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TAX PLANNING
2017
Published by:
KEIR EDUCATIONAL RESOURCES 4785 Emerald Way
Middletown, OH 45044
1-800-795-5347
1-800-859-5347 FAX
E-mail [email protected]
www.keirsuccess.com
© 2017 Keir Educational Resources 42.1 800-795-5347
TABLE OF CONTENTS
Title Page
Income Tax Planning (Topics 42-51) Topic 42: Fundamental Tax Law 42.1–42.21
Topic 43: Income Tax Fundamentals and Calculations 43.1–43.79
Topic 44: Characteristics and Income Taxation of Business Entities 44.1–44.44
Topic 45: Income Taxation of Trusts and Estates 45.1–45.13
Topic 46: Alternative Minimum Tax (AMT) 46.1–46.16
Topic 47: Tax Reduction/Management Techniques 47.1–47.16
Topic 48: Tax Consequences of Property Transactions 48.1–48.65
Topic 49: Passive Activity and At-Risk Rules 49.1–49.16
Topic 50: Tax Implications of Special Circumstances 50.1–50.25
Topic 51: Charitable/Philanthropic Contributions and Deductions 51.1–51.18
Appendix A
Ridgeway Case Appendix – 1
Keller Case Appendix – 7
Powers Case Appendix – 18
Adams Case Appendix – 29
Carlisle Case Appendix – 36
Tingey Case Appendix – 39
Beals Case Appendix – 42
Mocsin Case Appendix – 54
Loudon Case Appendix – 66
Young Case Appendix – 75
Jones Case Appendix – 85
Smith Case Appendix – 100
Perkins Case Appendix – 116
Walker Case Appendix – 128
Appendix B – Basis of property received as a gift Appendix – 149
Tax Forms Appendix – 150
Selected Facts and Figures Appendix – 153
72 Topic List Appendix – 180
Glossary Glossary – 1
Index Index – 1
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Fundamental Tax Law (Topic 42)
CFP Board Student-Centered Learning Objectives
(a) Compare and contrast the fundamental components of the income tax system including filing
forms, filing status, income, exemptions, exclusions, deductions, adjustments, credits and tax
rates. [See also Topics 43 and 44]
(b) Explain how a progressive income tax system works and contrast it with other tax systems.
(c) Compute marginal and average tax brackets and explain the appropriate use of each.
Fundamental Tax Law
A. Types of authority
1) Primary
2) Secondary
B. Research sources
C. Progressive tax system
D. Marginal and average tax brackets
E. Tax Doctrines F. Tax Accounting
1) Accounting periods 2) Accounting methods
a) Cash receipts and disbursements b) Accrual method c) Hybrid method d) Change in accounting method
G. Net operating losses
Income Tax Law
Fundamentals
An important part of any comprehensive financial plan is
consideration of the effect income taxes have on the outcome. Lack
of planning for taxes may result in a large portion of a client’s wealth
being forfeited to the federal and state governments. To be able to
properly plan for future tax consequences, financial planners must
be able to apply provisions of tax law to their clients’ specific
circumstances. Because tax law is very complex and constantly
changing, it is nearly impossible for a planner to memorize the
myriad applications. Thus, it is important to understand the sources
of tax law so that research can be done to locate answers.
Types of Authority When researching tax questions, a planner can find answers in either
primary or secondary sources. Primary sources are those which
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come directly from the government and have the official sanction of
those who enact the tax law. Secondary sources provide
explanations of provisions found in primary sources. Secondary
sources are generally much easier to read; however, only primary
sources carry official authority in a court or before the IRS.
Primary Sources Primary sources of tax law can be divided into three groups
corresponding to the three branches of the federal government. The
legislative branch (Congress) passes the laws, the executive branch
(President and governmental agencies) enforces the laws, and the
judicial branch (federal courts) interprets the laws. It is no different
for tax law – Congress passes tax legislation, the Treasury
Department (IRS) enforces it, and the Tax Court and other judges
interpret the law. Tax researchers must be familiar with the sources
of information that come from each branch of government.
Internal Revenue Code
Is Compilation of Tax
Laws
The Internal Revenue Code (IRC) is the compilation of all the laws
passed by Congress with regard to the collection of federal taxes. It
is organized in sections by topic and is amended each time Congress
passes a public law with tax provisions.
