Tax Law I flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Golsen rule

The Tax Court follows the decision of the Court of Appeals for the circuit in which the taxpayer resides or has its principal place of business, even if contrary to its own precedent.

Private letter ruling

Written IRS determination requested by a taxpayer on a specific transaction. It binds the IRS only as to that taxpayer and transaction, and may not be cited or used as precedent by others.

Substantial authority standard

A position supported by about a 40% likelihood of being sustained on the merits, weighing the authorities. It is required for undisclosed return positions to avoid the §6694 preparer penalty.

Constructive receipt doctrine

Income is taxed when it is credited to the taxpayer's account, set apart, or otherwise made available so the taxpayer may draw on it, even if not physically received.

Claim of right doctrine

Income received under a claim of right and without restriction as to use is taxable when received, even if the taxpayer may later be required to return it.

Annuity exclusion ratio

The investment in the contract divided by the expected return. That fraction of each annuity payment is a tax-free return of basis until basis is fully recovered.

Group term life exclusion

Employer-paid group term life insurance premiums are excluded from employee income for coverage up to $50,000. Coverage above that amount is taxed using IRS Table I rates.

Startup cost deduction

Up to $5,000 of §195 startup costs is deductible in the year business begins, reduced dollar-for-dollar by costs above $50,000; the remainder is amortized over 180 months.

Hobby loss rule

Under §183, expenses from an activity not engaged in for profit are deductible only up to the income from that activity, with a specific ordering of deductions.

Section 197 amortization

Qualified intangibles such as goodwill, going concern value, workforce in place, and customer lists acquired with a business are amortized straight-line over 15 years.

Qualified business income deduction

§199A allows a 20% deduction for qualified business income of pass-through entities and sole proprietors, subject to W-2 wage and qualified property limits at higher income.

Dual basis rule for gifts

For gifted property, the donee carries over the donor's basis for gain. For loss, basis is limited to fair market value at the date of gift.

Boot in like-kind exchange

Cash or nonqualifying property received in a §1031 exchange. Boot is recognized as gain to the lesser of boot received or total realized gain.

Section 121 exclusion

A taxpayer may exclude up to $250,000 of gain ($500,000 married filing jointly) on the sale of a principal residence meeting ownership and use tests.

Involuntary conversion replacement

Under §1033, gain from property destroyed or condemned is deferred if replacement property is acquired within two years, or three years for presidentially declared disasters.

Section 1245 recapture

Gain on sale of depreciable personal property is ordinary income to the extent of depreciation taken. Any remaining gain is treated as §1231 gain.

Unrecaptured Section 1250 gain

Depreciation taken on real property after 1986 that is not otherwise recaptured. It is taxed at a maximum rate of 25% rather than the ordinary rate.

Section 1231 lookback

Net §1231 gain is recharacterized as ordinary income to the extent of nonrecaptured net §1231 losses deducted in the five preceding tax years.

Net capital loss limit

Individuals may deduct net capital losses against ordinary income up to $3,000 per year ($1,500 if married filing separately); excess carries forward indefinitely.

All-events test

Accrual income is recognized when all events fixing the right to receive it have occurred and the amount is determinable with reasonable accuracy.

Economic performance requirement

Under §461(h), an accrual-basis liability is not deductible until the underlying services or property are provided, or the liability is paid.

Section 481(a) adjustment

A cumulative adjustment required when a taxpayer changes an accounting method, taken into income or deducted, generally over four years, with IRS consent.

LIFO conformity rule

A taxpayer using LIFO for tax must also use LIFO in its financial reports and statements to shareholders, partners, or owners, with limited exceptions.

Head of household status

Available to an unmarried taxpayer who paid more than half the cost of maintaining a home where a qualifying person lived more than half the year.

Qualifying child tests

A dependent must meet relationship, age, residency, support, and joint return tests. The child must be under 19, or under 24 if a full-time student.

Estimated tax safe harbor

Individuals avoid underpayment penalties by paying the lesser of 90% of current-year tax or 100% of prior-year tax (110% if prior AGI exceeded $150,000).

Child Tax Credit phase-out

The $2,000 credit per qualifying child is reduced by $50 for each $1,000 of modified AGI above $200,000 single or $400,000 married filing jointly.

Circular 230 Section 10.21

A practitioner who learns of an error or omission in a return or document submitted to the IRS must promptly advise the client and notify the IRS.

Circular 230 Section 10.34

Tax return positions must have a reasonable basis, and signing preparers must not sign returns with positions lacking substantial authority unless adequately disclosed.

Assessment statute of limitations

The IRS generally has three years after a return is filed to assess tax, six years if gross income is understated by more than 25%, and no limit for fraud.

Ninety-day letter

A notice of deficiency mailed by the IRS. The taxpayer has 90 days (150 if outside the U.S.) to petition the Tax Court before assessment.

Circular 230 contingent fees

Contingent fees are prohibited for original returns and refund claims, but allowed for IRS examination or challenge matters where the fee relates to the position taken.