Full Download pdf of (eBook PDF) Pearson's Federal Taxation 2018 Individuals 31st Edition all chapter

(eBook PDF) Pearson's Federal
Taxation 2018 Individuals 31st Edition

Go to download the full and correct content document:
https://ebooksecure.com/product/ebook-pdf-pearsons-federal-taxation-2018-individual
s-31st-edition/
More products digital (pdf, epub, mobi) instant
download maybe you interests ...
(Original PDF) Pearson's Federal Taxation 2018

Comprehensive 31st Edition
http://ebooksecure.com/product/original-pdf-pearsons-federal-
taxation-2018-comprehensive-31st-edition/
(eBook PDF) Pearson's Federal Taxation 2018

Corporations, Partnerships, Estates & Trusts 31st
Edition
http://ebooksecure.com/product/ebook-pdf-pearsons-federal-
taxation-2018-corporations-partnerships-estates-trusts-31st-
edition/
(eBook PDF) Pearson's Federal Taxation 2017 Individuals

30th
taxation-2017-individuals-30th/

33rd Edition
taxation-2020-individuals-33rd-edition/
34th Edition
taxation-2021-individuals-34th-edition/
(eBook PDF) Essentials of Federal Income Taxation for

Individuals 2017
http://ebooksecure.com/product/ebook-pdf-essentials-of-federal-
income-taxation-for-individuals-2017/
(eBook PDF) South-Western Federal Taxation 2019:

Essentials of Taxation: Individuals and Business
Entities 22nd Edition
http://ebooksecure.com/product/ebook-pdf-south-western-federal-
taxation-2019-essentials-of-taxation-individuals-and-business-
entities-22nd-edition/

Entities 25th Edition
entities-25th-edition/

Entities 23rd Edition
entities-23rd-edition/
Contents ◀ Individuals vii
Plans for Self-Employed Individuals 9-36 CHAPTER 11

Simplified Employee Pensions (SEP IRAs) 9-38 c aCCOunTinG PERiOds and METHOds 11-1
Simple Retirement Plans 9-38
Accounting Periods 11-2
Individual Retirement Accounts (IRAs) 9-38
Required Payments and Fiscal Years 11-3
Traditional IRA 9-39
Changes in the Accounting Period 11-4
Roth IRA 9-40 Returns for Periods of Less than 12 Months 11-5
Coverdell Education Savings Account 9-43
Health Savings Accounts 9-44 Overall Accounting Methods 11-7
Cash Receipts and Disbursements
Tax Planning Considerations 9-44
Method 11-7
Moving Expenses 9-44
Accrual Method 11-9
Providing Nontaxable Compensation
Hybrid Method 11-10
to Employees 9-45
Rollovers to Roth IRA 9-45 Inventories 11-11
Determination of Inventory Cost 11-11
Compliance and Procedural Considerations 9-46
Substantiating Travel and Entertainment Expenses 9-46 Special Accounting Methods 11-15
Reporting Employee Business Expenses 9-46 Long-Term Contracts 11-15
Reporting Moving Expenses 9-47 Installment Sales Method 11-17
Reporting Office in Home Expenses 9-47 Deferred Payment Sales 11-21
Qualification of Pension and Profit-Sharing Plans 9-50 Imputed Interest 11-22
Problem Materials 9-50 Imputed Interest Computation 11-23
Discussion Questions 9-50 Accrual of Interest 11-23
Issue Identification Questions 9-53 Gift, Shareholder, and Other Loans 11-24
Problems 9-53 Change in Accounting Methods 11-25
Comprehensive Problem 9-61 Amount of Change 11-26
Tax Strategy Problem 9-62 Reporting the Amount of the Change 11-27
Tax Form/Return Preparation Problems 9-62 Obtaining IRS Consent 11-27
Case Study Problems 9-64
Tax Research Problem 9-65
Accounting Periods 11-28
Accounting Methods 11-28
CHAPTER 10 Installment Sales 11-28
c dEPRECiaTiOn, COsT RECOvERY, aMORTiZaTiOn,
and dEPlETiOn 10-1
Compliance and Procedural Considerations 11-28
Reporting Installment Sales on Form 6252 11-28
Depreciation and Cost Recovery 10-2 Procedures for Changing to LIFO 11-30
General Considerations 10-2
Depreciation Methods 10-4 Problem Materials 11-30
Calculation of Depreciation 10-5 Discussion Questions 11-30
MACRS Restrictions 10-12 Issue Identification Questions 11-31
Problems 11-32
Amortization 10-17
Comprehensive Problem 11-34
Sec. 197 Intangibles 10-17
Tax Strategy Problems 11-35
Research and Experimental Expenditures 10-19
Tax Form/Return Preparation Problem 11-35
Computer Software 10-20
Depletion, Intangible Drilling and Development Costs 10-21 Tax Research Problems 11-36
Depletion Methods 10-22
Treatment of Intangible Drilling and Development
Costs 10-23 CHAPTER 12
c PROPERTY TRansaCTiOns: nOnTaXaBlE
EXCHanGEs 12-1
Alternative Depreciation System Under MACRS 10-24
Use of Units of Production Depreciation 10-24 Like-Kind Exchanges 12-2
Structuring a Business Combination 10-24 Like-Kind Property Defined 12-2
Compliance and Procedural Considerations 10-25 A Direct Exchange Must Occur 12-5
Reporting Cost Recovery, Depreciation, Depletion, and Three-Party Exchanges 12-5
Amortization Deductions 10-25 Receipt of Boot 12-6
Basis of Property Received 12-7
Problem Materials 10-28
Exchanges Between Related Parties 12-8
Discussion Questions 10-28
Issue Identification Questions 10-30 Transfer of Non–Like-Kind Property 12-9
Problems 10-30 Holding Period for Property Received 12-9
Comprehensive Problem 10-35 Involuntary Conversions 12-10
Tax Strategy Problem 10-36 Involuntary Conversion Defined 12-11
Tax Form/Return Preparation Problems 10-36 Tax Treatment of Gain Due to Involuntary Conversion
Case Study Problems 10-37 into Boot 12-12
Tax Research Problem 10-37 Replacement Property 12-13
viii Individuals ▶ Contents
Obtaining Replacement Property 12-14 Intangible Drilling Costs and Depletion 13-21
Time Requirements for Replacement 12-15 Gain on Sale of Depreciable Property Between Related
Sale of Principal Residence 12-16 Parties 13-22
Principal Residence Defined 12-17 Tax Planning Considerations 13-23
Sale of More than One Principal Residence Within a Avoiding the Recapture Provisions 13-23
Two-Year Period 12-18 Compliance and Procedural Considerations 13-24
Nonqualified Use After 2008 12-20 Reporting Sec. 1231 Gains and Losses on Form 4797 13-24
Involuntary Conversion of a Principal Residence 12-21 Reporting Gains Recaptured as Ordinary Income on
Tax Planning Considerations 12-21 Form 4797 13-24
Avoiding the Like-Kind Exchange Provisions 12-21 Reporting Casualty or Theft Gain or Loss on
Sale of a Principal Residence 12-22 Form 4684 13-24
Compliance and Procedural Considerations 12-23 Problem Materials 13-28
Reporting of Involuntary Conversions 12-23 Discussion Questions 13-28
Reporting of Sale or Exchange of a Principal Issue Identification Questions 13-29
Residence 12-24 Problems 13-30
Problem Materials 12-24 Comprehensive Problem 13-35
Discussion Questions 12-24 Tax Strategy Problems 13-35
Issue Identification Questions 12-25 Tax Form/Return Preparation Problems 13-36
Problems 12-26 Case Study Problems 13-36
Comprehensive Problem 12-30 Tax Research Problem 13-37
Tax Strategy Problem 12-30
Tax Form/Return Preparation Problems 12-31
Case Study Problem 12-32
CHAPTER 14
c sPECial TaX COMPuTaTiOn METHOds, TaX CREdiTs,
Tax Research Problems 12-32
and PaYMEnT OF TaX 14-1
CHAPTER 13 Alternative Minimum Tax 14-2
c PROPERTY TRansaCTiOns: sECTiOn 1231 AMT Computation 14-3
and RECaPTuRE 13-1 AMT Tax Rates and Brackets 14-3
History of Sec. 1231 13-2 AMT Exemption Amount 14-3
Overview of Basic Tax Treatment for Sec. 1231 13-3 AMT Tax Preference Items 14-4
Net Gains 13-3 AMT Adjustments 14-4
Net Losses 13-3 AMT Credits 14-6
Tax Rate for Net Sec. 1231 Gain 13-4 Summary Illustration of the AMT Computation 14-7
Section 1231 Property 13-5 Self-Employment Tax 14-8
Section 1231 Property Defined 13-5 What Constitutes Self-Employment Income 14-9
Real or Depreciable Property Used in Trade or Personal and Business Tax Credits 14-10
Business 13-5 Use and Importance of Tax Credits 14-10
Involuntary Conversions 13-6 Value of a Credit Versus a Deduction 14-10
Condemnations 13-6
Nonrefundable Personal Tax Credits 14-11
Other Involuntary Conversions 13-7
Foreign Tax Credit 14-17
Procedure for Sec. 1231 Treatment 13-7 Business Related Tax Credits 14-19
Recapture Provisions of Sec. 1245 13-8 Refundable Personal Credits 14-23
Purpose of Sec. 1245 13-9 Provisions Related to Health Insurance 14-24
Recapture Provisions of Sec. 1250 13-10 Health Insurance Premium Assistance Credit (Also
Purpose of Sec. 1250 13-11 Known as Premium Tax Credit) 14-24
Section 1250 Property Defined 13-11 Shared Responsibility Payment 14-26
Unrecaptured Section 1250 Gain 13-12
Payment of Taxes 14-27
Taxation of Gains on Sale or Exchange of Depreciable
Withholding of Taxes 14-27
Real Property 13-12
Estimated Tax Payments 14-29
Low-Income Housing 13-15
Additional Recapture for Corporations 13-16 Tax Planning Considerations 14-30
Summary of Secs. 1231, 1245, and 1250 Gains 13-17 Avoiding the Alternative Minimum Tax 14-30
Avoiding the Underpayment Penalty for Estimated
Recapture Provisions—Other Applications 13-18
Tax 14-31
Gifts of Property Subject to Recapture 13-18
Cash-Flow Considerations 14-32
Transfer of Property Subject to Recapture at Death 13-18
Charitable Contributions 13-18 Use of General Business Tax Credits 14-32
Like-Kind Exchanges 13-19 Foreign Tax Credits and the Foreign Earned Income
Involuntary Conversions 13-19 Exclusion 14-32
Installment Sales 13-19 Compliance and Procedural Considerations 14-33
Section 179 Expensing Election 13-20 Alternative Minimum Tax (AMT) Filing
Conservation and Land Clearing Expenditures 13-20 Procedures 14-33
Contents ◀ Individuals ix
Withholdings and Estimated Tax Payments 14-33 Specific Rules Applicable to Corporations 16-4
General Business Tax Credits 14-33 Capital Gains and Losses 16-4
Nonrefundable Personal Tax Credits 14-33 Dividends-Received Deduction 16-5
Problem Materials 14-34 Net Operating Losses 16-6
Discussion Questions 14-34 Charitable Contributions 16-7
Issue Identification Questions 14-36 Compensation Deduction Limitation for Publicly Held
Problems 14-37 Corporations 16-8
U.S. Production Activities Deduction 16-8
Tax Strategy Problem 14-42 Computation of Tax 16-10
Tax Form/Return Preparation Problems 14-43 Computation of Taxable Income 16-10
Case Study Problems 14-44 Computation of Regular Tax 16-10
Tax Research Problem 14-44 Computation of the Corporate Alternative Minimum Tax
(AMT) 16-12
Penalty Taxes 16-14
Computation of Tax for Controlled Groups 16-17
CHAPTER 15 Consolidated Returns 16-19
c TaX REsEaRCH 15-1 Transfers of Property to Controlled
Overview of Tax Research 15-2 Corporations 16-20
Steps in the Tax Research Process 15-3 Section 351 Nonrecognition Requirements 16-20
Basis Considerations 16-21
Importance of the Facts to the Tax Treatment of Liabilities 16-22
Consequences 15-5 Corporate Capital Structure 16-24
Creating a Factual Situation Favorable to the
Earnings and Profits 16-25
Taxpayer 15-6
Calculation of Earnings and Profits 16-25
The Sources of Tax Law 15-7 Current Versus Accumulated E&P 16-25
The Legislative Process 15-7
Noncash Distributions 16-27
The Internal Revenue Code 15-8
Tax Consequences to the Shareholders 16-27
Treasury Regulations 15-9
Tax Consequences to the Distributing
Administrative Pronouncements 15-11
Corporation 16-27
Judicial Decisions 15-14
Stock Redemptions 16-28
Tax Treaties 15-24 Determining Whether a Redemption Is a Dividend or
Tax Periodicals 15-24 Capital Gain 16-29
Tax Services 15-25 Corporate Distributions in Complete
The Internet as a Research Tool 15-26 Liquidation 16-31
Keyword Searches 15-27 Tax Consequences to the Liquidating
Search by Citation 15-28 Corporation 16-31
Noncommercial Internet Services 15-28 Tax Consequences to the Shareholders 16-32
Citators 15-28 Section 332: Liquidation of a Subsidiary
Using the Citator 15-30 Corporation 16-32
Professional Guidelines for Tax Services 15-30 Tax Planning Considerations 16-33
Capital Structure and Section 1244 16-33
Treasury Department Circular 230 15-30
Dividend Policy 16-34
AICPA’s Statements on Tax Standards 15-31
Use of Losses 16-34
Sample Work Papers and Client Letter 15-34 Charitable Contributions 16-34
Problem Materials 15-34 Dividends-Received Deduction 16-34
Discussion Questions 15-34 Reduced Taxes on Taxpayer Stock Sales 16-35
Problems 15-35 Compliance and Procedural Considerations 16-35
Comprehensive Problem 15-38 Filling Requirements 16-35
Tax Strategy Problem 15-38 Schedule M-1 and M-2 Reconciliations 16-36
Case Study Problem 15-39 Schedule M-3 Reconciliation 16-37
Tax Research Problems 15-39 Maintenance of E&P Records 16-37
Issue Identification Questions 16-43
CHAPTER 16 Problems 16-43
c CORPORaTiOns 16-1 Tax Strategy Problems 16-49
Definition of a Corporation 16-2 Tax Form/Return Preparation Problems 16-50
Similarities and Differences Between the Taxation of Case Study Problems 16-51
Corporations and Individuals 16-3 Tax Research Problems 16-52
x Individuals ▶ Contents
CHAPTER 17 The Exempt Model 18-10

