Glossary


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A

AAA.  Accumulated adjustments account. The earnings of a corporation after it became an S corporation. Distributions from this layer of earnings are taxed under the rules applicable to S corporations.

1939 Internal Revenue Code.  The 1939 Code was the first attempt by Congress to organize the tax statute into a cohesive unit. Subsequent to 1939, Congress continued to amend the tax statute.

1954 Internal Revenue Code.  In 1954, Congress greatly expanded the statute, bringing into statutory form many doctrines that had been created by the judiciary. Congress continued to amend the 1954 Code through various revenue acts.

1986 Internal Revenue Code.  The most significant tax law passed by Congress in recent times is the Tax Reform Act of 1986. New concepts were codified, old provisions were repealed, and the statute was renamed as the 1986 Internal Revenue Code. Through revenue acts that are adopted practically every year, Congress continues to amend the Code. It is more descriptive to refer to the tax statute as the 1986 Internal Revenue Code, as amended.

52-53-week Year.  A tax year that ends on the same day of the week at the end of a calendar month. That day may be either the last occurrence of that day during the month or the occurrence of that day closet to the end of the month.

Abandoned Spouse.  A married taxpayer who has not lived with his or her spouse during the last six months of the tax year and who qualifies to file as a single taxpayer or head of household instead of married filing separately.

Ability to Pay.  In the context of horizontal and vertical equity, ability to pay means taking equal amounts from taxpayers with equal tax bases.

Abusive Tax Shelter.  A tax shelter investment that lacks economic substance; generally, the investment promises tax savings in a ratio of at least 2 to 1 when compared to the original investment.

Accelerated Cost Recovery System (ACRS).  The statutory procedure used to compute cost recovery deductions for all tangible assets placed in service after 1980 and before 1987.

Accelerated Depreciation.  Depreciation deductions that are higher during the early years of the depreciation period (i.e., recovery period) and lower during the latter years.

Accident and Health Plan.  An arrangement for payments to employees in the event of personal injury or sickness.

Accounting Methods.  The rules used by an entity to a determine how and when transactions shall be recorded in the accounting records. These rules include the overall method of accounting (cash, accrual, or hybrid) and accounting for specific types of transaction (including depreciation, long-term contracts, and goodwill).

Accounting Period.  The period of time covered by the taxpayer's return. The basic period may be either a calendar or fiscal year.

Accrual Method.  An accounting method in which income is generally reported when it is earned, even though not received, and expenses generally are deducted when they are incurred even though not yet paid.

Accumulated Earnings Credit.  A statutory amount (generally $250,000) that a C corporation may accumulate beyond its reasonable business needs over its lifetime and not be subject to accumulated earnings tax.

Accumulated Earnings Tax (AET).  A penalty tax imposed on C corporations that unreasonably accumulate earnings at the corporate level rather than distribute dividends to their shareholders.

Acquisition Indebtedness.  Debt incurred to acquire a qualified residence.

Active Income.  Income generated by a taxpayer's material participation in a trade or business, whether as an entrepreneur or employee.

Active Trade or Business.  A venture that holds itself out to others as a seller of goods or services for profit.

Ad Valorem Taxes.  Personal property taxes that are based on the value of the property.

Additional Depreciation.  For property held more than one year, additional depreciation is the excess of actual post-1969 "depreciation adjustments" (deductions), over the depreciation adjustments (deductions) that would have resulted during the same period had the straight-line method been used for the entire period the property was held. If the property is held for one year or less, additional depreciation is the entire amount of the post-1969 depreciation adjustments.

Additional Section 263A Costs.  The indirect manufacturing costs (overhead) that are required to be capitalized under Sec. 263A (UNICAP costing) and the related Regulations but that were not required to be capitalized under Sec. 471 (absorption costing) and the related Regulations.

Adjusted Basis.  The basis of an asset plus improvement less cost recoveries.

Adjusted Current Earnings (ACE).  An important adjustment for C corporation AMT purposes that tries to measure economic income. It is comprised of three major components: depreciation, exclusion items, and some Section 312(n) items.

Adjusted Gross Estate.  The gross estate minus funeral expenses, administrative expenses, and liabilities.

Adjusted Gross Income.  An individual's adjusted gross income (AGI) is gross income minus specific deductions. The deductions allowed in computing AGI include trade or business expenses, losses from sale or expense of property, deductions attributable to rents and royalties, contributions to certain retirement accounts or plans, alimony and separate maintenance payments, and the moving expense deduction.

Adjusted Income.  The sum of a taxpayer's modified adjusted gross income and one-half of the taxpayer's social security benefits. Use in calculation to determine how much of the social security benefits must be included in gross income.

Adjusted Income from Rents.  In the PHC world, a net income item that may be personal holding company income if two statutory tests are not met.

Adjusted Ordinary Gross Income (AOGI).  A closely held C corporation's non-capital gain, non-Section 1231 gain income. This term excludes tax-exempt interest income.

Adjustments.  Items that must be added back to or subtracted from taxable income for AMT purposes (e.g., adjusted current earnings, depreciation on real estate, and tangible personal property).

Adjustments to Income.  Certain deductions for AGI that appear on the front of the Form 1040.

Affiliated Group.  An affiliated group exists if 80 percent or more of the stock of each corporation is owned by other members of the group.

After-tax Dollars.  The money (wealth) that a taxpayer has after paying the appropriate taxes on the income that generated the money (wealth).

Aggregate Concept.  The partners, rather than the partnership, are taxed with respect to their share of partnership income, gain, loss, deduction or credit, whether or not these items are actually distributed by the partnership. Thus, the partnership is a conduit rather than a separate taxable entity.

Aggregate Price Index.  A price index used to value an incremental layer of inventory under the double-extension, dollar-value LIFO method, determined by dividing the ending inventory at current prices by the ending inventory at base period prices.

Alimony.  Payments to a spouse or ex-spouse as a result of a divorce or separate maintenance agreement.

"All Events" Test.  The point in time that a liability becomes fixed, because all conditions necessary to fix the fact of and the amount of the liability have occurred.

Allocated.  Distributed or divided among several smaller categories or parts; usually applies to income or expense amounts.

Alternative Depreciation System.  An elective cost recovery system for assets placed in service after 1986 that generally requires straight-line recovery over the class life (and not the MACRS life) of the asset.

Alternative Minimum Tax (AMT).  A parallel income tax system that starts with taxable income and add/subtracts certain adjustments. The taxpayer pays the higher of regular tax or AMT. It is applicable to individuals, corporations, and trusts. The AMT ensures that taxpayers with substantial economic income do not avoid paying tax.

Alternative Minimum Taxable Income.  Although regular taxable income is shown on line 30 of Form 1120, taxable income before the regular tax NOL carryover is the starting point for computing alternative minimum taxable income. In addition, the dividends received deduction is allowed. S corporations, partnerships, and LLC's are not subject to the AMT at the entity level. However, individual shareholders and partners are subject to a modified version of the AMT system discussed in this module. See Module 28 for more information on how to compute the individual AMT.

Alternative Short-period Return Procedure.  A special after-the-fact computation that provides tax relief to taxpayers required to annualize their tax liabilities because of a short taxable year. The computation uses actual income for a 12-month period beginning with the short period and can be used to demonstrate that income was not earned at the same short-period rate for the remainder of the tax year.

Amortization.   A systematic, straight-line cost recovery procedure for intangible assets.

Amortize.  To deduct the cost on a ratable, even basis; generally applies to the cost of intangible assets, as opposed to the cost of tangible real or personal property.

Amount Realized.  The sum of any money received plus the fair market value of any property received less any selling expenses.

AMT Charitable Contributions.  The charitable contribution limitation is 10% of taxable income as specially defined. For AMT, the 10% limitation is based on AMTI, which usually results in a higher deductible amount of charitable contributions if the limitation is applicable. This also means that the five-year carryover amounts would be different.

AMT Credit.  The excess of AMT over regular tax attributable to timing differences is carried forward (but not back) against regular tax of that future year; but not below minimum tax of that future year.

AMT NOL.  The AMT NOL has its own set of computation rules under Sec. 172.

AMT Statutory Exemption.  A deduction from AMTI that helps small businesses and individuals avoid being subject to AMT. For a corporation the amount is $40,000 and is scaled down when AMTI exceeds $150,000, and eliminated at $310,000.

AMTNOL Carryover.  The AMTNOL is a limited deduction against AMTI. It may not reduce AMTI by more than 90%. For NOLs arising before 1987, it is basically the same as the regular tax NOL. For post-1986 years, it is derived under the AMT rules, including percentage-of-completion method, AMT depreciation rules, etc. The election to carry back the NOL for regular tax purposes is also binding for AMT purposes.

Annual Absorption Cost Ratio.  The ratio used to determine what portion of additional Sec. 263A costs incurred during a year must be added to the ending inventory valued determined under Sec. 471. The ratio is total Sec. 263A costs incurred during the year divided by total Sec. 471 costs incurred during the year.

Annualization.  A procedure for computing the tax liability of a short tax period, which extrapolates the short-period income for a 12-month period, calculates a tax liability, and allocates a portion of the annual tax to the short period.

Annuity.  A contract under which a series of installments is paid to the annuitant during their life.

Annuity Payments.  A stream of equal payments paid over equal time periods for a specified period of time, defined by either a number of years(e.g., ten years) or the occurrence of an event (e.g., the taxpayer's death).

Anti-churning Rules.  An elaborate set of rules designed to prevent taxpayers from obtaining the benefits of newly enacted shorter recovery periods by transferring depreciable property to related parties and subsequently reacquiring the property.

Apportioned.  Allocated according to some consistent formula.

Appreciated Property.  Property whose fair market value is greater than its adjusted basis.

Appreciation.  The amount by which the fair market value of an asset exceeds the adjusted basis.

Arbitrage.  In general, an arbitrage is a transaction which is profitable but requires no net personal funds or significant personal effort.

Arm's Length.  A transaction between two unrelated people who are acting in their own best interest.

Articles of Incorporation.  Statements filed to declare the desire of an individual(s) to become a corporation and spell out some initial minimum information required by the laws of the incorporating state.

Asset Depreciation Range (ADR) System.  An elective depreciation system for assets placed into service prior to 1981 that allowed a taxpayer to select a cost recovery period from a range of useful lives (with the midpoint of this range referred to as the "mid-point life").

Assignment of Income.  A general reference to an attempt by one taxpayer to cause income to be taxed to another taxpayer.

Associates.  Associates are more than co-owners of property; they are working together.

Association.  An unincorporated entity that is treated as a corporation for tax purposes because it has more corporate than noncorporate characteristics. The association is eligible to make an S election if it otherwise qualifies. Proposed regulations would reduce the significance of the association test by generally permitting an unincorporated entity with at least two members to elect to be a partnership for tax purposes.

At-risk Rules.  The at-risk rules limit losses from most income-producing activities to the lesser of the loss or the amount at risk. An individual or closely-held C corporation is considered at risk for amounts borrowed to use in the activity if personally liable or if the loan is secured by property other than that used in the activity.

Average Cost.  An inventory cost flow assumption that prices the cost of inventory acquired during the current year based on the average (mean) cost of goods acquired during the current year.

Average Nominal Rate.  The tax due, based on taxable income, divided by the taxpayer's income without exemptions being taken out.

Average Tax Rate.  A person's or entity's total tax divided by their tax base. Also known as average statutory rate.

B

Bail Out.  The act of taking earnings and profits out of a corporation in the form of capital gain rather than as dividend income.

Bank Deposit and Expenditures Method.  A method of income reconstruction that uses information from the taxpayer's bank statements.

Bardahl Formula.  A TCM decision that tries to derive the working capital needs of a business for AET purposes.

Base Amount.  An amount used to determine the incremental research activity during the current period. It is determined by multiplying the fixed based percentage by average gross receipts over four prior years.

Basic Research Credit.  20 percent of the basic research payments.

Basis.  Taxpayer's cost for purposes of determining gain or loss.

Beneficiary.  The person on whose behalf and for whose benefit a trust is established. The person is entitled to distributions of the assets placed in the trust or to the income produced by those assets.

Blue Book.  A report prepared by the Joint Committee on Taxation (a special congressional committee made up of members of the House and the Senate). The Blue Book contains an analysis and explanation of a tax bill soon after the bill has been enacted.

Board of Tax Appeals.  A Federal judicial court that was established in 1924 for the sole purpose of litigating tax matters. Its name was changed to the United States Tax Court in 1942. See also "Tax Court."

Bona Fide Debt.  A debt arising out of a debtor-creditor relationship and based on a valid, legally enforceable obligation to pay a fixed sum of money.

Boot.  Cash and other non-like-kind property given to equalize the values of properties exchanged; gain usually is limited to boot received.

Brother-sister Group.  Two or more corporations if five or fewer persons who are individuals, estates, or trusts own at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of shares of all classes of the stock of each corporation, and more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of shares of all classes of stock of each corporation, taking into account the stock ownership of each such person only to the extent such stock ownership is identical with respect to each such corporation.

Burden of Proof.  If the taxpayer and the IRS go to court, typically the taxpayer is presumed to be guilty until he/she can prove otherwise. Thus, the burden of proof is on the taxpayer to show innocence. The burden of proof is rarely on the IRS to show guilt or error.

Burden Rate Method.  A method of allocating indirect manufacturing costs to products, generally based on the incurrence of a direct cost (such as direct labor hours or costs) that bears a relationship to the manner in which the indirect costs are incurred.

Business Bad Debts.  The uncollectible portion of receivables created in transactions associated with the conduct of a trade or business.

Business Purpose.  Underlying all of the tax-free reorganization sections is the basic assumption that the transaction has a business purpose other than the evasion or avoidance of federal income taxes. If this factor is not present, the government will disallow the tax-free nature of the transaction even if you have complied with the letter of the law.

Bylaws.  The rules for governing the activities of corporate shareholders, officers, and directors.

C

C Corporation.  Regular corporations are technically referred to as C corporations because most of the Code's tax rules governing them are contained in Subchapter C of the Internal Revenue Code.