Whenever Congress considers a tax bill, it is first debated in the
House Ways and Means Committee and later in the Senate Finance
Committee. A record of these Committee meetings is kept and can
be useful in showing the intention of Congress in writing a tax bill.
REMEMBER: THE PRIMARY SOURCES OF TAX LAW
ARE: (1) THE INTERNAL REVENUE CODE
(2) TREASURY DEPARTMENT REGULATIONS AND
IRS REVENUE RULINGS
(3) COURT DECISIONS IN TAX CASES
Tax Code Is Public
Document
Because tax laws are public, the IRC and Committee reports are all
public documents that can be found on Congress’ Thomas website
(Library of Congress), as well as in other library sources online.
Some of these sources may not have the most up-to-date IRC and
may have limited indexing or search capabilities; however, they are
generally available at no cost.
Print versions of the Tax Code are also available from the
Government Printing Office (GPO) and various commercial
publishers. Committee reports by year are also available from the
GPO.
Treasury
Regulations Have
the Force of Law
The Treasury Department has been delegated the authority to
enforce tax laws passed by Congress. The Treasury Department
accomplishes this role in part by issuing Treasury Regulations,
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Revenue Rulings, Revenue Procedures, Technical Advice
Memorandums, Private Letter Rulings, and various other
instructional publications.
Of these, Treasury Regulations have the highest authority. When
the Treasury Department (more specifically the Internal Revenue
Service or IRS) issues regulations to fill in the details of tax law,
they have the force of law. These regulations must be followed by
all taxpayers and by the IRS. In many cases, the Treasury issues
proposed regulations or temporary regulations, which may later be
changed based on input from tax and business professionals.
Regulations are numbered according to the section of the IRC to
which they relate. Regulations may be successfully challenged in
court if they violate the intent of Congress in the legislation or
exceed the scope of authority delegated by Congress.
Regulations are first issued as proposed regulations, which allows
for taxpayers and tax professionals to comment and ask for changes
before the final regulations are issued. Overwhelming concern from
the public may prompt changes in the final regulations.
Revenue Rulings May
Be Relied On but Are
Not Law
The IRS may publish additional guidance on the specific application
of various tax provisions in either Revenue Rulings or Technical
Advice Memorandums (TAM). Revenue Rulings and TAMs do not
have the force of Regulations, but they can be relied on to show how
the IRS will treat specific situations. They are also much narrower
in application than Regulations. Revenue Rulings are usually issued
as a result of numerous questions about a specific tax issue. A TAM
may be written when a controversy is appealed to the National
Office by either an IRS agent or a taxpayer. Both Revenue Rulings
and TAMs must be followed by the IRS in subsequent cases with
the same or similar facts. Courts, however, are not bound by revenue
rulings.
Private Letter Rulings
A Private Letter Ruling (PLR) may be requested on behalf of a taxpayer who presents a specific set of facts. These requests are generally presented to the IRS prior to the taxpayer entering into a significant transaction in order to ensure a desired tax result. A PLR is applicable only to the taxpayer who requested it and may not be used by another taxpayer in a dispute with the IRS. However, PLRs do show the IRS’ pattern of thinking and can give taxpayers some assurance of similar treatment.
Revenue Procedures Revenue Procedures are published to show the internal workings of the IRS and to guide taxpayers in dealing with the IRS. For example, a revenue procedure document is issued each year which
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provides inflation adjustments for certain tax items such as the standard deduction. Much of the guidance described above is summarized in various publications by topic and may be picked up at a local IRS office or downloaded from the IRS website. The full text of the Regulations is found in the Code of Federal Regulations (Title 26), available online at the GPO website and other library sources. The print version can be ordered from the GPO. The other items are published in a weekly bulletin available online from the IRS website or by subscription. These weekly bulletins are bound together and published semiannually as the Cumulative Bulletins. The Cumulative Bulletins can also be ordered from the GPO. Indexing and cross-referencing of these sources are available from several commercial publishers, either in print, or online.
Court Interpretation of
the Tax Code
Finally, interpretation of the Tax Code is the responsibility of the courts. The Tax Court, Court of Claims, District Court, Court of Appeals, and the U.S. Supreme Court all publish decisions on tax cases. Court opinions are generally quite specific and are valuable only when the fact pattern being researched closely parallels the one considered by the court. However, sometimes, especially in appeals court cases, judges give more general guidance or will lay out rules that may have application in a wide array of future cases. It is important when referring to court decisions to check on subsequent appeals of court decisions for reversal or further clarification. Most tax publishers provide a volume which facilitates identifying opinions from appeals courts that refer to lower court decisions. Also, in Tax Court and appeals court cases, the IRS may publish an acquiescence to an unfavorable decision, indicating its willingness to follow the decision in other cases. Otherwise, the IRS is not bound by lower court decisions and may continue to litigate similar cases to get a more favorable ruling.