cPaRTnERsHiPs and s CORPORaTiOns 17-1 The Pension Model 18-10
Types of Pass-Through Entities 17-2 Multiperiod Strategies 18-14
Partnerships 17-2 Summary and Comparison of Basic Investment
S Corporations 17-3 Models 18-15
Limited Liability Companies 17-3 Other Applications of Investment Models 18-15
Limited Liability Partnerships 17-4 Flow-Through Entity Versus C Corporation 18-16
Taxation of Partnerships 17-4 Current Salary Versus Deferred
Formation of a Partnership 17-4 Compensation 18-20
Partnership Operations 17-8 Implicit Taxes and Clienteles 18-27
Special Allocations 17-8 Problem Materials 18-29
Allocation of Partnership Income, Deductions, Losses, Discussion Questions 18-29
and Credits to Partners 17-10 Problems 18-30
Basis Adjustments for Operating Items 17-10
Limitations on Losses and Restoration of Basis 17-11
Transactions Between a Partner and the T A B l E S
Partnership 17-12 2016 Tax Tables and Rate Schedules and 2017 Withholding
Partnership Distributions 17-13 Tables (Partial) T-1
Sale of a Partnership Interest 17-14
Optional and Mandatory Basis Adjustments 17-16
Electing Large Partnerships 17-17
Partnership Elections 17-18 A P P E N d i C E S
Taxation of S Corporations 17-20
c aPPEndiX a
Qualification Requirements 17-20
Election Requirements 17-21 Tax Research Working Paper File A-1
Termination Conditions 17-22
S Corporation Operations 17-23 c aPPEndiX B
Basis Adjustments to S Corporation Stock 17-25
S Corporation Losses and Limitations 17-26 Tax Forms B-1
Other S Corporation Considerations 17-28
Tax Planning Considerations 17-31 c aPPEndiX C
Use of Operating Losses 17-31 MACRS Tables C-1
Income Shifting Among Family Members 17-32
Optional Basis Adjustment Election Under Sec. 754 c aPPEndiX d
17-32
Compliance and Procedural Considerations 17-33 Glossary D-1
Partnership Filing Requirements and Elections 17-33 c aPPEndiX E
Reporting Partnership Items on Form 1065 17-33
S Corporation Filing Requirements and Accounting AICPA Statements on Standards for
Method Elections 17-34 Tax Services Nos. 1–7 E-1
Reporting S Corporation Items on Form 1120S 17-34
Comparison of Alternative Forms of Business c aPPEndiX F
Organizations 17-34
Index of Code Sections F-1
c aPPEndiX G
Issue Identification Questions 17-39
Problems 17-39 Index of Treasury Regulations G-1
Tax Strategy Problems 17-46 c aPPEndiX H
Tax Form/Return Preparation Problems 17-46
Index of Government Promulgations H-1
Tax Research Problems 17-48
c aPPEndiX i
Index of Court Cases I-1
CHAPTER 18
c TaXEs and invEsTMEnT PlanninG 18-1 c aPPEndiX J
Investment Models 18-2
Subject Index J-1
The Current Model 18-2
The Deferred Model 18-5
aBOuT THE EdiTORs
Timothy J. Rupert is a Professor at the D’Amore-McKim School of Business at Northeast-

ern University. He received his B.S. in Accounting and his Master of Taxation from the
University of Akron. He also earned his Ph.D. from Penn State University. Professor
Rupert’s research has been published in such journals as The Accounting Review, The
Journal of the American Taxation Association, Behavioral Research in Accounting,
Advances in Taxation, Applied Cognitive Psychology, Advances in Accounting Educa-
tion, and Journal of Accounting Education. He currently is the co-editor of Advances
in Accounting Education. In 2010, he received the Outstanding Educator Award from
the Massachusetts Society of CPAs. He also has received the University’s Excellence
in Teaching Award and the D’Amore-McKim School’s Best Teacher of the Year award
TIMOTHY J. RUPERT multiple times. He is active in the American Accounting Association and the American
Taxation Association (ATA) and has served as president, vice president, and secretary
of the ATA.
Thomas R. Pope is the Ernst & Young Professor of Accounting at the University of
Kentucky. He received a B.S. from the University of Louisville and an M.S. and D.B.A. in
business administration from the University of Kentucky. He teaches international taxa-
tion, partnership and S corporation taxation, tax research and policy, and introductory
taxation and has won outstanding teaching awards at the University, College, and School
of Accountancy levels. He has published articles in The Accounting Review, the Tax
Adviser, Taxes, Tax Notes, and a number of other journals. Professor Pope’s extensive
professional experience includes eight years with Big Four accounting firms. Five of those
years were with Ernst & Whinney (now part of Ernst & Young), including two years with
their National Tax Department in Washington, D.C. He subsequently held the position of
THOMAS R. POPE Senior Manager in charge of the Tax Department in Lexington, Kentucky. Professor Pope
also has been a leader and speaker at professional tax conferences all over the United States
and is active as a tax consultant.
Kenneth E. Anderson is the Pugh CPAs Professor of Accounting at the University of Tennessee.
He earned a B.B.A. from the University of Wisconsin–Milwaukee and subsequently attained
the level of tax manager with Arthur Young (now part of Ernst & Young). He then earned
a Ph.D. from Indiana University. He teaches corporate taxation, partnership taxation,
and tax strategy. Professor Anderson also is the Director of the Master of Accountancy
Program. He has published articles in The Accounting Review, The Journal of the American
Taxation Association, Advances in Taxation, the Journal of Accountancy, the Journal of
Financial Service Professionals, and a number of other journals.
KENNETH E. ANDERSON
xi
aBOuT THE auTHORs
D. Dale Bandy is the Professor Emeritus in the School of Accounting at the University of
Central Florida. He received a B.S. from the University of Tulsa, an M.B.A. from the
University of Arkansas, and a Ph.D. from the University of Texas at Austin. He helped to
establish the Master of Science in Taxation programs at the University of Central Florida
and California State University, Fullerton, where he previously taught. In 1985, he was
selected by the California Society of Certified Public Accountants as the Accounting
Educator of the year. Professor Bandy has published 8 books and more than 30 articles in
accounting and taxation. His articles have appeared in the Journal of Taxation, the
Journal of Accountancy, Advances in Taxation, the Tax Adviser, The CPA Journal,
Management Accounting, and a number of other journals.
N. Allen Ford is the Larry D. Homer/KPMG Peat Marwick Distinguished Teaching Professor
of Professional Accounting at the University of Kansas. He received an undergraduate de-
gree from Centenary College in Shreveport, Louisiana, and both the M.B.A. and Ph.D. in
Business from the University of Arkansas. He has published over 40 articles related to tax-
ation, financial accounting, and accounting education in journals such as The Accounting
Review, The Journal of the American Taxation Association, and The Journal of Taxation.
He served as president of the American Taxation Association in 1979–80. Professor Ford
has received numerous teaching awards, at the college and university levels. In 1993, he
received the Byron T. Shutz Award for Distinguished Teaching in Economics and Business.
In 1996 he received the Ray M. Sommerfeld Outstanding Tax Educator Award, which is
jointly sponsored by the American Taxation Association and Ernst & Young, and in 1998
he received the Kansas Society of CPAs Outstanding Education Award.
Robert L. Gardner is the Robert J. Smith Professor of Accounting in the School of Accountancy
at Brigham Young University (BYU). He received a B.S. and M.B.A. from the University of
Utah and a Ph.D. from the University of Texas at Austin. He has authored or coauthored two
books and over 25 articles in journals such as The Tax Adviser, Journal of Corporate Taxa-
tion, Journal of Real Estate Taxation, Journal of Accounting Education, Journal of Taxation
of S Corporations, and the International Tax Journal. Professor Gardner has received several
teaching awards. In 2001, he received the Outstanding Faculty Award in the Marriott School
of Management at BYU. He has served on the Board of Trustees of the American Taxation
Association and served as President of the ATA in 1999–2000.
David S. Hulse is an Associate Professor of Accountancy at the University of Kentucky, where

he teaches introductory and corporate taxation courses. He received an undergraduate
degree from Shippensburg University, an M.S. from Louisiana State University, and a Ph.D.
from the Pennsylvania State University. Professor Hulse has published a number of articles
on tax issues in academic and professional journals, including The Journal of the American
Taxation Association, Advances in Taxation, the Journal of Financial Service Professionals,
the Journal of Financial Planning, and Tax Notes.
xii
About the Authors ◀ Individuals xiii
LeAnn Luna is a Professor of Accounting at the University of Tennessee. She is a CPA and
holds an undergraduate degree from Southern Methodist University, an M.T. from the
University of Denver College of Law, and a Ph.D. from the University of Tennessee. She
has taught introductory taxation, corporate and partnership taxation, and tax research.
Professor Luna also holds a joint appointment with the Center for Business and Economic
Research at the University of Tennessee, where she interacts frequently with state policy-
makers on a variety of policy-related issues. She has published articles in the Journal of
Accounting and Economics, National Tax Journal, The Journal of the American Taxation
Association, and State Tax Notes.
Charlene Henderson is a visiting faculty member in the Department of Accountancy at the