Cafeteria Plan.  A plan that satisfies the requirements of Section 125 of the tax law and which allows employees the choice between receipt of cash or a qualified fringe benefit. A cafeteria plan allows the employee who chooses a nontaxable fringe to avoid being in constructive receipt of cash.

Calendar Year.  A tax year ending on December 31 of each year.

Capital.  The classification of gains and losses realized on the sale or disposal of capital assets.

Capital Expenditure.  An expenditure that will benefit more than one accounting period.

Capital Gain Net Income.  The term capital gain net income" means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges.

Capital Income.  The term "capital income" includes any gains from the sale or exchange of property that is considered a capital asset.

Capital Losses.  Capital losses result from the sale of capital assets (such as stocks and bonds) at a loss.

Carries On.  Being engaged in an ongoing business activity.

Carryback.  To carry a capital loss not used to offset a capital gain in the current period to a prior period. The capital loss carried back may be used to offset capital gains in prior tax periods.

Carryover.  To carry a capital loss not used to offset a capital gain in the current period to a future tax period. The capital loss carried forward may be used to offset capital gains that have yet to occur.

Carryover Basis.  When property is received in a tax deferred transaction such as a gift, or a corporation, partnership or acquiring company receiving property in return for giving the transferor ownership interest, then the basis of the transferor becomes the basis of the transferee. This is called carryover basis. The holding period of the transferor also tacks on for the transferee.

Cash Awards.  Cash payments made to employees held to be subject to withholding.

Cash Equivalent.  The fair market value of property or services received as income, as expressed in dollars for purposes of cash-basis income recognition.

Cash Equivalent Concept.  A fundamental tax principle that states that income received in the form of property or services should be valued at its equivalent value in cash and reported as gross income.

Cash Expenditures Method.  A method of reconstructing income that assumes the taxpayer's net worth during the years at issue remains constant, so that any expenditures over and above reported income are deemed to represent unreported taxable receipts.

Cash Method.  An accounting method under which generally income is reported when cash or a noncash equivalent is received and expenses are deducted when paid.

Cash or Deferred Arrangement (CODA).  An arrangement under which an employee is given a choice between taxable compensation now and a currently nontaxable deposit to a pension account qualified under Code Sec 401(k).

Casualty and Theft Losses.  Losses when property is damaged, destroyed, or lost due to a sudden, unexpected, or unusual event.

CD-ROM Systems.  The use of compact disc technology permits the storage of volumes of tax materials on CDs that utilize read-only memory (ROM). Textbooks are available through this medium as well as the topical and annotated tax services. Many CD-ROM systems Include the Internal Revenue Code, Regulations, and certain other primary materials. CD-ROM systems are popular because the cost is usually lower than that of an electronic database system. CD-ROM systems, however, may not contain as much data as do the electronic databases. RIA's CD-ROM system, OnPoint, is described in detail in Module 1.

Ceiling Amount.  The ceiling imposed by a State Housing Agency limiting the amount of low-income housing credits that can be taken on a qualified structure.

Centralization of Management.  Management can be delegated even to non-owners.

Certain Insurance Companies.  Two or more insurance companies subject to taxation under Section 801 which are members of a controlled group of corporations. These insurance companies shall be treated as a controlled group of corporations separate from any other corporations which are members of the controlled group of corporations.

Certainty.  A tax has certainty if the taxpayers can predict their tax liability with reasonable accuracy.

Certiorari.  A petition filed with the United States Supreme Court requesting a review of a Circuit Court decision. The petition (referred to as a "writ of certiorari ") may be filed by the aggrieved party. Although the Supreme Court rarely grants certiorari on tax matters, the higher court may decide to hear a case in order to resolve an important conflict that may exist between circuits.

Charitable Contributions.  Contributions of money or property to qualified organizations.

Child and Dependent Care Credit.   A credit for the employment-related expenses incurred by a taxpayer for the care of qualifying individuals in his or household.

Child Support.  Nondeductible payments to provide for the support of a child.

Child Support Payments.  Payments made by one former spouse to the other former spouse who has custody of their child (children), for the purpose of meeting the expenses of raising the child (children).

Circuit Courts of Appeal.  The Federal judicial system is made up of thirteen judicial circuits. In addition to the eleven numbered circuits, there is the D.C. Circuit for the District of Columbia, and there is the Federal Circuit. The Federal Circuit hears appeals from the Claims Court. Each of the other twelve circuits has jurisdiction over cases appealed from the Tax Court or a District Court. The appropriate circuit for appeal is determined with reference to the taxpayer's residence. Appeal from a Circuit Court is made by writ of certiorari to the U. S. Supreme Court.

Circular 230.  Treasury Department standards of practice. The standards govern practice before the Treasury Department, which includes the IRS, and applies to CPAs, attorneys, and enrolled agents.

Claim-of-right Doctrine.  A fundamental tax principle that states that an amount of income must be recognized no later than when it is received, even if received in error.

Claims Court.  One of the three courts of original jurisdiction concerning litigation of Federal tax issues. The Claims Court sits in Washington D.C. The Claims Court has jurisdiction over any claim against the United States; thus, in matters of Federal taxes, the court's jurisdiction is restricted to cases where the taxpayer has filed a claim for a refund of taxes. There is no provision for a trial by jury. Decisions of the Claims Court are appealable through the Circuit Courts of Appeal.

Class Life.  An estimate of the economic useful life of an asset as specified by Rev. Proc. 87-56, as modified by Rev. Proc. 88-22. Many of the class lives are based on the "mid-point" lives of the Class Life Asset Depreciation System in existence prior to 1981.

Clearly Reflecting.  A key requirement of an acceptable accounting method. The accounting method must be consistent with the best accounting practice and clearly reflect income.

Closed Fact.  In a closed fact situation, the item of income has been received, the expenditure has been made, or the transaction is otherwise closed. Typically, the research is concerned with the proper treatment of the item or items on the tax return. Closed fact situations also arise in connection with an I.R.S. examination of a client's prior year tax return.

Closely Held Corporation.  A corporation with any of the following: a small number of shareholders, shareholders serving as key executives for the corporation, or stock that has not been publicly traded.

Closing Agreement.  A written agreement between the IRS and the taxpayer to permanently close a tax issue. The agreement is binding unless fraud or misrepresentation is involved. A closing agreement may involve the determination of total tax liability for a preceding year or the treatment of one or more items claimed on a return.

Collapsible Corporation.  A corporation determined by the IRS under Code Sec. 341 to have been formed to convert what would normally be ordinary income into capital gains. Under this section, a shareholder who disposes of stock in a collapsible corporation reports the gain as ordinary even though the transaction otherwise qualifies for capital gain status.

Combined Controlled Group.  Three or more corporations each of which is a member of a group of corporations described as a parent subsidiary or brother-sister group and one of which is a common parent corporation included in a group of corporations described as a parent-subsidiary group and is also included in a brother-sister group.

Commercial Preparer.  A return preparer who is not subject to Treasury Circular 230 standards of practice. An example would be H&R Block. Generally, anyone may prepare a tax return. Only CPAs, attorneys, and enrolled agents may represent the taxpayer before the IRS, with representation defined as taking an advocacy role rather than simply explaining how entries were made on the return.

Committee Report.  A report from one of the three committees concerned with Federal taxation (House Ways and Means Committee, Senate Finance Committee, and the Joint Conference Committee). These reports typically summarize existing law, describe reasons why changes are proposed, and explain the provisions of proposed legislation.

Common Law.  Developed in England after the introduction of FEUDALISM following the Norman Conquest (1066). In feudalism the monarch was the supreme landlord. All title to real property was ultimately traced to the crown. The king made land grants to the great barons, who in turn made grants to their own retainers, or vassals.
The great majority of the people lived in the country, where they were divided into two main classes: lords and villagers. The lords lived in manor houses, sometimes castles, near which stood the crofts of their villagers. The villagers, who might legally be either free or serf, cultivated the land--whether their own or their lord's. The lord often had rights to services as well as monetary rents. The tenants commonly owed him a specified number of days of labor each year. The system of relationships between a lord and his tenants is called MANORIALISM. Because manorial services were not always reliable, some lords preferred to hire laborers from among the younger sons of the villagers, and frequently villagers were able to commute their personal services to a monetary payment.
Copyright - 1993 Grolier Electronic Publishing, Inc.

Common Law Employees.  A person who performs services for an employer who has the right to control and direct both the results of the work and the way in which it is done.

Common Stock.  Shares issued by a corporation conveying the rights to share proportionately in corporate earnings, vote for directors and on corporate decisions, maintain proportional ownership when additional shares are issued (pre-emptive rights), and to share in distributions of cash and property when the corporation is liquidated.

Completed Contract Method.  A method of accounting for long-term projects such as building homes, commercial buildings, airplanes, etc.. When the job is completed, the income is recognized. This method is to be contrasted with the percentage of completion method, where income is accrued as the project progresses.

Condemnation.  The legal process by which a governmental unit acquires property for a public purpose by purchasing the property from the owner. The property is taken under a right of imminent domain.

Condition Precedent.  A specific requirement or event that must occur prior to the recognition of a taxable event.

Condition Subsequent.  A specific requirement or event that occurs only if certain terms are not met after the recognition of a taxable event.

Conduit Entity.  A nontaxable reporting entity.

Conformity.  The situation in which the same accounting methods are used for financial and tax purposes.

Consistency.  A key requirement of an acceptable accounting method. An accounting method must be applied on the same basis ("consistently") in all years.

Consolidated Return.  A tax return filed by a group of two or more corporations, one of which owns at least 80% or more of the stock of another corporation.

Constructive or Disguised Dividend.  An economic transaction such as excessive salary or personal use of a corporate asset which benefits a shareholder of a closely held corporation and is erroneously deducted as a business expense.

Constructive Ownership.  Ownership attributed to a taxpayer by virtue of that taxpayer's ability to control the ownership rights owned by other taxpayers. Such control is possible due to familial or economic relations between the taxpayers.

Constructive Receipt Doctrine.  A fundamental tax principle that assumes that income should be recognized as soon as it can be reduced to the taxpayer's possession; actual possession is not required.

Contested Liabilities.  Liabilities that are disputed by the parties and await further resolution. A contested liability is generally regarded as a condition precedent.

Continuity of Business Enterprise.  Regulation 1.368-1(d) is the operationalization of this doctrine. It basically requires that the acquiring company use a significant portion of the historic business or assets of the target company. If this criteria is lacking, then the parties will not be allowed tax-free treatment. Also, any NOL's acquired may be permanently disallowed if business continuity is not present.

Continuity of Life.  The enterprise will continue after the death, disability, bankruptcy, or resignation of one or more of the owners.

Contracted Research Expenses.  For purposes of the research credit, 65 percent of any amount paid or incurred by the taxpayer to any person (other than an employee of the taxpayer) for qualified research.

Contribution to Capital.  Additional equity value contributed by a shareholder, not in exchange for stock.

Controlled Corporate Group.  The term "controlled group of corporations" means any group of (1) parent-subsidiary controlled group, (2) brother-sister controlled group, (3) combined group, or (4) certain insurance companies.

Controlled Foreign Corporations.  A foreign corporation in which more than 50 percent of the total voting power or total value of the stock is owned by U.S. shareholders on any day during the taxable year.

Convenience.  A convenient tax is one which causes the payer and the collector to do little that they would not do in the absence of the tax.

Corporation.  An association, joint-stock company, or insurance company with more corporate characteristics than non-corporate characteristics.

Cost Basis.  The amount the taxpayer pays in cash, debt obligations, other property, or services for property.

Cost Depletion.  Cost recovery deductions that are based on a proportionate recovery of the cost of the natural resource.

Cost of Goods Sold.  Beginning inventory plus purchases and other costs less ending inventory.

Cumulative Bulletin.  A semiannual publication of the I.R.S. The official materials that have appeared in the weekly Internal Revenue Bulletin are reorganized into Code section sequence and republished by the I.R.S. in the semiannual Cumulative Bulletin. This important publication is hard-bound and is more permanent than the weekly publications. See also "Internal Revenue Bulletin."

Current Income Tax Expense.  The amount of income tax to be paid to the tax authorities in the current period.

D

De Minimis Fringe.  A benefit that is so small that it would be unreasonable to account for the value of the benefit. An example would be personal phone calls made in the local calling area.

De Minimis Rule;  A rule that exempts transactions of a specified small amount from some general rule.

Dealer Disposition.  The term "dealer disposition" means any of the following dispositions:
(a) Personal Property. Any disposition of personal property by a person who regularly sells or otherwise disposes of personal property of the same type on the installment plan.
(b) Real Property. Any disposition of real property which is held by the taxpayer for sale to customers in the ordinary course of the taxpayer's trade or business.

Decrement.  A decrease in inventory when measured by comparing the ending inventory at base prices with the beginning inventory at base prices under the double-extension, dollar-value inventory method.

Deductions for Adjusted Gross Income (AGI).  Specific deductions from gross income that determine adjusted gross income.

Deductions from Adjusted Gross Income (AGI).  Deductions for a number of personal and nonbusiness expenses used in determining taxable income. The deductions from AGI include the standard or itemized deduction and personal and dependency exemptions.

Deemed Taxes.  Taxes paid by a foreign affiliate corporation that are considered paid by a domestic company that owns at least 10 percent of the voting power of the foreign corporation.

Deferral.  Deferral means that income earned during the year does not become taxable until some future year. Thus, the payment of tax on that income is postponed until a future year. Deferred compensation - In general, compensation that is earned in the current year, but not paid until some future year. Examples include pension plans and stock bonus plans.

Deferred.  A gain or loss that is realized but not recognized in the current period is considered "deferred."

Deferred Compensation.  An arrangement in which the employer pays for services in a year after the services are provided.

Deferred Exchanges.  The term used by the Treasury in the Sec. 1033 regulations related to nonsimultaneous delayed exchanges of like-kind properties.

Deferred Income Tax Expense.  The difference between the current income tax expense and the amount of income tax deducted for financial accounting purposes.

Deferred Tax Assets.  The amount of tax savings to be recognized in the future when financial income exceeds taxable income due to timing differences associated with a certain transaction.

