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 New concepts were codified, old provisions were repealed, and the statute was renamed as the 1986 Internal Revenue Code.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.
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 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.