University of Illinois at Urbana-Champaign. She earned undergraduate and master’s degrees
in accounting from Mississippi State University. After working in public accounting and
banking, she earned a Ph.D. from Arizona State University. She has taught introductory
taxation, corporate taxation, and tax research. Her research has appeared in several journals,
including Journal of the American Taxation Association, Journal of Accounting Auditing
and Finance, Auditing: A Journal of Practice and Theory, and a number of other journals.
Jared Moore is the Mary Ellen Phillips Associate Professor of Accounting at Oregon State
University (OSU). He earned his undergraduate, Master of Taxation, and Ph.D. degrees at
Arizona State University. He is a CPA (AZ-inactive) and worked in both public and pri-
vate accounting before pursuing his doctoral degree. Professor Moore has received several
teaching awards, including the Byron L. Newton Award for Excellence in Teaching at OSU,
and has taught individual and business taxation, introductory and intermediate financial
accounting, and doctoral-level financial accounting research. His research interests include
both tax and financial accounting, and he has published in journals including the Journal
of the American Taxation Association and the National Tax Journal.
Michael S. Schadewald, Ph.D., CPA, is on the faculty of the University of Wisconsin–

Milwaukee, where he teaches graduate and undergraduate courses in business taxation. A
graduate of the University of Minnesota, Professor Schadewald is a co-author of several
books on multistate and international taxation and has published more than 40 articles in
academic and professional journals, including The Accounting Review, Journal of
Accounting Research, Contemporary Accounting Research, The Journal of the American
Taxation Association, CPA Journal, Journal of Taxation, and The Tax Adviser. Professor
Schadewald also has served on the editorial boards of The Journal of the American Taxation
Association, Journal of State Taxation, International Tax Journal, The International Journal
of Accounting, Issues in Accounting Education, and Journal of Accounting Education.
PREFaCE
Why is the Rupert/Pope/anderson series the best choice for
you and your students?
The Rupert/Pope/Anderson 2018 Series in Federal Taxation is appropriate for use in any first course in federal taxation,
and comes in a choice of three volumes:
Federal Taxation 2018: Individuals
Federal Taxation 2018: Corporations, Partnerships, Estates & Trusts (the companion book to Individuals)
Federal Taxation 2018: Comprehensive (14 chapters from Individuals and 15 chapters from Corporations)
** For a customized edition of any of the chapters for these texts, contact your Pearson representative and they can create
a custom text for you.
• The Individuals volume covers all entities, although the treatment is often briefer than in the Corporations and Com-
prehensive volumes. The Individuals volume, therefore, is appropriate for colleges and universities that require only one
semester of taxation as well as those that require more than one semester of taxation. Further, this volume adapts the
suggestions of the Model Tax Curriculum as promulgated by the American Institute of Certified Public Accountants.
• The Corporations, Partnerships, Estates & Trusts and Comprehensive volumes contain three comprehensive tax re-
turn problems whose data change with each edition, thereby keeping the problems fresh. Problem C:3-66 contains the
comprehensive corporate tax return, Problem C:9-58 contains the comprehensive partnership tax return, and Problem
C:11-64 contains the comprehensive S corporation tax return, which is based on the same facts as Problem C:9-58 so
that students can compare the returns for these two entities.
• The Corporations, Partnerships, Estates & Trusts and Comprehensive volumes contain sections called Financial
Statement Implications, which discuss the implications of Accounting Standards Codification (ASC) 740. The main
discussion of accounting for income taxes appears in Chapter C:3. The financial statement implications of other
transactions appear in Chapters C:5, C:7, C:8, and C:16 (Corporations volume only).
What’s new to this Edition?
INDIVIDUALS
• Complete updating of significant court cases and IRS rulings and procedures during 2016 and early 2017.
• Complete updating for the Protecting Americans from Tax Hikes Act of 2015 and the 2016 Consolidated Appropria-
tions Act.
• Discussion of the expiration of certain deductions and credits in 2017.
• All tax rate schedules have been updated to reflect the rates and inflation adjustments for 2017.
• Whenever new updates become available, they will be accessible via MyAccountingLab.
C O R P O R AT I O N S
• The comprehensive corporate tax return, Problem C:3-66, has all new numbers for the 2016 forms.
• The comprehensive partnership tax return, Problem C:9-58, has all new numbers for the 2016 forms.
• The comprehensive S corporation tax return, Problem C:11-64, has all new numbers for the 2016 forms.
• Changes affecting 2017 tax law have been incorporated into the text where appropriate, including the tax legislation
listed in the second Individuals bullet item above.
• All tax rate schedules have been updated to reflect the rates and inflation adjustments for 2017.
• Whenever new updates become available, they will be accessible via MyAccountingLab.
MyAccountingLab is an online homework, tutorial, and assessment program designed to work with Pearson’s Federal
Taxation 2018 to engage students and improve results. MyAccountingLab’s homework and practice questions are cor-
related to the textbook, they regenerate algorithmically to give students unlimited opportunity for practice and mastery,
xiv
Preface ◀ Individuals xv
and they offer helpful feedback when students enter incorrect answers. Combining resources that illuminate content with
accessible self-assessment, MyAccountingLab with eText provides students with a complete digital learning experience—all
in one place. To register, go to http://www.pearsonmylabandmastering.com.
For instructors
MyAccountingLab provides instructors with a rich and flexible set of course materials, along with course-management
tools that make it easy to deliver all or a portion of your course online.
• Powerful Homework and Test Manager Create, import, and manage online homework and media assignments, quiz-
zes, and tests. Create assignments from online questions directly correlated to this and other textbooks. Homework ques-
tions include “Help Me Solve This” guided solutions to help students understand and master concepts. You can choose
from a wide range of assignment options, including time limits and maximum number of attempts allowed. In addition,
you can create your own questions—or copy and edit ours—to customize your students’ learning path.
• Comprehensive Gradebook Tracking MyAccountingLab’s online gradebook automatically tracks your students’
results on tests, homework, and tutorials and gives you control over managing results and calculating grades. All
MyAccountingLab grades can be exported to a spreadsheet program, such as Microsoft® Excel. The MyAccount-
ingLab Gradebook provides a number of student data views and gives you the flexibility to weight assignments, select
which attempts to include when calculating scores, and omit or delete results for individual assignments.
• department-Wide solutions Get help managing multiple sections and working with Teaching Assistants using
MyAccountingLab Coordinator Courses. After your MyAccountingLab course is set up, it can be copied to create
sections or “member courses.” Changes to the Coordinator Course flow down to all members, so changes only need
to be made once.
We will add the most current tax information to MyAccountingLab as it becomes available.
For students
MyAccountingLab provides students with a personalized interactive learning environment, where they can learn at their
own pace and measure their progress.
• interactive Tutorial Exercises MyAccountingLab’s homework and practice questions are correlated to the text-
book, and “similar to” versions regenerate algorithmically to give students unlimited opportunity for practice and
mastery. Questions offer helpful feedback when students enter incorrect answers, and they include “Help Me Solve
This” guided solutions as well as other learning aids for extra help when students need it.
• study Plan The Study Plan acts as a tutor, providing personalized recommendations for each of your students based
on his or her ability to master the learning objectives in your course. This allows students to focus their study time by
pinpointing the precise areas they need to review, and allowing them to use customized practice and learning aids—
such as videos, eText, tutorials, and more—to get them back on track. Using the report available in the Gradebook,
you can then tailor course lectures to prioritize the content where students need the most support—offering you better
insight into classroom and individual performance.
• dynamic study Modules Dynamic Study Modules help students study effectively on their own by continuously assessing
their activity and performance in real time. Here’s how it works: students complete a set of questions with a unique answer
format that also asks them to indicate their confidence level. Questions repeat until the student can answer them all correctly
and confidently. Once completed, Dynamic Study Modules explain the concept using materials from the text. These are
available as graded assignments prior to class, and accessible on smartphones, tablets, and computers. NEW! Instructors can
now remove questions from Dynamic Study Modules to better fit their course. Available for select titles.
strong Pedagogical aids

• Appropriate blend of technical content of the tax law with a high level of readability for students.
• Focused on enabling students to apply tax principles within the chapter to real-life situations.
Real-World Example
These comments relate the text material to events, cases, and statistics occurring in the tax and business environment. The
statistical data presented in some of these comments are taken from the IRS’s Statistics of Income at www.irs.gov.
Book-to-Tax Accounting Comparison
These comments compare the tax discussion in the text to the accounting and/or financial statement treatment of this
material. Also, the last section of Chapter C:3 discusses the financial statement implications of federal income taxes.
xvi Individuals ▶ Preface
What Would You Do in This Situation?

Unique to the Rupert/Pope/Anderson series, these boxes place students in a decision-making role. The boxes include
many controversies that are as yet unresolved or are currently being considered by the courts. These boxes make extensive
use of Ethical Material as they represent choices that may put the practitioner at odds with the client.
Stop & Think
These “speed bumps” encourage students to pause and apply what they have just learned. Solutions for each issue are
provided in the box.
Ethical Point
These comments provide the ethical implications of material discussed in the adjoining text. Apply what they have just learned.
Tax Strategy Tip
These comments suggest tax planning ideas related to material in the adjoining text.
Additional Comment
These comments provide supplemental information pertaining to the adjacent text.
Program Components
Materials for the instructor may be accessed at the Instructor’s Resource Center (IRC) online, located at
www.pearsonhighered.com/pearsontax or within the Instructor Resource section of MyAccountingLab. You may
contact your Pearson representative for assistance with the registration process.
• TaxAct 2016 Software: Available via online purchase with Individuals, Corporations, and Comprehensive Texts. This
user-friendly tax preparation program includes more than 80 tax forms, schedules, and worksheets. TaxAct calculates
returns and alerts the user to possible errors or entries. Consists of Forms 990, 1040, 1041, 1065, 1120, and 1120S.
• Instructor’s Resource Manual: Contains sample syllabi, instructor outlines, and information regarding problem areas
for students. It also contains solutions to the tax form/tax return preparation problems.
• Solutions Manual: Contains solutions to discussion questions, problems, and comprehensive and tax strategy prob-
lems. It also contains all solutions to the case study problems, research problems, and “What Would You Do in This
Situation?” boxes.
• Test Bank: Offers a wealth of true/false, multiple-choice, and calculative problems. A computerized program is available
to adopters.
• PowerPoint Slides: Consists of chapter outlines, featuring images, examples, and problems throughout, to aid in class
lectures.
• Image Library: Figures, tables, and tax forms featured in the book are provided as individual files for the convenience
of instructors and students.
• Multi-State Tax Chapter: An entire chapter, complete with problems (and solutions) dedicated to multi-state tax practices.
acknowledgments
Our policy is to provide annual editions and to prepare timely updated supplements when major tax revisions occur. We
are most appreciative of the suggestions made by outside reviewers because these extensive review procedures have been
valuable to the authors and editors during the revision process.
We also are grateful to the various graduate assistants, doctoral students, and colleagues who have reviewed the text
and supplementary materials and checked solutions to maintain a high level of technical accuracy. In particular, we would
like to acknowledge the following colleagues who assisted in the preparation of supplemental materials for this text:
Ann Burstein Cohen SUNY at Buffalo
Craig J. Langstraat/Joshua G. Coyne University of Memphis
Kate Demarest Carroll Community College
Allison McLeod University of North Texas
Mitchell Franklin LeMoyne College
Anthony Masino East Tennessee State University
In addition, we want to thank Myron S. Scholes, Mark A. Wolfson, Merle M. Erickson, M. L. Hanlon, Edward L.
Maydew, and Terry J. Shevlin for allowing us to use the model discussed in their text, Taxes and Business Strategy: A
Planning Approach, as the basis for material in Chapter I:18.
Please send any comments to Kenneth E. Anderson or Timothy J. Rupert.
CHAPTER
1
An IntroductIon
to tAxAtIon
LEARNING OBJECTIVES
After studying this chapter, you should be able to
▶ Discuss the history of taxation in the United States

1
▶ Describe the three types of tax rate structures

2
▶ Describe the various types of taxes

3
▶ Discuss
4 the criteria for a “good” tax structure, the objectives of the
federal income tax law, and recent tax reform proposals
▶ Describe the tax entities in the federal income tax system

5
▶ Identify
6 the various tax law sources and understand their implications
for tax practice
▶ Describe the legislative process for the enactment of the tax law
7
▶ Describe the administrative procedures under the tax law

