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CoNTENTS
PREFACE xiv Legal Requirements and Tax Considerations Related to

Forming a Corporation 2-9
CHAPTER 1 Legal Requirements 2-9
c TAX RESEARCH 1-1 Tax Considerations 2-9
Overview of Tax Research 1-2 Section 351: Deferring Gain or Loss Upon
Incorporation 2-12
Steps in the Tax Research Process 1-3
The Property Requirement 2-12
Importance of the Facts to the Tax Consequences 1-5 The Control Requirement 2-13
Creating a Factual Situation Favorable The Stock Requirement 2-16
to the Taxpayer 1-6 Effect of Sec. 351 on the Transferors 2-16
The Sources of Tax Law 1-7 Tax Consequences to Transferee Corporation 2-20
The Legislative Process 1-7 Assumption of the Transferor’s Liabilities 2-22
The Internal Revenue Code 1-8 Other Considerations in a Sec. 351 Exchange 2-25
Treasury Regulations 1-9
Choice of Capital Structure 2-27
Administrative Pronouncements 1-11
Characterization of Obligations as Debt or Equity 2-27
Judicial Decisions 1-14
Debt Capital 2-28
Tax Treaties 1-24
Equity Capital 2-29
Tax Periodicals 1-24
Capital Contributions by Shareholders 2-29
Tax Services 1-25 Capital Contributions by Nonshareholders 2-31
The Internet as a Research Tool 1-26
Worthlessness of Stock or Debt Obligations 2-32
Keyword Searches 1-27
Securities 2-32
Search by Citation 1-28
Unsecured Debt Obligations 2-33
Noncommercial Internet Services 1-28
Tax Planning Considerations 2-34
Citators 1-28
Using the Citator 1-30 Avoiding Sec. 351 2-34
Professional Guidelines for Tax Services 1-30 Compliance and Procedural Considerations 2-36
Treasury Department Circular 230 1-30 Reporting Requirements Under Sec. 351 2-36
AICPA’S Statements on Tax Standards 1-31 Problem Materials 2-37
Sample Work Papers and Client Letter 1-34 Discussion Questions 2-37
Issue Identification Questions 2-38
Problem Materials 1-34
Problems 2-38
Discussion Questions 1-34
Problems 1-35 Comprehensive Problems 2-43
Comprehensive Problem 1-38 Tax Strategy Problems 2-44
Tax Strategy Problem 1-38 Case Study Problems 2-44
Case Study Problem 1-39 Tax Research Problems 2-45
Tax Research Problems 1-39
CHAPTER 2 CHAPTER 3
c CoRPoRATE FoRMATIoNS AND CAPITAL c THE CoRPoRATE INCoME TAX 3-1
STRUCTURE 2-1 Corporate Elections 3-2
Organization Forms Available 2-2 Choosing a Calendar or Fiscal Year 3-2
Sole Proprietorships 2-2 Accounting Methods 3-4
Partnerships 2-3 Determining a Corporation’s Taxable Income 3-5
Corporations 2-5 Sales and Exchanges of Property 3-6
Limited Liability Companies 2-8 Business Expenses 3-8
Limited Liability Partnerships 2-8 Special Deductions 3-14
Check-the-Box Regulations 2-8 Exceptions for Closely Held Corporations 3-21
iii
iv Corporations ▶ Contents
Computing a Corporation’s Income Tax Liability 3-22 Stock Redemptions 4-16

General Rules 3-23 Tax Consequences of the Redemption to the
Personal Service Corporations 3-24 Shareholder 4-17
Controlled Groups of Corporations 3-24 Attribution Rules 4-18
Why Special Rules Are Needed 3-24 Substantially Disproportionate Redemptions 4-20
What Is a Controlled Group? 3-25 Complete Termination of the Shareholder’s Interest 4-21
Application of the Controlled Group Test 3-28 Redemptions Not Essentially Equivalent to a Dividend 4-23
Special Rules Applying to Controlled Groups 3-29 Partial Liquidations 4-23
Consolidated Tax Returns 3-29 Redemptions to Pay Death Taxes 4-25
Effect of Redemptions on the Distributing Corporation 4-26
Compensation Planning for Shareholder-Employees 3-31 Preferred Stock Bailouts 4-27
Special Election to Allocate Reduced Tax Rate Sec. 306 Stock Defined 4-28
Benefits 3-32 Dispositions of Sec. 306 Stock 4-28
Using NOL Carryovers and Carrybacks 3-34 Redemptions of Sec. 306 Stock 4-29
Exceptions to Sec. 306 Treatment 4-30
Compliance and Procedural Considerations 3-35
Estimated Taxes 3-35 Stock Redemptions by Related Corporations 4-30
Requirements for Filing and Paying Taxes 3-38 Brother-Sister Corporations 4-30
When the Return Must Be Filed 3-38 Parent-Subsidiary Corporations 4-32
Tax Return Schedules 3-39 Tax Planning Considerations 4-33
Financial Statement Implications 3-43 Avoiding Unreasonable Compensation 4-33
Scope, Objectives, and Principles of ASC 740 3-44 Bootstrap Acquisitions 4-34
Temporary Differences 3-44 Timing of Distributions 4-35
Deferred Tax Assets and the Valuation Compliance and Procedural Considerations 4-36
Allowance 3-44 Corporate Reporting of Nondividend Distributions 4-36
Accounting for Uncertain Tax Positions 3-45 Agreement to Terminate Interest Under Sec. 302(b)(3) 4-36
Balance Sheet Classification 3-46
Tax Provision Process 3-47
Comprehensive Example – Year 1 3-47
Comprehensive Example – Year 2 3-50
Problems 4-39
Other Transactions 3-54
Comprehensive Problem 4-45
Problem Materials 3-54 Tax Strategy Problem 4-46
Discussion Questions 3-54 Case Study Problems 4-46
Issue Identification Questions 3-55 Tax Research Problems 4-47
Problems 3-56
Tax Strategy Problem 3-65 CHAPTER 5
Tax Form/Return Preparation Problems 3-65 c oTHER CoRPoRATE TAX LEVIES 5-1
Case Study Problems 3-70
Tax Research Problems 3-71 The Alternative Minimum Tax 5-2
The General Formula 5-2
Exemption from the AMT for Small Corporations
and First-Year Corporations 5-3
CHAPTER 4 Tax Preference Items 5-5
c CoRPoRATE NoNLIQUIDATING DISTRIBUTIoNS 4-1 AMT Adjustment Items 5-5
Nonliquidating Distributions in General 4-2 Adjusted Current Earnings (ACE) Adjustment 5-9
Earnings and Profits (E&P) 4-3 Minimum Tax Credit 5-12
Current Earnings and Profits 4-3 Tax Credits and the AMT 5-13
Distinction Between Current and Accumulated E&P 4-6 Personal Holding Company Tax 5-14
Nonliquidating Property Distributions 4-8 Personal Holding Company Defined 5-15
Consequences of Nonliquidating Property Distributions Stock Ownership Requirement 5-15
to the Shareholders 4-8 Passive Income Requirement 5-15
Consequences of Property Distributions to the Calculating the PHC Tax 5-19
Distributing Corporation 4-9 Avoiding the PHC Designation and Tax Liability by
Constructive Dividends 4-11 Making Dividend Distributions 5-21
Stock Dividends and Stock Rights 4-13 PHC Tax Calculation 5-22
Nontaxable Stock Dividends 4-14 Accumulated Earnings Tax 5-23
Nontaxable Stock Rights 4-14 Corporations Subject to the Penalty Tax 5-23
Effect of Nontaxable Stock Dividends on the Distributing Proving a Tax-Avoidance Purpose 5-24
Corporation 4-15 Evidence Concerning the Reasonableness of an Earnings
Taxable Stock Dividends and Stock Rights 4-15 Accumulation 5-25
Contents ◀ Corporations v
Calculating the Accumulated Earnings Tax 5-29 Problem Materials 6-21

