CASES AND MATERIALS

FEDERAL INCOMETAXATION

SIXTH EDITION

by

PAUL R. MCDANIELProfessor of Law andJames J. Freeland Eminent Scholar in TaxationUniversity of Florida

MARTIN J. MCMAHON, JR .Clarence J. TeSelle Professor of LawUniversity of Florida

DANIEL L. SIMMONSProfessor of LawUniversity of California at Davis

GREGG D. POLSKYSheila M. McDevitt Professor of LawFlorida State University

FOUNDATION PRESS THOIVISOISI

ANNIVERSARY WEST

ACKNOWLEDGEMENTS

We gratefully acknowledge the permission extended by the followingpublishers to reprint excerpts from the articles and books listed below. Theacknowledgements are set forth in the order in which the excerpts of worksappear in this volume.Excerpt From: PageRichard Goode, "The Economic Definition of Income" in Joseph

A. Pechman, ed., Comprehensive Income Taxation: TheBrookings Institution, 1977. 5

Noel B. Cunningham, "The Taxation of Capital Income and TheChoice of Tax Base," 52 Tax Law Review 17 (1996). 9

Donald B. Marsh, The Taxation of Imputed Income: Reprintedby permission of the Political Science Quarterly from vol. 58p. 514 (1943). ( 83

Gene Steuerle, Back-Loaded IRA's: Head Taxes Replace Incomeand Consumption Taxes, 77 Tax Notes 109 (1997), Reprint-ed with permission, Copyright 1997, Tax Analysts.

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TABLE OF CONTENTS

PREFACE — — .— - - — . . . . : . . . . iiiACKNOWLEDGEMENTS - — - -— - - — vii

INSTRUCTOR'S NOTE - . - — . - - — ix

TABLE OF INTERNAL REVENUE CODE SECTIONS — — - xli

TABLE OF TREASURY REGULATIONS — - - —- - lxxiTABLE OF CASES AND RULINGS.--- ~. - - . - - — — lxxxi

PA R T I Introduction to Federal Income Taxation— 1

CHAPTER 1 Introduction - - - 1

Sec.1. An Overview of Policy Issues and the Current Income Tax 1

A. Selection of a Tax—Goals and Criteria - -~ —- 1B. Definitions of Income and a Comparison of Income vs. Con-

sumption as the Tax Base - - — - 4Goode, "The Economic j Definition of Income" in Pechman

(Ed.), Comprehensive Income Taxation --- - 5Cunningham, The Taxation of Capital Income and the Choice

of Tax Base — — — —- —- - 9C. The Structure of the Income Tax and Selected Policy Issues---- 13

(1) Defining the Tax Base —- - - — 13(a) General — - - — — 13(b) Income From Property . - -.- — - 14

(2) Establishing the Rate Structure . . - - 16(3) Defining the Taxable Unit - — —- —- 17(4) Determining the Taxable Period and the Taxable Income

for That Period —- — —- — 18(5) Other Key Concepts — — — - 19

(a) Timing - —- —- — - 19(b) Tax Expenditure Analysis — 20

2. The Road to the Sixteenth Amendment — 20A. Introduction . - -- - - - - 20B. The Early Years - —- —- - - —- 22C. The 1894 Income Tax—Legislative Victory and Judicial Defeat 23D. The Sixteenth Amendment ~ - —• -~. — 24

Illustrative Material - - - - 253. The Federal Income Tax System — 25

A. The Legislative Process -— -- — - 25B. The Administrative Process - - — 28

(1) General Organization of the Internal Revenue Service 28(2) Administrative Interpretation of the Tax Laws - 29

C. The Judicial Process - - — - - — 33(1) Original Jurisdiction - - 33

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Sec.