8
▶ Describe the components of a tax practice

9
▶ Understand the importance of computer applications in taxation

10
1-2 Individuals ▶ Chapter 1
CHAPTER OUTLINE Federal income taxes have a significant effect on business, investor, and personal decisions
History of Taxation in the United in the United States. Because tax rates can be as high as 35% on corporations and over
States...1-2 40% on individuals, virtually every transaction is impacted by income taxes. The follow-
Types of Tax Rate Structures...1-4 ing examples illustrate the impact of the tax law on various decisions in our society:
Other Types of Taxes...1-7
Criteria for a Tax Structure...1-12 c Because of the deductibility of home mortgage interest and real estate taxes, an indi-
Entities in the Federal Income Tax vidual may decide to purchase a home rather than to continue to rent an apartment.
System...1-16
c An investor may decide to delay selling some stock because of the significant taxes that
Tax Law Sources...1-24
Enactment of a Tax Law...1-24
may result from the sale.
Administration of the Tax Law c A corporation may get a larger tax deduction if it leases property rather than purchas-
and Tax Practice Issues...1-26 ing the property.
Components of a Tax
Practice...1-29 The purpose of this text is to provide an introduction to the study of federal income
Computer Applications in Tax taxation. However, before discussing the specifics of the U.S. federal income tax law, it is
Practice...1-31
helpful to have a broad conceptual understanding of the taxation process. This chapter
provides an overview of the following topics:
c Historical developments of the federal tax system
Key Point c Types of taxes levied and structural considerations
In many situations, the use of c Objectives of the tax law, including a discussion of recent tax reform proposals
the tax laws to influence human
behavior is deliberate. As will be c Taxpaying entities in the federal income tax system
seen later in this chapter, tax laws
are often used to achieve social c Tax law sources and the legislative process
and economic objectives.
c Internal Revenue Service (IRS) collection, examination, and appeals processes
c The nature of tax practice, including computer applications and tax research
HIstory of tAxAtIon
In tHe unIted stAtes
OBJECTIVE 1
E A r ly P E r i o d s
Discuss the history of The federal income tax is the dominant form of taxation in the United States. In addition,
taxation in the United most states and some cities and counties also impose an income tax. Both corporations
States and individuals are subject to such taxes.
Prior to 1913 (the date of enactment of the modern-day federal income tax), the federal
government relied predominantly on customs duties and excise taxes to finance its opera-
tions. The first federal income tax on individuals was enacted in 1861 to finance the Civil
HiStoRiCAL note
War but was repealed after the war. The federal income tax was reinstated in 1894, how-
The reinstatement of the income
ever, that tax was challenged in the courts because the U.S. Constitution required that an
tax in 1894 was the subject of income tax be apportioned among the states in proportion to their populations. This type
heated political controversy. In of tax system, which would be both impractical and difficult to administer, would mean
general, the representatives in
Congress from the agricultural that different tax rates would apply to individual taxpayers depending on their states of
South and West favored the residence.
income tax in lieu of customs
duties. Representatives from the
In 1895, the Supreme Court ruled that the tax was in violation of the U.S.
industrial eastern states were Constitution.1 Therefore, it was necessary to amend the U.S. Constitution to permit the
against the income tax and passage of a federal income tax law. This was accomplished by the Sixteenth Amendment,
favored protective tariff
legislation. which was ratified in 1913. The Sixteenth Amendment, while being an extraordinarily
important amendment, consists of one sentence.
sixteenth Amendment to the constitution of the united states

The Congress shall have the power to lay and collect taxes on incomes, from whatever
source derived, without apportionment among the several States, and without regard to any
census or enumeration.
1Pollock v. Farmers’ Loan & Trust Co., 3 AFTR 2602 (USSC, 1895). Note, was held to be constitutional because it was treated as an excise tax. See
however, that a federal income tax on corporations that was enacted in 1909 Flint v. Stone Tracy Co., 3 AFTR 2834 (USSC, 1911).
An Introduction to Taxation ◀ Individuals 1-3
rEvEnuE Acts From 1913 to thE PrEsEnt

HiStoRiCAL note The Revenue Act of 1913 imposed a flat 1% tax (with no exemptions) on a corporation’s
The Revenue Act of 1913 con- net income. The rate varied from 1% to 7% for individuals, depending on the individual’s
tained sixteen pages. income level. However, very few individuals paid federal income taxes because a $3,000
personal exemption ($4,000 for married individuals) was permitted as an offset to taxable
income. These amounts were greater than the incomes of most individuals in 1913.
HiStoRiCAL note Various amendments to the original law were passed between 1913 and 1939 as separate
Before 1939, the tax laws were revenue acts. For example, a deduction for dependency exemptions was provided in 1917. In
contained in the most current rev- 1939, the separate revenue acts were codified into the Internal Revenue Code of 1939. A simi-
enue act, a reenactment of a prior
revenue act plus amendments. In lar codification was implemented in 1954. The 1954 codification, which was known as the
1939, a permanent tax code was Internal Revenue Code of 1954, included the elimination of many “deadwood” provisions, a
established; it was revised in 1954
and 1986. rearrangement and clarification of numerous code sections, and the addition of major tax
law changes. Whenever changes to the Internal Revenue Code (IRC) are made, the old
language is deleted and the new language added. Thus, the statutes are organized as a single
document, and a tax advisor does not have to read through the applicable parts of all previ-
ous tax bills to find the most current law. In 1986, major changes were made to the tax law,
and the basic tax law was redesignated as the Internal Revenue Code of 1986, which is still
the title today.
The federal income tax became a “mass tax” on individuals during the early 1940s.
This change was deemed necessary to finance the revenue needs of the federal govern-
ment during World War II. In 1939, less than 6% of the U.S. population was subject to
the federal income tax; by 1945, 74% of the population was taxed.2 To accommodate the
broadened tax base and to avoid significant tax collection problems, Congress enacted
pay-as-you-go withholding in 1943.
A major characteristic of the federal income tax since its inception to today is the manner
in which the tax law is changed or modified. The federal income tax is changed on an incre-
mental basis rather than a complete revision basis. Under so-called incrementalism, when a
change in the tax law is deemed necessary by Congress, the entire law is not changed, but
specific provisions of the tax law are added, changed, or deleted on an incremental basis.
Thus, the federal income tax has been referred to as a “quiltwork” of tax laws, referring to
the patchwork nature of the law. Without question, one of the principal reasons for the com-
plexity of the federal income tax today is the incremental nature of tax legislation.
AdditionAL Comment rEvEnuE sourcEs

In 2014, 148 million individual As mentioned earlier, the largest source of federal revenues is individual income taxes. Other
income tax returns were filed, major revenue sources include Social Security (FICA) taxes and corporate income taxes (see
and collections from individuals
totaled $1.36 trillion. Table I:1-1). Two notable trends from Table I:1-1 are (1) the gradual increase in social insur-
ance taxes from 1960 to 2016 and (2) the gradual decrease in corporate income taxes for the
same period. Individual income taxes have remained fairly stable during the past 50 years.
tyPiCAL miSConCePtion . tABlE i:1-1

It is often assumed that the tax Breakdown of Federal revenues
revenue from corporation income
taxes is the largest source of tax
revenue. However, the revenue
generated from this tax only rep- 1960 1975 2000 2016
resents approximately 9% of
total federal revenues in 2016.
Individual income taxes 44% 45% 50% 47%
Social insurance taxes and contribution 16 32 32 34
Corporation income taxes 23 15 10 9
Other 17 8 8 10
Total 100% 100% 100% 100%
Source: Council of Economic Advisers, Economic Indicators (Washington, DC: U.S. Government Printing Office, 1967,
1977, 2016).
2
Richard Goode, The Individual Income Tax (Washington, DC: The
Brookings Institution, 1964), pp. 2–4.
types of tAx rAte structures