Comprehensive Example 5-32 Discussion Questions 6-21
Tax Planning Considerations 5-33 Issue Identification Questions 6-23
Depreciation Election 5-33 Problems 6-24
Eliminating the ACE Adjustment 5-34 Comprehensive Problem 6-30
Multiyear Effects of AMT 5-34 Tax Strategy Problems 6-31
Avoiding the Personal Holding Company Tax 5-35 Case Study Problems 6-32
Avoiding the Accumulated Earnings Tax 5-35 Tax Research Problems 6-33
Alternative Minimum Tax 5-36 CHAPTER 7
Personal Holding Company Tax 5-36 c CoRPoRATE ACQUISITIoNS AND REoRGANIZATIoNS 7-1
Accumulated Earnings Tax 5-36
Taxable Acquisition Transactions 7-2
Financial Statement Implications 5-37 Asset Acquisitions 7-2
Alternative Minimum Tax 5-37 Stock Acquisitions 7-4
Problem Materials 5-38 Comparison of Taxable and Nontaxable Acquisitions 7-10
Discussion Questions 5-38 Taxable and Nontaxable Asset Acquisitions 7-10
Issue Identification Questions 5-41 Comparison of Taxable and Nontaxable Stock
Problems 5-41 Acquisitions 7-11
Types of Reorganizations and Their Tax Consequences 7-14
Tax Strategy Problems 5-50
The Target or Transferor Corporation 7-14
Tax Form/Return Preparation Problem 5-50
The Acquiring or Transferee Corporation 7-15
Shareholders and Security Holders 7-16
Acquisitive Reorganizations 7-19
CHAPTER 6 Type A Reorganization 7-19
c CoRPoRATE LIQUIDATING DISTRIBUTIoNS 6-1 Type C Reorganization 7-25
Overview of Corporate Liquidations 6-2 Type D Reorganization 7-28
The Shareholder 6-2 Type B Reorganization 7-29
The Corporation 6-3 Type G Reorganization 7-33
Definition of a Complete Liquidation 6-3 Divisive Reorganizations 7-33
General Liquidation Rules 6-5 Divisive Type D Reorganization 7-33
Effects of Liquidating on the Shareholders 6-5 Divisive Type G Reorganization 7-38
Effects of Liquidating on the Liquidating Corporation 6-6 Other Reorganizations 7-38
Liquidation of a Controlled Subsidiary 6-10 Type E Reorganization 7-38
Overview 6-10 Type F Reorganization 7-40
Requirements 6-11 Judicial Restrictions on the Use of Corporate
Effects of Liquidating on the Shareholders 6-12 Reorganizations 7-40
Effects of Liquidating on the Subsidiary Continuity of Interest 7-41
Corporation 6-13 Continuity of Business Enterprise 7-41
Special Reporting Issues 6-15 Business Purpose Requirement 7-42
Pertaining to Shareholders 6-15 Step Transaction Doctrine 7-42
Pertaining to the Liquidating Corporation 6-16 Tax Attributes 7-43
Recognition of Gain or Loss When Property Is Distributed Assumption of Tax Attributes 7-43
in Retirement of Debt 6-17 Limitation on Use of Tax Attributes 7-43
General Rule 6-17 Tax Planning Considerations 7-46
Satisfaction of the Subsidiary’s Debt Obligations 6-17 Why Use a Reorganization Instead of a Taxable
Tax Planning Considerations 6-18 Transaction? 7-46
Timing the Liquidation Transaction 6-18 Avoiding the Reorganization Provisions 7-47
Recognition of Ordinary Losses When a Liquidation Compliance and Procedural Considerations 7-47
Occurs 6-19 Section 338 Election 7-47
Obtaining 80% Ownership to Achieve Sec. 332 Plan of Reorganization 7-47
Benefits 6-19 Party to a Reorganization 7-48
Avoiding Sec. 332 to Recognize Losses 6-20 Ruling Requests 7-48
Compliance and Procedural Considerations 6-20 Financial Statement Implications 7-48
General Liquidation Procedures 6-20 Taxable Asset Acquisition 7-48
Section 332 Liquidations 6-21 Nontaxable Asset Acquisition 7-49
Plan of Liquidation 6-21 Stock Acquisition 7-50
vi Corporations ▶ Contents
Pricing the Acquisition 7-50 Financial Statement Implications 8-39

Net Operating Losses 7-51 Intercompany Transactions 8-39
Problem Materials 7-51 SRLY Losses 8-41
Discussion Questions 7-51 Problem Materials 8-42
Issue Identification Questions 7-52 Discussion Questions 8-42
Problems 7-53 Issue Identification Questions 8-43
Comprehensive Problem 7-61 Problems 8-44
Tax Strategy Problems 7-62 Comprehensive Problems 8-52
Case Study Problems 7-63 Tax Strategy Problem 8-53
Tax Research Problems 7-63 Tax Form/Return Preparation Problem 8-53
Case Study Problem 8-54
CHAPTER 8
c CoNSoLIDATED TAX RETURNS 8-1 CHAPTER 9
Definition of an Affiliated Group 8-2 c PARTNERSHIP FoRMATIoN AND oPERATIoN 9-1
Requirements 8-2 Definition of a Partnership 9-2
Comparison with Controlled Group Definitions 8-4 General and Limited Partnerships 9-2
Consolidated Tax Return Election 8-4 Overview of Taxation of Partnership Income 9-4
Consolidated Return Regulations 8-4 Partnership Profits and Losses 9-4
Termination of Consolidated Tax Return Filing 8-5 The Partner’s Basis 9-4
Consolidated Taxable Income 8-6 Partnership Distributions 9-5
Accounting Periods and Methods 8-6 Tax Implications of Formation of a Partnership 9-5
Income Included in the Consolidated Tax Return 8-6 Contribution of Property 9-6
Calculation of Consolidated Taxable Income Contribution of Services 9-10
and Tax 8-8 Organizational and Syndication Expenditures 9-12
Intercompany Transactions 8-8 Partnership Elections 9-12
Basic Concepts 8-8 Partnership Tax Year 9-12
Matching and Acceleration Rules 8-10 Other Partnership Elections 9-15
Applications of Matching and Acceleration Rules 8-12 Partnership Reporting of Income 9-16
Relevance of Matching and Acceleration Rules 8-18 Partnership Taxable Income 9-16
Items Computed on a Consolidated Basis 8-18 Separately Stated Items 9-16
Charitable Contribution Deduction 8-19 Partnership Ordinary Income 9-17
Net Sec. 1231 Gain or Loss 8-19 U.S. Production Activities Deduction 9-17
Capital Gains and Losses 8-19 Partner Reporting of Income 9-18
Dividends-Received Deduction 8-20 Partner’s Distributive Share 9-18
U.S. Production Activities Deduction 8-22 Special Allocations 9-19
Regular Tax Liability 8-24
Basis for Partnership Interest 9-21
Corporate Alternative Minimum Tax 8-24
Beginning Basis 9-21
Tax Credits 8-25
Effects of Liabilities 9-21
Estimated Tax Payments 8-26
Effects of Operations 9-24
Net Operating Losses (NOLs) 8-27
Special Loss Limitations 9-26
Current Year NOL 8-27
At-Risk Loss Limitation 9-26
Carrybacks and Carryovers of Consolidated NOLs 8-28
Passive Activity Limitations 9-26
Special Loss Limitations 8-30
Transactions Between a Partner and the Partnership 9-27
Stock Basis Adjustments 8-34
Sales of Property 9-27
Tiering Up of Stock Basis Adjustments 8-35
Guaranteed Payments 9-28
Excess Loss Account 8-36
Family Partnerships 9-30
Capital Ownership 9-30
Advantages of Filing a Consolidated Tax Return 8-36
Donor-Donee Allocations of Income 9-30
Disadvantages of Filing a Consolidated
Tax Return 8-37 Tax Planning Considerations 9-31
Timing of Loss Recognition 9-31
The Basic Election and Return 8-37 Compliance and Procedural Considerations 9-32
Parent Corporation as Agent for the Consolidated Reporting to the IRS and the Partners 9-32
Group 8-38 IRS Audit Procedures 9-33
Separate Entity Treatment of Intercompany Problem Materials 9-34
Transactions 8-39 Discussion Questions 9-34
Liability for Taxes Due 8-39 Issue Identification Questions 9-35
Contents ◀ Corporations vii
Problems 9-36 Election of S Corporation Status 11-7