Publishers Court cases involving tax law are published in bound volumes by year and are made available by the Research Institute of
America and the Commerce Clearing House. Recent decisions of the Tax Court and all intermediate appeals courts are also available online either through the court’s own website or through an online college law library or through Find law (an online law library). These listings are not limited to tax cases, and searches must be done carefully to find the information needed.
Secondary Sources Secondary sources for tax research include comprehensive multi-
volume publications by the Research Institute of America (RIA), the
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Commerce Clearing House (CCH), and the Bureau of National
Affairs (BNA). These sources are generally organized by topic and
have extensive indexing. They include explanation of tax
provisions, with reference to the IRC, Committee reports,
Regulations, court cases, and other pertinent primary sources. These
explanations provide a guide to, but are not a substitute for,
reference to the actual primary sources. These publishers also
provide single volumes that provide a very condensed overview of
tax provisions in an easy-to-use format. All these sources are
available in print and online.
Other secondary sources include tax periodicals, such as the Tax
Adviser published by the American Institute of Certified Public
Accountants (AICPA), the Tax Lawyer published by the ABA, and
other journals published by the CCH and the RIA. These periodicals
usually give in-depth coverage of a topic, including application
examples. They also help readers keep up with new and changing
topics.
Research Sources Research of a complex tax question involves the following steps:
Gather and review all facts pertaining to the tax situation.
Identify the issue that must be decided.
Identify the primary sources of tax law that have relevance to
the issue, either with original research or by using secondary
sources as a guide.
Compare the situations described in the tax law sources to the
question at hand and identify the similarities and the differences.
Evaluate the sources found, giving more weight to those that
have the force of law and checking to make sure Regulations or
Rulings have not been superseded and that Court cases have not
been reversed on appeal.
Choose an appropriate course of action to recommend, based on
how closely the facts match those described in tax sources and
the authority of those sources – if no tax law authority closely
resembles the case at hand, then a planner can use similar cases
to extrapolate a possible interpretation.
Communicate the recommendation in a concise manner, with
brief reference to the pertinent tax authority – indicate any lack
of authority for the recommendation and disclose those risks
involved in proceeding, where clear guidance is not available.
Progressive Tax The U.S. income tax system is a progressive tax system, meaning
that taxpayers pay at lower levels first, then higher levels of tax as
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taxable income increases. Each level of tax is called a tax bracket,
and payment of taxes occurs at marginally higher rates. For
example, the current income tax system has brackets at the 10%,
15%, 25%, 28%, 33%, 35%, and 39.6% rates. The average, or
effective tax rate, will increase as income increases and taxes are
paid at increasingly higher rates.
Other tax systems include proportional tax systems where the
average tax rate is the same no matter what the taxpayer’s income
is, regressive tax systems where the average tax rate decreases as
income increases, and a flat tax system where everyone pays the
same lump-sum or same percentage of income each year.
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Marginal vs. Average
Tax Rates
The taxpayer’s marginal tax rate is the highest tax bracket in which
they fall. This is the rate that will apply to the next dollar of income
earned. When analyzing the after-tax return on investments, the
marginal rate is the appropriate rate to use.
The average tax rate is the average rate of tax paid, factoring in the
payments at various marginal brackets.
Example:
If Heather is a single taxpayer with gross income of $115,000 and
total deductions of $20,000, her taxable income is $95,000. Based
on the following rate schedule, her marginal tax bracket is 28%. Her
average tax rate, however, is calculated by taking the tax liability
divided by her total income (for this example, we will assume
Heather does not qualify for any tax credits that reduce her tax after
the tax is calculated). Heather’s tax liability will be $18,713.75 plus
28% of the excess taxable income over $91,900. Based on this
calculation, Heather’s tax is:
18,713.75 + [(95,000 – 91,900) x .28] = 19,581.75
SINGLE (UNMARRIED INDIVIDUALS) If Taxable Income Is The Tax Is Not over $9,325 10% of taxable income Over $9,325 but not over $37,950 $932.50 plus 15% of the excess over $9,325 Over $37,950 but not over $91,900 $5,226.25 plus 25% of the excess over $37,950 Over $91,900 but not over $191,650 $18,713.75 plus 28% of the excess over $91,900 Over $191,650 but not over $416,700 $46,643.75 plus 33% of the excess over $191,650 Over $416,700 but not over $418,400 $120,910.25 plus 35% of the excess over $416,700 Over $418,400 $121,505.25 plus 39.6% of the excess over $418,400
Heather’s average tax rate is then calculated by dividing the
$19,581.75 in tax by her total income of $115,000, giving her an
average tax rate of 17.03%.