OBJECTIVE 2
thE structurE oF individuAl
Describe the three types i n c o m E tA x r At E s
of tax rate structures Virtually all tax structures are comprised of two basic parts: the tax base and the tax rate.
The tax base is the amount to which the tax rate is applied to determine the tax due. For
example, an individual’s tax base for the federal income tax is taxable income, as defined
and determined by the income tax law. Similarly, the tax base for the property tax is gener-
ally the fair market value of property subject to the tax. The tax rate is merely the percent-
age rate applied to the tax base.
AdditionAL Comment
Tax rates may be progressive, proportional, or regressive. A progressive rate structure
In the 1950s, the top marginal tax
is one where the rate of tax increases as the tax base increases. The most notable tax that
rate for individual taxpayers incorporates a progressive rate structure is the federal income tax. Thus, as a taxpayer’s
reached 92%. This astonishingly taxable income increases, a progressively higher rate of tax is applied. For 2017, the fed-
high rate only applied to taxpay-
ers with very high taxable eral income tax rates for individuals begin at 10% and increase to 15%, 25%, 28%, 33%,
incomes but still is an extremely 35%, and 39.6% as a taxpayer’s taxable income increases.3 Examples I:1-1 and I:1-2
confiscatory tax rate.
show how the progressive rate structure of the federal income tax operates.
eXAmPLe i:1-1 c Alice, who is single, has $30,000 taxable income in 2017. Her federal income taxes for the year
are $4,034, computed as follows: the first $9,325 of taxable income is taxed at 10% and the
remaining $20,675 at 15%. (For tax rates, see the inside front cover.)
LeGiSLAtiVe Allen, who also is single, has taxable income of $60,000. A 10% rate applies to the first
BACKGRoUnd $9,325 of taxable income, 15% on the next $28,625, and a 25% rate applies to the taxable
Beginning with tax year 2013, income over $37,950. Thus, Allen’s total tax is $10,739 [(0.10 × $9,325) + (0.15 × $28,625) +
the top rate for high-income indi- (0.25 × $22,050)].
vidual taxpayers was increased to
39.6% from 35%. If Allen’s taxable income is $120,000, a 28% rate applies to $28,100 of his taxable income
($120,000 − $91,900) because the 28% rate applies to taxable income above $91,900 for
a single individual and his total tax for the year is $26,582. Thus, the tax rates are progressive
because the rate of tax increases as a taxpayer’s taxable income increases. b
Notice in Example I:1-1 that taxable income has doubled in size in the three cases, but
the income taxes have more than doubled (i.e., $4,034 to $10,739 to $26,582). This
demonstrates how a progressive rate structure operates.
eXAmPLe i:1-2 c Assume the same facts as in Example I:1-1 except that Alice has taxable income of $200,000. Of
Alice’s taxable income, $8,350 ($200,000 − $191,650) is subject to the 33% rate. Alternatively, if
Allen has taxable income of $450,000, $33,300 ($450,000 − $416,700) is subject to the top mar-
ginal rate of 39.6%. b
A proportional tax rate, sometimes called a flat tax, is one where the rate of tax is the
same for all taxpayers, regardless of the level of their tax base. This type of tax rate is
generally used for real estate taxes, state and local sales taxes, personal property taxes,
customs duties, and excise taxes. A flat tax has been the subject of considerable discus-
sion over the past twenty years and promises to be a controversial topic as the debate on
federal income tax reform continues into the future.
eXAmPLe i:1-3 c Assume the same facts as in Example I:1-1, except that a 17% tax rate applies to all amounts
of taxable income. Based on the assumed flat tax rate structure, Alice’s federal income tax is
$5,100 on $30,000 of taxable income; Allen’s tax is $10,200 on $60,000 of taxable income and
$20,400 on $120,000 of taxable income. The tax rate is proportional because the 17% rate ap-
plies to both taxpayers without regard to their income level. As you can see, a proportional tax
rate results in substantially lower taxes for higher income taxpayers.4 b
3 See the inside front cover for the 2017 tax rates and Chapter I:2 for a discus- 4 This example assumes the same tax base (taxable income) for the flat tax as
sion of the computation procedures. 2016 rate schedules and tax tables are with the current federal tax. Most flat tax proposals allow only a few deduc-
located immediately before Appendix A. tions and, therefore, would generate higher taxes than in the example.
SeLF-StUdy QUeStion A regressive tax rate decreases with an increase in the tax base (e.g., income). Regressive
Assume a tax system with a tax of taxes, while not consistent with the fairness of the income tax,5 are found in the United States.
$1,000 on taxable income of
$10,000 and a $1,500 tax on tax- The Social Security (FICA) tax is regressive because a fixed rate of tax of 6.20% for OASDI
able income of $20,000. Is the tax for both the employer and employee is levied up to a ceiling amount of $127,200 for 2017. So,
rate system progressive, propor- for example, assume Taxpayer A has income subject to Social Security of $80,000 and
tional, or regressive?
Taxpayer B income of $400,000. Taxpayer A’s OASDI would be $4,960 ($80,000 × 0.062),
Taxpayer B’s OASDI would be $7,886 ($127,200 × 0.062). Taxpayer A’s average rate of
AnSWeR OASDI tax is 6.2% while Taxpayer B’s average rate of tax is 1.97% ($7,886/$400,000).
This tax system is regressive. Even The sales tax, which is levied by many states, is also regressive when measured
though the amount of tax has against the income base.
increased, the rate of taxation has
decreased from 10% on the first
$10,000 of taxable income to 5% t h E s t r u c t u r E o F c o r P o r At E tA x r At E s
on the second $10,000 of taxable Corporations are separate entities and are subject to income tax. The federal corporate
income.
income tax reflects a stair-step pattern of progression that tends to benefit small corpora-
tions. The corporate rates, which have not changed for several years, are as follows:6
Taxable Income7 Tax
First $50,000 15% of taxable income
Over $50,000 but not over $75,000 $7,500 + 25% of taxable income over
$50,000
$75,000
$100,000
Over $335,000 34% of taxable income
Over $10,000,000 but not over $3,400,000 + 35% of taxable income
$15,000,000 over $10,000,000
Over $15,000,000 but not over $5,150,000 + 38% over $15,000,000
$18,333,333
Over $18,333,333 35% of taxable income
m A r g i n A l , Av E r A g E , A n d
E F F E c t i v E tA x r At E s F o r tA x PAy E r s
A taxpayer’s marginal tax rate is the tax rate applied to an incremental amount of taxable
income that is added to the tax base. The marginal tax rate concept is useful for planning
because it measures the tax effect of a proposed transaction.
eXAmPLe i:1-4 c Tania, who is single, is considering the purchase of a personal residence that will provide a
$20,000 tax deduction for interest expense and real estate taxes in 2017. Tania’s taxable income
would be reduced from $120,000 to $100,000 if she purchases the residence. Because a 28% tax
rate applies to taxable income from $100,000 to $120,000, Tania’s marginal tax rate is 28%. Thus,
Tania’s tax savings from purchasing the personal residence would be $5,600 (0.28 × $20,000). b
While the marginal tax rate measures the tax rate applicable to the next $1 of income
or deduction for a taxpayer, there are two other tax rates that are used primarily by tax
policymakers: average tax rate and effective tax rate. The average tax rate is computed
by dividing the total tax liability by the amount of taxable income. This represents the
average rate of tax for each dollar of taxable income. For example, a single taxpayer with
taxable income of $450,000 in 2017 would incur a total tax liability of 134,019. The tax-
payer’s marginal tax rate is 39.6%, but his average tax rate is 29.8% (134,019/$450,000).
5 See the discussion of equity and fairness later in this chapter. the tax equals 34% of taxable income. A 35% tax rate applies to taxable
6 For C corporations with taxable income over $100,000, the lower rates income in excess of $10 million. For corporations with taxable income in
of tax on the first $75,000 of income are gradually phased out by applying excess of $15 million, a 3 percentage-point-surtax applies to taxable income
a 5-percentage-point surtax on taxable income from $100,000 to $335,000 from $15 million to $18,333,333 to eliminate the lower 34% rate that applies
so that benefits of the favorable rates are eliminated once a corporation’s to the first $10 million of taxable income.
taxable income reaches $335,000. Once taxable income exceeds $335,000 7 Also see the inside back cover for the corporation income tax rates.
AdditionAL Comment The effective tax rate is the total tax liability divided by total economic income. total
One method of calculating eco- economic income includes all types of economic income that a taxpayer has for the year.
nomic income is to start with
adjusted gross income (AGI), add
Thus, economic income is much broader than taxable income and includes most types
back items of excludible income, of excludible income, such as tax-exempt bond interest, and generally permits business
such as tax-exempt bond interest, deductions but not personal-type deductions. It should be pointed out that economic
proceeds of life insurance policies,
etc., and then deduct certain income is not statutorily defined and experts may disagree on a precise calculation. The
nondeductible business expenses, basic purpose of calculating the effective tax rate is to provide a broad measure of taxpay-
such as life insurance premiums,
penalties and fines, etc. ers’ ability to pay taxes. Accordingly, the effective tax rate mainly is used by tax policy-
makers to determine the fairness of the income tax system.
eXAmPLe i:1-5 c Amelia, who is single, has adjusted gross income of $140,000 and economic income of $175,000
in 2017. The difference is attributable to $35,000 of tax-exempt bond interest. If Amelia has
deductions of $30,000, then her taxable income is $110,000, and her total tax is $23,782.
Her average tax rate is 21.62% ($23,782 ÷ $110,000). Amelia’s effective tax rate is 13.59%
($23,782 ÷ $175,000). Amelia’s effective tax rate is considerably lower than her average tax rate
because of her substantial amount of tax-exempt income. b
STOP & THINK Question: Gwen, a single taxpayer, has seen her income climb to $200,000 in the current
year. She wants a tax planner to help her reduce her tax liability. In planning for tax
clients, tax professionals almost exclusively use the marginal tax rate in their analysis
rather than the average tax rate. Why is the marginal tax rate much more important in the
tax planning process than the average tax rate?
Solution: Because tax planning is done at the margin. A single taxpayer who has taxable
income of $200,000 has a marginal tax rate of 33% (at 2017 rates), but an average tax
rate of 24.70%, computed as follows:
Taxable income $200,000
Tax on first $191,650 of taxable income $46,643.75

Remaining taxable income $8,350
Times: Marginal tax rate × 0.33 2,755.50
Total tax liability $ 49,399.25
Total tax $ 49,399.25

Average tax rate = Taxable income = $200,000 = 24.70%
If a tax planner could reduce Gwen’s taxable income by $10,000, Gwen’s tax liability would
decrease by $3,333 ($10,000 × 0.33). When the taxpayer wants to know how much she
can save through tax planning, the appropriate marginal tax rate yields the answer.
Overall, estimated effective federal income tax rates for individuals have increased slightly
during the period 2003–2012,8 amounting to 12.6% in 2012 as compared with 9.1%
in 2003. For the highest 20% of households, the effective individual income tax rate in-
creased to 18.0% in 2012 from 14.4% in 2003. The effective tax rate for individuals in
the United States is relatively low compared to most other industrialized countries.
AdditionAL Comment
In the determination of tax rates, d E t E r m i n At i o n o F tA x A B l E
one should consider the incidence
of taxation that involves the issue i n c o m E A n d tA x d u E
of who really bears the burden of As will be discussed in later chapters, the federal income taxes imposed on all taxpayers
the tax. If a city raises the real
property tax but landlords simply (individuals, corporations, estates, and trusts) are based on the determination of taxable
raise rents to pass on the higher income. In general, taxable income is computed as follows:
taxes, the tax burden is shifted to
their tenants. The concept has Total income (income from whatever source derived) $xxx
important implications in deter-
mining any kind of average or Minus: Exclusions (specifically defined items, such as
effective tax rate. tax-exempt bond interest) (xx)
8 Congressional Budget Office, Effective Federal Tax Rates Under Current

Law, 2001 to 2014 (Washington, DC: U.S. Government Printing Office,
August, 2004), p. 10.
Gross income $xxx

Minus: Deductions (business expenses and itemized deductions) (xx)
Exemptions (not applicable for corporations) (xx)
Taxable income $xxx
Times: Applicable tax rate × .xx
Income tax before credits $xxx
Minus: Tax credits (xx)
Total tax liability $xxx
Minus: Prepayments (xx)
Balance due or refund $xxx
Each different type of taxpayer (individuals, corporations, etc.) computes taxable

income in a slightly different manner, but all use the general framework above. An intro-
ductory discussion of the various types of taxpayers is provided later in this chapter. More
detailed discussions of individual taxpayers (Chapter I:2) and corporation taxpayers
(Chapter I:16) are examined in this Individuals book. Corporations, estates, and trusts
are further examined in Pearson’s Federal Taxation: Corporations, Partnerships, Estates
& Trusts.
otHer types of tAxes