Comprehensive Problems 9-44 Making the Election 11-8
Tax Strategy Problem 9-45 Termination of the Election 11-9
Tax Form/Return Preparation Problems 9-46 S Corporation Operations 11-13
Case Study Problems 9-50 Taxable Year 11-13
Tax Research Problems 9-51 Accounting Method Elections 11-14
Ordinary Income or Loss and Separately Stated
CHAPTER 10 Items 11-14
c SPECIAL PARTNERSHIP ISSUES 10-1 U.S. Production Activities Deduction 11-16
Nonliquidating Distributions 10-2 Special S Corporation Taxes 11-16
Recognition of Gain 10-2 Taxation of the Shareholder 11-19
Basis Effects of Distributions 10-4 Income Allocation Procedures 11-19
Holding Period and Character of Distributed Loss and Deduction Pass-Through to Shareholders 11-20
Property 10-7 Family S Corporations 11-24
Nonliquidating Distributions with Sec. 751 10-7 Basis Adjustments 11-24
Section 751 Assets Defined 10-7 Basis Adjustments to S Corporation Stock 11-24
Exchange of Sec. 751 Assets and Other Property 10-9 Basis Adjustments to Shareholder Debt 11-25
Liquidating or Selling a Partnership Interest 10-11 S Corporation Distributions 11-27
Liquidating Distributions 10-12 Corporations Having No Earnings and Profits 11-27
Sale of a Partnership Interest 10-16 Corporations Having Accumulated Earnings and
Other Partnership Termination Issues 10-19 Profits 11-28
Retirement or Death of a Partner 10-19 Other Rules 11-32
Exchange of a Partnership Interest 10-20 Tax Preference Items and Other AMT Adjustments 11-33
Income Recognition and Transfers of a Partnership Transactions Involving Shareholders and Other Related
Interest 10-22 Parties 11-33
Termination of a Partnership 10-22 Fringe Benefits Paid to a Shareholder-Employee 11-33
Mergers and Consolidations 10-25
Division of a Partnership 10-25
Election to Allocate Income Based on the S Corporation’s
Optional and Mandatory Basis Adjustments 10-26 Accounting Methods 11-34
Adjustments on Transfers 10-26 Increasing the Benefits from S Corporation Losses 11-35
Adjustments on Distributions 10-28 Passive Income Requirements 11-36
Special Forms of Partnerships 10-29 Compliance and Procedural Considerations 11-37
Tax Shelters and Limited Partnerships 10-29 Making the Election 11-37
Publicly Traded Partnerships 10-29 Filing the Corporate Tax Return 11-37
Limited Liability Companies 10-30 Estimated Tax Payments 11-38
Limited Liability Partnerships 10-31 Consistency Rules 11-39
Limited Liability Limited Partnership 10-31 Sample S Corporation Tax Return 11-39
Electing Large Partnerships 10-32
Tax Planning Considerations 10-35 Discussion Questions 11-40
Liquidating Distribution or Sale to Partners 10-35 Issue Identification Questions 11-41
Problem Materials 10-35 Problems 11-41
Discussion Questions 10-35 Comprehensive Problems 11-47
Issue Identification Questions 10-36 Tax Strategy Problems 11-49
Problems 10-37 Tax Form/Return Preparation Problems 11-50
Comprehensive Problems 10-47 Case Study Problem 11-52
Tax Strategy Problem 10-48 Tax Research Problems 11-53
Tax Research Problems 10-50 CHAPTER 12
c THE GIFT TAX 12-1
The Unified Transfer Tax System 12-2
CHAPTER 11 History and Purpose of Transfer Taxes 12-2
c S CoRPoRATIoNS 11-1 Unified Rate Schedule 12-3
Should an S Election Be Made? 11-3 Impact of Taxable Gifts on Death Tax Base 12-3
Advantages of S Corporation Treatment 11-3 Unified Credit 12-3
Disadvantages of S Corporation Treatment 11-3 Gift Tax Formula 12-4
S Corporation Requirements 11-4 Determination of Gifts 12-4
Shareholder-Related Requirements 11-4 Exclusions and Deductions 12-4
Corporation-Related Requirements 11-5 Gift-Splitting Election 12-4
viii Corporations ▶ Contents
Cumulative Nature of Gift Tax 12-6 The Gross Estate: Valuation 13-6
Unified Credit 12-6 Date-of-Death Valuation 13-6
Transfers Subject to the Gift Tax 12-7 Alternate Valuation Date 13-7
Transfers for Inadequate Consideration 12-7 The Gross Estate: Inclusions 13-8
Statutory Exemptions from the Gift Tax 12-8 Comparison of Gross Estate with Probate
Cessation of Donor’s Dominion and Control 12-10 Estate 13-9
Valuation of Gifts 12-11 Property in Which the Decedent Had an Interest 13-9
Gift Tax Consequences of Certain Transfers 12-13 Dower or Curtesy Rights 13-10
Exclusions 12-16 Transferor Provisions 13-10
Amount of the Exclusion 12-16 Annuities and Other Retirement Benefits 13-13
Present Interest Requirement 12-16 Jointly Owned Property 13-14
General Powers of Appointment 13-15
Gift Tax Deductions 12-18
Life Insurance 13-16
Marital Deduction 12-19
Consideration Offset 13-17
Charitable Contribution Deduction 12-21
Recipient Spouse’s Interest in QTIP Trust 13-17
The Gift-Splitting Election 12-22
Deductions 13-18
Computation of the Gift Tax Liability 12-23 Debts and Funeral and Administration
Effect of Previous Taxable Gifts 12-23 Expenses 13-18
Unified Credit Available 12-24 Losses 13-19
Comprehensive Illustration 12-25 Charitable Contribution Deduction 13-19
Basis Considerations for a Lifetime Giving Plan 12-26 Marital Deduction 13-20
Property Received by Gift 12-26 Computation of Tax Liability 13-23
Property Received at Death 12-27 Taxable Estate and Tax Base 13-23
Below-Market Loans: Gift and Income Tax Consequences Tentative Tax and Reduction for Post-1976 Gift
12-28 Taxes 13-23
General Rules 12-28 Unified Credit 13-23
De Minimis Rules 12-28 Portability Between Spouses of Exemption Amount 13-24
Tax Planning Considerations 12-29 Other Credits 13-24
Tax-Saving Features of Inter Vivos Gifts 12-29 Comprehensive Illustration 13-25
Negative Aspects of Gifts 12-30 Liquidity Concerns 13-28
Compliance and Procedural Considerations 12-30 Deferral of Payment of Estate Taxes 13-28
Filing Requirements 12-30 Stock Redemptions to Pay Death Taxes 13-29
Due Date 12-31 Special Use Valuation of Farm Real Property 13-29
Gift-Splitting Election 12-31 Generation-Skipping Transfer Tax 13-30
Liability for Tax 12-31 Tax Planning Considerations 13-31
Determination of Value 12-32 Use of Inter Vivos Gifts 13-32
Statute of Limitations 12-32 Use of Exemption Equivalent 13-32
Problem Materials 12-33 What Size Marital Deduction Is Best? 13-33
Discussion Questions 12-33 Use of Disclaimers 13-33
Issue Identification Questions 12-34 Role of Life Insurance 13-33
Problems 12-34 Qualifying the Estate for Installment
Comprehensive Problem 12-37 Payments 13-34
Tax Strategy Problems 12-38 Where to Deduct Administration Expenses 13-34
Tax Form/Return Preparation Problems 12-38 Compliance and Procedural Considerations 13-35
Filing Requirements 13-35
Due Date 13-35
Valuation 13-35
Election of Alternate Valuation Date 13-35
CHAPTER 13 Problem Materials 13-36
c THE ESTATE TAX 13-1 Discussion Questions 13-36
Estate Tax Formula 13-2 Issue Identification Questions 13-37
Gross Estate 13-2 Problems 13-37
Deductions 13-3 Comprehensive Problems 13-41
Adjusted Taxable Gifts and Tax Base 13-4 Tax Strategy Problems 13-42
Tentative Tax on Estate Tax Base 13-4 Tax Form/Return Preparation Problems 13-43
Reduction for Post-1976 Gift Taxes 13-4 Case Study Problems 13-44
Unified Credit 13-5 Tax Research Problems 13-45
Contents ◀ Corporations ix
CHAPTER 14 Choice of Year-End for Estates 14-34