3. The Federal Income Tax System—Continued(2) Appellate Jurisdiction —- — 35(3) IRS Acquiescence and Nonacquiescence - - - - - - 36

D. A Brief Survey of Income Tax Procedure - -- 36(1) Current Payment-— - - —- 36(2) Filing of Return and Final Payment - - 37(3) Investigation of Returns and Settlement Procedure - - 38(4) Tax Court Proceedings - —- —- - 40(5) Refund Procedure---- .— —- - 41(6) Interest, Penalties, and Attorneys' Fees - - - - - 42(7) Conclusion- - — — .— 47

E. The Tax Adviser - —- — —- 48Treasury Decision 9165 — 48American Bar Association Formal Opinion 85-352 - 54Report of the Special Task Force in Formal Opinion 85-352 .— 57Illustrative Material — —- —- 60

P A R T II Gross Income —- —- — — - 63

C H A P T E R ( 2 General Principles of Gross Income - 63

Sec.

1. Income — — — -- 63A. Increase in Net Worth — — - 64

Commissioner v. Glenshaw Glass Co -- -- 64Illustrative Material — — — -- 67

B. Indirect Receipts - — — 68Old Colony Trust Company v. Commissioner.— 68Illustrative Material — ~- — 70

2. The Realization Requirement-- —- — — 72Eisner v. Macomber - — - 72Helvering v. Bruun - - — 76Illustrative Material— — --- --- - 78

3. Imputed Income .— — 83Marsh, The Taxation of Imputed Income - -- — 83Illustrative Material — - 85

CH A P T E R 3 Compensation for Services and IndirectPayments-- : —- —- — 87

Sec.

1. Noncash Transactions —- — —- — 87Revenue Ruling 79-24. — —- — - 87Illustrative Material — 88Rooney v. Commissioner -- - - — - - 88Illustrative Material- -- -- -- 91

2. Deferred Compensation Arrangements — 94United States v. Drescher — - - —- 94Illustrative Material -- -- — -- 98

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Sec.3. Employee Fringe Benefits —- —- — — 99

A. Exclusions Based on Tax Policy and Administrative Conven-ience —- --- -- - 101

General Explanation of the Revenue Provisions of the DeficitReduction Act of 1984 — —- — 101

Illustrative Material -- — -- 109B. Employee Benefits Excluded from Gross Income to Further

Social Policy Goals - — — - - 119Illustrative Material - --- I- — 119

CHAPTER 4 Gifts, Inheritances, and Similar Items-- 126

Sec.1. Gifts and Inheritances -~ -— 126

A. Exclusion for Gifts and Inheritances - — -- 126Illustrative Material---- -— —- -— 127

B. The Meaning of "Gift" or "Inheritance" - 127Commissioner v. Duberstein -- -- -- - 127Illustrative Material -— —- — 135

2. Life Insurance Death Benefits— — — — 142Illustrative Material - —- — — -- 142

3. Prizes — — - - 145Illustrative Material —- — ---- - 146

4 Scholarships — — - - — — 147General Explanation of the Tax Reform Act of 1986 - - 147Illustrative Material ---- -— -- - - 151

5. Governmental Subsidies and Related Items — - - 154A. Business Subsidies —- —- -- — 155

Illustrative Material — -- - 155B. Social Welfare Payments —- - 156

Notice 99-3 — -— —- — 157Illustrative Material — —- -- 159

CH A P T E R 5 Loans and Other Receipts Balanced byOffsetting Obligations —. — - 163

Sec.1. Loans— —- —- 163

Milenbach, et al. v. Commissioner - 163Illustrative Material - -— - 167

2. Claim of Right Doctrine — 169North American Oil Consolidated v. Burnet- 169Illustrative Material.— —- — - - 170

3. Illegal Income — —- —- 172James v. United States - -- — -~ 172Illustrative Material -— ~- -— 178

4. Deposits -— — 181Commissioner v. Indianapolis Power & Light Co - 181Illustrative Material -— -- —- 186

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Sec.5. Conduit Situations - 188

Revenue Ruling 68-512 188Illustrative Material — '-- 189

CH A P T E R 6 Income From the Disposition of Property.— 193

Sec.