OBJECTIVE 3
s tAt E A n d l o c A l i n c o m E A n d
Describe the various types F r A n c h i s E tA x E s
of taxes In addition to federal income taxes, many states and local jurisdictions impose income
taxes on individuals and businesses. These state and local taxes have gradually increased
over the years and currently represent a significant source of revenue for state and local
governments but also represent a significant tax burden on taxpayers.
State and local income taxes vary greatly in both form and rates.9 Only seven states do
not impose an individual income tax.10 In most instances, state income tax rates are mildly
progressive and are based on an individual’s federal adjusted gross income (AGI), with
minor adjustments.11 For example, a typical adjustment to a state income tax return is
AdditionAL Comment
interest income on federal government bonds, which is subject to tax on the federal return
States that do not impose a state
income tax depend on other taxes
but generally is not subject to state income taxes. Some states also allow a deduction for
to support the government federal income taxes in the computation of taxable income for state income tax purposes.
mission, principally sales taxes. States imposing a state income tax generally require the withholding of state income
taxes and have established mandatory estimated tax payment procedures. The due date
for filing state income tax returns generally coincides with the due date for the federal
AdditionAL Comment income tax returns (e.g., the fifteenth day of the fourth month following the close of the
State income tax rates for individ- tax year for individuals).
uals have increased significantly Most states impose a corporate income tax, although in some instances the tax is called
in the past 20 years. More than
23 states now have marginal tax a franchise tax. Franchise taxes usually are based on a weighted-average formula consist-
rates of 6% or higher. ing of net worth, income, and sales.
W E A lt h t r A n s F E r tA x E s
U.S. citizens are subject to taxation on certain transfers of property to another person. The
tax law provides a unified transfer tax system that imposes a single tax on transfers of prop-
erty taking place during an individual’s lifetime (gifts) and at death (estates). (See the inside
back cover of the text for the transfer tax rate schedules.) Formerly, the gift and estate tax
laws were separate and distinct. The federal estate tax was initially enacted in 1916. The
original gift tax law dates back to 1932. The gift tax was originally imposed to prevent
widespread avoidance of the estate tax (e.g., taxpayers could make tax-free gifts of property
9 For a thorough discussion of state and local taxes, see the chapter entitled and Wyoming. New Hampshire has an income tax that is levied only on
Multistate Income Taxation that accompanies this textbook in electronic form on dividend and interest income and Tennessee’s income tax applies only to
the Pearson Federal Taxation 2018 Web page at www.prenhall.com/phtax. income from stocks and bonds.
10 11 See Chapter I:2 for a discussion of the AGI computation.
These states are Alaska, Florida, Nevada, South Dakota, Texas, Washington,
before their death). Both the gift and estate taxes are wealth transfer taxes levied on the
transfer of property and are based on the fair market value (FMV) of the transferred prop-
erty on the date of the transfer. Following are brief descriptions of the gift tax and estate tax.
Key Point The Federal Gift Tax. The gift tax is an excise tax that is imposed on the donor (not the
The $14,000 annual exclusion is donee) for transfers of property that are considered to be a taxable gift. A gift, generally
an important tax-planning tool speaking, is a transfer made gratuitously and with donative intent. However, the gift tax
for wealthy parents who want to
transfer assets to their children law has expanded the definition to include transfers that are not supported by full and
and thereby minimize their gift adequate consideration.12 To arrive at the amount of taxable gifts for the current year, a
and estate taxes. A husband and
wife who have three children $14,000 (2017) annual exclusion is allowed per donee.13 In addition, an unlimited marital
could transfer a maximum of deduction is allowed for transfers between spouses.14 The formula for computing the gift
$84,000 [($14,000 × 2) × 3] to tax is as follows:
their children each year without
incurring any gift tax.
FMV of all gifts made in the current year $x,xxx
Minus: Annual donee exclusions ($14,000 per donee) $xx
Marital deduction for gifts to spouse xx
Charitable contribution deduction xx (xxx)
Plus: Taxable gifts for all prior years xxx
Cumulative taxable gifts (tax base) $x,xxx
Times: Unified transfer tax rates × .xx
Tentative tax on gift tax base $ xxx
Minus: Unified transfer taxes paid in prior years (xx)
Unified credit (xx)
Unified transfer tax (gift tax) due in the current year $ xx
AdditionAL Comment Note that the gift tax is cumulative over the taxpayer’s lifetime (i.e., the tax calculation for the
The gift tax was enacted to make current year includes the taxable gifts made in prior years). The detailed tax rules relating to
the estate tax more effective. the gift tax are covered in Chapter C:12 in both Pearson’s Federal Taxation: Corporations,
Without a gift tax, estate taxes
could be easily avoided by large Partnerships, Estates & Trusts and the Comprehensive volume. The following general
gifts made before death. concepts and rules for the federal gift tax are presented as background material for other
chapters of this text dealing with individual taxpayers:
c Gifts between spouses are exempted from the gift tax due to the operation of an unlim-
ited marital deduction.
c The primary liability for payment of the gift tax is imposed on the donor. The donee is
contingently liable for payment of the gift tax in the event of nonpayment by the donor.
c A donor is permitted a $14,000 annual exclusion for gifts of a present interest to each
donee.15
c Charitable contributions are effectively exempted from the gift tax because an unlim-
ited deduction is allowed.
c The tax basis of the property to the donee is generally the donor’s cost. It is the lesser
of the donor’s cost and the property’s FMV on the date of the gift if the property is sold
by the donee at a loss. (See Chapter I:5 for a discussion of the gift tax basis rules.)
c A unified tax credit equivalent to a $5,000,000 deduction (adjusted for inflation, the
amount is $5,490,000 for 2017) is available to offset any gift tax on taxable gifts that
exceed the $14,000 annual exclusion.16
eXAmPLe i:1-6 c Antonio makes the following gifts in the year 2017:
c $25,000 cash gift to his wife
c $15,000 contribution to the United Way
12 Sec. 2512(b). donee is currently entitled to receive the income from the property. A gift of a
13 Sec. 2503(b). The annual exclusion for gift tax purposes had been $10,000 future interest comes into being at some future date (e.g., property is transferred
for many years. However, for 2002–2005, the inflation adjustment increased by gift to a trust in which the donee is not entitled to the income from the prop-
the exclusion to $11,000, for 2006–2008, the exclusion was increased to erty until the donor dies) and is not eligible for the $14,000 annual exclusion.
$12,000, and for 2009–2012 to $13,000. For 2013 and later years, the cur- 16 The applicable exclusion amount has been $1,000,000 since 2002. However,
rent exclusion has been increased to $14,000. beginning in 2011, the exclusion was increased to $5,000,000, adjusted for infla-
14 Sec. 2523(a). tion. For further details, see Pearson’s Federal Taxation: Corporations, Partner-
15 A gift of a present interest is an interest that is already in existence and the ships, Estates & Trusts, 2018 Edition, Chapters C:12 and C:13.
Another random document with
no related content on Scribd:
spread. As sure as I am now dictating to you, the practical way of
teaching is “Explanation, followed by Execution.” Have a lecture on
Optics in the morning: make a telescope in the afternoon. Tell the boys
in the morning about the mariner’s compass and the use of the chart;
and in the afternoon go out and navigate a Ship.
Similarly, with the selection of boys for the Navy, I didn’t want any
examination whatsoever, except the boy and his parents being “vetted,”
and then an interview with the boy to examine his personality (his soul,
in fact); and not to have an article in the Navy stuffed by patent
cramming schoolmasters like a Strasburg goose. A goose’s liver is not
the desideratum in the candidate. The desideratum was: could we put
into him the four attributes of Nelson:—
I. Self reliance.
(If you don’t believe in yourself, nobody else will.)
II. Fearlessness of Responsibility.
(If you shiver on the brink you’ll catch cold, and possibly
not take the plunge.)
III. Fertility of Resource.
(If the traces break, don’t give it up, get some string.)
IV. Power of initiative.
(Disobey orders.)
Aircraft.
Somewhere about January 15th, 1915, I submitted my resignation
as First Sea Lord to Mr. Churchill because of the supineness
manifested by the High Authorities as regards Aircraft; and I then
prophesied the raids over London in particular and all over England,
that by and by caused several millions sterling of damage and an
infinite fright.
I refer to my resignation on the aircraft question with some fear and
trembling of denials; however, I have a copy of my letter, so it’s all right.
I withdrew my resignation at the request of Authority, because Authority
said that the War Office and not the Admiralty were responsible and
would be held responsible. The aircraft belonged to the War Office; why
on earth couldn’t I mind my own business? I didn’t want the Admiralty
building and our wireless on the roof of it to be bombed; so it was my
business (the War Office was as safe as a church, the Germans would
never bomb that establishment!).
Recently I fortuned to meet Mr. Holt Thomas, and he brought to my
recollection what was quite a famous meeting at the Admiralty. Soon
after I became First Sea Lord on October 31st, 1914, I had called
together at the Admiralty a Great Company of all interested in the air;
for at that moment I had fully satisfied myself that small airships with a
speed of fifty miles an hour would be of inestimable value against
submarines and also for scouting purposes near the coast. So they
proved.
Mr. Holt Thomas was a valued witness before the Royal
Commission on Oil and Oil Engines, of which I was Chairman (a sad
business for me financially—I only possessed a few hundred pounds
and I put it into Oil—I had to sell them out, of course, on becoming
Chairman of the Oil Commission, and what I put those few hundreds
into caused a disappearance of most of those hundreds, and when I
emerged from the Royal Commission the oil shares had more than
quintupled in value and gone up to twenty times what they were when I
first put in).
Through Mr. Holt Thomas we obtained the very important evidence
of the French inventor of the Gnome engine—that wonderful engine
that really made aeroplanes what they now are. His evidence was of
peculiar value; and so also was that of Mr. Holt Thomas’s experience;
and the result of the Admiralty meeting on aircraft was that we obtained
from Mr. Holt Thomas an airship in a few weeks, when the experience
hitherto had been that it took years; and a great number of this type of
aircraft were used with immense advantage in the war. I remember so
well that the very least time that could be promised with every effort
and unstinted money, was three months (but Mr. Holt Thomas gave a
shorter time). In three weeks an airship was flying over the Admiralty at
50 miles an hour (“there’s nothing you can’t have if you want it
enough”), and now we’ve reached the Epoch—prodigious in its advent
—when positively the Air commands and dominates both Land and
Sea; and we shall witness quite shortly a combination in one Structure
of the Aeroplane, the Airship, the parachute, the common balloon, and
an Aerial Torpedo, which will both astound people by its simplicity and
by its extraordinary possibilities, both in War and Commerce (the
torpedo will become cargo in Commerce). The aeroplane has now to
keep moving to live—but why should it? The aerial gyroscopic
locomotive torpedo suspended by a parachute has a tremendous
significance.
And let no one think like the ostrich that burying one’s head in the
sand will make Invention desist. At the first Hague Peace Conference in
1899, when I was one of the British Delegates, huge nonsense was
talked about the amenities of war. War has no amenities, although Mr.
Norman Angell attacked me in print for saying so. It’s like two Innocents
playing singlestick; they agree, when they begin, not to hit hard, but it
don’t last long! Like fighting using only one fist against the other man
with two; the other fist damn soon comes out! The Ancient who
formulated that “All’s fair in love and war” enunciated a great natural
principle
“War is the essence of violence.”

“Moderation in War is imbecility.”
“HIT FIRST. HIT HARD. KEEP ON HITTING.”
The following Reports and letter will illustrate this history of my

efforts in this direction:—
Lord Fisher returned to the Admiralty on October 30th, 1914.

38 S.S. airships were at once ordered—single engine type. Six
improved type.
Before Lord Fisher left the Admiralty, a design of a double-
engine type was got out, and subsequently another 32 airships
were ordered.
Circular Letter issued by Lord Fisher in 1914 when First Sea
Lord:—
Lord Fisher desires to express to all concerned his high

appreciation of the service rendered by those who carried out the
recent daring raid on Lake Constance.
He considers that the flight mentioned, made over 250 miles of
enemy country of the worst description, is a fine feat of endurance,
courage, and skill, and reflects great credit on all who took part in
the raid, and through them on the Air Service to which they belong.
* * * * *
The following précis of correspondence is inserted because
contributory to Lord Fisher’s resignation. He had previously written to
Mr. Churchill, resigning on the ground of the disregard of his warnings
respecting the Aircraft menace:—
An Official Secret German Dispatch, obtained from a German
Source, dated December 26th, 1914:—
The General Staff of the German Army are sending aircraft to
attack French fortified places. Full use to be made of favourable
weather conditions for attack of Naval Zeppelins against the East Coast
of England with the exception of London. The attack on London will
follow later combined with the German Army Airships.
* * * * *
Précis of History of Rigid Airships of Zeppelin Type.—
Lord Fisher, when First Sea Lord, in December, 1908, instructed
Admiral Bacon to press for the construction of rigid airships for naval
purposes at the meetings of a Sub-Committee of the Committee of
Imperial Defence, which held its first meeting in December, 1908, after
many meetings at which Admiral Bacon presented the naval point of
view with much lucidity. The Committee recommended on January
28th, 1909, the following:—
(a) The Committee are of opinion that the dangers to which we
might be exposed by developments in aerial navigation cannot be
definitely ascertained until we ourselves possess airships.
(b) There are good grounds for assuming that airships will prove of
great value to the Navy for scouting and possibly for destructive
12
purposes. From a military point of view they are also important.
(c) A sum of £35,000 should be included in the Naval Estimates for
the purpose of building an airship of a rigid type. The sum alluded to
should include the cost of all preliminary and incidental expenses.
(d) A sum of £10,000 should be included in Army Estimates for
continuing experiments with navigable balloons of a non-rigid type, and
for the purchase of complete non-rigid airships and their component
parts.
January 28th, 1909.

Approved by Committee of Imperial Defence, February 25th,
1909.
And nothing more was done till I came back to Admiralty on October
30th, 1914!
Letter from Admiral Sir S. Eardley Wilmot, formerly Superintendent
of Ordnance Stores, Admiralty:—
The Old Malt House,

Marlow ,
August 13th, 1916.
Dear Lord Fisher,
Having given us splendid craft to fight on and under the sea, I
wish you would take up the provision of an air fleet. There is going
to be a great development of air navigation in the future and all
nations will be at it. With our resources and wealth we can take
and keep the lead if we like.
As a modest programme to start with we might aim at 100 air
battleships and 400 air cruisers: all on the “lighter than air”
principle.
I met a young fellow who had been in the Jutland action and
asked him how the 15-inch guns did. “Splendidly,” he said—“They
did nearly all the real execution.” I hear the Germans have got 17-
inch guns which is what I anticipated, but they won’t get ahead of
us in that time tho’ we can’t yet snuff out their Zepps, thanks to you
know who.
Yours sincerely,
(Signed) S. Eardley Wilmot.
Note.—More than a year before I got this letter I had got a 20-
inch gun ready to be built for a new type of Battle Cruiser!
Aged 19. Lieutenant.
In temporary command of “Coromandel” in
China.
The Submarine Mine

As quite a young Lieutenant, with extraordinary impudence I told
the then First Sea Lord of the Admiralty that the Hertz German
Submarine Mine, which I had seen a few days before in Kiel Harbour,
would so far revolutionise sea warfare as possibly to prevent one fleet
pursuing another, by the Fleet that was flying dropping submarine
mines in its wake; and certainly that sudden sea operations of the old
Nelsonic type would seriously be interfered with. He very good
humouredly sent me away as a young desperado, as he remembered
that I had been a lunatic in prophesying the doom of masts and sails,
which were still then magnificently supreme, and the despised engineer
yet hiding his diminished head had to keep the smell of oily oakum
away from the noses of the Lords of the ship.
That same Hertz mine in all its essentials remains still “The King of
Mines,” and if only in those years immediately preceding the war we
had manufactured none else, instead of trying to improve on it, we
should have bagged no end of big game. But as it was, our mines were
squibs; the enemy’s ship always steamed away and got into harbour,
while ours always went down plump.
The Policy of the Submarine Mine favoured us, but our authorities
couldn’t see it. I printed in three kinds of type:
(1) Huge capitals; (2) Italics; (3) big Roman block letters the
following words, submitted to the authorities very early in the war—
“Sow the North Sea with Mines on such a huge scale that
Naval Operations in it become utterly impossible.”
So you nip into the Baltic with the British Fleet.