c INCoME TAXATIoN oF TRUSTS AND ESTATES 14-1 Deduction of Administration Expenses 14-34
Basic Concepts 14-2 Compliance and Procedural Considerations 14-35
Inception of Trusts 14-2 Filing Requirements 14-35
Inception of Estates 14-2 Due Date for Return and Tax 14-35
Reasons for Creating Trusts 14-3 Documents to Be Furnished to IRS 14-35
Basic Principles of Fiduciary Taxation 14-3 Sample Simple and Complex Trust Returns 14-35
Principles of Fiduciary Accounting 14-4 Problem Materials 14-36
The Importance of Identifying Income and Discussion Questions 14-36
Principal 14-4 Issue Identification Questions 14-37
Principal and Income: The Uniform Act 14-5 Problems 14-37
Categorization of Depreciation 14-6 Comprehensive Problem 14-40
Formula for Taxable Income and Tax Liability 14-7 Tax Strategy Problems 14-40
Gross Income 14-7 Tax Form/Return Preparation Problems 14-41
Deductions for Expenses 14-7 Case Study Problems 14-42
Distribution Deduction 14-9 Tax Research Problems 14-43
Personal Exemption 14-9
Credits 14-10
U.S. Production Activities Deduction 14-10
CHAPTER 15
Distributable Net Income 14-10 c ADMINISTRATIVE PRoCEDURES 15-1
Significance of DNI 14-11
Role of the Internal Revenue Service 15-2
Definition of DNI 14-11
Enforcement and Collection 15-2
Manner of Computing DNI 14-11
Interpretation of the Statute 15-2
Determining a Simple Trust’s Taxable Income 14-13
Audits of Tax Returns 15-3
Allocation of Expenses to Tax-Exempt Income 14-14
Percentage of Returns Examined 15-3
Determination of DNI and the Distribution
Selection of Returns for Audit 15-3
Deduction 14-15
Disclosure of Uncertain Tax Positions 15-5
Tax Treatment for Beneficiary 14-15
Alternatives for a Taxpayer Whose Return Is Audited 15-5
Shortcut Approach to Proving Correctness of Taxable
90-Day Letter 15-7
Income 14-16
Litigation 15-7
Effect of a Net Operating Loss 14-16
Effect of a Net Capital Loss 14-16 Requests for Rulings 15-9
Comprehensive Illustration: Determining a Simple Information to Be Included in Taxpayer’s Request 15-9
Trust’s Taxable Income 14-17 Will the IRS Rule? 15-10
When Rulings Are Desirable 15-10
Determining Taxable Income for Complex Trusts and
Estates 14-19 Due Dates 15-10
Determination of DNI and the Distribution Due Dates for Returns 15-10
Deduction 14-20 Extensions 15-11
Tax Treatment for Beneficiary 14-21 Due Dates for Payment of the Tax 15-10
Effect of a Net Operating Loss 14-24 Interest on Tax Not Timely Paid 15-12
Effect of a Net Capital Loss 14-24 Failure-to-File and Failure-to-Pay Penalties 15-13
Comprehensive Illustration: Determining a Complex Failure to File 15-15
Trust’s Taxable Income 14-24 Failure to Pay 15-16
Income in Respect of a Decedent 14-27 Estimated Taxes 15-17
Definition and Common Examples 14-27 Payment Requirements 15-17
Significance of IRD 14-28 Penalty for Underpaying Estimated Taxes 15-18
Grantor Trust Provisions 14-30 Exceptions to the Penalty 15-19
Purpose and Effect 14-30 Other More Severe Penalties 15-20
Revocable Trusts 14-31 Negligence 15-20
Post-1986 Reversionary Interest Trusts 14-31 Substantial Understatement 15-21
Retention of Administrative Powers 14-31 Transactions without Economic Substance 15-22
Retention of Economic Benefits 14-31 Civil Fraud 15-22
Control of Others’ Enjoyment 14-32 Criminal Fraud 15-23
Tax Planning Considerations 14-33 Statute of Limitations 15-24
Ability to Shift Income 14-33 General Three-Year Rule 15-24
Timing of Distributions 14-33 Six-Year Rule for Substantial Omissions 15-24
Property Distributions 14-34 When No Return is Filed 15-26
x Corporations ▶ Contents
Other Exceptions to Three-Year Rule 15-26 Filing Requirements for Aliens and Foreign
Refund Claims 15-27 Corporations 16-37
Liability for Tax 15-27 Financial Statement Implications 16-38
Joint Returns 15-27 Foreign Tax Credit 16-38
Transferee Liability 15-29 Deferred Foreign Earnings 16-39
Tax Practice Issues 15-29 Problem Materials 16-42
Statutory Provisions Concerning Tax Return Discussion Questions 16-42
Preparers 15-29 Issue Identification Questions 16-43
Reportable Transaction Disclosures 15-30 Problems 16-44
Rules of Circular 230 15-31 Comprehensive Problem 16-48
Statements on Standards for Tax Services 15-32 Tax Strategy Problem 16-49
Tax Accounting and Tax Law 15-35 Tax Form/Return Preparation Problems 16-50
Accountant-Client Privilege 15-36 Case Study Problems 16-50
Problem Materials 15-37 Tax Research Problems 16-51
Problems 15-38 A P P E N d i C E S
Comprehensive Problem 15-41 c APPENDIX A
Tax Strategy Problem 15-41 Tax Research Working Paper File A-1
Tax Research Problems 15-41 c APPENDIX B
Tax Forms B-1
c APPENDIX C
CHAPTER 16 MACRS Tables C-1
c U.S. TAXATIoN oF FoREIGN-RELATED TRANSACTIoNS 16-1
c APPENDIX D
Jurisdiction to Tax 16-2 Glossary D-1
Taxation of U.S. Citizens and Resident Aliens 16-3
c APPENDIX E
Foreign Tax Credit 16-3
Foreign-Earned Income Exclusion 16-8 AICPA Statements on Standards for
Tax Services Nos. 1–7 E-1
Taxation of Nonresident Aliens 16-14
Definition of Nonresident Alien 16-14 c APPENDIX F
Investment Income 16-15 Comparison of Tax Attributes for C Corporations,
Trade or Business Income 16-16 Partnerships, and S Corporations F-1
Taxation of U.S. Businesses Operating Abroad 16-18
Domestic Subsidiary Corporations 16-18 c APPENDIX G
Reserved G-1
Foreign Branches 16-18
Foreign Corporations 16-19 c APPENDIX H
Controlled Foreign Corporations 16-23 Actuarial Tables H-1
Foreign Sales Corporations Regime and Extraterritorial
Income Exclusion 16-31 c APPENDIX I
Inversions 16-31 Index of Code Sections I-1
Tax Planning Considerations 16-32 c APPENDIX J
Deduction Versus Credit for Foreign Taxes 16-32 Index of Treasury Regulations J-1
Election to Accrue Foreign Taxes 16-33
Special Earned Income Elections 16-34 c APPENDIX K
Tax Treaties 16-35 Index of Government Promulgations K-1
Special Resident Alien Elections 16-35
c APPENDIX L
Compliance and Procedural Considerations 16-36 Index of Court Cases L-1
Foreign Operations of U.S. Corporations 16-36
Reporting the Foreign Tax Credit 16-36 c APPENDIX M
Reporting the Earned Income Exclusion 16-36 Subject Index M-1
ABoUT THE EDIToRS
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 sub-
sequently 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
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.
Timothy J. Rupert is a Professor and the Golemme Administrative Chair at the D’Amore-
McKim School of Business at Northeastern University. He received his B.S. in Ac-
counting 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 Education, 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
TIMOTHY J. RUPERT School’s Best Teacher of the Year award 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.
xi
ABoUT THE AUTHoRS
Anna C. Fowler is the John Arch White Professor Emeritus in the Department of
Accounting at the University of Texas at Austin. She received her B.S. in accounting from
the University of Alabama and her M.B.A. and Ph.D. from the University of Texas at
Austin. Active in the American Taxation Association throughout her academic career, she
served on the editorial board of its journal and held many positions, including president.
She is a former member of the American Institute of CPA’s Tax Executive Committee and
a former chair of the AICPA’s Regulation/Tax Subcommittee for the CPA exam. She has
published a number of articles, most of which have dealt with estate planning or real estate
transaction issues. In 2002, she received the Ray M. Sommerfeld Outstanding Educator
Award, co-sponsored by the American Taxation Association and Ernst & Young.
Richard J. Joseph is the former Provost-for-Term and Chief Academic Officer of Bryant
University. Prior to joining Bryant, he was Provost and Global Dean of Hult International
Business School, and before that, he served on the administration and tax faculty of The
University of Texas at Austin. Dr. Joseph also has worked as an international banker at
Citibank, Riyadh; an investment banker at Lehman Brothers, New York; a securities trader
at Becker Paribas, Dallas, and Bear Stearns, New York; and a mergers and acquisitions
lawyer for the Bass Group, Fort Worth. A graduate magna cum laude of Harvard College,
Oxford University, and The University of Texas at Austin School of Law, Dr. Joseph is
co-editor of the Handbook of Mergers and Acquisitions (Oxford University Press) and
author of The Origins of the American Income Tax (Syracuse University Press). He has
written numerous commentaries in the Financial Times, The Christian Science Monitor,
Tax Notes, and Tax Notes International.
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 undergrad-
uate 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.
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.
xii
About the Authors ◀ Corporations xiii
William J. Moser is an Assistant Professor in the Department of Accountancy at the Farmer

School of Business at Miami University. He received his B.S. in Accountancy from Miami
University in 1995, his Masters in Accountancy with an emphasis in taxation from North-
ern Illinois University in 1997, and his Ph.D. from the University of Arizona in 2005. He
teaches taxation of individuals, property transactions, business entities, estates, gifts, and
trusts, and he has received numerous teaching awards during his academic career. He has
co-authored articles in the Journal of Accounting Research, the Journal of Financial and
Quantitative Analysis, Review of Accounting Studies, and The Journal of the American
Taxation Association.
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 2017 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 2017: Individuals
Federal Taxation 2017: Corporations, Partnerships, Estates & Trusts (the companion book to Individuals)
Federal Taxation 2017: 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 cre-
ate 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
return 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 2015 and early 2016.
• Complete updating for the Protecting Americans from Tax Hikes Act of 2015, the Trade Preferences Extension Act
of 2015, and the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015.
• Discussion of the tax extender deductions and credits in 2016.
• All tax rate schedules have been updated to reflect the rates and inflation adjustments for 2016.
• 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 2015 forms.
• The comprehensive partnership tax return, Problem C:9-58, has all new numbers for the 2015 forms.
• The comprehensive S corporation tax return, Problem C:11-64, has all new numbers for the 2015 forms.
• Changes affecting 2016 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 2016.
• 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 Fed-
eral Taxation 2017 to engage students and improve results. MyAccountingLab’s homework and practice questions are
xiv
Preface ◀ Corporations xv
correlated to the textbook, they regenerate algorithmically to give students unlimited opportunity for practice and mas-
tery, 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 experi-
ence—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, quizzes,
and tests. Create assignments from online questions directly correlated to this and other textbooks. Homework questions
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, proctoring, 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 textbook,
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 for Self-Paced Learning MyAccountingLab’s study plan helps students monitor their own progress, letting
them see at a glance exactly which topics they need to practice. MyAccountingLab generates a personalized study
plan for each student based on his or her test results, and the study plan links directly to interactive, tutorial exercises
for topics the student hasn’t yet mastered. Students can regenerate these exercises with new values for unlimited prac-
tice, and the exercises include guided solutions and multimedia learning aids to give students the extra help they need.
• Dynamic Study Modules MyAccountingLab’s Dynamic Study Modules work by continuously assessing student per-
formance and activity, then using data and analytics to provide personalized content in real time to reinforce concepts
that target each student’s particular strengths and weaknesses.
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 Corporations ▶ 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 exten-
sive 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/phtax or within the Instructor Resource section of MyAccountingLab. You may contact your
Pearson representative for assistance with the registration process.
• TaxAct 2015 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 avail-
able 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 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
Tax ReseaRch
Learning Objectives
After studying this chapter, you should be able to
▶ Distinguish between closed fact and open fact tax situations

1
▶ Describe the steps in the tax research process

2
▶ Explain how the facts influence tax consequences

3
▶ Identify the sources of tax law and assess the authoritative value of each
4
▶ Consult tax services to research an issue

5
▶ Apply the basics of Internet-based tax research

6
▶ Use a citator to assess tax authorities

7
▶ Describe
8
follow
the professional guidelines that CPAs in tax practice should
▶ Prepare work papers and communicate to clients

9
1-2 Corporations ▶ Chapter 1
CHAPTER OUTLINE This chapter introduces the reader to the tax research process. Its major focus is the sources
Overview of Tax Research...1-2 of the tax law (i.e., the Internal Revenue Code and other tax authorities) and the relative
Steps in the Tax Research weight given to each source. The chapter describes the steps in the tax research process
Process...1-3 and places particular emphasis on the importance of the facts to the tax consequences. It
Importance of the Facts to the Tax
Consequences...1-5
also describes the features of frequently used tax services and computer-based tax research
The Sources of Tax Law...1-7 resources. Finally, it explains how to use a citator.
Tax Services...1-25 The end product of the tax research process—the communication of results to the
The Internet as a Research client—also is discussed. This text uses a hypothetical set of facts to provide a compre-
Tool...1-26 hensive illustration of the process. Sample work papers demonstrating how to document
Citators...1-28
the results of research are included in Appendix A. The text also discusses two types
Professional Guidelines for Tax
Services...1-30 of professional guidelines for CPAs in tax practice: the American Institute of Certified
Sample Work Papers and Client Public Accountants’ (AICPA’s) Statements on Standards for Tax Services (reproduced in
Letter...1-34 Appendix E) and Treasury Department Circular 230.
OveRview Of Tax ReseaRch