1. Introduction - 1932. Realization of Gain or Loss 195

A. Mortgaging Property as a Disposition 195Woodsam Associates, Inc. v. Commissioner - 195Illustrative Material -- — — 197

B. Realization As Material Change--- 198Cottage Savings Association v. Commissioner 198Illustrative Material 206

3. Determining the Amount of Gain 210A. Sales of Property and Transfers of Property in Satisfaction of

a Claim - —- -— — 210International Freighting Corporation, Inc. v. Commissioner 210Illustrative Material---- -- 213

B. Basis of Property Received in an Exchange - - 217Philadelphia Park Amusement Co. v. United States 217Illustrative Material 220

C. The Role of Debt in Amount Realized and Basis— 223Illustrative Material 224

4. Exclusion of Gains From the Sale of a Principal Residence 228Illustrative Material - 228

CH A P T E R 7 The Relationship of Basis to Income Recog-nition —- - 235

Sec.

1. Gifts of Property: Transferred Basis — 235Toft v. Bowers— — —- —- - 235Illustrative Material —- 237

2. Transfers at Death: Fair Market Value Basis 239Illustrative Material — 240

3. Gifts and Inheritances of Split Interests - 245Irwin v. Gavit — — — 245Illustrative Material — - 247

4. Income in Respect of a Decedent 248Edward D. Rollert Residuary Trust v. Commissioner.— 249Illustrative Material —- - 252

5. Tax Policy Aspects of Gratuitous Transfers of AppreciatedProperty — 254

U.S. Treasury Department Tax Reform Studies and Proposals 2556. Nonshareholder Contributions to Capital - 256

Illustrative Material 257

TABLE OF CONTENTS X X I X

CH A P T E R 8 Taxation of Periodic Income From Capital — 261

Sec.1. Introduction —- —- — — - 261

Illustrative Material — -- — — 2612. Tax Deferred and Tax-Exempt Investment Accounts - - 269

Illustrative Material-- - —- —- - 271Eugene Steuerle, Back-loaded IRAs: Head Taxes Replace Income

and Consumption Taxes .— —>.,..___—__ __ 2743. Special Treatment of Corporate Dividends - 277

Jobs and Growth Tax Relief Reconciliation Act of 2003, Report ofthe Committee on Ways and Means, House of Representatives 277

Illustrative Material — — - —- — 2784. Tax-Exempt Interest on State and Local Bonds —- 279

General Explanation of the Tax Reform Act of 1986 —- 283Illustrative Material - - — —- — 285

5. Treatment of the Owner of Annuity and Life InsuranceContracts - - —- - - 287

A. Annuities —- — —- - - - 288Illustrative Material — —- — - — 290

B. Life Insurance —- —- —- — — 295Illustrative Material —- —- - 297

CH A P T E R 9 Damage Awards and Settlements andInsurance Recoveries - — — — 301

1. Damages Received on Account of Property and LostProfits- - - --- — — 302

Clark v. Commissioner - — -— — 302Raytheon Production Corp. v. Commissioner 303Illustrative Material - -- — 306

2. Damage Awards for Personal Injury 309General Explanation of Tax Legislation Enacted in the 105th

Congress - — —- - - - 311Illustrative Material - — —- - 313

3. Insurance Recoveries - — — —- 318A. Compensation for Personal Injuries or Sickness - -- 319

(1) Worker's Compensation — — 319(2) Accident And Health Insurance - — - 319

B. Insurance Payments for Living Expenses —- — 320

CH A P T E R 10 Income From the Cancellation of Indebt-edness --- --- --- — --- 321

Sec.1. General Principles — — — 321

United States v. Kirby Lumber Company —- 321Illustrative Material — — - — 322

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Sec.

