandaar dan ook die gesegde in Transvaal: „By ’n trekker
en ’n delwer is ’n mens altyd welkom.”
Die weer het eindelik opgeklaar, en na ’n hartlike dankie aan my
nuwe kennis wou ek op die moter klim.
„Kyk hier,” sê hy, terwyl hy my aan die arm vat, „kan julle dan niks
doen vir die mense wat hier langs my woon nie? Die toestand van
hierdie famielie is allerellendigs. Die vader suip soos ’n vis, die
moeder is in die bed met ’n babetjie, die oudste dogtertjie lê siek, en
die ander kinders word totaal verwaarloos. Ek glo nie daar is ’n
stukkie kos in daardie huisie te kry nie. So ver ek kon het ek gehelp,
maar op die oomblik is ek self poot-uit. Kan jy nie nog ’n oomblikkie
spaar om saam met my te gaan kyk nie?”
Om die waarheid te sê, het ek maar min lus daarvoor gevoel,
maar meer om my gasheer tevrede te stel as om enige ander rede
het ek ingewillig.
Die famielie het maar ’n paar tree van Fanie se huisie gewoon, en
ons was dus gou by ons bestemming. Nou het ek al gewoon geword
om enige pondokkie op ’n delwery as geskik vir menslike verblyf te
beskou, maar so ’n krot as waar ons nou voor staan, het ek nog
nooit gesien nie. Hoe enige persoon in so iets kan lewe, is vir my
nou nog ’n raaisel! Die hutjie het bestaan uit ’n klompie oopgevlekte
parafienblikke wat op een of ander manier aan mekaar getimmer
was, met seilsakke hier en daar tussenin om as vensters te dien.
Ons kruip hande-viervoet in, en ons oë moes eers gewoon word
aan die half-duister voor ons iets binne kon onderskei.
„Ruk daardie sak solank af asseblief,” sê ek aan Fanie, „sodat ’n
mens kan sien en asem kan skep.”
Hy doen dit op my versoek, en toe ontvou hom daar ’n toneel aan
ons oë, so hartverskeurend soos ek nog nooit van te vore gesien het
nie of hoop om ooit weer getuie van te wees nie.
In die een hoek op ’n klomp sakke wat oor droë gras gesprei is, lê
die moeder met haar babetjie, en onder by die voetenent op ’n paar
sakke die siek dogtertjie, wat niemand anders as Annie Losper was
nie. My nuwe kennis en ek kon ons met moeite omdraai in die
kamertjie.
„Die dokter was vanmôre hier,” fluister Renier in my oor, „en hy sê
daar is nie hoop vir Annie nie. Haar liggaampie is deur gedurige
ondervoeding te uitgeput om die siekte af te skud.”
Dis my later meegedeel dat Renier ses maande na hierdie voorval
nog altyd doktersrekening afbetaal het.
„Dag, Annie,” groet ek so opgewek as ek kon onder die treurige
omstandighede, „en hoe gaan dit met jou, my kind?”
„Nie alte sleg nie, Meneer, maar ek was tog so spyt dat ek nie
vandag op skool kon wees nie,” antwoord sy met ’n flou glimlaggie,
en haar stemmetjie was so swak dat ek haar amper nie kon verstaan
nie.
„Ag, moenie vir jou kwel nie, my kind; jy sal tog in ieder geval
oorgeplaas word na ’n hoër standerd. Hou maar vir jou stil sodat jy
gou kan gesond word. Aanstaande jaar hoop ek seker om jou weer
eerste in jou klas te sien staan.”
’n Hemelse glimlaggie speel om die bleek ou mondjie. Sy skud
haar koppie en nouliks hoorbaar fluister sy: „Aanstaande jaar sal ek
nie meer op skool wees nie.”
„Ag nee wat, Annie, jy is nog glad te jonk om uit die skool te gaan,”
en ek maak asof ek haar nie reg begryp het nie, „en die
onderwyseres sal dit mos nooit toelaat nie. Maar moenie meer praat
nie; dit maak jou alte moeg. Probeer liewer om ’n bietjie te rus.”
Ek moes nou my oor vlak teen haar mondjie hou om te hoor wat
sy sê. Gelukkig het Renier die moeder besig gehou en sy het dus nie
gemerk wat hier by haar plaasvind nie.
„Meneer,” en sy kyk my stip in die oë, „sal Meneer nie asseblief vir
my saggies Psalm 23 opsê nie? Ek het dit laas nog by die inspeksie
vir Meneer opgesê.”
Dis die eerste keer wat ek die rol van sieke-trooster en predikant
moes vervul, maar ek het dit gedoen so goed as ek kon. Ek het haar
uitgeteerde handjies in myne geneem en toe daardie mooi Psalm so
goed as ek kon opgesê. Toe ek klaar was, kon ek nog ’n flou dankie
hoor en daarna die woorde: „Al gaan ek ook in die dal van die
skaduwee van die dood, dan sou ek nie kwaad vrees nie.” Toe breek
die mooi blou ogies, die handjies word koud, en Annie Losper was in
’n beter wêreld oorgeplant.
Die handjies het ek eerbiedig op die borsie gekruis, ’n sagte
soentjie op die voorkoppie gedruk, en toe letterlik die pondokkie
uitgevlug. My gemoed was te vol; ek kon die droefheid en hartseer
ook nie aansien nie.
Uit die tent kom die angsgeskrei van ’n gebroke moederhart: „O,
my God! My kind! My kind!”
Buite het ek vir Renier gewag. Aan sy gesig kon ek sien dat ook
hy ontroerd was. Daar is geen woord tussen ons gewissel nie, net ’n
warm handdruk wedersyds, en toe het ek op die moter geklim en
huis-toe gery.
HENDRIK BLITS.
I.
Wat Hendrik Blits se regte naam was, kon niemand van die
delwers my vertel nie. Hierdie bynaam het hy verwerf, eerstens
omdat hy hom gereeld elke naweek dronk gedrink het aan
kafferblits, en twedens omdat sy taal dan by sulke geleenthede so
sterk gekleur was.
My kennismaking met Hendrik was nogal baie buitengewoon. Op
’n koue môre in Julie het ek my op Diamantkuil bevind, waar ek in