Objective 1 Tax research is the process of solving tax-related problems by applying tax law to specific
Distinguish between sets of facts. Sometimes it involves researching several issues and often is conducted to
closed fact and open fact formulate tax policy. For example, policy-oriented research would determine how far
tax situations the level of charitable contributions might decline if such contributions were no longer
deductible. Economists usually conduct this type of tax research to assess the effects of
government policy.
Tax research also is conducted to determine the tax consequences of transactions
to specific taxpayers. For example, client-oriented research would determine whether
Smith Corporation could deduct a particular expenditure as a trade or business expense.
Accounting and law firms generally engage in this type of research on behalf of their
ADDITIONAL COMMENT clients.
Closed-fact situations afford the This chapter deals only with client-oriented tax research, which occurs in two contexts:
tax advisor the least amount of
flexibility. Because the facts are 1. closed fact or tax compliance situations: The client contacts the tax advisor after com-
already established, the tax advi-
sor must develop the best solution
pleting a transaction or while preparing a tax return. In such situations, the tax con-
possible within certain predeter- sequences are fairly straightforward because the facts cannot be modified to obtain
mined constraints. different results. Consequently, tax saving opportunities may be lost.
EXAMPLE C:1-1 c Tom informs Carol, his tax advisor, that on November 4 of the current year, he sold land held
as an investment for $500,000 cash. His basis in the land was $50,000. On November 9, Tom
reinvested the sales proceeds in another plot of investment property costing $500,000. This is a
closed fact situation. Tom wants to know the amount and the character of the gain (if any) he
must recognize. Because Tom solicits the tax advisor’s advice after the sale and reinvestment,
the opportunity for tax planning is limited. For example, the possibility of deferring taxes by
using a like-kind exchange or an installment sale is lost. b
ADDITIONAL COMMENT
Open-fact or tax-planning situa- 2. Open fact or tax planning situations: Before structuring or concluding a transaction,
tions give a tax advisor flexibility
to structure transactions to accom- the client contacts the tax advisor to discuss tax planning opportunities. Tax-planning
plish the client’s objectives. In this situations generally are more difficult and challenging because the tax advisor must
type of situation, a creative tax consider the client’s tax and nontax objectives. Most clients will not engage in a trans-
advisor can save taxpayers dollars
through effective tax planning. action if it is inconsistent with their nontax objectives, even though it produces tax
savings.
EXAMPLE C:1-2 c Diane is a widow with three children and five grandchildren and at present owns property
valued at $30 million. She seeks advice from Carol, her tax advisor, about how to minimize
her estate taxes and convey the greatest value of property to her descendants. This is an
open-fact situation. Carol could advise Diane to leave all but $5.45 million of her property
to a charitable organization so that her estate would owe no estate taxes. Although this rec-
ommendation would eliminate Diane’s estate taxes, Diane is likely to reject it because she
wants her children or grandchildren to be her primary beneficiaries. Thus, reducing estate
Tax Research ◀ Corporations 1-3
taxes to zero is inconsistent with her objective of allowing her descendants to receive as much
after-tax wealth as possible. b
TAX STRATEGY TIP When conducting research in a tax planning context, the tax professional should keep
Taxpayers should make invest- a number of points in mind. First, the objective is not to minimize taxes per se but rather
ment decisions based on after-tax to maximize a taxpayer’s after-tax return. For example, if the federal income tax rate is a
rates of return or after-tax cash
flows. constant 30%, an investor should not buy a tax-exempt bond yielding 5% when he or she
could buy a corporate bond of equal risk that yields 9% before tax and 6.3% after tax.
This is the case even though his or her explicit taxes (actual tax liability) would be mini-
mized by investing in the tax-exempt bond.1 Second, taxpayers typically do not engage
in unilateral or self-dealing transactions; thus, the tax ramifications for all parties to the
transaction should be considered. For example, in the executive compensation context,
employees may prefer to receive incentive stock options (because they will not recognize
income until they sell the stock), but the employer may prefer to grant a different type of
option (because the employer cannot deduct the value of incentive stock options upon is-
suance). Thus, the employer might grant a different number of options if it uses one type
of stock option versus another type as compensation. Third, taxes are but one cost of do-
ADDITIONAL COMMENT ing business. In deciding where to locate a manufacturing plant, for example, factors more
It is important to consider nontax important to some businesses than the amount of state and local taxes paid might be the
as well as tax objectives. In many proximity to raw materials, good transportation systems, the cost of labor, the quantity of
situations, the nontax consider-
ations outweigh the tax consider- available skilled labor, and the quality of life in the area. Fourth, the time for tax planning
ations. Thus, the plan eventually is not restricted to the beginning date of an investment, contract, or other arrangement.
adopted by a taxpayer may not
always be the best when viewed Instead, the time extends throughout the duration of the activity. As tax rules change or
strictly from a tax perspective. as business and economic environments change, the tax advisor must reevaluate whether
the taxpayer should hold onto an investment and must consider the transaction costs of
any alternatives.
One final note: the tax advisor should always bear in mind the financial accounting
implications of proposed transactions. An answer that may be desirable from a tax per-
spective may not always be desirable from a financial accounting perspective. Though in-
terrelated, the two fields of accounting have different orientations and different objectives.
Tax accounting is oriented primarily to the Internal Revenue Service (IRS). Its objectives
include calculating, reporting, and predicting one’s tax liability according to legal prin-
ciples. Financial accounting is oriented primarily to shareholders, creditors, managers, and
employees. Its objectives include determining, reporting, and predicting a business’s finan-
cial position and operating results according to Generally Accepted Accounting Principles.
Because tax and financial accounting objectives may differ, planning conflicts could arise.
For example, management might be reluctant to engage in tax reduction strategies that also
reduce book income and reported earnings per share. Success in any tax practice, especially
at the managerial level, requires consideration of both sets of objectives and orientations.
sTepsin The Tax

ReseaRch pROcess
Objective 2 In both open- and closed-fact situations, the tax research process involves six basic steps:
Describe the steps in the 1. Determine the facts.
tax research process 2. Identify the issues (questions).
3. Locate the applicable authorities.
4. Evaluate the authorities and choose those to follow where the authorities conflict.
5. Analyze the facts in terms of the applicable authorities.
6. Communicate conclusions and recommendations to the client.
1
For an excellent discussion of explicit and implicit taxes and tax planning of the Individuals volume. An example of an implicit tax is the excess of the
see M. S. Scholes, M. A. Wolfson, M. Erickson, M. Hanlon, L. Maydew, and before-tax earnings on a taxable bond over the risk-adjusted before-tax earn-
T. Shevlin, Taxes and Business Strategy: A Planning Approach, fifth edition ings on a tax-favored investment (e.g., a municipal bond).
(Upper Saddle River, NJ: Pearson Prentice Hall, 2015). Also see Chapter I:18
1-4 Corporations ▶ Chapter 1
You may need to

Determine the facts. gather additional
facts.
You may need to

Identify the issues
restate the
(questions).
questions.
Locate the applicable

authorities.
Evaluate the authorities;

choose those to follow where
the authorities conflict.
Analyze the facts in

terms of the applicable
authorities.
Communicate conclusions and

recommendations to the client.
FIGURE C:1-1 c STEPS In THE TAx RESEARCH PRoCESS
ADDITIONAL COMMENT Although the above outline suggests a linear approach, the tax research process often is
The steps of tax research provide circular. That is, it does not always proceed step-by-step. Figure C:1-1 illustrates a more
an excellent format for a written accurate process, and Appendix A provides a comprehensive example of this process.
tax communication. For example,
a good format for a client memo In a closed-fact situation, the facts have already occurred, and the tax advisor’s task
includes (1) statement of facts, is to analyze them to determine the appropriate tax treatment. In an open-fact situation,
(2) list of issues, (3) discussion of
relevant authority, (4) analysis, by contrast, the facts have not yet occurred, and the tax advisor’s task is to plan for them
and (5) recommendations to the or shape them so as to produce a favorable tax result. The tax advisor performs the latter
client of appropriate actions
based on the research results.
task by reviewing the relevant legal authorities, particularly court cases and IRS rulings,
all the while bearing in mind the facts of those cases or rulings that produced favorable
results compared with those that produced unfavorable results. For example, if a client
wants to realize an ordinary loss (as opposed to a capital loss) on the sale of several plots
of land, the tax advisor might consult cases involving similar land sales. The advisor
might attempt to distinguish the facts of those cases in which the taxpayer realized an
ordinary loss from the facts of those cases in which the taxpayer realized a capital loss.
The advisor then might recommend that the client structure the transaction based on the
fact pattern in the ordinary loss cases.
TYPICAL MISCONCEPTION Often, tax research involves a question to which no clearcut, unequivocally correct an-
Many taxpayers think the tax law swer exists. In such situations, probing a related issue might lead to a solution pertinent to
is all black and white. However, the central question. For example, in researching whether the taxpayer may deduct a loss
most tax research deals with
gray areas. Ultimately, when con- as ordinary instead of capital, the tax advisor might research the related issue of whether
fronted with tough issues, the abil- the presence of an investment motive precludes classifying a loss as ordinary. The solution
ity to develop strategies that favor
the taxpayer and then to find rel- to that issue might be relevant to the central question of whether the taxpayer may deduct
evant authority to support those the loss as ordinary.
strategies will make a successful
tax advisor. Thus, recognizing plan-
Identifying the issue(s) to be researched often is the most difficult step in the tax re-
ning opportunities and avoiding search process. In some instances, the client defines the issue(s) for the tax advisor, such as
potential traps is often the real where the client asks, “May I deduct the costs of a winter trip to Florida recommended by
value added by a tax advisor.
my physician?” In other instances, the tax advisor, after reviewing the documents submit-
ted to him or her by the client, identifies and defines the issue(s) himself or herself. Doing
so presupposes a firm grounding in tax law.2
2 Often, in an employment context, supervisors define the questions to be