Deferred Tax Liabilities.  The amount of tax to be paid to the tax authorities in the future when taxable income exceeds financial income due to timing differences associated with a certain transaction.

Defined Benefit Plan.  A tax favored pension plan under which the current contributions to the plan are a function of the benefit being promised.

Defined Contribution Plan.  A tax favored pension plan under which the current contributions are determined in some way that is not a direct function of the benefit being provided. A plan that calls for contributions equal to 10 percent of an employee's compensation is such a plan.

Demand Loan.  A loan that is payable in full when requested by the lender.

Dependency Exemption.  A deduction from AGI of a specified amount adjusted annually for inflation for each of the taxpayer's dependents.

Dependent.  An individual who meets the five requirements to be claimed by another taxpayer as a deduction.

Dependent Care.  In the context of nontaxable benefits, care provided for a dependent under the age of 13, or for a dependent or spouse who is physically or mentally incapable of their own care.

Depletion.  A cost recovery deduction allowed to an owner of an economic interest in minerals or petroleum.

Depreciation.  A systematic procedure for providing a reasonable allowance for the exhaustion, wear and tear, and obsolescence of trade or business or income-producing property.

Destruction.  As used in Sec. 1033, the term refers to damaged property through any means, including a casualty or gradual deterioration.

Determination Letter.  An official letter issued by an I.R.S. District Director in response to a request by a taxpayer regarding the tax effects of a closed transaction or the tax exempt status of an exempt organization.

DIF.  An acronym for Discriminant Income Function, which is a score assigned to tax returns to assist in determining whether the return should be audited.

Direct Conversion.  An involuntary conversion that does not involve an exchange of cash; rather, property related in service or use is provided directly to the taxpayer (in such a case, the application of Sec. 1033 is mandatory).

Direct Home Office Expenses.  Expenses of a portion of the home that benefit only that portion.

Direct Labor Costs.  All costs of labor that can be traced specifically to goods produced.

Direct Material Costs.  All costs of material that can be traced specifically to goods produced.

Disproportionate Distribution.  A distribution to one or more owners of an entity that is not in proportion to their ownership interest.

Distributive Share.  A share of income, gain, loss, deduction, or credit from a flow-through entity determined in accordance with the partner's interest in the partnership.

District Courts.  One of the three courts of original jurisdiction concerning litigation of Federal tax issues. District Courts consider various types of legal issues, and tax decisions comprise only a small portion of the total case load. In Federal tax matters, a District Court's jurisdiction is limited to cases where the taxpayer has filed a suit for a tax refund. Although infrequently used, the option of a jury trial is available in a District Court. Decisions of a District Court are appealable through the Circuit Courts of Appeal.

Dividend.  A distribution of cash or property made by a corporation to its stockholders from accumulated or current earnings and profits.

Dividend Reinvestment Plans.  A corporate-sponsored program that allows investors to buy stock directly from the corporation then automatically reinvest the dividends in more stock.

Dividends Received Deduction (DRD).  An exclusion from income of 70%, 80%, or 100% of the dividend received by one corporation from another corporation.

Dollar-value Methods.  A LIFO inventory procedure whereby a number of inventory items are grouped (pooled) together, with increases or decreases in inventory determined on an aggregate basis (total dollars) with reference to all items in the pool.

Domestic International Sales Corporation.  A corporation organized in the U.S. to export goods produced in the U.S. that is exempt from all federal income taxes.

Domestic Service Employment Tax.  The FICA, FUTA, and withheld income taxes that taxpayers with household help must pay.

Donee.  The person receiving a gift.

Donor.  The person giving a gift.

Double-extension Method.  A dollar-value LIFO method that employs a set of established base period prices to use as common denominators in determining if aggregate inventory values have increased or decreased.

E

Earned Income.  Income from salary, wages, tips, and self-employment income generated by a taxpayer's material participation in a trade or business, whether as entrepreneur or employee.

Earned Income Credit.  A refundable tax credit available to low income taxpayers with earned income.

Earnings & Profits (E&P).  A measure of a corporation's ability to make distributions that are not returns on capital to shareholders. There are two components: current and accumulated.

Economic Activity Limitation.  A limitation imposed on the possession credit if the percentage limitation is not used.

Economic Performance.  The point in time at which a liability is satisfied and the corresponding deduction is allowed (assuming that the "all events test" has been met).

Economic Risk Of Loss.  An obligation that makes a partner at risk for all or part of a partnership debt.

Economy.  A tax is economical if the costs of collection are small relative to the amount of tax collected.

Effective Tax Rate.  The average tax burden, sometimes defined as the ratio of tax paid to income subject to tax.

Effectively Connected Income.  Income of a nonresident alien or foreign corporation that is attributable to the operation of a U.S. trade or business under a business activity or asset use test.

Elderly Credit.  A credit available to taxpayers who are 65 or older or totally disabled that is equal to 15% of a base amount, determined by age and filing status, AGI, and amount of nontaxable income.

Election.  A statement, generally filed with a tax return according to certain Internal Revenue Code specified requirements, announcing adoption of tax treatment or method that is contrary to some general rule.

Electronic Tax Databases.  An electronic database consists of the primary tax law sources together with selected secondary sources. The database is accessed through the researcher's computer by means of a modem-telephone connection. There are several tax databases available , LEXIS by Mead Data Central, WESTLAW by West Publishing Company, and ACCESS by Commerce Clearing House.
In general, research through a tax database is conducted by means of key words , Code section numbers, case names, ruling numbers, etc. Each Code section, regulation, ruling, case, etc. is referred to as a "document."

Eligible Access Expenditures.  Amounts paid or incurred by an eligible small business for the purpose of enabling such eligible small business to comply with applicable requirements under the Americans With Disabilities Act of 1990.

Eligible Small Business.  Any business for which the gross receipts for such business for the preceding taxable year did not exceed $1,000,000, or such person employed not more than 30 full-time employees during the preceding taxable year.

Employee Business Expenses.  Deductible expenses incurred by an individual in his/her capacity as an employee.

Employer Identification Number (EIN).  A nine-digit number assigned by the IRS to any employer who has properly completed form SS-4.

Employee Stock Option Plan (ESOP).  A type of trust that owns a C corporation's stock on behalf of the employees. The tax law allows several tax advantages to transactions with this entity.

Employment Taxes.  Payroll taxes, which include FICA taxes, Medicare taxes, and unemployment taxes.

Employment-related Expenses.   Expenses that are incurred to enable the taxpayer to be gainfully employed while there is a qualifying individual in the household. Expenses are considered to be employment related if they are paid for household services or for the care of a qualifying individual.

Energy Property.  For purposes of the energy credit, any property which is equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat, or equipment used to produce, distribute, or use energy derived from a geothermal deposit but only, in the case of electricity generated by geothermal power, up to (but not including) the electrical transmission stage.

Engagement Letter.  A letter from a CPA to a client that defines the scope of the engagement. Engagement letters may be helpful in resolving fee disputes and avoiding professional malpractice exposure.

Entity Concept.  Although a partnership is not a separate taxable entity, it is required to file an annual tax return and to make tax accounting elections affecting the computation of partnership income or loss at the partnership, rather than the partner level.

Estate.  A legal entity created upon the death of an individual.

Estimated Tax Payments.  Quarterly tax payments that must be made by taxpayers to ensure that they have paid the required annual payment and to avoid an underpayment penalty.

Excess Accumulations.  Any retirement accumulations in a person's name at death that exceed the present value of an annuity for the decedent's life (ignoring the fact of their death) of the amount specified in Code Sec. 4980A(c)(B), currently (1996) $155,000 per year.

Excess Distributions.  For regular distributions, the amount by which the total of all distributions received during the year exceed the amount specified in Code Sec. 4980A(c)(B), currently (1996) $155,000. For a lump-sum distribution, the amount by which such a distribution exceeds five times the amount specified in Code Sec. 4980A(c)(B), currently (1996) $155,000.

Exchanged Basis.  The basis determined in whole or in part by reference to other property held at any time by the person for whom the basis is to be determined.

Excise Tax, Surtax, or Tax Bubble.  A mechanism for increasing the marginal tax rate on taxable income over a specified range of income. The increase in the marginal rate can apply to income over the entire range or the amount can be capped at a specific dollar amount.

Exclusion Ratio.  The proportion of an annuity payment that a taxpayer excludes from taxable income because it represents a tax-free return of capital invested in an annuity.

Exclusions.  Items of income specifically exempted from taxation under the Code.

Exclusions from Gross Income.  Income (economic benefits) realized but not recognized by a taxpayer. As a general rule, exclusions are not reported in gross income, except to the extent that the law requires this inclusion.

Exercise Price.  The amount that must be paid by the holder of an option to acquire the property subject to the option right. In a compensation context, this is the amount that an employee must pay to the employer to acquire stock.

Existing Firm.  For purposes of the research credit, a firm that had both qualified research expenditures and gross receipts for at least three years during 1984-1989.

Export Property.  Property manufactured or produced in the U.S. by a company other than a foreign sales corporation. The property must be held primarily for sale by or to a foreign sales corporation for direct use or sale outside the U.S.

F

Facts and Circumstances.  A method of making a tax determination that does not follow established rules or guidelines; rather, the determination involves a detailed examination of the actual facts relevant to the determination.

Fair Labor Standards Act (FLSA).  A minimum wage is a lower limit established by law for the wages employers may pay. In the United States the Fair Labor Standards Act (1938) set a minimum wage (25 cents per hour) for many workers engaged in interstate commerce. The law was intended to prevent competitive wage cutting by employers during the Depression. After the law was passed, however, wages began to rise as the economy turned to war production. Wages and prices continued to rise, and the original minimum wage ceased to be relevant. Accordingly, it was raised by Congress to 75 cents an hour in 1950 and after a series of additional increase reached $3.35 in 1981. Federal legislation passed in 1989 further increased the minimum hourly wage to $3.80 by April 1990 and to $4.25 by April 1991. The law's scope has been broadened to include millions of workers not originally covered. Small businesses--those with annual gross income of less than $500,000--are exempt.
Copyright - 1993 Grolier Electronic Publishing, Inc.

Fair Market Value.  The price at which the property would change hands between a willing buyer and willing seller. Both buyer and seller are assumed to be cognizant of relevant facts and are under no compulsion to buy or sell.

Family Attribution.  The concept that certain family members are considered to own each other's stock. Under Sec. 318, a mother is considered to own her son's stock.

Federal Insurance Contribution Act (FICA).  The federal system which provides for retirement, survivors, and disability pensions and hospital insurance.

Federal Unemployment Tax.  A tax system which provides unemployment payments to workers who have lost their jobs.

Fiduciary.  A guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any other person.

FIFO.  An inventory cost flow assumption that presumes that the earliest acquired goods are the first goods sold, and thus ending inventory is composed of the most recent acquisitions.

Filing Status.  A tax rate structure which varies according to marital status.

Final Regulations.  After publication in proposed form, the Commissioner may issue a regulation in final form. A final regulation is either interpretative or legislative. A final regulation is issued in the form of a "Treasury Decision."

Fiscal Year.  A tax year that ends on the last day of a calendar month other than December. A fiscal year also includes a "52-53-week year."

Flow-through Entity.  An entity that does not itself (generally) pay tax, but is a tax reporting entity. Items of income and loss "flow-through" to the owners and are reported on the owner's tax returns for the year.

Foreign Corporation.  Any association, joint stock company, or insurance company that is not organized in the U.S. under the laws of a state or the District of Columbial.

Foreign Sales Corporation.  Foreign corporations organized by U.S. corporations to export goods and services.

Foreign Source Income.  Income from sources outside the U.S.

Foreign Tax Credit.  A nonrefundable credit for part or all of the foreign income taxes paid by a U.S. taxpayer to help minimize double taxation. The credit is equal to the portion of the U.S. tax liability that results from foreign source taxable income being included in total U.S. taxable income.

Foreign Trade Income.  The income of a foreign sales corporation which includes gross receipts from dispositions or rentals of export property, services related to the disposition and rental of export property, engineering or architectural services for construction projects located outside the U.S., and managerial services performed for an unrelated foreign sales corporation or domestic international sales corporation.

Former Passive Activity.  Any activity of a taxpayer which is not a passive activity for the current taxable year but was a passive activity for any prior taxable year.

Forward Averaging.  The process in which the income tax on a lump-sum distribution from a qualified retirement plan is calculated as though the distribution was received in equal amounts over either a five- or ten-year period.

Franchise.  The term "franchise" includes an agreement that gives one of the parties to the agreement the right to distribute, sell, or provide goods, services, or facilities within a specific area.

Fraud.  Fraud is a willful and deliberate attempt to evade taxes.

Free Transferability of Interests.  Transferability that requires the consent of co-owners or that permits transferability of income interest but not management interest is not considered free transferability.

Fringe Benefits.  A term commonly used to describe a broad category of compensation paid other than in cash or stock. Some fringe benefits are taxable but most are not.

Frivolous.   A tax return position that is "patently improper." A CPA or attorney may not sign a return that includes a frivolous position.

Full-absorption Method.  The required method of accounting for costing products for inventory purposes under Sec. 471. This requires that a portion of all costs, both direct and indirect, be assigned to ending inventories.

Funded Plan.  A deferred compensation arrangement in which the employer irrevocably sets aside funds to satisfy its obligation to pay one or more employees.

G

Gain.  Gain is the difference between the fair market of the property and the taxpayer's basis in the property. Generally, the basis in the property is its purchase price increased by amounts incurred for capital improvements less any allowed or allowable depreciation.

General Asset Class.  The 13 classes of assets specified in Rev. Proc. 87-56, 1987-2 CB 674, which are used to determine if certain exchanges of personalty qualify for Sec. 1031 deferral.

General Depreciation System.  Another term used to describe the Modified Accelerated Cost Recovery System (MACRS).

General Partner.  A partner who participates in the management of the partnership and who is fully liable for the debts of the partnership.

Generally Accepted Accounting Principles.  The standards used by the accounting profession to prepare financial statements for users outside of the reporting entity.