2. Statutory Codification of Cancellation of IndebtednessRules -- 327

Illustrative Material 3273. The Disputed Debt, or Contested Liability, Doctrine 332

Preslar v. Commissioner - 332Illustrative Material - 339

4. Cancellation of Indebtedness as a Medium of Payment 342Illustrative Material 342

C H A P T E R 11 Tax Expenditures — 345

Sec.

1. The Concept of Tax Expenditures 345A. Introduction — 345B. Identifying Tax Expenditures 346C. The Tax Expenditure Budget —- 348

Estimates of Federal Tax Expenditures for Fiscal Years 2007-2011 348

Illustrative Material-^ 3592. Application of Tax Expenditure Analysis 369

Illustrative Material 369PA R T III Business Deductions and Credits 373

CH A P T E R 12 Ordinary and Necessary Business andProfit-Seeking Expenses 373

Sec.1. The Relevance of "Trade or Business" Versus "Profit-

Seeking" Expenses 374Illustrative Material - 376

2. The "Ordinary and Necessary" Limitation 377A. The Supreme Court Decisions -- 377

Welch v. Helvering- 378Illustrative Material 379

B. The "Ordinary and Necessary" Limitation in the LowerCourts —- 380

Friedman v. Delaney — 380Illustrative Material —- 384

3. The Limitation of "Unreasonable" Compensation 387Exacto Spring Corporation v. Commissioner— 387Illustrative Material - 391

4. Expenses Related to Tax-Exempt Income 394Revenue Ruling 83-3 394Illustrative Material 397

5. "Public Policy" Limitations: Tax Penalties 399A. Bribes, Fines, and Penalties 400

Tank Truck Rentals, Inc. v. Commissioner 400Illustrative Material 402

TABLE OF CONTENTS X X X I

Sec.5. "Public Policy" Limitations: Tax Penalties—Continued

B. Lobbying Activities - - — —- — 408Cammarano v. United States — —- 408Illustrative Material-- — -- - 409

C. Other Tax Penalties— —- - — 413Illustrative Material - —- —- - 413

CH A P T E R 13 Deductible Profit-Seeking Expenses Ver-sus Nondeductible Capital Expenditures — -- 416

Sec.1. Expenditures to Acquire or Produce Tangible Property 418

Encyclopaedia Britannica, Inc. v. Commissioner — —- 418Illustrative Material — - - —- - 421

2. Improvement Versus Repair or Replacement - —- 430Midland Empire Packing Company v. Commissioner - - - 430Mt. Morris Drive-In Theatre Co. v. Commissioner - 433Mt. Morris Drive-In Theatre Company v. Commissioner---- 435Illustrative Material- -- -- -- — — 436

3. Expenditures With Benefit^Beyond the Taxable Year andIntangible Assets - - — - 446

INDOPCO, Inc. v. Commissioner — — 446Illustrative Material - — — 450

4. Business Investigation, Start-Up and Expansion Costs 457Senate Finance Committee Report, Miscellaneous Revenue Act of

1980 —- - - - 459Illustrative Material — - —- — 461

CHAPTER 14 Cost Recovery Mechanisms — — 466

Sec.1. Depreciation — — - 468

A. Accelerated Cost Recovery System - - —- 468Simon v. Commissioner -- — — 468Illustrative Material— — — - — 475

B. Election to Expense Certain Depreciable Business Assets 489Illustrative Material - —- —- —- 490

C. The Financial Impact of Accelerated Cost Recovery— 491Illustrative Material — - — -— 496

2. Statutory Amortization of Intangible Assets — - — 502Revenue Reconciliation Act of 1993, Report of the Committee on

Ways and Means, House of Representatives — —- 502Illustrative Material — ----- -- — —- 504

3. Expensing and Amortization Provisions — 507Illustrative Material — — -- — 508

4. Capital Recovery for Natural Resources - 510Illustrative Material — - - — —- 511

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CHAPTER 15 Transactional Losses —- 517