That British Mining Policy blocked the North Sea entrance to the
Kiel Canal—that British Mining Policy dished the neutrals. When the
neutrals got blown up you swore it was a German mine—it was the
Germans who began laying mines; and a mine, when it blows you up,
don’t hand you a ticket like a passport, saying what nationality it is. In
fact, our mines were so damned bad they couldn’t help believing it was
a German mine. But I might add I think they would have sunk any
Merchant ship, squibs though they were; and I may add in a
parenthesis this British policy of submarine mines for the North Sea
would have played hell with the German submarines, not so much
blowing them up but entangling their screws.
Well, at the last—longo intervallo—towards the close of the war,
being the fifteenth “Too Late” of Mr. Lloyd George’s ever memorable
and absolutely true speech, the British Foreign Office did allow this
policy, and the United States sent over mines in thousands upon
thousands, and we’re still trying to pick ’em up, in such vast numbers
were they laid down!
We really are a very peculiar people.
Lions led by Asses!
I bought a number of magnificent and fast vessels for laying down
these mines in masses—no sooner had I left the Admiralty in May,
1915, they were so choice that they were diverted and perverted to
other uses.
But perhaps the most sickening of all the events of the war was the
neglect of the Humber as the jumping-off place for our great fast Battle
Cruiser force, with all its attendant vessels—light Cruisers, Destroyers,
and Submarines, and mine-layers, and mine-sweepers—for offensive
action at any desired moment, and as a mighty and absolute deterrent
to the humiliating bombardment of our coasts by that same fast
German Battle Cruiser force. The Humber is the nearest spot to
Heligoland; and at enormous cost and greatly redounding to the credit
of the present Hydrographer of the Navy, Admiral Learmonth (then
Director of Fixed Defences), the Humber was made submarine-proof,
and batteries were placed in the sea protecting the obstructions, and
moorings laid down behind triple lines of defence against all possibility
of hostile successful attack.
However, I had to leave the Admiralty before it was completed and
the ships sent there; and then the mot d’ordre was Passivity; and when
the Germans bombarded Scarborough and Yarmouth and so on, we
said to them à la Chinois, making great grimaces and beating tom-
toms; “If you come again, look out!” But the Germans weren’t Chinese,
and they came; and the soothing words spoken to the Mayors of the
bombarded East Coast towns were what Mark Twain specified as being
“spoke ironical.”
I conclude this Chapter with the following words, printed in the early
autumn of 1914:—
“By the half-measures we have adopted hitherto in regard to

Open-Sea Mines we are enjoying neither the one advantage nor
the other.”
That is to say, when the Germans at the very first outbreak of war
departed from the rules of the Hague Conference against the type of
mine they used, we had two courses open to us: there was the moral
advantage of refusing to follow the bad lead, or we could seek a
physical advantage by forcing the enemies’ crime to its utmost
consequences. We were effete. We were pusillanimous, and we were
like Jelly-fish.
And we “Waited and See’d.”
CHAPTER X
APOLOGIA PRO VITA SUA
We started out on the compilation of this book on the

understanding that it was not to be an Autobiography, nor a Diary, nor
Meditations (à la Marcus Aurelius), but simply “Memories.” And now
you drive me to give you a Synopsis of my life (which is an artful
periphrasis), and request me to account for my past life being one
continuous series of fightings—Love and Hate alternating and Strife the
thread running through this mortal coil of mine. (When a coil of rope is
made in a Government Dockyard a coloured worsted thread is
introduced; it runs through the centre of the rope: if the rope breaks and
sends a man to “Kingdom Come,” you know the Dockyard that made it
and you ask questions; if it’s purloined the Detective bowls out the
purloiner.) So far my rope of life has not broken and the thread is there
—Strife.
Greatly daring, and “storms of obloquy” having been my portion, I
produce now an apologia pro vita mea, though it may not pulverise as
that great Cardinal pulverised with his famous Apologia (“He looked like
Heaven and he fought like Hell”).
* * * * *
Here I would insert a note which I discovered this very afternoon
sent me by an unknown friend when Admiral von Spee and all his host
went to the bottom. Before that event there had been a series of
disasters at sea, and a grave uneasy feeling about our Navy was
spreading over the land. The three great Cruisers—“Hogue,” “Cressy”
and “Aboukir”—had been sunk near the German coast. What were they
doing there? Did they think they were Nelson blockading Toulon? The
“Goeben” and “Breslau” had escaped from our magnificent Battle
Cruisers, then in the Mediterranean, which had actually boxed them up
in the Harbour of Messina; and they had gone unharmed to
Constantinople, and like highwaymen had held a pistol at the head of
the Sultan with the threat of bombarding Constantinople and his Palace
and thus converted Turkey, our ancient ally, into the most formidable
foe we had. For is not England the greatest Mahomedan Power in the
world? The escape of the “Goeben” and “Breslau” was an irreparable
disaster almost equalled by our effete handling of Bulgaria, the key
State of the Balkans; and we didn’t give her what she asked. When we
offered it and more next year, she told us to go to hell. Then there was
the “Pegasus,” that could neither fight nor run away, massacred in cold
blood at Zanzibar by a German Cruiser as superior to her as our Battle
Cruisers were to von Spee. And last of all, as a climax, that sent the
hearts of the British people into their boots, poor Cradock and his brave
ships were sunk by Admiral von Spee. I became First Sea Lord within
24 hours of that event, and without delay the Dreadnought Battle
Cruisers, “Inflexible” and “Invincible,” went 7,000 miles without a hitch
in their water tube boilers or their turbine machinery, and arrived at the
Falkland Islands almost simultaneously with Admiral von Spee and his
eleven ships. That night von Spee, like another Casablanca with his
son on board, had gone to the bottom and all his ships save one—and
that one also soon after—were sunk. I have to reiterate about von
Spee, as to this day the veil is upon the faces of our people, and they
do not realise the Salvation that came to them.
1. We should have had no munitions—our nitrate came from Chili.
2. We should have lost the Pacific—the Falkland Islands would
have been another Heligoland and a submarine base.
3. Von Spee had German reservists, picked up on the Pacific
Coast, on board, to man the fortifications to be erected on the Falkland
Islands.
4. He would have proceeded to the Cape of Good Hope and
massacred our Squadron there, as he had massacred Cradock and his
Squadron.
5. General Botha and his vast fleet of transports proceeding to the
conquest of German South-West Africa would have been destroyed.
6. Africa under Hertzog would have become German.
7. Von Spee, distributing his Squadron on every Ocean, would
have exterminated British Trade.
That’s not a bad résumé!
Now I give the note, for it really is first-rate. Who wrote it I don’t
know, and I don’t know the paper that it came from:—
“It is amusing to read the eulogies now showered on Lord

Fisher. He is the same man with the same methods, the same
ideas, and the same theories and practice which he had in 1905
when he was generally abused as an unscrupulous rascal for
whom the gallows were too good. Lord Fisher’s silence under
storms of obloquy while he was building up Sea Power was a
striking evidence of his title to fame.”
The writer of the paragraph quotes the above words from some
other paper; then he goes on with the following remark:—
“We cordially endorse these observations. At the same time,

not all of those who raised the ‘storms of obloquy’ in 1905 and for
some years subsequently are now indulging in eulogy. Many of
them just maintain a more or less discreet silence, varied by an
occasional insinuation either in public or in private that everything
is not quite as it should be at the Admiralty, or that Lord Fisher is
too old for his job, etc., etc., etc. As we have often remarked, many
of the vituperators of Lord Fisher hated him for this one simple
reason, that he had weighed them up and found them wanting.
They had imposed on the public, but they couldn’t impose on him.
Some of these vituperators are now discreetly silent, but we know
for a fact that their sentiments towards the First Sea Lord are not in
the slightest degree changed.”
To proceed with this synopsis:—

I entered the Navy, July 12th, 1854, on board Her Majesty’s Ship
“Victory,” after being medically examined by the Doctor on board of her,
and writing out from dictation The Lord’s Prayer; and I rather think I did
a Rule of Three sum. Before that time, for seven years I had a hard life.
My paternal grandfather—a splendid old parson of the fox-hunting type
—with whom I was to live, had died just before I reached England; and
no one else but my maternal grandfather was in a position to give me a
home. He was a simple-minded man and had been fleeced out of a
fortune by a foreign scoundrel—I remember him well, as also I
remember the Chartist Riots of 1848 when I saw a policeman even to
my little mind behaving, as I thought, brutally to passing individuals. I
remember seeing a tottering old man having his two sticks taken away
from him and broken across their knees by the police. On the other
hand, I have to bear witness to a little phalanx of 40 splendid police
(who then wore tall hats and tail coats) charging a multitude of what
seemed to me to be thousands and sending them flying for their lives.
They only had their truncheons—but they knew how to use them
certainly. They seized the band and smashed the instruments and tore
up their flags.
I share Lord Rosebery’s delightful distaste; and wild horses won’t
make me say more about those early years. These are Lord
Rosebery’s delicious words:—
“There is one initial part of a biography which is skipped by

every judicious reader; that in which the pedigree of the hero is set
forth, often with warm fancy and sometimes at intolerable length.”
How can it possibly interest anyone to know that my simple-minded