researched and the authorities that might be relevant to the tax consequences.
Another random document with
no related content on Scribd:
Yet of all the pictures of either the stately or the modest homes of
Scotland, which now hang in the gallery of memory, none exceeds in
beauty and charm those of the home at Invergowrie, where we were
several times guests. Here was a typical Scottish family of character
and culture. Father and mother were in the prime of life, health, and
manifold activities. Around them had grown up a family of sons and
daughters, from the youngest, a blooming maiden of eighteen,
educated in Germany and at Brussels, to the eldest son, who,
besides being active in business, was an officer in the local volunteer
artillery corps. At night he loved to put on his Highland suit for
comfort and enjoyment, as we chatted with his friends on British and
American politics. One of these talks, in the billiard-room, was soon
after President Cleveland had issued his strenuous proclamation
concerning Venezuela, when British feelings were hurt and when a
combination of tact, some knowledge of history, and of the political
and personal motives of American Presidents was necessary to the
guest and peacemaker.
The Invergowrie family honored the American in Scotland more
than once by inviting, to the dinners given in his honor, the
professional gentlemen of the neighborhood and from Dundee.
While in Scotland one must beware of what toes he is likely to
tread upon, should he nurse opinions differing from those welcomed
by people holding any of the various shades of Presbyterianism,
whom he will probably meet anywhere and everywhere. It was in
Scotland, above every other country, that we learned what it meant
to “mind your p’s,” yet our hope is that we succeeded measurably.
The garden parties, in which the young people had their fun and
amusement, the five o’clock teas, at which the ladies of the
neighborhood dropped in for chat and friendly calls, were as
delightful to enjoy as they are now pleasant to recall. Yet, as in the
United States the county fair excels all other inventions and facilities
for seeing the real, average American, so I valued most, for intimate
knowledge of the Scottish populace of all grades and ages, the local
exhibitions, “bazaars,” and gatherings.
To be present, as we often were, to see the modern version of
“The Cotter’s Saturday Night,”—though in this version we mean a
luxurious home, with all the appointments of comfort, culture, and of
service,—crowned all delights. This social situation in Scotland is
necessarily different from that in America, where, in the cities at
least, native-born maidens so rarely take domestic service in
families. With our composite people, also, there is usually such a
disagreement as to the theories of the universe, as taught by priest,
parson, and rabbi, that worship of the same God by all, at one time,
in the same way, and in one household, seems impossible. The
head of the house or the mistress holds usually to one form of
dogma or ritual, while the servants have been reared in an
atmosphere so very different that family worship, with the “help”
joining in or present, is, to say the least, not customary in “the land of
the free.” Occasionally British visitors, who imagine that the very
mixed people called Americans are descended chiefly from insular
instead of continental stock, like the late James Anthony Froude
when in New York city, for instance, make disagreeable discoveries.
At times, in our democracy the kitchen rules the parlor.
At Invergowrie, as in a score or more of homes on the island in
which I have been so often a guest, the two or three maids and
perhaps a man-servant came in with their Bibles and read, with the
children of the household, the Word which is above every other word
—the Father’s message to his children. Where there was but one
servant, the same rule usually held. At Invergowrie, besides a
chapter of Scripture and a prayer by the father, the high priest of the
family, the older son read one of the Psalms in Rous’s metrical
version.
The breakfast in Scotland, as in the British Isles generally, is one
that suits admirably the free-born Briton. It is certainly a festival of
freedom for the servants, who are usually apt to be upstairs or
attending to other domestic duties, though in a large family, the
members of which sit down at the same time, there is usually one
maid present to wait upon the table. At several places where I was
entertained, even in well-to-do families, the grown sons and
daughters or members of the household came and went at their
convenience, helping themselves at will from dishes on a sideboard.
After the table has been laid by one of the maids, who may or may
not remain present, it may be that the elder daughter serves. At
Invergowrie there was a large, normal family, consisting of parents
and children, with sufficient uniformity of dispositions and habits to
make both the breakfast and the dinner time a delightful gathering,
with merriment and leisure. The news of the day, the happenings of
the neighborhood, the things alike and different as between Scotland
and America, the annals of the village fair, or the social chat, or
those pleasant nothings that lubricate life, made the moments pass
all too rapidly.
That father benign and mother of imposing presence have been
long laid to sleep; but in London, and Edinburgh, and Dundee, in the
world at large, live yet these sons and daughters of “Bonnie
Scotland” who have made the Americans’ memories of their lovely
home in their home land a storehouse of delight.
Besides the private grounds of the home, with their trees and
shrubbery, there were walks that afforded plenty of room for rambles.
Still farther afield, yet not far away from either the house or the
railway station, were ruins of Dargie Church. These touched the
imagination and called history to resurrection. It appeared strange to
come across the footprints of our old friend St. Winifred, or Boniface,
whom we met with in our studies of the Pilgrim Fathers, and in the
Netherlands, whose varied and strenuous life, as ecclesiastical
politician as well as saint and soldier of the Papacy, quite as much
as preacher of the gospel, was one of such amazing activity. At
Scrooby in England, at Dokkum in Friesland, in France and in
Germany, where I visited the places made historic by his activities,
he left enduring marks of his influence and power.
At Invergowrie I meditated among the ruins of the old kirk, in
which, or near by, it is said, St. Boniface, the apostle to Germany
and a legate from the Church of Rome, in the eighth century
preached and planned to neutralize the work of the Irish monks in
favor of British uniformity, and by means of conformity with Rome.
Here also are still to be seen some singular examples of ancient
sculptured stone monuments.
In 1107, Alexander I, son of Margaret of England, had a
residence at Invergowrie, which, however, he did not long possess,
for assassination was so much of a pastime with many and a settled
custom with a few in those days, that, after having escaped the dirk
only by a narrow margin, he left Invergowrie, built a church at Scone,
and then turned over the property he left behind him for its support.
I recall that it was at the last of our visits and entertainment at
Invergowrie, which was in 1900, after the ladies had left the dinner
table and the gentlemen adjourned to the billiard-room for a smoke,
the conversation turned on the next European war, and the possible
relations of Great Britain and the United States in the alignment of
friends, foes, allies, and neutrals. One prominent Dundeean
confessed himself not so much exasperated, as hurt, by President
Cleveland’s sharp method of reasserting the Monroe Doctrine, in
regard to the boundary of Venezuela. From our town of Ithaca, the
two scholars, the ex-president of Cornell University and Professor
George Burr, had been summoned to consult archives, rectify
boundaries, and help keep the peace. After the American in Scotland
had emptied his cruse of oil upon the waters, by explaining some of
the ins and outs of American politics, the conversation drifted to
regions across the North Sea—the growth of the Kaiser’s navy, the
salient features of German politics, and the reports, then very direct
from the Fatherland, that the “Kultur” of the twentieth century
required that “England [Great Britain] needed to be taught a lesson.”
The hope was warmly expressed that, in the coming clash,—then
looked for to come before many years,—the sympathy, and even aid,
if necessary, of “the States” would be forthcoming. With American
friendliness and the possession of the coaling-stations of the world, it
was believed that the United Kingdom could withstand the coming
shock and recover triumphantly.
More than once, at these social conferences with Scotsmen, as
well as in the press, I noted the indignation, even anger, expressed,
that in all national affairs it was “England” and “the English” that took
and received the credit for what belonged to the four nations making
up the United Kingdom. The claim was for a more liberal use of
“Britain” and “British” in place of “England” and “English.” Both
Scotch and Irish, to say nothing of the Welsh, resent the assumption
that “England” is the British Empire. In a word, the great need of the
language used in the British archipelago is a common name for the
federated four countries and for all the subjects of the Crown. Here is
an instance of the priceless value of right words. The absence of an
acceptable comprehensive term is a real impediment to patriotism
and an obstacle to perfect union. The fault is in language, not in the
human spirit. The situation reinforces the argument that “words are
things.”
We Americans can throw no stones. Canadians, Mexicans, the
southern republics below Panama, all challenge our right to the
monopoly of “America” and “Americans.” Language lags behind
events.
When at last, in 1914, the great war did come, and the storm
broke, no part of the Empire responded more quickly, generously,
fully than Scotland, nor did any courage or sacrifice exceed that of
the Scots; yet, not only was the credit usually given to “England,” but
even the prayer of hate, made in Germany, chose “England” as its
butt. Yet while Scottish valor and sacrifice and Irish courage and
free-will offerings of life on the field and waves are unstinted, who
can blame the poet, nay, who does not say “amen,” to his lines, in
the Glasgow “Herald,” written in the closing days of 1915?
“The ‘English’ navy in its might

Is out upon the main;
The ‘English’ army—some in kilts—
Is at the front again;
The dogs of war are loosened
And gathering to the fray,
But the British ships and British troops—
I wonder where are they?
“When blood has flowed like water,
And ’midst the heaps of slain
Lie stalwart Scot and brawny Celt
Who victory help to gain,
The glory will be ‘England’s,’
Like every other thing;
’Tis ‘England’ this and ‘England’ that—
Flag, navy, army, king.
“Still let Scots do their duty