1. Business or Profit Seeking Losses 518Miller v. Commissioner 520Illustrative Material- - 522

2. Loss Disallowance Rules - 533A. Sales to Related Persons: Section 267 533

Illustrative Material 534B. Wash Sales c - 536C. Tax Straddles- —:.r.7. 537D. Public Policy Limitation 538

3. Bad D e b t s - — 540Illustrative Material 541

CH A P T E R 16 Interest as a Profit-Seeking Expense 548

Sec.1. What Is Interest? 548

Albertson's, Inc. v. Commissioner 548Illustrative Material 552

2. Allocation of Interest 558Illustrative Material <- 559

3. Limitations on the Interest Deduction -- 563A. Investment Interest Limitation 563

General Explanation of the Tax Reform Act of 1986 563Illustrative Material 565

B. Capitalization of Interest 567Illustrative Material 568

C. Interest on Loans to Acquire or Carry Tax Exempt Bonds 569Revenue Procedure 72-18 —- 569Illustrative Material 572

D. Interest Incurred in Connection with Insurance Contracts 575C H A P T E R 17 Business Tax Credits 576

Sec.1. Introduction 5762. General Business Credit 577

Illustrative Material 5783. Other Business Credits — - 587

Illustrative Material 588

PART IV Dual Purpose Expenses 595

CH A P T E R 18 Determining When a Taxpayer is Engagingin a Business or Profit-Seeking Activity 595

Sec.1. Is There a Profit-Seeking Motive? — 596

Peacock v. Commissioner 596Illustrative Material 603

TABLE OF CONTENTS xxxm

Sec.2. Business Use of Residence — - 610

Hamacher v. Commissioner--- 610Illustrative Material — —- —- 614

CH A P T E R 19 Expenses Involving Both Personal andBusiness Purposes- —- —- 622

Sec.1. General Principles — -, — -— 622

Moss v. Commissioner .— - — 623Illustrative Material ---- — - — 626

2. Travel and Related Expenses — — - - 628Commissioner v. Flowers -- — - 629Hantzis v. Commissioner — — 631Illustrative Material — — —- — 637

3. Business Meals and Entertainment —- - 645Churchill Downs, Inc. v. Commissioner - 646Illustrative Material — —- —- —. 650

4. Statutory Limitations on Deductions for Certain Property 659General Explanation of the Revenue Provisions of the Tax Reform

Act of 1984 —- —- — - 659Illustrative Material -- — -~ — - 660

5. Clothing - — —- 663Pevsner v. Commissioner 663Illustrative Material —- —- - 666

6. Child and Dependent Care - -— - - — 667Smith v. Commissioner — — - 667Illustrative Material - —- - —. _ 669

CH A P T E R 20 Expenditures Involving Both Personal andCapital Aspects —- — —- —- 671

Sec.1. Legal Expenses— — —- - 671

United States v. Gilmore —- —- - 671Illustrative Material - 676

2. Expenses for Education and Seeking Employment 682Wassenaar v. Commissioner — 683Illustrative Material —- - - 686

PA R T V Deductions and Credits for Personal LivingExpenses 695

C H A P T E R 21 Itemized Personal Deductions- 695

Sec.1. Introduction—The Adjusted Gross Income Concept and

Itemized Deductions— .— — — 695Illustrative Material — 696

x x x i v TABLE OF CONTENTS

Sec.

2. Medical Expenses 697Revenue Ruling 99-28 698Rev. Rul. 2002-19 — 700Illustrative Material 701

3. Charitable Contributions - 710Hernandez v. Commissioner 711Illustrative Material 719

4. State and Local Taxes 738Illustrative Material ---K. —— - 739

5. Qualified Home Mortgage Interest 741General Explanation of the Tax Reform Act of 1986 742Illustrative Material - 743

6. Casualty Losses - 752Chamales v. Commissioner 752Illustrative Material 757

7. Limitations on Itemized Deductions 762

CH A P T E R 22 Standard Deduction, Personal and Depen-dency Exemptions, and Personal Credits 765

Sec.