The Doctrine of
Constructive Receipt
Tax Doctrines
There are some basic principles that are applied in income tax law,
the understanding of which can be fundamental to learning the
myriad rules associated with income taxation.
Under the Doctrine of Constructive Receipt, a cash-basis taxpayer
(cash-basis versus accrual-basis is discussed below) need not take
physical possession of income in order for it to be treated as
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“received” for income tax purposes. Income is taxable in the year
in which it is credited to the taxpayer’s account, set apart for the
taxpayer, or otherwise made available to be drawn upon by the
taxpayer at any time during the tax year. For example, a taxpayer
may purchase shares of a mutual fund and elect to have dividends
paid by the mutual fund reinvested to purchase additional shares.
The dividends will be taxable in the year of distribution even though
the taxpayer did not actually receive the dividend in cash form. The
fact that the dividend payment was credited to the taxpayer’s
account and was available for withdrawal governs the year in which
it is taxed.
If, however, the taxpayer’s control of the receipt of income is
subject to substantial limitations or restrictions, income is not
constructively received, and not taxed at that time. For example,
and employer might allocate a stock bonus to an employee but
restrict availability until some point beyond the end of the current
tax year. Although the stock bonus has been credited to the
employee’s account, it is not available to be withdrawn.
The Economic Benefit
Doctrine
The Economic Benefit Doctrine generally applies to employee
compensation and requires that the cash-basis taxpayer be taxed in
the year in which he or she receives an absolute right to property
(cash or otherwise) of measurable value. In other words, when the
employee receives an economic benefit. Thus, for example,
constructive receipt might be avoided if there is not an immediate
right to withdraw compensation from an employer when that
compensation is placed in an irrevocable trust for the benefit of the
taxpayer. However, the economic benefit doctrine may cause
taxation in the current year if there is a non-forfeitable right to
receipt at some point in the future, and the value of that right is
currently measurable. The economic benefit doctrine will not cause
immediate taxation, however, if there is substantial risk of
forfeiture.
The Doctrine of
Assignment of Income
The Assignment of Income Doctrine is a judicial doctrine designed
to limit tax evasion. The doctrine requires that a full transfer of
ownership of property must take place in order to transfer taxation
on the income. For example, a parent who owns an apartment
building cannot assign the rental income to his or her child (who is,
presumably, in a lower tax bracket). In addition, the assignment of
income doctrine also limits the ability to shift taxes to a family
member who is in a lower tax bracket by requiring that income
generated by performing personal services must be taxed to the
person who performed the services. Therefore, a parent cannot
assign salary earnings to a child in order to reduce taxation.
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Accounting Periods
Tax Accounting A tax year is the annual time period over which a taxpayer calculates tax liability. The vast majority of taxpayers use a calendar year to calculate their tax liability because it easily conforms to the receipt of W-2s and 1099s. The tax year is elected on the first tax return and can only be changed with the permission of the IRS. A fiscal year may be beneficial for certain types of seasonal businesses, and the IRS will generally allow a change if it is also the business’ annual accounting period and the books are kept according to the fiscal year. A business may also choose to report using a 52-53-week year that always ends on a certain day of the week. For example, a company could have a fiscal year that ends on the last Tuesday in September each year. Other than this exception, a fiscal year must end on the last day of the month.
Generally, partnerships (and other entities taxed as partnerships)
must conform to the tax year of the majority owners (probably the
calendar year) unless a business purpose is established for a fiscal
year. S corporations and personal-service corporations are generally
limited to a calendar year unless a business purpose for a fiscal year
can be established. C corporations may choose any tax year desired
upon formation. When different tax years are approved and result in
tax deferrals, required payments by the entities must be made that
will neutralize any tax benefits.