In Britain’s day of war;
A greater cause than ‘England’s’
Nerves Scottish hearts by far.
For Britain and the empire
We Scotsmen draw the sword,
And not like hired mercenaries,
As if ‘England’ were our lord.”
During this trial of the soul of a nation, in the wager of battle, to

decide whether truth is worth living and dying for and whether
solemn compacts are as torn paper—we catch a glimpse of a great
part of the nation at prayer.
It is in St. Giles’s Church, Edinburgh, that the General Assembly
of the Church of Scotland holds its annual sessions and the function
is made decidedly spectacular, as is supposed to become a State
Church. For two hundred and twenty-five years, the meeting has
been held without interruption. In the brilliant procession, the Lord
High Chancellor, as representative of the king, takes part, and
usually a regiment of the garrison troops adds color and a show of
worldly might to the spectacle. Few elements appropriate to the day
are omitted, for this is the august assembly of the “Church
established by law.” In the spring of 1914, the full strength of the
Cameron Highlanders was paraded.
FOR THE WHOLE WORLD
(The Edinburgh Conference of Missions)
But in 1915, after the gates of hell had been fully opened on the
Continent, swallowing up, it is said, from one regiment, by death and
wounds, no fewer than nine hundred of the Cameron Highlanders,
leaving but one hundred unwounded survivors, the meeting was
more than usual like a gathering of the ministers of the Prince of
Peace. The king’s representative on this occasion, the Earl of
Aberdeen, was dressed in a soldier’s service uniform of khaki and
the military escort as guard of honor was a corps of cadets. The
interior phenomena were equally impressive. Men cared little for
debate and turned constantly to prayer and intercession. The high-
water mark of interest in the proceedings was on Foreign Mission
Day. Then a strong note of optimism appeared regarding that work,
in comparison with the depression felt as to other interests of the
Church. It was in Edinburgh that the world-wide conference upon
missions was held in 1913, whose influence is still felt throughout the
whole earth.
Perhaps some thoughts turned to the words of the Almighty to
Job, “And the Lord turned the captivity of Job, when he prayed for
his friends.”
Be this as it may, can we not all abide in hope that the ultimate
history of “Bonnie Scotland” will follow that of Job—“Also the Lord
gave Job twice as much as he had before.”
CHAPTER XXV
AMERICA’S DEBT TO SCOTLAND
It is a tradition, rather than a fact, that we Americans—not of

Canada—of the United States of America are an English people.
The burden of popular and uncritical historiography is responsible for
this notion. Because of the overpowering influence of law and
language, and because our most direct relations, in war and in
peace, have been with Great Britain, it is assumed that we are both
an English people and an English nation.
The result has been confusion at home, prolonged
misunderstanding in Europe, and injustice to those who have
contributed generously their blood and energies to the making and
the saving of the nation.
Without the initial and formative elements, now absorbed into our
national composite, from the Dutch, Huguenot, German, Scottish,
Welsh, Irish, and Iroquois, the existence and history of the United
States are, to the unprejudiced mind, inconceivable. In this chapter
we propose to glance at the debt we owe to Scotland.
In point of time, in the unshackling of the human spirit, and in the
attainment of mental and spiritual freedom, we have shown how
Scotland led Europe; first in revolt against kings and prelates, and
then in the initiative of the constructive principles of democracy. The
spirit of Scottish history, of which Robert Burns’s poem, “A man’s a
man for a’ that,” is the epitome, and the general education of the
common people do in themselves alone show how different were
and are the Scottish from the English people.
This early Scottish influence, conveyed through both theory and
example, was especially potent with the founders of New England,
the Puritans in Old England, and the Pilgrims who, in the Dutch
Republic, received tremendous reinforcement.
In philosophy—which is greater than armies or navies—to no
other land or people were the beginners of the American nation more
indebted than to the Scotch. This may be said, not only in the
departments of political and ecclesiastical science, but equally so in
the domain of pure thought. The Scottish philosophy of realism and
common sense dominated largely our infant colleges. It swayed the
thinking and shaped the conduct of our public men in bar and pulpit.
It was translated into action by the leaders of the Revolution.
So long as the Scots were able to hold their own against the
tyrannical Stuart kings of England, and even while they were pouring
by the tens of thousands into Ulster, making a new nation in northern
Ireland,—the old land of the Scots,—there were but few emigrants,
from Scotland direct, to the Atlantic Coast colonies. Even these were
sporadic and mostly by way of Holland; but when the oppressive
economic measures of Parliament ruined the Scotch-Irish industries,
there began an emigration of people of Scottish birth or descent
which numerically excelled any previous colonial accession to
America.
Whereas, the emigration from England to New England, mostly
between 1630 and 1650, had added but twenty thousand souls to
the northeastern seacoast region, the Scotch-Irish migration, lasting
fifty years, added fifty thousand hardy, intelligent, thrifty people who
settled in the interior and on the frontiers. They not only served as a
barrier against the savages, but they developed the soil of the
valleys and built their towns on the highlands and the watersheds.
After the accession of the Hanoverian dynasty and the breaking-
up of the old economic and social conditions in Scotland, there
poured into America a flood of Scottish islanders, Lowlanders, and
Highlanders from Scotland direct, numbering tens of thousands.
From this multitude of the Scots and Scotch-Irish, scattering widely
and settling mostly on the frontiers and developing virgin land, came
forth, at the call of the Continental Congress, one third of the
American army of freedom in the Revolution.
Throughout our history none have excelled these lovers of
ordered freedom in safeguarding human rights and in illustrating
loyalty to moral convictions and public duty. The number of able men
of Scottish descent who have filled the highest offices of honor and
trust in the learned professions, in pulpit, bar, bench, in chairs of
science, or as governors, presidents, officers of the army and navy,
and in every line of human achievement, is not excelled, if equalled,
by those of any other stock in the American blend of nationalities.
Yet the total value of such an addition to the resources of
manhood, for the making of the future American commonwealth,
cannot be estimated in mathematics only. In education almost every
classical school and colonial college in the South was established by
these people. In character and abilities—trained and nourished by
education, morals, and religion—the Scotch-Irish were excelled by
no other people.
In our land—new birth of the ages—the names of the clans and
of individuals who bear Caledonian names do not only call up
scenes in Scotland’s history, but do forcibly emphasize our blessings
of peace after long strife. One of the earliest Scottish stories I
remember was of a Grant and a Macpherson, who met one day
upon a log spanning a chasm. As neither would give way to the
other, their dirks settled the controversy by subtracting two from the
population of the Highlands. In our soldier days, it was delightful to
see, under the same flag and battling for the same Union, two
generals—the ever-victorious James Macpherson and
“Unconditional Surrender” Grant. Was it the Inverness-born
Macpherson, or the Kentuckian MacClernand, who uttered the
prophecy concerning the then closed Mississippi Valley, that “the
men of the West would, with their swords, hew their way to the
Gulf”? In any event, what would the North have done had all the men
of Scottish descent been subtracted from the hosts under Grant?
Indeed, what would American history and the reality of to-day be if all
the Scotsmen who took part were eliminated from the story? Even in
Civil War days it was largely the descendants of Scots who made the
Union sentiment in East Tennessee and created West Virginia.
The long discipline of the Scotsmen, resulting in the gifts and
graces of Highlander, Lowlander, and Ulsterman, helped grandly on
American soil to make the great Republic possible. As we have
seen, the tens of thousands of Scots, emigrating beyond the Atlantic,
located themselves largely along the line and at the post of danger—
among the mountains they loved, on the frontier and the great
American highlands, the Appalachian chain, from Maine to Alabama.
In the infant days of our nation, when the vital struggle was between
savagery and civilization, the Scottish-American frontiersman, alert,
brave, tenacious, was the man for the era. He would never say “die”
nor give up, while life remained in him. His record, both with the
Continentals, in the War of Independence, and in the Union army
during the conflict between the States, is a shining one. In the
Confederate forces, from 1861 to 1865, the one body of men,
selected by that best judge of humanity, Professor N. S. Shaler, of
Harvard, as embodying the finer human qualities that shine brightest
in adversity, was a regiment composed almost wholly of
descendants of men of Scottish stock.
Even to hear casually some of these Scottish names, so
interesting to us in history, sets ringing the bells of memory, as when
Joseph Henry, at Albany, first sent a thrill through miles of wire to
make sound—which Morse, without electrical research or profound
knowledge, turned into writing, and thus won the world’s glory. Even
the commonplace names of neighbors, as our Scottish hosts in
Dundee, Invergowrie, or Newport-on-Tay mentioned them offhand,
set our imagination on the dance or to rambling to the ends of the
earth.
At home, too, do we not meet at school, in business, at garden
parties, or in church, girls and boys, friends and acquaintances, or
do we not hear of or see eminent men and women who bear these
their ancestral names most modestly? Immediately, a carillon of
associations, usually sweet, with “auld lang syne” sounds, fills the
secret chambers of memory. “Cochrane” may bring up a rosy face
and the laughing eyes of a pretty Vassar girl; “Macfarland” limns in
imagination a schoolmate or army comrade; “Cameron” pictures a
fellow of infinite wit; “MacIntosh” suggests eloquence in the pulpit.
Others recall the halls of Congress, or the seats of executives, or the
council board, business experiences, or clerical scenes, or pageants.
It has the sensation almost of a shower bath, or crash towel friction,
to see in court or pulpit, at clinic, or amid scenes of gentleness,
people who bear ancestral names of once slashing swordsmen, or
fellows of old famous for lifting cattle, or for defying the king’s writ, of
whom we have read often in poetry and romance. How the centuries
soften sharp outlines in the enchantment of distance!
It is invidious, if not mildly dangerous, to single out names. Yet
with one we close our sketch of “Bonnie Scotland,” choosing for
praise the dead, with no living line of descendants. Hepburn, for
example, instead of being associated in our minds with dirks and
poison, caste squabbles, or pitched battles,—after which “the turf
looked red,”—calls up the mild face of a saintly soul who illustrated
the Scripture promise of long life because of lips that refrained from
speaking guile and of hands that ever healed. Who that is at home in
Scottish history but has not infrequently run across the name of
Hepburn—which reproduces in its vocables, not only a Scottish
streamlet, but a line of mighty men? Who, also, that knows the story
of the making of modern Japan but has heard of the beloved
physician of Yokohama, known among the native-born as Kun-shi—
the sage, super-man, gentleman by eminence, who spent his life in
unselfish devotion to his fellow men, as a Christian healer, scholar,
lexicographer, and philanthropist. In the midst of fame and fortune
won by medical practice in the metropolitan city of New York, James
Curtis Hepburn turned his back on these, to uplift in body and spirit
the people of Japan, when just opened from hermitage to modern
life. In the days of sailing ships and at the seaport where the
selvages of two civilizations met, I saw him, day by day for years,
with his healing touch dispensing medicine and cheer. He lived to
make the dictionary which bridged the linguistic gulf between Orient
and Occident, to translate the Eternal Word, to raise up hundreds of
effective physicians, and, at ninety, to be honored by His Imperial
Majesty the Mikado with a decoration, and to live, in serene old age,
a benediction to his neighbors, until within five years of a century. In
him I saw America honored and the nobler Scotland incarnated.
THE END
CHRONOLOGICAL FRAMEWORK OF
SCOTLAND’S HISTORY
PREHISTORIC
Britain, “north of the Tweed.” Picts and various
tribes.
THE ROMAN PERIOD