1. Personal Exemptions and the Standard Deduction 765A. The Standard Deduction 766

Illustrative Material— 766B. Personal Exemptions 767

Illustrative Material - 7682. Personal Credits 772

A. Credits for Basic Living Expenses 772(1) Earned Income Credit — —- 772

Illustrative Material 773(2) The Child Credit - - 775

B. Tax Credits for Personal Costs 776Illustrative Material — — 777

C H A P T E R 23 Tax Expenditures for Education 782

Overview of Present Law and Economic Analysis Relating to Tax andSavings Incentives for Education 782

Illustrative Material 792

P A R T VI Characterization of Gains and Losses 803

C H A P T E R 24 Capital Gains and Losses— 803

Sec.

1. Special Treatment of Capital Gains and Losses--- 803Illustrative Material --.- —- 808

TABLE OF CONTENTS XXXV

Sec.2. Definition of "Capital Asset" . . . — —- 822

A. The Statutory Exclusions - — 824(1) Investment Property Versus Property Held For Sale To

Customers —- 824Suburban Realty Co. v. United States-- - - 826Illustrative Material —- - 836

(2) Section 1221(a)(2): Real Property And Depreciable Prop-erty Held For Use In The Taxpayer's Trade Or Business 845

(3) Section 1221 (a) (3): Investment Profits Versus RewardsFor Personal Services —~~~ — — 846

Illustrative Material — — - 846(4) Section 1221(a)(4): Accounts Receivable — 850(5) Section 1221(a)(5): Government Documents — 851(6) Section 1221(a)(6): Dealer-Held Commodities Derivative

Financial Instruments — 851(7) Section 1221(a)(7): Hedging Transactions 851

Illustrative Material — - 852(8) Section 1221(a)(8): Non-Inventory Supplies - 854

B. Judicial Limitations on Capital Asset Classification - - 854Hort v. Commissioner-- — 855Commissioner v. P.G. Lake, Inc. -- 858Lattera v. Commissioner — — 859Illustrative Material —- 869

3. Sale or Exchange Requirement — 877A. Termination of Taxpayer's Interest Without a "Sale or Ex-

change"—The Creditor's Situation - 877Taxpayer Relief Act of 1997, Report of the Committee on Ways

and Means, House of Representatives — 877Illustrative Material - .— 880

B. Satisfaction of a Claim—The Debtor's Situation — 8834. Holding Period Requirement-.- — — - 884

Illustrative Material .— 8845. Special Statutory Treatment of Particular Gains and Loss-

es -- 886Illustrative Material ^- 887

6. Transactional Problems of Capital Gains and Losses 891A. Transaction Related to a Previous Capital Transaction — 891

Arrowsmith v. Commissioner — — — - 891Illustrative Material— 894

CH A P T E R 25 Sales of Assets Held for Use in a Trade orBusiness —- 899

Sec.1. Section 1231 Property —- — 899

Illustrative Material .— 9032. Sale of an Entire Business 909

Williams v. McGowan 909Illustrative Material — 910

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P A R T VII Deferred Recognition of Gain From Property 917

C H A P T E R 26 Like-Kind Exchanges - - 917

Sec.

1. Like-Kind Exchanges In General - - —- — 918Illustrative Material •.- - - -- - - 938

2. Multiparty and Deferred Exchanges - — — 935Illustrative Material - — — — - 938

CH A P T E R 27 Involuntary Conversions and other De-ferred Recognition Transactions — — - — 945

Sec.1. Involuntary Conversions — - - - .- 945

Willamette Industries, Inc. v. Commissioner - - - - - 946Illustrative Material — - — - 952