Accounting Methods The accounting methods used to calculate taxable income (especially from business or rental activities) do not always follow the rules established by the accounting profession. When calculating a client’s tax liability, a planner needs to understand the differences between a client’s accounting practices and the accounting required by the IRC. Individuals may elect to be taxed as cash-basis taxpayers, accrual-basis taxpayers, or as a hybrid of the two bases. Most taxpayers do not know they have a choice and, by default, become cash-basis taxpayers (when they file their first tax return, using this basis). Cash-basis taxpayers record income when the cash is received and deduct expenses when payments are made. The IRS must approve any change in the basis of accounting.
Cash Receipts and
Disbursements
According to IRS regulations, a cash-basis taxpayer must include
in income any amounts that are “constructively received”
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(Cash Method)
during the taxpayer’s tax year. For example, a check written by a customer and held at the customer’s office for pickup by the taxpayer must be included in the taxpayer’s income on the date it was available even if it was not actually picked up. This rule applies to any payment where the amount is available to the taxpayer without substantial limitation. When it is available, it is included in income. Payments received by a taxpayer’s agent and amounts set aside by a taxpayer’s employer in the current year, without significant restriction, are income in the current year. Even unearned income, such as advance payments of rent, is taxed when received.
KEY SUMMARY 42 – 1
Cash-Method Taxpayers – The Exceptions
In addition to cash collected or constructively received,
cash-basis taxpayers report as income:
The increment on Series E and EE bonds unless the
taxpayer has elected to defer recognition of income until
maturity (In the past, a taxpayer could exchange the E
or EE bonds for HH bonds and continue to defer interest
until the HH bonds matured.)
The original issue discount earned on bonds, including
zero-coupon bonds
Expenses are only deductible when paid. Receiving the bill for an expense is not enough; the bill has to be paid prior to the yearend to be deductible in the current year. An exception arises for expenses paid by credit card. These expenses are deductible in the period in which the credit card is charged, even if actual payment in cash is made later. The cash-basis method cannot be used if it does not clearly reflect income. Tax Regulations do not allow the cash basis to be used in businesses where inventory is a material income-producing factor. However, the IRS recently allowed an exception for businesses with gross receipts of under $1 million.
REMEMBER: TYPICALLY, THE CASH METHOD OF ACCOUNTING IS USED WHEN THE TAXPAYER MAKES ONLY CASH TRANSACTIONS AND HAS NO INVENTORY.
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Accrual Method The accrual-basis method of tax accounting requires a taxpayer to
record income when the right to receive it exists (accounts
receivable), not when it is actually received.
Further, expenses are recorded when they are incurred (accounts
payable). This basis must be used by taxpayers who have inventories
(at least for purchases and sales), by C corporations with gross
receipts of over $5 million (except for qualified personal-service
corporations), by partnerships which have a partner that is a C
corporation with gross receipts over $5 million, and by certain trusts.
Even accrual-basis taxpayers cannot deduct estimated expenses,
such as bad debt allowances and warranty expenses; rather, they
must wait until the bad debt is actually written off or the warranty
costs are incurred. On the other hand, cash received prior to
providing the services or goods (unearned income) is generally
taxable. One exception allows accrual taxpayers to defer unearned
income for one year if the income will definitely be earned by the
end of the following year. For example, an accrual-basis taxpayer
received payment this year for music lessons to be provided evenly
during the last month of this year and the first two months of next
year. The taxpayer could elect to defer two-thirds of the income
until next year, rather than including all of it this year.
REMEMBER: TAXPAYERS MUST TYPICALLY ACCOUNT
FOR INVENTORIES UNDER THE ACCRUAL METHOD.
Hybrid Method
A combination of the cash and accrual bases for tax accounting can
be used as long as the method is consistent and clearly reflects
income. Sometimes, a combination is required by tax Regulations.
For instance, an amount owed by an accrual-basis taxpayer to a
related, cash-basis taxpayer cannot be deducted until it is paid.
Therefore, for payments to related cash-basis taxpayers, an
otherwise accrual-basis taxpayer is on a cash basis.
Taxpayers can use a different basis for each separate business (as
long as the basis is used consistently from the start of the business),
and they can use a different basis for personal and business items.
Therefore, a taxpayer who must use accrual accounting for his
or her inventory-based business can still be a cash-basis
taxpayer for itemized deductions and other personal items.