Gift.  The transfer of an asset between two taxpayers where no consideration for the transfer is provided the donor.

Golden Handcuffs.  A compensation arrangement in which the employee is rewarded only if he or she remains with the employer for a specified period of time. For example, the employee may receive shares of stock that will be forfeited if he or she quits within three years of the grant date of the shares.

Goodwill.  The value associated with the conduct of business activity rather than the specific value of assets in the business. Goodwill will cause the fair market value of a business to exceed the total fair market value of individual assets.

Grantor.  The person who establishes a trust by transferring the title to assets to the trust fiduciary.

Grantor Trust.  A trust that complies with state fiduciary law but fails to qualify as a taxpayer for federal income tax law. Consequently, the person (grantor) who transferred assets to the trust is taxed on the trust's income.

Gross Income.  Gross income means all income from whatever source derived, including (but not limited to) the items listed in Sec. 61(a). For a trade or business, gross income is defined as gross receipts less cost of goods sold.

Gross Profit.  The selling price less the adjusted basis as defined in Sec. 1011 and the regulations thereunder.

Gross Profit Percentage.  The ratio of the gross profit to total contract price.

Group-term Life Insurance.  Term life insurance (a specified death benefit but no investment feature) provided by an employer to a broad group of employees on substantially equal terms that has no savings/investment component. Therefore it has no cash surrender value and provides death benefits only while the policy is in force.

Guaranteed Payment.  Payments to a partner for services rendered or for the use of capital that are determined without regard to the income of the partnership.

H

H.R. 10 Plan.  A synonym for Keogh plan. The name refers to the fact that when Congressman Keogh repeatedly introduced his attempt to allow the self-employed to have pension plans, he always had the bill assigned number 10. Hence H.R. 10 for House of Representatives Bill 10.

Half-year Convention.  A general MACRS assumption applicable to all personalty that assumes each item was acquired in the middle of the taxpayer's tax year and thus qualifies for one-half year's cost recovery. (This rule is inapplicable if the "mid-quarter convention" applies.)

Head of Household.  A taxpayer who is unmarried, or is considered unmarried, on the last day of the year and provides more than half the cost of a household for the taxpayer and a qualifying relative for more than half the year.

Highly Compensated Employee.  As defined in Code Sec. 414(q), an employee who also owns at least five percent of the company and potentially other employees making as little as $80,000 per year (inflation adjusted). This definition has been relaxed by recent legislation. See revised Code Sec. 414(q).

Historic Absorption Cost Ratio.  An elective ratio used to determine what portion of additional Sec. 263A costs incurred during a year must be added to the ending inventory value determined under Sec. 471. The ratio is total Sec. 263A costs incurred during the preceding three tax years divided by total Sec. 471 costs incurred during the preceding three tax years.

Historical Structure.  
Sec. 47 (c) Definitions.
(3) Certified historical structure defined.
(A) In general. The term certified historical structure means any building (and its structural components) which --
(i) is listed in the National Register, or
(ii) is located in a registered historical district and is certified by the Secretary of the Interior to the Secretary as being of historical significance to the district.
(B) Registered historical district. The term registered historical district means --
(i) any district listed in the National Register, and
(ii) any district --
(I) which is designated under a statute of the appropriate state or local government, if such statute is certified by the Secretary of the Interior to the Secretary as containing criteria which will substantially achieve the purpose of preserving and rehabilitating buildings of historical significance to the district, and
(II) which is certified by the Secretary of the Interior to the Secretary as meeting substantially all of the requirements for the listing of districts in the National Register.

Hobby.  An activity engaged in for personal pleasure or satisfaction rather than to make a profit.

Hobby Loss.  Loss realized by a taxpayer who incurs expenses in an income producing activity that does not qualify as a trade or business or as a production of income activity.

Holding Period.  The period of time that property is considered held for gain or loss purposes. Usually a holding period of one year and one day qualifies for long-term capital gains or Sec. 1231 treatment.

Home Equity Indebtedness.  Any debt that is secured by a qualified residence and which does not exceed an amount equal to the fair market value of the residence reduced by any acquisition indebtedness.

Home Equity Loan.  Typically, when an individual buys a home, the individual invests some of his/her own money (called equity) in the home (10 to 20 percent of home value is typical) and borrows the rest in the form of a home mortgage. Over time, the percentage of equity increases as the mortgage is gradually repaid to the lender and/or the value of the home rises. A variety of lenders, such as banks and savings and loans institutions, make home equity loans to homeowners based on the amount of equity in their home. The home becomes collateral for the loan, just as it is for the mortgage.

Horizontal Equity.  Horizontal equity is achieved if equally situated taxpayers are taxed equally.

House Bill.  A document originating in the House of Representatives containing proposed legislation. Each House Bill is assigned a number prefixed by the symbol "H.R." For example, H.R. 1215 is the 1995 proposal titled "Contract with America Tax Relief Act of 1995."

Hybrid Method.  A combination of two or more acceptable accounting methods. For example, gross profit may be based on the accrual basis and expenses reported on the cash basis.

I

Identifiable Event.  An event that is clearly distinguishable as the cause of the loss.

Implicit Tax.  A cost that a person incurs, or income that they forgo to avoid a given amount of tax.

Improper (Impermissible) Accounting Method.  An accounting method that is not sanctioned by the Code, Regulations, rulings, or court cases.

Imputed Income.  An economic benefit received by a taxpayer, but not realized in the traditional sense.

Inadvertent (Involuntary) Termination.  An unintentional act that disqualifies a corporation from being taxed as an S corporation.

Inadvertent Termination Relief.  When an S corporation terminates its election by no longer meeting all of the qualification requirements, and that termination was not intended. With IRS approval and an agreement to certain conditions, the termination may be disregarded, and the S election will be allowed to continue.

Incentive Stock Option.  A qualified stock option that must satisfy statutory requirements. If the employee holds the stock acquired by exercise of the option at least one year after the exercise date and two years after the grant date, and if the option plan meets other statutory requirements, the employee recognizes capital gain only when the stock is sold.

Income Forecast Method.  A special method of depreciating certain assets (movies, videos, games) that looks to the earnings stream rather than the wear and tear of the physical asset.

Income Splitting.  Allocation of income among two or more taxable entities which reduces the total tax.

Increment.  An increase in inventory when measured by comparing the ending inventory at base prices with the beginning inventory at base prices under the double-extension, dollar-value inventory method.

Incremental Research Credit.  20 percent of the excess (if any) of the qualified research expenses for the taxable year, over the base amount.

Independent Contractor.  A worker who is subject to the control and direction of another only as to the result of the work and not as to the means.

Index Method of LIFO.  A dollar-value LIFO method that uses government indexes to value incremental layers of inventory, as opposed to internally-developed indexes as under the double-extension method.

Indirect Home Office Expenses.  Shared expenses of the entire residence that must be allocated to the home office portion by some percentage of business use.

Indirect Production Costs (Overhead).  Costs associated with the manufacture of a product that cannot be traced directly to the product.

Individual Retirement Account (IRA).  A trust or custodial account established by an individual with a bank or other similarly qualified custodian under the rules of Code Sec. 408 which is accorded tax deferred treatment on some of the contributions to the account and all the earnings.

In-house Expenses.  For purposes of the research credit, any wages paid or incurred to an employee for qualified services performed by such employee, any amount paid or incurred for supplies used in the conduct of qualified research, and any amount paid or incurred to another person for the right to use computers in the conduct of qualified research.

Inside Basis.  A partner's tax basis in the assets of the partnership.

Installment Method.  A method of accounting whereby income is reported as payments that are received in installments. The gain recognized is the gross profit percentage. This method was generally repealed for dealers in inventory as part of the 1986 act, with several exceptions.

Installment Sale.  A disposition of property where at least one payment is received after the close of the tax year in which the disposition of the asset occurs.

Integration (with social security).  Counting social security taxes as contributions toward an employee's pension under Code Sec. 401(l). The result of which is to permit limited disparity in contributions to the plan in favor of higher paid employees.

Internal Revenue Bulletin.  A weekly I.R.S. publication. It is utilized to officially publish administrative regulations and rulings, to report on tax legislation, to report on important tax litigation, to make official announcements, and a host of other official uses. Materials contained in the weekly bulletin are reorganized and published by the I.R.S. in the semiannual Cumulative Bulletin.

Internal Revenue Code.  Official name of the Federal tax statutes. Through revenue acts that are adopted practically every year, Congress continues to amend the Code. The Code is sometimes renamed to recognize milestone events. The 1939 Code was the first attempt by Congress to organize the tax statute into a cohesive unit. The 1954 Code brought into statutory form many doctrines that had been created by the judiciary. The 1986 Code contains comprehensive tax reforms. Because the Code is amended so frequently, it is more descriptive to refer to it as the 1986 Internal Revenue Code, as amended.

Interpretative Regulation.  An I.R.S. regulation that has the force and effect of law unless it is in conflict with the statute. Because the taxpayer may challenge the validity of a regulation in court, this type of regulation is susceptible to litigation. An interpretative regulation assumes more prominence if it has been in existence for a long period of time and has been consistently upheld by the courts. See also "legislative regulation."

Intervening Years.  The years to which an NOL is carried, other than the last year to which it is carried.

Investment Income.  Income generated by property held for investment, including the periodic payments (dividends, interest, rents, etc.) and the net gains recognized on the property's disposition.

Investment Interest Expense.  Interest expense incurred on funds borrowed to acquire investment property.

Involuntary Conversion.  Property that is compulsorily replaced by a different property due to destruction, theft, seizure, requisition, condemnation, or threat of condemnation.

Itemized Deductions.  Deductions for certain nonbusiness expenses such as medical and dental expenses, taxes, interest, charitable contributions, casualty and theft losses, and various other miscellaneous expenses if the taxpayer elects to claim them instead of the standard deduction.

J

K

Keogh Plan.  A retirement plan for self-employed individuals and partners in partnerships, also known as an H.R.10 plan.

Kiddie Tax.  Tax rules under which the net unearned income of a child is taxed at the parents' marginal tax rate if that tax is higher than what the child would pay.

L

Lapse Restriction.  A restriction that, by its terms, will eventually disappear. For example, a provision that an employee will forfeit stock if he or she does not stay with the employer for at least three years is a lapse restriction because it will disappear after three years.

Large Corporations.  For purposes of the estimated tax rules, a corporation that had more than $1,000,000 in taxable income during the test period.
For purposes of the estimated tax rules, a test period is, three prior tax periods. The test of whether a corporation is considered large depends on this three-year period.

Layoff Payments.  Wages received during a period when the firm is shut down.

Leased Employees.  Workers provided under a contract with a service agency.

Least Aggregate Deferral (LAD).  An averaging procedure used to determine a required tax year for a partnership if the majority interest and principal partner rules are inconclusive. An aggregate deferral period is computed for each of the tax years of the partners, and the tax year with the least aggregate deferral will be the required tax year for the partnership.

Legislative Grace Concept.  The idea that excludable income and deductible expenses (i.e., tax relief) exist because of explicit congressional action.

Legislative Regulation.  An I.R.S. regulation issued in accordance with a statutory directive. In certain cases, Congress will direct the Commissioner of Internal Revenue to issue regulations that prescribe the details of the operation of a specific Code section. Legislative regulations carry more weight than do interpretive regulations. See also "interpretative regulation."

Letter Ruling.  An official response by the I.R.S. national office directed to a specific request by a taxpayer regarding the tax consequences of a contemplated transaction. A letter ruling is binding on the I.R.S. provided the contemplated transaction is consummated as described by the taxpayer in the request. These items are also called "private letter rulings."

Leveraging.  The process of obtaining large tax (or nontax) benefits by using minimal initial cash outflows; this is usually accomplished through extensive use of debt.

LIFO.  An inventory cost flow assumption that presumes that the most recently acquired goods are the first goods sold, and thus ending inventory is composed of the earliest acquisitions.

Like Class.  Items of personalty that qualify for Sec. 1031 deferral because they are either of the same general asset class or the same product class.

Like Kind.  A qualifying test based on individual facts and circumstance for certain exchanges of personalty that do not meet the "like-class" tests.

Limited Liability.  Liability for business debts is limited to the assets of the entity.

Limited Liability Company.  An unincorporated entity organized under state law which generally provides the owners, who are called members, with limited liability similar to that of shareholders of a corporation. This entity is generally treated as a partnership for tax purposes.

Limited Liability Partnership.  A partnership organized under state law which generally provides the owners with limited liability similar to that of a corporation. This entity is generally treated as a partnership for tax purposes.

Limited Partner.  A partner who does not participate in the management of the partnership and whose liability for the debts of the partnership is limited to his or her investment in the partnership.

Limited Partnership.  A partnership that includes one or more general partners who are responsible for the operation of the business and at least one limited partner.

Lineal Descendant.  A child, grandchild, great grandchild, etc. of the taxpayer.

Link Chain Method.  A dollar-value LIFO procedure that uses internally-developed indexes to value incremental layers of inventory. This method does not require individual base prices, but may only be used where the use of the double-extension method is not practical.

Listed Property.  Items of depreciable personalty as defined in Sec. 280F(b) that potentially have both business and personal uses (e.g., computers, automobiles, cellular phones, etc.).

Long-term Capital Gain.  The term "long-term capital gain" means gain from the sale or exchange of a capital asset held for more than one year, if and to the extent that such gain is taken into account in computing taxable income.

Long-term Capital Loss.  The term "long-term capital loss" means loss from the sale or exchange of a capital asset held more than one year, if and to the extent that such loss is taken into account in computing taxable income.

Long-term Construction Contracts.  As defined in Sec. 460, those construction contracts that involve unique items or require more than 12 months to complete.

Lower-of-cost or -market Procedure.  An inventory costing method that values each item in the ending inventory at the lesser of its original cost or its current market value.

Low-income Units.  Any unit in a building that has restricted rent and in which the individuals occupying the unit have incomes 50 or 60 percent below the area median gross income.

Lump-sum Distribution.  A distribution of a fixed sum of money at one time, rather than over a period of time, as with annuities.