2. Miscellaneous Nonrecognition Provisions — 960I l l u s t r a t i v e Material --- — — - — — - - 9 6 1

P A R T VIII Timing of Income and Deductions — — 965

C H A P T E R 28 Tax Accounting Methods —- - - 965

Sec.1. General Principles — - - - - —- 965

A. Tax Accounting Methods in General—Cash and AccrualMethods— — — — - — 965

B. The Function of Tax Accounting — - —- 968C. The Accounting Method Standard: Clear Reflection of Income 969D. Differences Between Tax Accounting and Financial Account-

ing - - - — .^- - - 9712. The Cash Method — — - - — 973

A. Income Items - - — — -- — 973Revenue Ruling 92-69- - — — 974Pulsifer v. Commissioner — — 976Illustrative Material-— - - - - -- —- 977

B. Deduction Items - - — - - - 982(1) Constructive Payment and the Equivalence of Cash—Has

an Item Been "Paid"—- — - — — —- 982Illustrative Material - - — — — - — 983

(2) Advance Payments—When Must Deduction of an Item BeDeferred Even Though Actually Paid - — — 985

Commissioner v. Boylston Market Association - - 986Illustrative Material - - - 987

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Sec.3. The Accrual Method —- —- 991

A. Income Items — - 991(1) Inclusion Prior to Receipt—The Concept of Accrual - 991

Charles Schwab Corporation v. Commissioner 992Illustrative Material — 998

(2) Advance Receipts—May Inclusion of an Actual Receipt BeDeferred —- — 1003

Schlude v. Commissioner 1003Illustrative Material — i — 1007

B. Deduction I t e m s — ——S .-. 1012(1) The Historic All Events Test -—- 1013

Mooney Aircraft, Inc. v. United States 1013Illustrative Material 1017

(2) The Economic Performance Requirement 1021General Explanation of the Tax Reform Act of 1984 1022Illustrative Material 1028

(3) Long-Term Contracts 10334. Inventory Accounting -1034

Illustrative Material — —- 10365. Changes in Method of Accounting or Method of Reporting

Income — .— 1040Illustrative Material-- 1040

CH A P T E R 29 The Annual Accounting Concept —- 1043

Sec.1. Transactional Problems 1043

A. General Principles — .— 1043Burnetv. Sanford & Brooks Co 1043Illustrative Material 1045

B. Initial Deduction Followed by Later Recovery: The Tax Bene-fit Doctrine- —- 1046

Hillsboro National Bank v. Commissioner 1047Illustrative Material -1051

C. Initial Inclusion in Income Followed by Later Repayment - 1055Illustrative Material- -<—__- __ 1055

D. Related Procedural Doctrines 1059(1) Mitigation Of T h e S ta tu te Of Limitat ions - 1059(2) The Judicial Doctrines Of Estoppel And Recoupment-- 1062(3) Res Judicata And Collateral Estoppel — 1063

2. Net Operating Loss Carryover and Carryback 1065Illustrative Material - 1067

CH A P T E R 30 Deferred Compensation Arrangements 1072

Sec.1. Nonqualified Deferred Compensation Contracts 1073

A. The Situation Before Section 409A— —-1073Revenue Ruling 60-31 - — —- -1073Illustrative Material 1078

xxxviii TABLE OF CONTENTS

Sec.

1. Nonqualified Deferred Compensation Con-tracts—Continued

B. Section 409A 1081House Committee Report, American Jobs Creation Act of 2004 1081Illustrative Material 1085

2. Transfers of Property for Services — 1087A. The Situation Before Section 83 1087

Commissioner v. LoBue 1087Illustrative Material^ 1090

B. Section 83 -— -——— 1091General Explanation of the Tax Reform Act of 1969 1091Alves v. Commissioner 1092Illustrative Material 1096