maternal grandfather was driven through the artifices of a rogue to take
in lodgers, who of their charity gave me bread thickly spread with butter
—butter was a thing I otherwise never saw—and my staple food was
boiled rice with brown sugar—very brown?
Other vicissitudes of my early years—until I became Gunnery
Lieutenant of the first English Ironclad, the “Warrior,” at an
extraordinarily early age—may be told some day; and all that your
desired synopsis demands is a filling in of dates and a few details, till I
became the Captain of the “Inflexible”—the “Dreadnought” of her day. I
was promoted from Commander to Captain largely through a Lord of
the Admiralty by chance hearing me hold forth in a Lecture to a bevy of
Admirals.
H.M.S. “Vigilant,” Portsmouth.
October 3rd, 1873.
Mr. Goschen and Milne left at 10 a.m. I stayed and went on
board “Vernon,” Torpedo School Ship, at 11. Had a most interesting
lecture from Commander Fisher, a promising young officer, and
witnessed several experiments. The result of my observations was
that in my opinion the Torpedo has a great future before it and that
mechanical training will in the near future be essential for officers.
Made a note to speak to Goschen about young Fisher.
That was in 1873. More than thirty years after, “Young Fisher” was
instrumental in making this principle the basis of the new system of
education of all naval cadets at Osborne.
I remember so well taking a “rise” out of my exalted company of
Admirals and others. The voltaic element, which all lecturers then
produced with gusto as the elementary galvanic cell, was known as the
“Daniell Cell.” A bit of zinc, and a bit of copper stuck in sawdust
saturated with diluted sulphuric acid, and there you were! A bit of wire
from the zinc to one side of a galvanometer and a bit of wire from the
copper to the other side and round went the needle as if pursued by the
devil.
There were endless varieties of this “Daniell Cell,” which it was
always considered right and proper to describe. “Now,” I said, “Sirs, I
will give you without any doubt whatsoever the original Daniell Cell”—at
that moment disclosing to their rapt and enquiring gaze a huge drawing
(occupying the whole side of the lecture room and previously shrouded
by a table cloth)—the Lions with their mouths firmly shut and Daniel
apparently biting his nails waiting for daylight! Anyhow, that’s how
Rubens represents him.
I very nearly got into trouble over that “Sell.” Admirals don’t like
being “sold.”
I should have mentioned that antecedent to this I had been
Commander of the China Flagship. I wished very much for the
Mediterranean Flagship; but my life-long and good friend Lord Walter
Kerr was justly preferred before me. The Pacific Flagship was also
vacant; and I think the Admiral wanted me there, but I had a wonderful
good friend at the Admiralty, Sir Beauchamp Seymour, afterwards Lord
Alcester, who was determined I should go to China. So to China I went;
and, as it happened, it turned out trumps, for the Admiral got softening
of the brain, and I was told that when he got home and attended at the
Admiralty I was the only thing in his mind; the only thing he could say
was “Fisher!” And this luckily helped me in my promotion to Post
Captain.
After starting the “Vernon” as Torpedo School of the Navy and
partaking in a mission to Fiume to arrange for the purchase of the
Whitehead Torpedo, I was sent at an hour’s notice overland to Malta,
where on entering the harbour I noticed an old tramp picking up her
anchor, and on enquiry found she was going to Constantinople, where
the ship I was to command was with the Fleet under Sir Geoffrey
Hornby. I went alongside, got up a rope ladder that was hanging over
the side and pulled up my luggage with a rope’s end, when the Captain
of the Tramp came up to me and said: “Hullo!” I said “Hullo!” He said
“What is it you want?” He didn’t know who I was, and I was in plain
clothes, just as I had travelled over the Continent, and I replied: “I’m
going with you to Constantinople to join my ship”; and he said “There
ain’t room; there’s only one bunk, and when I ain’t in it the mate is.” I
said “All right, I don’t want a bunk.” And he said “Well, we ain’t got no
cook.” And I said “That don’t matter either.” That man and I till he died
were like Jonathan and David. He was a magnificent specimen of those
splendid men who command our merchant ships—I worshipped the
ground he trod on. His mate was just as good. They kept watch and
watch, and it was a hard life. I said to him one day “Captain, I never see
you take sights.” “Well,” he said, “Why should I? When I leaves one
lamp-post I steers for the other” (meaning lighthouses); “and,” he says,
“I trusts my engineer. He gives me the revolutions what the engine has
made, and I know exactly where I am. And,” he says, “when you have
been going twenty years on the same road and no other road, you gets
to know exactly how to do it.” “Well,” I said, “what do you do about your
compass? are you sure it’s correct? In the Navy, you know, we’re
constantly looking at the sun when it sets, and that’s an easy way of
seeing that the compass is right.” “Well,” he said, “what I does is this. I
throws a cask overboard, and when it’s as far off as ever I can see it, I
turns the ship round on her axis. I takes the bearing of the cask at
every point of the compass, I adds ’em all up, divides the total by the
number of bearings, which gives me the average, and then I subtracts
each point of the compass from it, and that’s what the compass is
wrong on each point. But,” he says, “I seldom does it, because
provided I make the lamp-post all right I think the compass is all right.”
I found Admiral Hornby’s fleet at Ismid near Constantinople, and
Admiral Hornby sent a vessel to meet me at Constantinople. He had
heard from Malta that I was on board the tramp. That great man was
the finest Admiral afloat since Nelson. At the Admiralty he was a failure.
So would Nelson have been! With both of them their Perfection was on
the Sea, not at an office desk. Admiral Hornby I simply adored. I had
known him many years; and while my cabins on board my ship were
being painted, he asked me to come and live with him aboard his
Flagship, which I did, and I was next ship to him always when at sea.
He was astounding. He would tell you what you were going to do wrong
before you did it; and you couldn’t say you weren’t going to do it
because you had put your helm over and the ship had begun to move
the wrong way. Many years afterwards, when he was the Port Admiral
at Portsmouth, I was head of the Gunnery School at Portsmouth, and,
some war scare arising, he was ordered to take command of the whole
Fleet at home collected at Portland. He took me with him as a sort of
Captain of the Fleet, and we went to Bantry Bay, where we had
exercises of inestimable value. He couldn’t bear a fool, so of course he
had many enemies. There never lived a more noble character or a
greater seaman. He was incomparable.
* * * * *
After commanding the “Pallas” in the Mediterranean under Sir
Geoffrey Hornby, I was selected by Admiral Sir Cooper Key as his Flag
Captain in North America in command of the “Bellerophon”; and I again
followed Sir Cooper Key as his Flag Captain in the “Hercules” when he
also was put in command of a large fleet on another war scare arising.
It was in that year I began the agitation for the introduction of Lord
Kelvin’s compass into the Navy, and I continued that agitation with the
utmost vehemence till the compass was adopted. After that I was
chosen by Admiral Sir Leopold McClintock, the great Arctic Explorer, to
be his Flag Captain on the North American Station, in the
“Northampton,” then a brand new ship. He again was a splendid man
and his kindness to me is unforgettable. He had gone through great
hardships in the Arctic—once he hadn’t washed for 179 days. He was
like a rare old bit of mahogany; and I was told by an admirer of his that
when the thermometer was 70 degrees below zero he found the ship
so stuffy that he slept outside on the ice in his sleeping bag.
1885. Aged 41. Post Captain.

In command of Gunnery School at
Portsmouth.
I was suddenly recalled to England and left him with very deep
regret in the West Indies to become Captain of the “Inflexible.” I had the
most trying parting from that ship’s company of the “Northampton”; and
not being able to stand the good-bye, I crept unseen into a shore boat
and got on board the mail steamer before the crew found out that the
Captain had left the ship. And the fine old Captain of the Mail Steamer
—Robert Woolward by name—caught the microbe and steamed me
round and round my late ship. He was a great character. Every Captain
of a merchant ship I meet I seem to think better than the last (I hope I
shan’t forget later on to describe Commodore Haddock of the White
Star Line, for if ever there was a Nelson of the Merchant Service he
was). But I return to Woolward. He had been all his life in the same line
of steamers, and he showed me some of his correspondence, which
was lovely. He was invariably in the right and his Board of Directors
were invariably in the wrong. I saw a lovely letter he had written that
very day that I went on board, to his Board of Directors. He signed
himself in the letter as follows:—
“Gentlemen, I am your obedient humble servant” (he was

neither), “Robert Woolward—Forty years in your employ and
never did right yet.”
I must, while I have the chance, say a few words about my friend
Haddock. It was a splendid Captain in the White Star steamer in which I
crossed to America in 1910, and I remarked this to my Cabin Steward,
as a matter of conversation. “Ah!” he said, “you should see ’addick.”
Then he added “We knows him as ’addick of the ‘Oceanic.’ Yes,” he
said, “and Mr. Ismay (the Head of the White Star Line) knows him too!”
The “Oceanic” was Mr. Ismay’s last feat in narrowness and length and
consequent speed for crossing the Atlantic. I have heard that when he
was dying he went to see her. This conversation never left my mind,
although it was only the cabin steward that told me; but he was an
uncommon good steward. So when I came back to the Admiralty as
First Sea Lord on October 31st, 1914, I at once got hold of Haddock,
made him into a Commodore, and he commanded the finest fleet of
dummy wooden “Dreadnoughts” and Battle Cruisers the world had ever
looked on, and they agitated the Atlantic, and the “Queen Elizabeth” in
wood got blown up by the Germans at the Dardanelles instead of the
real one. The Germans left the other battleships alone chasing the
“Elizabeth.” If this should meet the eye of Haddock, I want to tell him
that, had I remained, he would have been Sir Herbert Haddock, K.C.B.,
or I’d have died in the attempt.
* * * * *
Now you have got perhaps not all you want, but sufficient for the
Notes to follow here.
The “Warrior”
I was appointed Gunnery Lieutenant of the “Warrior” our First
Ironclad in 1863, when I was a little over 22 years old. I had just won
the Beaufort Testimonial (Senior Wrangler), and that, with a
transcendental Certificate from Commodore Oliver Jones, who was at
that time the demon of the Navy, gave me a “leg up.”
The “Warrior” was then, like the “Inflexible” in 1882 and the
“Dreadnought” in 1905, the cynosure of all eyes. She had a very
famous Captain, the son of that great seaman Lord Dundonald, and a
still more famous Commander, Sir George Tryon, who afterwards went
down in the “Victoria.” She had a picked crew of officers and men, so I
was wonderfully fortunate to be the Gunnery Lieutenant, and at so
young an age I got on very well, except for sky-larking in the ward-
room, for which I got into trouble. There was a dear old grey-headed
Paymaster, and a mature Doctor, and a still more mature Chaplain,
quite a dear old Saint. These, with other willing spirits, of a younger
phase, I organised into a peripatetic band. The Parson used to play the
coal scuttle, the Doctor the tongs and shovel, the dear old Paymaster
used to do the cymbals with an old tin kettle. The other instruments we
made ourselves out of brown paper, and we perambulated, doing our
best. The Captain came out of his cabin door and asked the sentry
what that noise was? We were all struck dumb by his voice, the skylight
being open, and we were silent. The Sentry said: “It’s only Mr. Fisher,
Sir!” so he shut the door! The Commander, Sir George Tryon, wasn’t so
nice! He sent down a message to say the Gunnery Lieutenant was “to
stop that fooling!” (However, this only drove us into another kind of
sport!) We were all very happy messmates; they kindly spoilt me as if I
was the Baby. I never went ashore by any chance, so all the other
Lieutenants liked me because I took their duty for them. One of them
was like Nelson’s signal—he expected every man to do his duty! I was

Full Download pdf of (eBook PDF) Pearson&#39;s Federal Taxation 2018 Individuals 31st Edition all chapter

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Full Download pdf of (eBook PDF) Pearson&#39;s Federal Taxation 2018 Individuals 31st Edition all chapter

Uploaded by

Copyright:

Available Formats

(eBook PDF) Pearson's Federal

Taxation 2018 Individuals 31st Edition

(Original PDF) Pearson's Federal Taxation 2018

(eBook PDF) Pearson's Federal Taxation 2018

(eBook PDF) Pearson's Federal Taxation 2017 Individuals

(eBook PDF) Pearson's Federal Taxation 2020 Individuals

(eBook PDF) Essentials of Federal Income Taxation for

(eBook PDF) South-Western Federal Taxation 2019:

(eBook PDF) South-Western Federal Taxation 2022:

(eBook PDF) South-Western Federal Taxation 2020:

Plans for Self-Employed Individuals 9-36 CHAPTER 11

CHAPTER 17 The Exempt Model 18-10

Timothy J. Rupert is a Professor at the D’Amore-McKim School of Business at Northeast-

David S. Hulse is an Associate Professor of Accountancy at the University of Kentucky, where

Charlene Henderson is a visiting faculty member in the Department of Accountancy at the

Michael S. Schadewald, Ph.D., CPA, is on the faculty of the University of Wisconsin–

What’s new to this Edition?

strong Pedagogical aids

What Would You Do in This Situation?

▶ Discuss the history of taxation in the United States

▶ Describe the three types of tax rate structures

▶ Describe the various types of taxes

▶ Describe the tax entities in the federal income tax system

▶ Describe the administrative procedures under the tax law

▶ Describe the components of a tax practice

▶ Understand the importance of computer applications in taxation

sixteenth Amendment to the constitution of the united states

rEvEnuE Acts From 1913 to thE PrEsEnt

AdditionAL Comment rEvEnuE sourcEs

tyPiCAL miSConCePtion . tABlE i:1-1

types of tAx rAte structures

Tax on first $191,650 of taxable income $46,643.75

Total tax $ 49,399.25

8 Congressional Budget Office, Effective Federal Tax Rates Under Current

Gross income $xxx

Each different type of taxpayer (individuals, corporations, etc.) computes taxable

otHer types of tAxes

“War is the essence of violence.”

The following Reports and letter will illustrate this history of my

Lord Fisher returned to the Admiralty on October 30th, 1914.

Lord Fisher desires to express to all concerned his high

January 28th, 1909.

The Old Malt House,

The Submarine Mine

So you nip into the Baltic with the British Fleet.

“By the half-measures we have adopted hitherto in regard to

We started out on the compilation of this book on the

“It is amusing to read the eulogies now showered on Lord

“We cordially endorse these observations. At the same time,

To proceed with this synopsis:—

“There is one initial part of a biography which is skipped by

How can it possibly interest anyone to know that my simple-minded

1885. Aged 41. Post Captain.

“Gentlemen, I am your obedient humble servant” (he was

You might also like

Full Download pdf of (eBook PDF) Pearson's Federal Taxation 2018 Individuals 31st Edition all chapter

Full Download pdf of (eBook PDF) Pearson's Federal Taxation 2018 Individuals 31st Edition all chapter