Luxury Automobiles.  As defined in Sec. 280F(d)(5), such automobiles are four-wheel passenger vehicles weighing less than 6,000 pounds. Depending on the cost of such automobiles, special annual cost recovery limitations may apply.

M

Majority Interest Rule.  The first test for a required year for partnerships. If a majority interest of the partners have the same tax year, then this is the required tax year for the partnership.

Marginal Tax Rate.  The rate at which the next dollar of income would be taxed.

Marriage Tax Penalty.  The additional income tax burden incurred by married couples vis--vis the amount of income tax they would pay if they were not married.

Married Filing Jointly.  Taxpayers who are married on the last day of the tax year and agree to file a joint return.

Married Filing Separately.  A married taxpayer who files a separate return from his or her spouse.

Medical Expenses.  Expenses paid for the prevention or alleviation of physical or mental illness that are deductible to the extent that they exceed 7.5% of the taxpayer's adjusted gross income.

Mid-month Convention.  A MACRS assumption applicable to all realty that assumes that each item of realty was acquired in the middle of the month of acquisition.

Mid-quarter Convention.  A MACRS assumption applicable to all personalty that assumes each item was acquired in the middle of the taxpayer's actual quarter of purchase. This convention is applicable only when the taxapayer places more than 40% of all personalty in service during the last quarter of the tax year.

Minimum Base Amount.  An amount no less than 50 percent of the qualified research expenditures during the current period.

Minimum Tax.  A feature of the AMT system in that if a taxpayer shows a positive taxable income for the year, NOL carryforwards and tax credits will not totally shield the taxpayer's current year tax liability.

Minimum Tax Credit (MTC).  A credit equal to the excess adjusted net minimum tax incurred in all prior years in excess of the minimum tax credits used in those years.

Miscellaneous Itemized Deductions.  A subset of itemized deductions that consists of such items as reimbursed employee expenses, tax return preparation expenses, and safe deposit box rental.

Mixed Service Costs.  Indirect manufacturing costs that include both deductible portions (those not related to production or reselling activities) and capitalizable inventory portions (those related to production or reselling activities). Examples include legal and computing services.

Modified Accelerated Cost Recovery System (MACRS).  The statutory procedure used to compute cost recovery deductions for all tangible assets placed in service after 1986; the system is a major modification of the ACRS procedure.

Modified Adjusted Gross Income.  AGI before including social security benefits and excluding income earned by a U.S. citizen working abroad, plus the taxpayer's exempt interest income. Calculated for purposes of determining how much of a taxpayer's social security benefits must be included in taxable income.

Monetary Boot.  Property that is either cash or the equivalent of cash.

Mortgage Certificate Credit.  A credit available to low income taxpayers who have received a mortgage credit certificate from a state or eligible local government. Certificate holders arrange financing on a principal residence and claim a credit that is equal to the credit rate specified in the certificate multiplied by the interest paid or accrued by the holder on the remaining principal of the debt.

Moving Expenses.  Expenses of an employee or self-employed person who must move because of a new job or business. The expenses include the costs of moving a family and household goods to the new residence.

MSSP.  An acronym for Market Segment Specialization Program. This program helps the IRS to identify issues that are specific to a particular business, such as taxi drivers or auto body and repair shops.

Multiple Support Agreement.  A written declaration (Form 2120) signed by a group of taxpayers indicating that only one person in the group will claim a dependency exemption for another taxpayer. A multiple support agreement can be signed if no one person provides more than half of the support of an individual for the year, but the group provides over half of the support. Any one person who actually provides more than 10% of the support can meet the support test if each of the other persons in the group whose contribution exceeded 10% signs a written declaration that he or she will not claim the dependency deduction for the tax year.

N

National Labor Relations Act.  The National Labor Relations Act, passed by the U.S. Congress in 1935, was intended to encourage and regulate collective bargaining between employers and employees. It was known as the Wagner Act after its principal author, Sen. Robert F. WAGNER, Sr., of New York. Passage of this act was facilitated by the success of the Norris-La Guardia Act of 1932, which outlawed two antilabor weapons, the INJUNCTION and the YELLOW-DOG CONTRACT. The declared purpose of the act was to correct "the inequality of bargaining power" between labor and management. It enumerated several "unfair labor practices" by employers, including interference with union organization attempts and discrimination against employees because of union activity.
Under the act an employer could informally recognize a particular union if the employer believed that it was the choice of a majority of the employees. Otherwise, a majority of the employees voting determined whether a union was wanted and, if so, what particular union they preferred. An employer was obligated to bargain exclusively with the appropriate union representatives. Administration of the act was entrusted to the National Labor Relations Board.
Copyright - 1993 Grolier Electronic Publishing, Inc.

Natural Business Year.  A qualifying tax year based on the seasonality of the business. Generally, the peak sales season is deemed to occur shortly before the end of the tax year; the IRS requires that at least 25% of the average annual gross receipts for a three-year period occur in the last two months of the tax year.

Necessary.  To be necessary, an expense must be capable of making a contribution to a trade or business.

Necessary Expense.  An expense that is deductible because it is appropriate and helpful in a taxpayer's business.

Negligence.  Failure to exercise the care that a prudent person usually exercises.

Net Capital Loss.  The term "net capital loss" means the excess of the losses from sales or exchanges of capital assets over the sum allowed under Sec. 1211. In the case of a corporation, for the purpose of determining losses under this paragraph, amounts which are short-term capital losses under Sec. 1212 shall be excluded.

Net Income Tax.  The net income tax is the taxpayer's regular tax liability plus alternative minimum tax reduced by nonrefundable credits described in Subparts A and B.

Net Investment Income.  The excess of investment income over investment expenses.

Net Long-term Capital Gain.  The term "net long-term capital gain" means the excess of long- term capital gains for the taxable year over the long-term capital losses.

Net Long-term Capital Loss.  The term "net long-term capital loss" means the excess of long- term capital losses for the taxable year over the long-term capital gains.

Net Operating Income.  Business income less cost of goods sold and ordinary and necessary expenses.

Net Operating Loss (NOL).  A net operating loss for corporations results when deductions exceed income. The NOL can be used as a deduction in other tax years. NOLs can be carried forward and used as deductions up to 15 years into the future. They can also be carried back three years and used as additional deductions on prior-year tax returns. When carried back, NOLs generate refunds of taxes paid in prior years.

Net Operating Loss Deduction.  The deduction allowed in computing taxable income for any tax year that equals the aggregate of the net operating loss carryovers plus the net operating loss carrybacks to the particular tax year.

Net Regular Tax Liability.  The net regular tax liability is the taxpayer's regular tax liability reduced by nonrefundable credits in 21-30.

Net Short-term Capital Gain.  The term "net short-term capital gain" means the excess of short-term capital gains for the taxable year over the short-term capital losses.

Net Short-term Capital Loss.  The term "net short-term capital loss" means the excess of short-term capital losses for the taxable year over the short-term capital gains.

Net Worth Method.  A method of reconstructing income that adds to consumption expenditures the taxpayer's change in net assets during the year.

Nexus.  The minimum connection between a state and the transaction, property, or party that it seeks to tax.

No Additional Cost Fringe.  A benefit that does not cause the employer to incur any substantial additional cost and which is offered on a nondiscriminatory basis to employees within a line of business.

Nominee.  An agent acting on behalf of another.

Nonaccrual Experience Method.  A method of accounting for accrual-basis service providers that uses a taxpayer's receivables collection history as a means of reducing gross sales for an estimate of that portion of a receivable that will not be collected in the future.

Nonbusiness Bad Debts.  The uncollectible portion of receivables created in transactions not associated with the conduct of a trade or business. Usually related to personal loans.

Nonfrivolous.  A tax return position that is not patently improper. If the position has a realistic possibility of being sustained on its merits, there is no need to disclose the position on the return. If the position lacks a realistic possibility of being sustained, but is nonfrivolous, a CPA or attorney may sign a return with such a position if the position is separately disclosed.

Nonlapse Restriction.  A restriction that, by its terms, will never disappear. For example, a requirement that the employee must sell stock to the employer at book value is a restriction that will never lapse.

Nonqualified Plan.  A compensation plan that does not satisfy any specific statutory requirements for favorable tax treatment.

Nonrecourse Debt.  Debt secured only by property. Upon default of a nonrecourse debt, the creditor's recourse is limited to the property. No partner is personally liable for a nonrecourse debt upon default by the partnership.

Nonresident Alien.  An individual who is neither a U.S. citizen nor a resident of the United States.

Not-for-profit Entity.  A nontaxable reporting entity organized to carry on a tax-exempt purpose.

Not-for-profit Organization.  An enterprise engaged in trade or business activities for the purpose of serving a public good. Includes public charities, certain cooperatives, homeowners' associations, and political organizations.

O

Objective.  To carry on a business and divide the gains therefrom. The emphasis here is on a business enterprise, not a hobby.

Occupational Safety and Health Administration.  The Occupational Safety and Health Administration (OSHA) was established by the U.S. Congress in the Occupational Safety and Health Act of 1970 "to assure so far as possible every working man and woman in the nation safe and healthful working conditions." The act covers every employer whose business affects interstate commerce. Because it is an agency of the Department of Labor, OSHA is administered by an assistant secretary of labor. In 1988, OSHA had a staff of more than 2,300 and a budget of $234 million.
OSHA cooperates with the National Institute of Occupational Safety and Health (NIOSH), which carries out the research necessary to establish basic safety standards. OSHA inspectors carry out frequent, surprise inspections of workplaces to see that standards are maintained. Charges brought by OSHA are adjudicated by the Occupational Safety and Health Review Commission, and violators are obliged to pay fines. In 1977, OSHA's right to set penalties was upheld in court; however, in 1978, the Supreme Court in Marshall v. Barlow declared that employers can bar OSHA inspectors who search without warrants.
Copyright - 1993 Grolier Electronic Publishing, Inc.

Open Fact.  An open fact situation arises in connection with tax planning. In the latter case, the financial transaction under study has not been completed. The transaction may only be of a proposed nature. In the open fact case, the object of the research is to determine if the transaction may be arranged in such a way as to minimize the tax liability while attaining the personal and financial goals of the client.

Option.  A contract right that gives the holder of the option the right, but not the obligation, to acquire property (a call option) by payment of a specified option exercise price within a specified time period.

Ordinary and Necessary Business Expenses.  An amount that is deductible in computing the taxable income from carrying on any trade or business.

Ordinary Expense.  An expense is ordinary if it would be acceptable or commonplace among other taxpayers who find themselves in comparable circumstances.

Ordinary Gross Income (OGI).  A definition used in the computing of adjusted ordinary gross income and for testing whether rental income is good or bad.

Ordinary Income.  The term "ordinary income" includes any gains from the sale or exchange of property which is neither a capital asset nor property described in Sec. 1231(b). Any gain from the sale or exchange of property that is treated or considered under other provision of this subtitle as "ordinary income" shall be treated as gain from the sale or exchange of property which is neither a capital asset nor property described in Sec. 1231 (b).

Ordinary Life Insurance.  A life insurance policy that includes insurance and savings components, which creates a cash surrender value (CSV) that increases over the policy's life. The CSV is distinct from the death benefit.

Original Issue Discount.  The intentional difference between the issue price and the redemption price of a debt instrument, when it is first issued. Represents interest income that (1) will not be received by an investor until the instrument is redeemed at maturity, but (2) will be amortized and taxed over the investment's life.

Other Miscellaneous Expenses.  Expenses that are not related to employment that may be deductible as miscellaneous itemized deductions if they are to (1) produce or collect income, (2) manage, conserve, or maintain property held for producing income, or (3) determine, contest, pay, or claim a refund of any tax.

Outside Basis.  A partner's tax basis in a partnership interest.

Owner-Lessor Properties.  Properties that are leased by the owner, as opposed to being used productively in a trade or business.

Owner-User Properties.  Properties used productively by the owner in a trade or business.

P

Parallel System.  A feature of the AMT system in that income, deductions, adjusted basis, gains and losses, limitations, and credits may be computed differently for AMT than for regular tax.

Parent-subsidiary Group.  One or more chains of corporations connected through stock ownership with a common parent corporation if -- (A) stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of shares of all classes of stock of each of the corporations, except the common parent corporation, is owned by one or more of the other corporations; and the common parent corporation owns stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of shares of all classes of stock of at least one of the other corporations, excluding, in computing such voting power or value, stock owned directly by such other corporations.

Partner.  An individual, corporation, trust, estate, or other partnership that owns an interest in a partnership.

Partnership.  A conduit entity formed by two or more persons formally or informally joining together to make a profit. Also a syndicate, group, pool, joint venture, or any other unincorporated organization through or by means of which any business, financial operation, or venture is carried on, and that is not a corporation, trust, or estate.

Party to a Reorganization.  A term denoting a taxpayer that qualifies for the reorganization tax deferral provisions of the Code; this generally includes the acquiring company, the acquired company, and shareholders and security holders of the companies.

Passive Activity Loss.  Tax losses related to investments in ventures that are not classified as active or portfolio incomes, and that do not involve material participation.

Passive Income.  Income generated by activities in which the taxpayer does not materially participate.

Passive Income Test.  One of two tests to determine if a C corporation is a personal holding company or not. If 60% or more of adjusted ordinary gross income is passive in nature, then this test is met.

Passive Investments.  An investment is passive with respect to a particular taxpayer if that taxpayer does not materially participate in the management and operations of the business. For example, limited partners are generally passive investors in their partnerships. In contrast, sole proprietors generally materially participate in their businesses and are therefore considered active, not passive. Losses from passive investments can generally only be offset against income from passive sources. By definition, investments in stocks and bonds are classified as "portfolio investments" rather than passive investments.

Patent.  An officical document conferring or securing to an inventor the exclusive right to make, use, or sell an invention. The exclusionary period is generally 17 years.

Payment Liabilities.  Those liabilities designated by the Code or Regulations as requiring actual payment before the economic performance test is satisfied. These include such items as tort liabilities, taxes, rebates, and awards.

Payroll Period.  Any period of time in which a firm usually makes a payment of wages to one or more employees.