C. Incentive Stock Options 1105Summary of H.R. 4242, The Economic Recovery Tax Act of

1981 - 1105Illustrative Material 1106

C H A P T E R 31 Deferred Payment Sales 1108

Sec.1. Nonstatutory Deferred Reporting of Gains 1108

Burnet v. Logan 1108Illustrative Material 1110

2. Installment Reporting Under Section 453 - 1111Illustrative Material 1112

CH A P T E R 32 Interest on Discount Obligations 1125

Sec.1. Introduction 11252. Original Issue Discount 1127

Tax Reform Act of 1984 General Explanation of the RevenueProvisions 1127

Illustrative Material 11323. Bond Premium 1141

Illustrative Material 1141

PART DI Tax Motivated Transactions —- 1143

CH A P T E R 33 Transactions Involving Leased Property:Is It a Lease or Is It a Sale and Purchase? 1143

Estate of Starr v. Commissioner 1144Alstores Realty Corp. v. Commissioner 1146Frank Lyon Co. v. United States 1149Illustrative Material 1161

TABLE OF CONTENTS xxxix

CHAPTER 34 NONRECOURSE DEBT AND LEVERAGEDTAX SHELTERS 1173

1. Acquisition and Disposition of Property Subject to Nonre-course Debt -— 1173

Commissioner v. Tufts 1177Illustrative Material — —- 1185

2. Tax Shelters - - \ — - 1191Illustrative Material - ->. -_- 1192

3. The Valuation of Property Subject to Debt - - 1196Estate of Franklin v. Commissioner -1197Illustrative Material - - - 1200

CH A P T E R 35 STATUTORY LIMITATIONS ON LEVERAGED TAXSHELTERS .— .— — - — 1204

1. The At-Risk Limitation — - - 1204Senate Finance Committee Report, Tax Reform Act of 1976 1204Illustrative Material — — 1206

2. Passive Activity Loss Limitation — 1213Senate Finance Committee Report, Tax Reform Act of 1986 — 1214Illustrative Material —- —-1216

CHAPTER 36 Economic Substance Doctrine 1229

Coltec Industries, Inc. v. United States — — 1229Compaq Computer Corp. v. Commissioner — 1237Illustrative Material — 1246Options to Improve Tax Compliance and Reform Tax Expenditures 1249

PA R T X The Taxable Unit V- 1263

CHAPTER 37 Shifting Income Among Taxable Units 1263

Sec.1. Income From Personal Services — 1264

Lucas v. Earl —.'— 1264Illustrative Material ---- - 1265

2. Income From Property 1272Blair v. Commissioner — 1272Helvering v. Horst —- —- 1273Harrison v. Schaffner .— 1278Illustrative Material -1280

3. Property that is the Product of Personal Efforts— - 1288Helvering v. Eubank 1288Revenue Ruling 54-599 —~ 1290Illustrative Material - - 1290

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4. Below-Market and Interest-Free Loans — 1293General Explanation of the Revenue Provisions of the Deficit

Reduction Act of 1984 1293Illustrative Material- 1298

CH A P T E R 38 Taxation of Families 1300

Sec.

1. The Married Couple as a Unit of Taxation 1300Druker v. Commissioner -. 1300Mueller v. Commissioner - 1304Illustrative Material 1307

2. Taxation of Children as Part of the Family Unit 1312General Explanation of the Tax Reform Act of 1986 1312Illustrative Material 1313

3. Tax Aspects of Divorce and Separation 1315A. Property Settlements —. 1316

Balding v. Commissioner 1316Illustrative Material 1319

B. Alimony and Child Support- - -1324General Explanation of the Revenue Provisions of the Deficit

Reduction Act of 1984 1324Illustrative Material 1326

4. Grantor Trusts 1332A. Grantor Trust Rules 1333

Illustrative Material - 1335B. Summary of Non-Grantor Trust Rules 1346

PA R T XI Alternative Minimum Tax 1347

CH A P T E R 39 Alternative Minimum Tax for Individuals 1347

Sec. v_

1. Structure of the AMT 1348Present Law and Background Relating to the Individual Alterna-

tive Minimum Tax 1348Illustrative Material 1351

2. The Growth of the AMT—From Class Tax to Mass Tax 1358Klaassen v. Commissioner--- 1358Illustrative Material - 1362

INDEX 1369