gesprek was met die hoof van die Goewerment-skool, toe hy die
opmerking maak: „Allewêreld, hoe mishandel so ’n Groot Lawaai
weer vanoggend die stomme donkies!”
Groot Lawaai was die naam van ’n groot, vierkantige lummel van
’n vent. Hy was ’n baster en ’n boelie so groot as wat daar te vinde
is. Om sy grootte en krag het die delwers hom met respek behandel
en verder maar so veel moontlik uit sy pad gebly. Ek kyk in die
rigting waar die hoof wys, en daar sien ek ’n waterwa met veertien
donkies bespan, krakend en waggelend die spruit se wal uitkom. Dit
was duidelik dat die donkies so skaars-skaars die wa kon uitbring.
En g’n wonder nie! Gras was daar op die hele delwery nie genoeg vir
’n paar honderd sprinkane nie, laat staan ’n paar honderd diere. En
op hierdie veld moet die arme donkies nou snags hulle pense
volvreet, na ’n dag van swaar trek en mishandeling.
’n Diamantkoper wat ook vroeër gedelf het, het eendag die
onderstaande opmerking in my teenwoordigheid gemaak: „Twee
dinge dank ek die liewe Vader dat ek nie is nie: ’n delwer se donkie
en ’n delwer se vrou!” Sedert dié tyd het ek eersgenoemde bewering
ongelukkig al oor en oor gestaaf gesien.
Wel, die veertien donkies van Groot Lawaai was g’n uitsondering
nie; die arme diere was letterlik net vel en been. Om hulle aan die
gang te hou, loop hy op en af langs die span, en terwyl hy die
gruwelikste vloekwoorde uitstoot, gésel hy die donkies
meedogenloos met ’n groot handsambok. ’n Mens kon die doef,
doef, van die houe seker ’n myl ver hoor.
„Maar is hier dan niemand op Diamantkuil om ’n stop aan sulke
wreedheid te sit nie?” vra ek, en ek voel hoe die bloed na my kop toe
bruis.
„Nee,” sê die hoof, „almal is bang vir Groot Lawaai, want hy is ’n
vreeslike woestaard.”
Al nader en nader kom die wa, en al harder en harder klink die
doef, doef van die sambok.
Ek het my al klaar voorgeneem om met die vent te gaan praat en,
as dit nie help nie, die poliesie van die mishandeling van die esels te
gaan verwittig, toe daar skielik uit ’n onverwagte oord ’n ander vir die
donkies in die bres spring.
„O magtig!” roep die hoof verbaasd uit, „wat gaan Hendrik Blits
nou maak? Groot Lawaai sal hom vermorsel. Laat ons nader stap
om, indien moontlik, die rusie te voorkom.”
Ek het nooit die persoon opgemerk wat g’n vyftig tree van ons af
onder ’n doringboom gelê en slaap het nie, voordat die opmerking
van die onderwyser nie my aandag by hom bepaal het nie. Ewe op
sy gemak staan Hendrik Blits op, rek hom uit, gooi sy flenterbaadjie
van hom af en stap reguit na Groot Lawaai toe.
„Kyk hier, jou gemene boelie, as jy nog ’n slag jou arm oplig om
die donkies te slaan, dan dons ek vir jou op. Het jy my begryp, jou
vervloekte baster?”
Die Groot Lawaai se gesig was die moeite werd om te sien. Dis
amper ongelooflik dat ’n mens se gelaatstrekke so kan verander. Die
duiwel, soos hy my in my kinderjare op sy lelikste afgeskilder is, sou
vir hierdie bakkies geskrik het.
„Jou verd...de kind!” brul Groot Lawaai woedend, „sal jy vir my
kom belet om my eie diere vrek te slaan as ek wil? Jakob! Jou
d..der!” en met hierdie vloek slaan hy die hotagter donkie oor die kop
netso hard as hy kan. Toe draai hy na Hendrik Blits en sê smalend:
„En nou gaan ek van jou frikkadel maak, jou vieslike dronklap.”
’n Mens sou nooit sulke ratheid by Hendrik gesoek het nie, maar
voor jy mes kon sê, ruk hy die handsambok uit die baster se hand uit
en gebied: „Trek uit jou baadjie; ek wil jou op gelyke voet ontmoet,
sodat jy nie naderhand behoef te vertel dat ek jou onder ’n hendikep
’n pak slae gegee het nie. Toe, maak gou as jy nie te lafhartig is nie!”
En Hendrik gooi die sambok neer en plaas sy voet daarop.
Groot Lawaai het hom nie tweemaal laat nooi nie. Hy pluk sy
baadjie uit en onder ’n stroom van die profaanste vloeke loop hy vir
Hendrik storm. Van natuur is ek nie iemand wat behae skep in rusie
en bakleiery nie, maar hierdie môre het ek die mieks-op—soos die
delwers sal sê—eerlik geniet, en my hele siel was aan Hendrik se
kant.
’n Man wat baie woedend is, kan nie goed boks nie. Groot Lawaai
was seker tweemaal so sterk as Hendrik Blits, maar waar
laasgenoemde kortgeskiet het in krag, het sy ratheid en kennis van
boks hierdie tekortkoming meer as vergoed.
Hy duik onder Groot Lawaai se arm deur, en voordat die baster sy
ewewig kan herwin, kry hy ’n opstopper op sy kinnebak wat hom
soos ’n besopene laat waggel. Arrie! maar dit het die boelie darem
nie verwag nie. Hierdie veragtelike skepsel wat hy tot stof sou
vermorsel, het hom so wrintig-waar amper onderstebo geslaan. Hy
sal nou sy taktiek verander en versigtiger te werk gaan. Soos ’n
mierkat om ’n slang begin Groot Lawaai al om Hendrik Blits te dans,
totdat hy skielik buk en die handsambok gryp en voordat Hendrik
kan keer, hom ’n hou oer sy gesig gee dat die bloed so tussen vel en
vleis wys.
„Eina! maar dis gemeen!” skree die onderwyser, en hy tel ’n klip op
wat goed ’n paar pond weeg. „Ek voel by my kool lus om die vloek
se kop hiermee te verbrysel!” en hy hef die steen dreigend omhoog.