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Some transactions require specialized tax accounting methods, as
prescribed in the tax law.
Change in Accounting
Method
Once a business entity or individual has adopted an accounting
method or accounting period, a change in the method or period
requires IRS permission even if the original method was incorrect.
Corrections cannot be made just by filing an amended tax return.
Changes in method include going from cash-basis to accrual-basis
or from one inventory valuation method to another. Errors in the
calculation of income or tax liability do not count as changes in
method and may be corrected by filing an amended return within the
statute of limitations. Many changes receive an automatic consent
from the IRS, including changes to begin the use of the accrual
method or to discontinue the use of LIFO. These automatic changes
can only be made once every five years and are severely limited
once a taxpayer is subject to audit.
For changes in the tax year, a Form 1128 must be filed with the
taxpayer’s income tax return for the first year of the change, by the
due date of the return, including extensions. Form 3115 is required
to change the accounting method. This Form is due by the end of the
year in which the change is made unless the change is among those
receiving automatic consent. Forms requesting an automatic change
can be filed, along with the tax return for the year of the change, by
the due date, including extensions.
Net Operating Losses
Generally, taxpayers must pay tax on the income earned in the
specified tax year, without regard to other tax years. However, some
modification of this general rule is available in the case of net
operating losses. When a client has a net operating loss, this loss
can be carried back to offset past income to produce a refund of tax
paid, and/or it can be carried forward, to offset future income. The
general rule is that NOLs can be carried back 2 years and forward
20 years. The carryback provision is extended to 3 years for NOLs
arising from casualties that occur in a Presidentially-declared
disaster area or that are incurred by businesses with less than $5
million in gross receipts. Farmers can carry back NOLs for 5 years.
Corporations can carry losses back 2 years and forward 20 years.
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Practice Question
The Pine Tree Corporation has had the following amounts of taxable
income:
Year Taxable Income
2012 $10,000
2013 $15,000
2014 $20,000
2015 $10,000
2016 $ 5,000
2017 $10,000
In 2018, the company sustained a $70,000 loss. What amount of
loss can the Pine Tree Corporation carry back to previous years?
A. $0
B. $5,000
C. $15,000
D. $60,000
Answer:
The carryback of losses is limited to two years. Pine Tree
Corporation can carry back only $15,000 of the losses.
The answer is C.
For an individual, the NOL must arise from business activities. To
calculate the NOL for any given year for an individual, personal
exemptions are ignored, as are nonbusiness deductions in excess of
nonbusiness income. Capital losses are only subtracted to the extent
of capital gains, and no NOL from any other year is used. If, after
these adjustments are made, an individual still has a loss, it is first
carried back two years prior to the NOL year and used to offset
income from that year, dollar-for-dollar. The excess is then applied
to the year previous to the NOL year in the same way, and any
excess is carried forward.
For corporations, the NOL rules apply in the same way. The only
adjustment to the taxable income used to calculate a corporate NOL
is that no NOL from any other year may be used.
Editor’s Note: Certain companies who received assistance under
the Troubled Asset Relief Program (TARP) are not allowed to elect
to carry back their NOL for five years. They are limited to the
traditional two-year carry back or 20-year carry forward.
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EXHIBIT 42 – 1 Forms and Schedules
Form 1040 – Individuals report their income to the IRS by
filing this tax return annually. See Topic 43 Form 1041 – Estates and Trusts report income to the IRS by
filing this form annually. See Topic 45 Form 1040X – This form is used to amend a previously filed
Form 1040 return. Schedule A – This schedule is filed with the Form 1040 to
report a taxpayer’s itemized deductions. Schedule B – This schedule is filed with the Form 1040 to
report a taxpayer’s interest and dividend income. Schedule C – This schedule is used to report income from a
business operated by the taxpayer as a sole proprietor. A separate Schedule C must be prepared for each business the taxpayer operates.
Schedule D – This schedule is filed with the Form 1040 to report the taxpayer’s capital gains and losses.
Form W-2 – An employer prepares this statement of wages, salary, or tips paid to an employee and the taxes withheld. The employer provides the form to the employee and to the IRS.
Form 1099 – This form reports many different types of income, such as interest, dividends, and other income, where the payer has not withheld taxes for the payee.
Form K-1 – This form reports a taxpayer’s share of income or losses from a pass-through entity, such as a partnership, S corporation, trust, or LLC.