Payroll Taxes.  The sum of unemployment taxes and social security taxes. Typically, the term refers only to social security taxes (old age, survivor's and disability insurance and medicare insurance) because unemployment taxes phase out at low levels of compensation. The employer and the employee may pay as much as 7.65 percent of incremental wages.

Penalties for Early Withdrawal of Funds.  A deduction for AGI for amounts forfeited to a bank or savings institution as a penalty for premature withdrawal of funds.

Pension Plan.  A plan generally designed to provide income to an individual after they have retired. In this chapter, usually a plan that involves tax deferral.

Percentage Limitation.  A limitation imposed on the possessions credit which is equal to an applicable percentage of the possessions credit. The limitations are 50% in 1996, 45% in 1997, and 40% in 1998 and thereafter.

Percentage Markup Method.  A method of income reconstruction that applies the experience of the taxpayer in other years and information about other similar taxpayers or businesses to estimate a probable margin of profit and to reconstruct likely expenses. It is used when records are missing.

Permanent Differences.  Differences between financial accounting income and tax accounting income that will never reverse. They arise because tax law either prevents deductions that are allowed by GAAP or excludes income that must be recognized under GAAP.

Person.  An individual, trust, estate, partnership, association, company, or corporation.

Personal Exemption.  A deduction from AGI of a specified amount for the taxpayer and his or her spouse which is adjusted annually for inflation.

Personal Expenditure.  An expenditure that is not related to a trade or business or the production of income.

Personal Holding Company (PHC).  A C corporation that meets both the stock ownership test and the passive income test.

Personal Holding Company Income (PHCI).  A closely held C corporation's passive or portfolio income such as interest income, dividend income, certain rents and royalty income, etc.

Personal Property.  For purposes of the definition of Sec. 1245 property the term personal property means: tangible personal property, defined in the same way that term is defined for investment credit purposes and intangible personal property.

Personal Property Taxes.  Taxes imposed by a state or local government that are deductible if they are imposed annually on personal property and are based on the value of the property.

Personal Service Corporation.  Any corporation that generates substantially all of its income by providing personal services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, which are performed by owner-employees who own more than 10% of the value of the corporation's stock.

Personal Services Contract.  In the PHC context, income earned by a closely held C corporation where either the customer decides who provides the services or the contract does. This is a component of PHCI.

Personalty.  Tangible property other than land, buildings, or permanent additions or components of buildings.

Phantom Stock.  Compensation that tracks the value of company stock but which does not actually transfer shares to the employee.

Phaseout of Exemptions.  A reduction of the personal and dependency exemptions of a taxpayer whose adjusted gross income is greater than a specified threshold amount.

Plan of Reorganization.  The understanding (usually in writing) that expresses the intent of the parties contemplating a corporate reorganization.

Points.  Amounts paid by a borrower to obtain a mortgage. These amounts are also referred to as loan origination fees or loan discounts.

Ponzi Scheme.  An investment scheme in which the promoters use the funds from the last investors to invest to pay off earlier investors, because the scheme has no economic substance.

Pooling.  The process of combining several inventory items into one grouping for purposes of applying a dollar-value method of inventory valuation.

Portfolio Income.   Income generated by property held for investment, including the periodic payments (dividend and interest) and the net gains recognized on the property's sale or disposition.

Possessions Credit.  A tax credit equal to a percentage of the U.S. taxes imposed on the business and investment income from a possession.

Postponed Gain or Loss.  The difference between the realized (accounting) gain or loss and the recognized (tax) gain or loss.

Post-termination Transition Period.  A period of time in which a corporation may make a tax-free distribution of S corporation AAA to its shareholders after it no longer qualifies to be taxed as an S corporation. The period usually begins on the day after the last day of the corporation's last taxable year as an S corporation and ends one year later.

Predictability.  A key requirement for an accounting method. A proper accounting method that is consistently applied should be predictable as to the results of applying the accounting method.

Preferences.  Items that must be added back to taxable income for AMT purposes. They generally originated from pre-1987 tax year concepts and activities (e.g., accelerated depreciation on real estate).

Preferred Stock.  A second class of stock issued to outside investors with limited rights to vote and participate in the equity of the corporation. Preferred stock may have a wide range of rights and preferences regarding voting rights, dividend preference, convertibility, and redemption treatment.

Prepaid Amounts.  Any contract research expenses paid or incurred during any taxable year attributable to qualified research to be conducted after the close of such taxable year.

Preparer Penalty.  Generally, a $250 penalty may be assessed if a preparer takes a position on a return that lacks a realistic possibility of being sustained. The penalty does not apply if the position is not frivolous and is adequately disclosed. A $1,000 penalty may apply if a preparer willfully attempts to understate a taxpayer's liability or recklessly or intentionally disregards rules and regulations when preparing a return.

Prepayment System.  A concept that allows a credit against future years' regular tax liability for past years' minimum tax liability. The mechanism for this is the minimum tax credit.

Preproductive Expenses.  Defined under Reg. Sec. 1.162-12 to be the period in the growth of vines, trees, or animals prior to the harvest stage.

Pre-tax Dollars.  The money (wealth) that a taxpayer has before paying the appropriate taxes on the income that generated the money (wealth).

Primary Authority.  Consists of three "primary" sources of tax law: the statute, administrative pronouncements, and judicial decisions.

Principal Partners Rule.  The second test for a required year for partnerships, assuming that the majority interest rule is inconclusive. If all principal partners (those with interests exceeding 5%) have the same tax year, then that year is the required tax year for the partnership.

Principal Residence.  In general, the residence in which a taxpayer lived the majority of the year; other factors may be considered on a "facts and circumstances" basis if the taxpayer owns several residences.

Private Activity Bond Interest.  A category of interest income that is not taxable for regular tax purposes, but is for AMT.

Private Letter Ruling.  See "letter ruling."

Producers.  Taxpayers who manufacture goods for eventual resale.

Product Class.  The 4-digit coding system within Division D of the Standard Industrial Classification Manual that are used in certain cases to determine if items of personalty qualify for Sec. 1031 deferral.

Production of Income.  Profit-making activity in which there is no ongoing personal effort of an entrepreneurial nature and which is not a hobby.

Progressive Tax.  A tax is progressive when the rate of tax rises as the base increases.

Proper (Permissible) Accounting Method.  An accounting method that is specifically allowed under the Code, Regulations, rulings, or court decisions.

Property.  Anything a new owner might contribute to a corporation for use in its business except for future personal services to be rendered to the corporation.

Proportional Tax.  A tax is proportional when the rate stays the same as the base changes.

Proportionate Distribution.  A distribution to owners of an entity that is in proportion to their ownership interests.

Proposed Regulation.  Before final adoption of a regulation, the statute requires that it must first be issued as a "proposed regulation." Interested parties are invited to comment on the proposal. Proposed regulations are sometimes modified or withdrawn as a result of public input. Proposed regulations are not binding on taxpayers or on the I.R.S.; however, they may be cited as primary authority. Perhaps the most important role of proposed regulations is that they serve as a predictor of future action on the part of the I.R.S.

Prudent Man Rule.  A common law rule that restricts the investments made by a trustee or other fiduciary to those that would be made by a conservative individual looking out for their own best interest.

Purchase Price Basis.  When a buyer acquires assets in a taxable transaction, the purchase price becomes the adjusted basis in the acquired property. Holding period of the property will also begin on the date of purchase. If boot is received in a tax deferred transaction, the basis in the boot will also be determined under the purchase price rules.

Q

Qualified Employee Discount.  A discount offered on a nondiscriminatory basis to employees within a line of business. The discount may equal the gross profit percentage for goods or 20 percent for services.

Qualified Higher Education Expenses.  Tuition and fees not covered by scholarships or veteran's benefits and incurred by the taxpayer or the taxpayer's spouse or dependent in an eligible educational institution.

Qualified Pension Plan.  A pension plan that meets qualified pension plan federal tax law requirements. Such requirements include nondiscrimination rules and vesting rules. Qualified plans enjoy a variety of favorable tax treatments including deferral of tax on employer contributions until they are paid to employees in future years.

Qualified Plan.  A compensation arrangement that satisfies certain statutory requirements for tax-favored treatment. Generally, this term refers to a qualified pension or profit sharing plan offered by the employer.

Qualified Real Property Business Indebtedness.  Debt secured by real property used in a trade or business or investment activity by taxpayers other than C corporations.

Qualified Residence.  The taxpayer's principal residence and a second residence. Property that has sleeping space and toilet and cooking facilities is considered a residence and includes a house, condominium, cooperative apartment, houseboat, or trailer.

Qualified Residence Interest.  Interest paid or accrued during the year on debt incurred to acquire, construct, or substantially improve a qualified residence.

Qualified Timber Property.  For purposes of the reforestation credit, a woodlot or other site located in the United States which will contain trees in significant commercial quantities and which is held by the taxpayer for the planting, cultivating, caring for, and cutting of trees for sale or use in the commercial production of timber products.

Qualifying Properties.  Also termed like-kind properties, these are properties used in a trade or business or held for the production of income that qualify for Sec. 1031 deferral.

Qualifying Replacement Period.  The statutory length of time that a taxpayer has to acquire qualified replacement property and qualify for Sec. 1033 deferral on an involuntary conversion.

Qualifying Replacement Properties.  Property that is related in service or use to property destroyed due to an involuntary conversion and thus qualifies for Sec. 1033 deferral.

R

Real Property Taxes.  Taxes imposed for the general welfare by a local, state, or foreign government on land and buildings.

Realistic Possibility.  The standard that CPAs and attorneys must satisfy to take a position on a tax return. Treasury Circular 230 defines this standard as requiring that the position have a one-in-three chance of success if challenged.

Realized.  The occurrence of an economic event that may affect the taxpayer's economic position.

Realized Gain or Loss.  The difference between the fair market value and adjusted basis of property sold or disposed of.

Realty.  Tangible property that is either land, buildings, or permanent additions or components of buildings.

Reasonable.  Typically, the reasonable or reasonableness criterion is an issue in compensation situations. According to Reg. Sec. 1.162-7(b)(3), compensation payments are deductible only in an amount which is reasonable under all the circumstances of the particular situation. Reasonable compensation is the amount that would ordinarily be paid for like services by like enterprises under like circumstances. Thus, every case of reasonable compensation must stand on its own facts and circumstances.

Reasonable Business Needs.  An important concept for AET purposes that holds that if there is a need to accumulate earnings in the corporate solution for current or future business needs, then no AET will be imposed to that extent.

Reasonable Compensation.  The amount of compensation that an employee should be paid for the value of his or her services. In closely held corporations, the IRS may question whether the compensation levels for shareholders or family members of shareholders are reasonable.

Rebuttable Presumption.  A presumption that can be defeated if the Internal Revenue Service finds evidence to the contrary.

Recognized.  The amount of gain or loss actually included in taxable income.

Recognized Gain or Loss.  The amount of realized gain or loss that is taxable or deductible for income tax purposes. If there is a difference between realized and recognized it is usually a tax deferred transaction which is the subject of this module, an installment sale as discussed in Module 19, or it is a personal item for which loss is not allowed.

Recomputed Basis.  Except as provided for sports contracts and reforestation expenditures, a property's recomputed basis is its adjusted basis plus all depreciation or amortization deductions that (a) are reflected in that adjusted basis, (b) are attributable to the property or other property, and (c) were allowed or allowable to the taxpayer or to another person.

Recourse Debt.  Debt secured by property and the owners' personal guarantee. Upon default of a recourse debt, the creditor's recourse is not limited to the property. The general partners are personally liable for a recourse debt upon default by the partnership.

Recurring Item Exception.  A special exception to the economic performance rules for liabilities that are recurring in nature, meet the "all events" test, meet the economic performance test generally within 8 1/2 months following the close of the tax year, and are either not material or whose early accrual results in a better matching of expenses and income.

Redemption.  The act by a corporation of buying back its own stock (a treasury stock transaction), usually at no tax cost to the corporation and with capital gain treatment to the shareholder.

Refundable Credit.  A tax credit that can result in a tax refund if it exceeds the taxpayer's tax liability.

Regressive Tax.  A tax is regressive when a decreasing fraction of the base is taken as the amount of the base increases.

Regular C Corporation.  A taxpaying entity that has been authorized by state law.

Reg. Sec. 1.861-8(a)(3).  
(3) Class of gross income.

For purposes of this section, the gross income to which a specific deduction is definitely related is referred to as a 'class of gross income' and may consist of one or more items (or subdivisions of these items) of gross income enumerated in section 61, namely:

(i) Compensation for services, including fees, commissions, and similar items;
(ii) Gross income derived from business;
(iii) Gains derived from dealings in property;
(iv) Interest;
(v) Rents;
(vi) Royalties;
(vii) Dividends;
(viii) Alimony and separate maintenance payments;
(ix) Annuities;
(x) Income from life insurance and endowment contracts;
(xi) Pensions;
(xii) Income from discharge of indebtedness;
(xiii) Distributive share of partnership gross income;
(xiv) Income in respect of a decedent;
(xv) Income from an interest in an estate or trust.

Related Party Transfers.  A Sec. 1031 exchange with a person related to a taxpayer that is designed to assign the higher basis of the the related party's property to the property received from a taxpayer so that the property may be sold at little or no gain.

Remuneration.  Remuneration is the payment of an amount equivalent in value to a service, loss, or expense.

Reorganization.  The Code term that denotes a change in the capital structure of one or more corporations.

Representing a Client Before the I.R.S..  Representing a client before the I.R.S. generally arises in one of two ways:
(a) in connection with an I.R.S. examination of a client's tax return, or
(b) in connection with tax planning, such as a request for a private letter ruling from the I.R.S. regarding the tax consequences of a contemplated financial transaction.

Research and Experimentation Expenditures.  All costs as defined in Sec. 174 that are incident to the development or improvement of a model, process, formula, or invention.

Reseller.  A taxpayer who acquires property for resale but is not involved in the production of the property.