b.c.
55. Julius Cæsar lands in southern Britain.
a.d.
50. Romans in Britain learn of the Caledonii in the
north.
81. Agricola’s frontier between the Firths of Forth
and Clyde.
82. The Ninth Legion at the Tay River.
84. Great battle between the Romans and northern
natives.
84. Caledonia circumnavigated.
120. Hadrian erects the Roman Wall.
139. Wall of Antoninus Pius.
181. Revolt of the Tribes. Commodus.
208. Uprising of the Tribes. Severus.
210. Roman road made through the Forth Forests.
364. Highland host invades the South.
368. Roman slaughter of the “Scots” (Irish invaders).
406. Revolt of the northern tribes.
410. The Romans leave Britain.
PERIOD OF ANARCHY—FIFTH TO SEVENTH
CENTURY
Migration of the “Scots” (Irish) to the peninsula.
Fergus, first “Scots” Prince.
Entrance of the Germanic, Continental tribes
into Britain.
Four kingdoms: Pictish (Pictland); Irish
(Dalriada); Brython (Strathclyde); and
“English” (Benicia).
CHRISTIAN SCOTLAND
563. St. Columba (521–592), Christian missionary at
Iona.
573. St. Kentigern at Glasgow.
651. St. Cuthbert at Melrose.
710. The Pict Christians conform to the Roman
Church rules.
717. The Columba monks expelled.
730–761. The Pict, Angus MacFergus, paramount.
802. Iona burnt by the Norsemen. Desolate for two
hundred years.
802–839. The Scandinavian sea-rovers settle on the
northern coasts.
844–860. Kenneth MacAlpine, King of the Picts.
Blending of the Picts and Scots into one people.
904. St. Andrews: religious centre. Stone of Scone.
945. Malcolm acquires northern Strathclyde.
1018. Lothian part of the Celto-Pict realm.
1005–1034. King Malcolm II.
FEUDAL SCOTLAND
1039–1056. Macbeth flourishes.
Ireland, “the Land of the Scots,” is known by its
modern name. “Scotland” refers to northern
Britain.
1057. Macbeth defeated and slain by Malcolm
Canmore.
1066. Normans invade England.
1058–1093. Malcolm Canmore and Queen Margaret.
Great social and political changes in Scotland.
The Celtic Church gives way to Western
uniformity.
Dunfermline, capital of the realm.
1124. Alexander, King of Scotland.
Planting of Norman, Flemish, and Anglican
colonies on east coast.
Anglo-Norman feudalism in Scotland.
David I, “The Maker of Scotland,” builder of
abbeys and bishoprics.
1153–1165. Malcolm the Maiden. Great Clan of Macdonalds
formed.
Ascendancy of Anglican influence. Inverness
granted a royal charter.
1165–1214. William the Lion. Dundee granted a royal
charter.
Chimneys introduced into Scotland.
1249–1286. Alexander III. Treaty with Norway.
Islands incorporated in the Scottish realm.
1292. John Baliol crowned on the Stone of Scone.
FIVE HUNDRED YEARS OF HOSTILITY TO

ENGLAND
AND FRIENDSHIP WITH FRANCE
1297–1305. Edward of England. Intervention in Scotland.
1298. William Wallace.
1274–1329. Robert the Bruce.
1334–1346. Battle of Bannockburn.
Scotland independent.
Scottish Parliament at Cambuskenneth.
1333–1361. Struggle with Edward III of England.
King David in Captivity. Ransom. Scheme of
Union.
Struggles between Scottish kings and nobles
looking to centralization of royal power.
Partisan warfare. The House of Douglas.
1364. Proposal of Union with England rejected by the
Scottish Parliament.
THE SCOTTISH KINGS

1371–1390. Robert II. The Stuart line of kings founded.
Policy of Scotland shaped by Earls Douglas,
Mar, March, and Moray.
English invasions of Scotland.
1390–1406. Robert III. Beginning of nearly two centuries of
royal minority, regencies, and nobles’ power.
Decline of kingly authority. Great power of the
nobles.
1395. The Lollards in Scotland: forerunners of the
Reformation.
1406–1437. James I. His reign a struggle against anarchy.
Attempts to Anglicize Scotland.
Parliament of Highlanders at Inverness. Several
chiefs seized and executed.
1437–1460. James II marries Mary of Gelderland: kills
Douglas at Stirling. Earls still powerful.
THE RENAISSANCE
1460–1488. James III marries Anne of Denmark.
The thistle, the national badge of Scotland.
Witchcraft. King imprisoned by the nobles and
assassinated.
1465–1536. Hector Boece writes the “History of Scotland.”
1488–1513. James IV. Modern History of Scotland begins.
1494. Grey Friars’ Church in Edinburgh built.
Ayala, Spanish envoy and writer on Scotland.
Music and poetry cultivated.
1495. University of Aberdeen founded.
1496. Parliament decrees compulsory education.
University of St. Andrews. Hepburn founds St.
Leonard’s College.
1503. Marriage of James IV with Margaret of England,
at Holyrood.
First Peace with England since 1332. An era of
prosperity.
1505. Royal College of Surgeons founded at
Edinburgh.
1507. Printing introduced into Scotland.
1513. Battle of Flodden Field.
THE REFORMATION
Rise of the burgesses and middle classes.
1513–1542. James V: minority. Angus rules. James escapes
to France.
1537. James marries Mary of Guise, and on her
decease, Mary of Lorraine.
1540. Lordship of the Isles annexed to the Crown.
1542. Invasion of Scotland by Henry VIII.
King and clergy on the Roman, nobles on the
Reformed, side.
1542–1587. Mary Stuart, Queen of Scots.
Close relations with France.
1505–1572. John Knox.
Destruction of monasteries and abbeys.
1557. Last Protestant martyr burned.
1565. Queen Mary marries Lord Darnley.
1566. Murder of Rizzio in Holyrood.
1567. Murder of Lord Darnley.
Marriage of Mary with Bothwell.
1567–1625. George Buchanan, scholar, reformer, author of
De Jure Regni apud Scotos.
James VI educated by George Buchanan.
PRESBYTERIAN SCOTLAND
1560. Foundation of the National Church.
First General Assembly of Scotland.
1578. Andrew Melville the Reformer. Second Book of
Discipline.
Divine Right of Presbytery taught. Nobles
debarred from spoiling the Church.
1587. Execution of Mary Queen of Scots.
1592. James gives Presbyterianism his sanction.
1603. Union of the crowns of England and Scotland.
James VI of Scotland becomes James I of
England.
1605. The Border region pacified and civilized.
1606. The Union Jack flag, uniting crosses of St.
George and St. Andrew.
STRUGGLE FOR FREEDOM OF

CONSCIENCE
1584–1688. Scotland’s fight against prelacy.
1610. King James changes his mind. Attempts
assimilation of Church of Scotland with the
Anglican Establishment.
1618. The Perth Synod accepts episcopacy.
1600–1649. Charles I asserts the royal prerogative.
1625. Attempts to fasten the liturgy and bishops upon
Scotland.
1637. Jenny Geddes. Uproar in St. Giles’s Cathedral.
Signing of the National Covenant.
1638. Episcopacy cast out.
1645. Covenanters compel Charles I to sign the
Covenant.
1649. Charles Stuart, King of England, executed.

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(eBook PDF) Concepts in Federal Taxation 2017 24th

PREFACE xiv Legal Requirements and Tax Considerations Related to

Computing a Corporation’s Income Tax Liability 3-22 Stock Redemptions 4-16

Calculating the Accumulated Earnings Tax 5-29 Problem Materials 6-21

Pricing the Acquisition 7-50 Financial Statement Implications 8-39

Problems 9-36 Election of S Corporation Status 11-7

CHAPTER 14 Choice of Year-End for Estates 14-34

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

William J. Moser is an Assistant Professor in the Department of Accountancy at the Farmer

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?

▶ Distinguish between closed fact and open fact tax situations

▶ Describe the steps in the tax research process

▶ Explain how the facts influence tax consequences

▶ Consult tax services to research an issue

▶ Apply the basics of Internet-based tax research

▶ Use a citator to assess tax authorities

▶ Prepare work papers and communicate to clients

OveRview Of Tax ReseaRch

sTepsin The Tax

You may need to

You may need to

Locate the applicable

Evaluate the authorities;

Analyze the facts in

Communicate conclusions and

FIGURE C:1-1 c STEPS In THE TAx RESEARCH PRoCESS

2 Often, in an employment context, supervisors define the questions to be

“The ‘English’ navy in its might

“Still let Scots do their duty

During this trial of the soul of a nation, in the wager of battle, to

It is a tradition, rather than a fact, that we Americans—not of

THE ROMAN PERIOD

FIVE HUNDRED YEARS OF HOSTILITY TO

THE SCOTTISH KINGS

STRUGGLE FOR FREEDOM OF

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