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Ebook South Western Federal Taxation 2018 Individual Income Taxes PDF Full Chapter PDF

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South-western Federal Taxation 2018:

Individual Income Taxes - eBook PDF

James H. Boyd Steven L. Gill Mark B. Persellin W. Eugene Seago

Sr. Marketing Manager: Nathan Anderson

Printed in the United States of America

COMMITTED TO EDUCATIONAL SUCCESS

S outh-Western Federal Taxation (SWFT) is the

■ Selected content is streamlined

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THE BIG PICTURE: Tax Solutions for the Real

ETHICS & EQUITY: Most issues do not

TAX PLANNING: Chapters include

GLOBAL TAX ISSUES: The Global

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INDIVIDUAL INCOME TAXES, 2018 EDITION

CORPORATIONS, PARTNERSHIPS, ESTATES

COMPREHENSIVE VOLUME, 2018 EDITION

ESSENTIALS OF TAXATION: INDIVIDUALS &

FEDERAL TAX RESEARCH, 11E

ABOUT THE EDITORS

David M. Maloney, Annette Nellen,

William H. Hoffman, Jr. Bill consistently recruited new contributors, creat-

PART 1: INTRODUCTION AND BASIC TAX MODEL

CHAPTER 1 AN INTRODUCTION TO TAXATION AND

PART 2: GROSS INCOME

CHAPTER 4 GROSS INCOME: CONCEPTS AND INCLUSIONS 4-1

CHAPTER 6 DEDUCTIONS AND LOSSES: IN GENERAL 6-1

PART 4: SPECIAL TAX COMPUTATION METHODS,

CHAPTER 12 ALTERNATIVE MINIMUM TAX 12-1

PART 5: PROPERTY TRANSACTIONS

CHAPTER 14 PROPERTY TRANSACTIONS: DETERMINATION

PART 6: ACCOUNTING PERIODS, ACCOUNTING

CHAPTER 18 ACCOUNTING PERIODS AND METHODS 18-1

PART 7: CORPORATIONS AND PARTNERSHIPS

CHAPTER 20 CORPORATIONS AND PARTNERSHIPS 20-1

Part 1: Introduction and Basic Statute of Limitations

A BRIEF HISTORY OF U.S. TAXATION 1-5 CHAPTER 2

TAX FORMULA 3-2

TAX PLANNING 4-30

TAX PLANNING 9-36

CHARITABLE CONTRIBUTIONS 10-17 OTHER INVESTMENT LOSSES 11-23

INDIVIDUAL ALTERNATIVE MINIMUM TAX 12-2

OVERVIEW AND PRIORITY OF CREDITS 13-4 Recognized Gain or Loss 14-8

TAX TREATMENT OF CAPITAL GAINS AND TAX PLANNING 17-27

Part 6: Accounting Periods, CHAPTER 19

TAX PLANNING 20-37

CHOICE OF ENTITY 20-2 APPENDIXES

THE S ELECTION 20-26

FAMILY AND TAXES—A TYPICAL YEAR