Reserve Method.  A formulary approach to determining the bad debt deduction, which assumes that a certain percentage of outstanding receivables will become uncollectible in the coming period. The percentage is typically based on the taxpayer's history with uncollectible debts.

Resident Alien.  An individual, although not a U.S. citizen, resides in the United States and meets either a physical presence test or has a green card.

Residential Realty.  For tax purposes, residential realty includes buildings where dwelling unit rentals to nontransients account for 80% or more of the gross income generated by the property (e.g., residential apartments).

Residual Grouping Income.  U.S. source income for purposes of apportioning expenses or deductions to U.S. and foreign income.

Responsible Person.  Any officer of a corporation, partner, sole proprietor, any employee, or any trustee or agent who has authority over the funds of a business.

Restricted Stock.  An award of stock to an employee that may be forfeited if the employee fails to satisfy factors specified in the plan, such as remaining in employment for a specified number of years or meeting a specified performance goal.

Retail Method.  An inventory method where goods are initially valued at retail sales prices, then converted to cost by a reduction for the gross profit percentage after reflecting markups and markdowns.

Return of Capital.  A nontaxable cash or property distribution to a shareholder that exceeds the corporation's earnings and profits.

Return Preparer.  A person who is compensated for preparing an income tax return or a claim for refund. Only one person from a firm may be considered to be a preparer of a tax return.

Revenue Act.  When a tax measure is officially enacted, it is referred to as a Revenue Act. Many acts are given descriptive titles, such as the Tax Reform Act of 1986. The measure is also assigned a public law number. For example, the Revenue Reconciliation Act of 1993 is P.L. 103-66.

Revenue Procedure.  An administrative pronouncement issued by the I.R.S. A Revenue Procedure pertains to procedural matters, such as the manner in which a method of accounting is to be changed, a tax year is to be adopted, or an election is to be made. Often, Revenue Procedures are concerned with the rights and responsibilities of taxpayers in dealing with the I.R.S. Revenue Procedures are released by the I.R.S. in its weekly publication, the Internal Revenue Bulletin, and later compiled in Code section sequence in the semiannual publication, the Cumulative Bulletin.

Revenue Ruling.  An administrative pronouncement issued by the I.R.S. Typically, a Revenue Ruling deals with the application of the tax law to a specific set of circumstances. Revenue Rulings are released by the I.R.S. in its weekly publication, the Internal Revenue Bulletin. The rulings are later compiled in Code section sequence in the semiannual publication, the Cumulative Bulletin.

Risk of Forfeiture.  The possibility that an employee may forfeit property if the employee fails to satisfy factors specified in the plan, such as remaining in employment for a specified number of years or meeting a specified performance goal.

Rollover.  A transfer of funds from one tax deferral vehicle to another without incurring an income tax.

S

S Corporation.  S corporations are regular corporations for state law purposes (i.e., shareholders have limited liability), yet their income is generally not taxed at the corporate level. Instead it is only taxed at the shareholder level, thereby avoiding the double taxation on corporate dividends that exists for dividends paid by C corporations.

S Termination Year.  The last tax year in which a corporation qualifies to be taxed as an S corporation. If the terminating event occurs during the tax year, two short-period tax returns must be filed--one S corporation return and one C corporation.

Salary.  Compensation for services rendered.

Schedule A.  A tax form that is attached to an individual's Form 1040. It lists itemized deductions.

Schedule C.  A tax form that is attached to an individual's Form 1040. Schedule C is essentially an income statement for a sole proprietor. It lists revenue, expenses, and net income or loss.

Schedule M-1.  Schedules on the income tax returns prepared for C corporations (Form 1120), S corporations (Form 1120S), and partnerships (Form 1065), that are used to reconcile an entity's book (financial) income to some measure of its taxable income.

Schedule M-2.  Schedules on the income tax returns prepared for C corporations (Form 1120), S corporations (Form 1120S), and partnerships (Form 1065), that are used to analyze an entity's equity accounts. Those accounts include unappropriated retained earnings for C corporations; partners' capital accounts for partnerships, and accumulated adjustment accounts, other adjustments accounts, and shareholder's undistributed taxable income previously taxed for S corporations.

Scholarship.  A grant-in-aid to a person to fund knowledge and learnings.

Section 83(b) Election.  An election made by an employee who receives property subject to a risk of forfeiture. The employee elects to be taxed as if the forfeiture risk did not exist.

Section 197 Intangibles.  Goodwill, going concern value, and certain other intangibles acquired after August 10, 1993 that qualify for a 15-year amortization period.

Section 306 Stock.  Preferred stock originally issued in a tax-free transaction which would have resulted in a taxable dividend.

Section 444 Election.  A special election for partnerships, S corporations, and personal service corporations that allows such entities, within limits, to use a tax year other than the required tax year. The price for this privilege is either required advance payments (for partnerships or S corporations) or possible disallowance of certain compensation deductions (for personal service corporations).

Section 444 Year.  A tax year for a flow through entity that allows no more than three months of income deferral when compared to the entity's required tax year. The flow through entity must be individually (or separately) reported to each of the owners so that they can determine how the items affect their tax situation.

Section 471 Costs.  Manufacturing costs (direct labor, direct materials, and factory overhead) that are required to be capitalized under the full absorption costing method.

Section 481 Adjustment.  A cumulative adjustment sometimes required with a change of accounting method so that income or expenses not recognized under the old accounting method (but not currently reportable under the new accounting method) will not escape taxation.

Section 530 Relief.  A section of the Revenue Act of 1978 which offers relief to employer's who have not complied with the wage withholding requirements with respect to compensation paid to certain workers. It does not refer to a section in the Internal Revenue Code.

Section 736(b) Payments.  Payments to a retiring or deceased partner for his or her interest in the assets of the partnership. If the partnership agreement specifically provides for the payment of goodwill, the payment will always be classified as a Sec. 736(b) payment. These payments are part tax-free return of basis and part gain (ordinary or capital, depending upon the nature of the partnership's assets).

Section 754 Election.  A written election to adjust the bases of partnership assets when gain is recognized by a partner or partnership upon any transfer of a partnership interest.

Section 1202 Stock.  Specially qualified stock in a small business corporation that was issued after August 11, 1993 which entitles an owner who holds it for five years to exclude from gross income 50% of any gain realized on a sale.

Section 1244 Stock.  Specially qualified stock in a small business corporation which entitles shareholders who comply with the provisions of this section to ordinary loss treatment if the stock is sold or exchanged.

Self-employed Health Insurance Deduction.  A deduction for AGI permitted to a self-employed taxpayer for 60% (in 200) of the amount paid for medical insurance for himself, his spouse, and his dependents.

Self-employment Tax.  The social security and hospital insurance tax imposed on self-employed taxpayers.

Self-insured Medical.  A medical reimbursement plan in which the employer, rather than a reimbursement plan insurance company, reimburses employees for their medical expenses.

Self-rehabilitated.  For purposes of the rehabilitation credit, any building if it is reasonable to believe that more than half of the qualified rehabilitation expenditures for such building will be made directly by the taxpayer.

Separate Maintenance Payments.  Payments made by one spouse to the other spouse for the purpose of equalizing their income after a separation.

Separately Stated Item.  An item of income, gain, deduction, or loss reported by a flow through entity that can have a different tax treatment to different owners. Such items must be individually (or separately) reported to each of the owners so that they can determine how the items affect their tax situation.

Service Costs.  Indirect manufacturing costs of an activity or department that benefit production activities or other service activities.

Severance Damages.  Payments designed to compensate a taxpayer for a decrease in the value of noncondemned property due to a condemnation of a portion of the property.

Sham Transaction.  A term used to signify a tax transaction that has no economic substance.

Short Taxable Year.  A tax year of less than 12 months, generally caused by a change of accounting period. A taxpayer's first or last return may also involve a short period.

Short-term Capital Gain.  The term "short-term capital gain" means gain from the sale or exchange of a capital asset held for not more than one year, if and to the extent such gain is taken into account in computing gross income.

Short-term Capital Loss.  The term "short-term capital loss" means loss from the sale or exchange of a capital asset held for not more than one year, if and to the extent that such loss is taken into account in computing taxable income.

Sick Pay.  An amount paid to an employee during which time the employee is temporarily absent from work on account of sickness or personal injuries.

Simplified Dollar Value Method.  An elective dollar-value LIFO inventory method that groups inventories into multiple pools and uses published indexes (Consumers Price Index or Producers Price Index) to value the ending inventories in a link- chain fashion.

Simplified Employee Pension (SEP).  A written retirement plan for sole proprietors and small businesses that allows the business owner to make deductible contributions to an individual retirement arrangement (called a SEP-IRA) for the owner and common-law employees.

Simplified Resale Method.  An elective method of assigning additional Sec. 263A costs to an ending inventory that is initially determined using the Sec. 471 absorption costing rules. The ratio of total Sec. 263A costs related to purchasing costs and handling costs to total Sec. 471 costs (the combined absorption ratio) is multiplied by total Sec. 471 costs in the ending inventory to determine this additional amount.

Simplified Production Method.  A procedure for estimating the additional Sec. 263A costs for a producer based on the relationship of total Sec. 263A costs to total production costs.

Simplified Service Cost Method.  An elective method of assigning service costs to inventories that uses an "allocation ratio," either based on the ratio of total Sec. 263A labor costs to total labor costs or total Sec. 263A production costs to total costs. Producers may use either allocation ratio, but resellers may only use the labor cost ratio.

Single.  A taxpayer who, on the last day of the tax year, is unmarried or separated from a spouse by divorce or separate maintenance decree and does not qualify for another filing status.

Social Security Number (SSN).  A nine-digit number assigned by the Social Security Administration to any person who furnishes evidence of age, identity, and US citizenship or residency.

Sole Proprietor.  An individual engaged in a trade or business.

Special Allocation.  An allocation to the partners of a partnership or the members of a limited liability company that does not follow the owners' interest in the entity. For example, an allocation of 20 percent of the losses to a partner who owns a 10 percent interest in the entity is a special allocation. The special allocation will be respected for tax purposes if it has substantial economic effect.

Specialized Small Business Investment Companies (SSBIC).  A partnership or corporation licensed by the Small Business Administration Act of 1958 as effective on May 13, 1993. Investments in such companies qualify for a limited rollover of invested funds in such entities under Sec. 1044.

Specific Charge-off Method.  A method of determining the bad debt deduction by identifying the specific loans (or portions thereof) that are uncollectible, then deducting the related amount.

Specific Identification System.  An inventory system using the actual costs of goods sold in determining gross income. This system is used most frequently for unique or expensive items where the specific costs can be identified with the specific product.

Standard Cost Method.  A method of accounting for producers where expected costs are preassigned for all elements of product cost (direct materials, direct labor, and factory overhead). This preestablished cost is used to cost goods, and variances between actual and standard costs are allocated between cost of goods sold and ending inventory at the end of the year.

Standard Deduction.  A deduction from AGI of a basic amount which prevents taxpayers with minimal income from being subject to taxation. The standard deduction depends on the taxpayer's filing status and is adjusted annually for inflation.

Standard Federal Tax Reports ("SFTR").  An annotated tax service published by Commerce Clearing House, Inc.

Standard Mileage Rate.   A method of calculating business use of an automobile by multiplying the number of business miles by an annually published per-mile rate.

Start-up Costs.  Costs incurred in bringing a business to the point of regular, daily operations selling goods or services to customers.

Startup Firm.  For purposes of the research credit, a firm that had fewer than three taxable years beginning after December 31, 1983, and before January 1, 1989, in which the taxpayer had both gross receipts and qualified research expenses.

Statutory Employees.  Employees, including full-time life insurance salespeople, certain agents or commission drivers, traveling salespeople, and certain homeworkers, who are not common-law employees but are treated as such for FICA purposes. Nonetheless, their income and business expenses are reported on Schedule C of Form 1040.

Statutory Grouping Income.  Foreign source income for purposes of apportioning expenses or deductions to U.S. and foreign income.

Statutory Incidence.  Refers to the tax entity that pays the tax burden, as identified in the tax law.

"Steps-into-the-shoes": The transfer of an ownership interest in which the new owner's basis is the same as the prior owner's basis.

Stock.  Evidence of an ownership interest in a corporation.

Stock Appreciation Rights.  An award of units that pays the employee for increases in the value of company stock without actually giving the employee legal ownership of the shares. Commonly used in closely held corporation in which the shareholders want to maintain control.

Stock Attribution Rules.  Also called Constructive Ownership. There are several sets of rules that attribute stock of one owner to another person. In the PCH area, the rules of Section 544 are used to determine if five or fewer individuals own more than 50% of the stock.

Stock Ownership Test.  One of two tests necessary for a C corporation to be treated as a PHC. If five or fewer individuals own more than 50% of the stock any day during the last half of the year, than this test is met.

Straight-line Depreciation.  Depreciation deductions that are equal over most of the depreciation period (i.e., recovery period).

Subpart F Income.  Income of a controlled foreign corporation that is from foreign operations in which mobile capital is dominant.

Substantial Economic Effect.  The test that must be satisfied for a special allocation to be respected for tax purposes. The allocation must have economic effect, and that economic effect must be substantial.

Substantial Understatement.  An understatement that exceeds the greater of (i) $5,000 ($10,000 for most corporations), or (ii) 10 percent of the tax that should have been shown on the return. A 20 percent penalty may be assessed if an understatement is substantial, unless the position had substantial authority or was adequately disclosed on the return.

Substantially Rehabilitated.  For purposes of the rehabilitation credit, a structure for which the expenditures on rehabilitation over a 24-month period exceed the adjusted basis of such building (and its structural components) or $5,000.

Substituted Basis.  When property is received in return for property given up, such as in a like-kind exchange or in a Sec. 351 or 721 transaction, the transferor's basis will be governed by the substituted basis rules. This generally means that adjusted basis of the property received will equal the fair market value of the property received minus the nonrecognized gain or plus the nonrecognized loss. Any boot property will take its fair market value as its adjusted basis.

Superfund Environmental Tax.  An excise tax that despite its name is independent of the C corporation's business activities. It only applies if a corporate taxpayer's alternative minimum taxable income, before NOLs, exceeds $2,000,000.