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APPLICATION QUESTIONS
1. Which of the following sources should be
consulted to determine the intent of Congress
in enacting a tax statute?
A. Committee reports
B. Treasury Regulations
C. Private Letter Rulings
D. Revenue Rulings
2. Which of the following sources of
authority in tax matters is not issued by the
IRS?
A. Committee reports
B. Technical Advice Memoranda
C. Revenue Procedures
D. Private Letter Rulings
3. Which of the following sources of tax law
is binding on the Internal Revenue Service
for dealing with future tax disputes?
A. Circuit Court of Appeals decisions
B. Tax Court decisions
C. Private Letter Rulings
D. Revenue Procedures
4. Which of the following statements
concerning tax research are correct?
(1) If the IRS acquiesces to an
unfavorable Tax Court decision, it
will continue to litigate that issue in
other cases.
(2) Secondary sources may provide clear
explanations, but they are not
authoritative in controversies with the
IRS.
(3) Because Private Letter Rulings are
now published, they are considered
binding on the IRS.
(4) Rulings favorable to the taxpayer in
Tax Court may be reversed on appeal.
A. (1) and (4) only
B. (2) and (3) only
C. (2) and (4) only
D. (1), (2), and (4) only
5. Primary sources of tax law include:
(1) Treasury Regulations
(2) Revenue Rulings
(3) Tax Court decisions
(4) CCH reports
A. (1) only
B. (1), (2), and (3) only
C. (3) only
D. (1), (2), (3), and (4)
Tax Planning – Application Questions – Topic 42
© 2017 Keir Educational Resources 42.17 www.keirsuccess.com
For practice answering case questions related to Topic 42, please answer the following questions
in the cases included in Appendix A at the back of this textbook.
Case Questions
Ridgeway 1 and 10
Keller
Powers
Adams
Carlisle
Tingey
Beals
Mocsin
Loudon
Young
Jones 1 and 2
Smith 1 and 2
Perkins
Steve and Michelle Walker 1, 2, 3, 4, 5, and 6
Tax Planning – Application Questions – Topic 42
© 2017 Keir Educational Resources 18 www.keirsuccess.com
ANSWERS AND EXPLANATIONS
1. A is the answer. The intent of Congress is determined from its Committee reports, which
record the statements of members of Congress about the tax law. Treasury Regulations, Private
Letter Rulings, and Revenue Rulings are prepared by the IRS and do not show Congressional
intent.
2. A is the answer. Committee reports appear from Congressional committees as they consider
tax law changes. These reports are frequently valuable in establishing the intent of lawmakers with
regard to certain tax provisions. The other items are issued by the IRS. Revenue Procedures are
guidance on how taxpayers should treat a common transaction to ensure uniform treatment. TAMs
and PLRs are issued in response to specific requests from or disputes with individual taxpayers
regarding specific fact patterns. TAMs have a more general application than PLRs, but both are
valuable in showing the IRS’ thinking with regard to certain transactions.
3. D is the answer. No court’s decision is binding on the IRS in subsequent tax disputes, except
for the Supreme Court. However, the IRS can acquiesce to a lower court decision, which means
it agrees to follow the decision with other taxpayers. A PLR is issued in response to a specific set
of facts and is binding only on the requesting taxpayer in the described set of facts. A Revenue
Procedure is general guidance and is binding on the IRS for matters described in the Procedure.
4. C is the answer. Secondary sources are written by commercial publishers and are organized
in a way that makes them easy to use to find answers to tax questions. However, they make
reference to primary sources, which include the Internal Revenue Code and Regulations, which
actually are authoritative and can be used to prove a point to the IRS. Tax researchers should
always be careful when finding a court case that appears to support their position. Unless it is a
Supreme Court case, the Citator volume in most commercial tax publications will indicate later
decisions that cite the original case and can be used to identify changes upon appeal. IRS
acquiescence in a court case means that the IRS will not challenge the position if taken by other
taxpayers. The IRS is bound to follow only Supreme Court rulings. Private Letter Rulings are
now published with identifying information removed, but they can still be used as authority only
in the case for which they were issued. They are helpful in determining the general thinking of
the IRS on issues.
5. B is the answer. Primary sources of tax law come from one of the three branches of the
government and include the Internal Revenue Code, Treasury Regulations, Revenue Rulings,
Private Letter Rulings, court decisions, and Congressional Committee reports. CCH reports and
other explanations are secondary sources.