Supreme Court.  Decisions of the U. S. Supreme Court constitute the law of the land. As such, these decisions occupy the same level of importance as does the Internal Revenue Code. In general, a principle of law that has been established by the Supreme Court can be overturned in one of only two ways: (1) Congress may enact new statutes, or (2) the high court may reverse itself.

Surtax, Tax Bubble, or Excise tax.  A mechanism for increasing the marginal tax rate on taxable income over a specified range of income. The increase in the marginal rate can apply to income over the entire range or the amount can be capped at a specific dollar amount.

Surviving Spouse.  Certain widows and widowers who, for up to two years following the year of a spouse's death, can qualify to use the same standard deduction and tax rates as a married couple.

Suspended Loss.  The excess of expenses from all passive activities over the income from all passive activities. A suspended loss is not deductible in the current year, but it can be carried over to subsequent tax years until fully used.

Syndication Costs.  Costs incurred to market or sell a partnership interest.

T

Tacking On.  Adding the holding period of a former owner to the holding period of the current owner.

Tax Attributes.  Favorable tax benefits as designated in the Code, such as net operating loss and capital loss carryovers, that are subject to reduction under Sec. 108 to the extent that a forgiven debt is excluded from income.

Tax Avoidance.  The art of minimizing a taxpayer's bill within the terms of the tax law.

Tax Base.  The quantity that is going to be taxed.

Tax Benefit.  The reduction in taxes that occurs when the deduction in question is taken.

Tax Benefit Rule.  An important tax principle that requires the recognition of gross income from the recovery of a previously deducted item to the extent that the prior deduction reduced taxes in the prior year.

Tax Bubble, Surtax, or Excise Tax.  A mechanism for increasing the marginal tax rate on taxable income over a specified range of income. The increase in the marginal rate can apply to income over the entire range or the amount can be capped at a specific dollar amount.

Tax Court.  One of the three courts of original jurisdiction concerning litigation of Federal tax issues. The Tax Court's jurisdiction is limited to cases where the taxpayer is contesting an I.R.S. proposed tax deficiency. There are no jury trials in the Tax Court. Decisions of the Tax Court are appealable through the Circuit Courts of Appeal.

Tax Credit.  A dollar-for-dollar reduction of the tax liability which is considered to be a payment of the tax.

Tax Deferral.  What happens when an item of income is earned in one period, but is subjected to tax in a future period.

Tax Deferred Annuity.  A special kind of pension vehicle available under Code Sec. 403(b) only to employees of public educational institutions and certain other tax-exempt organizations.

Tax Evasion.  The act of reducing one's tax liability by breaking the tax law.

Tax Formula.  Gross income less exclusions, adjustments, and deductions which is used to compute the tax expense.

Tax Haven Income.  Income from countries that impose low tax rates.

Tax Identification Number.  A number assigned by the Internal Revenue Service to various business entities which is used to identify their tax filings.

Tax Incidence.  Refers to the entity that actually bears the tax burden, by virtue of the ability of the taxpayer that pays the tax to shift it to another party. Tax burdens are shifted by changing pricing, compensation, and dividend payment arrangements.

Tax Planning.  The arrangement of a client's property transactions, investments, business affairs, and personal financial matters so as to minimize the client's tax liability.

Tax Practice.  May include tax compliance, tax research and tax planning. Practice before the Treasury Department refers to taking an advocacy role on behalf of the taxpayer.

Tax Practitioner.  An expert in tax planning, tax research, and tax compliance.

Tax Preferences or Adjustments.  Items that are treated differently for AMT purposes and regular tax purposes. A preference involves the addition of the difference between the AMT treatment and the regular tax treatment while an adjustment involves a substitution of a special AMT treatment of an item for the regular tax treatment. Adjustments can be positive or negative amounts.

Tax Rate.  The rate specified in the tax law.

Tax Rate Change.  A tax rate change means a change in the rate of any tax imposed by Chapter 1 of the Code.

Tax Rate Schedules.  Schedules made up of five tax brackets: 15%, 28%, 31%, 36%, and 39.6% which are indexed upwards for inflation each year.

Tax Research.   The process of identifying tax issues that pertain to a financial transaction, locating and analyzing the authoritative tax laws that apply to the issues, and developing answers to the tax issues regarding the proper tax treatment of the transaction.

Tax Return Preparation.  The process of reporting a client's income and deductions on appropriate tax forms and determining a client's tax liability in compliance with authoritative tax law.

Tax Return Preparer Penalties.  Civil penalties are imposed on tax return preparers for failure to sign a return, omission of the preparer's tax identification number, and other practice related matters. Additionally, significant penalties are imposed for such acts as negligent or willful understatement of a tax liability, intentional disregard of rules and regulations, and improper disclosure of information for any purpose. Refer to Module 3.

Tax Shelter.  In general, an investment activity designed specifically to minimize the tax effects of the income tax on wealth accumulation. Most generate tax losses and positive cash flows.

Tax Shifting.  Tax shifting occurs when a tax is imposed on one person or entity, but in reality is paid by another. Thus, a real-estate tax which is collected from the property owner, but which the owner passes on to the tenants is shifted from the landlord to the tenants.

Tax Tables.  A table of gross tax liabilities for each filing status.

Taxable Entity.  Entity that is liable for the payment of tax on taxable income.

Taxable Income.  As defined by 63, gross income minus allowed deductions.

Taxes.  Charges imposed on persons or property by governmental authority to raise funds for the support of government or for public purposes.

Tax-exempt Income.  Income that is not subject to taxation. The most typical example is interest earned on municipal bonds (bonds issued by states, cities, and municipalities).

Taxpayer Penalties.  Civil penalties are imposed on taxpayers for failure to file a tax return or pay tax, late filing or late payment of tax, negligence, substantial understatement of tax, filing of a frivolous suit, and other reasons, as discussed in Module 3.

TCMP.  An acronym for Taxpayer Compliance Measurement Program. This program uses very detailed audits, in which the taxpayer must substantiate every entry on a tax return, to determine those areas in which compliance with the tax laws is low. TCMP audits assist in developing IRS audit policies. The audits are very costly for both the government and the taxpayer, and have been criticized. The IRS planned to conduct a large number of such audits beginning in late-1995 but was forced by budget limitations (and perhaps by criticism) to put the TCMP audits on hold.

Temporary Differences.  Timing differences between financial accounting income and tax accounting income. They arise because tax law requires the same amount of income recognition and allows the same amount of deductions as GAAP, but not in the same time periods.

Temporary Regulation.  In matters of expediency, the Commissioner may issue a temporary regulation without the normal public hearings. Temporary regulations usually pertain to procedural matters. Generally, a temporary regulation has the same force and effect as does a final regulation.

Tentative Alternative Minimum Taxable Income (TAMTI).  Also called pre-adjustment AMTI. This is the number prior to the ACE adjustment, the AMTNOL, and the statutory exemption.

Tentative Minimum Tax.  The tentative minimum tax is the taxpayer's alternative minimum tax reduced by the alternative minimum foreign tax credit.

Term Loan.  A loan that is payable at a specified due date; any loan that is not a demand loan.

Theft.  Property that is stolen (within the meaning of Sec. 165) in an act that is considered to be a crime.

Thinly Capitalized.  Capitalizing a corporation with a nominal amount of capital stock (often the minimum required by state law) and exchanging the remaining contributions for debt securities.

Three-Corner Exchange.  A Sec. 1031 exchange involving three parties, usually due to the fact that Party 1 wants Party 2's property, but Party 2 does not want 1's property. As a result, Party 1 acquires property from Party 3 that will satisfy Party 2, and the exchange between 1 and 2 occurs.

Time-space Percentage.  A calculation that applies to the home-office expenses of home day care providers, which allocates personal residence expenses to business use by a percentage of square footage multiplied by the time the area is used for business.

Timing.  An expression referring to when an item of income or expense is reported for tax purposes.

Tip.  A gift or sum of money tendered for a service performed. Tips are included in gross income of the person receiving the tip.

Total Contract Price.  The selling price reduced by that portion of any qualifying indebtedness assumed or taken subject to by the buyer, which does not exceed the seller's basis in the property.

Trade or Business.  An activity in which a taxpayer maintains an active and continuous involvement with the intent of making a profit.

Transfer Tax.  A tax levied on the transfer of property between legal entities; includes the U.S. gift and estate taxes and state inheritance taxes.

Transportation Expenses.  Ordinary and necessary expenses of getting from one workplace to another in the vicinity of the taxpayer's home.

Travel Expenses.  Transportation, meals, and lodging incurred while pursuing a trade or business.

Treasury Decision.  A document issued by the Treasury Department to signify the Treasury's approval of a new I.R.S. regulation or an amendment of an existing regulation. A Treasury Decision is often referred to as a "T.D." The date of the T.D. establishes the effective date of a new regulation or of an amendment.

Trust.  A legal and taxable entity established when a grantor transfers title to assets to a fiduciary, who assumes a stewardship role over the property on behalf of the trust's beneficiaries.

Trust Fund Recovery Penalty.   V-1700 Trust Fund Recovery (100%) Penalty for Responsible Person's Failure to Collect, Account for, and Pay Over Tax
Any person required to collect, truthfully account for, or pay over tax who willfully fails to collect the tax or to truthfully account for and pay over the tax, or who willfully attempts in any manner to evade or defeat the tax or its payment, is liable for a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. 1
fn1 Code Sec. 6672(a)
This "trust fund recovery penalty" (i.e., the "100% penalty") contains two basic elements: the taxpayer must be a "responsible person" who "willfully" violates his responsibility. A person need only be responsible for one of the three duties (collect, account for, and pay over) in order to be subject to the trust fund recovery penalty.  2
FN2 Slodov, Ike In re, (1978, S Ct) 42 AFTR 2d 78-5011

Twenty-factor Control Test.  Factors used to indicate the degree of control a firm has over a worker. The factors are listed in Rev. Rul. 87-41.

U

U.S. Source Income.   Income from sources in the U.S.

Underpayment Penalty.  A penalty imposed on a taxpayer who is required to make estimated tax payments and fails to do so. The penalty is the amount of the underpayment for the period of the underpayment multiplied by the applicable underpayment rate.

Undistributed Personal Holding Company Income.  A modified version of corporate taxable income that is taxed at 39.6% if the company is a PHC. Adjustments are made for dividends paid, federal income taxes, capital gains, etc.

Unearned Income.  Income generated by activities in which the taxpayer does not materially participate, including investing activities that generate periodic payments (dividend, interest, and rents) and the gains and losses when property is disposed of.

Unfunded Plan.  A deferred compensation arrangement in which the employer does not irrevocably set aside funds to satisfy the promise to pay deferred compensation. An unfunded plan includes an arrangement in which the employer sets aside funds that creditors may reach.

Uniform Capitalization Rules.  The comprehensive Sec. 263A inventory capitalization rules that extend the principle of full absorption costing of Sec. 471 to include a number of costs that were previously treated as period costs (primarily mixed service costs).

Unique Item.  A manufactured product that is a fundamentally new item and is usually custom-designed for specific customers. Because of these characteristics, such products may be accounted for under the long-term contract rules of Sec. 460.

Unitary Principle.  A business is considered unitary if its income-producing activity in a state is inextricably related to its activities in another state.

United States Tax Reporter ("USTR").  An annotated tax service published by Research Institute of America.

Unrealized Receivable.  A right to a payment that has not previously been included in income of the partnership because of the method of accounting adopted by the partnership. For example, the accounts receivable of a cash method service partnership are "unrealized receivables." Certain ordinary income recapture potential present in partnership assets is also classified as an unrealized receivable. For example, accumulated depreciation for a Sec. 1245 depreciable asset could be considered an "unrealized receivable."

Unreimbursed Employee Expenses.  Expenses paid or incurred during the year to carry on the business of being an employee.

V

Vacation Rental Home.  A residence of the taxpayer (usually a second home) that is rented but does have significant personal usage (the personal usage exceeds the greater of 14 days or 10% of the days rented).

Vertical Equity.  Vertical equity is achieved when taxpayers in different tax situations pay taxes that cause them to make an equal sacrifice in paying the tax.

Vest.  To become fixed. In a pension situation, an amount vests when the employee has a right to an amount regardless of his or her future actions.

Vesting.  An employee's right to pension benefits is vested when the employee retains that right even if he or she terminates employment with the employer voluntarily or involuntarily.

Voluntary Termination.  The revocation of an S corporation election by a majority of the shareholders. A written statement must be filed with the Internal Revenue Service Center where the original S corporation election was filed.

W

Wages.  Payment for services performed by an employee, including not only cash but also the cash value of all benefits paid in any medium other than cash.

Wherewithal-to-pay Concept.  A fundamental tax principle that assumes that a tax should be collected when the taxpayer is best able to pay the tax and the government is best able to collect the tax.

Willfully.  Willfully in this case means voluntarily, consciously, and intentionally acting. For example, paying other expenses of the business instead of the taxes due is considered to be acting willfully.

Withholding Allowances.  An amount based upon the personal exemption amount. If wages are less than this amount, the employee is not subject to income tax withholding.

Working Condition Fringe.  A fringe benefit that would be deductible by the employee if the employee had paid for the benefit.

Working Interest.  An interest in an oil or gas activity that involves outright ownership of the operation, or ownership as a general partner, with unlimited personal liability for all of the operation's debts.

Worker's Compensation.  Workers' compensation, traditionally called workmen's compensation, is the name commonly applied to statutes that give protection and security to workers and their dependents against injury, disease, or death occurring in the course of employment. The statutes in general establish the liability of an employer for injuries suffered by workers, and benefits--generally financed by insurance bought by the employer--usually include hospital and other medical payments and compensation for loss of income. In the late 1800s various European countries instituted the first workers' compensation programs. In 1911, Wisconsin passed a workers' compensation act--the first U.S. social security program--that was upheld by the Supreme Court, and other states followed Wisconsin's lead. Today, all 50 states have workers' compensation statutes.
Copyright - 1993 Grolier Electronic Publishing, Inc.

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