Tax Law I key terms

A standard of support for a return position that is stronger than reasonable basis but weaker than more-likely-than-not; it weighs the authorities and generally protects against the accuracy-related penalty for understatements.

The lowest defensible standard for a return position, meaning there is some sound legal or factual support; it avoids the frivolous-position penalty but not the accuracy-related penalty for negligence or substantial understatement.

A confidence standard meaning greater than 50 percent likelihood of prevailing on the merits; it is required for certain disclosed positions and for avoiding the tax shelter portion of the substantial understatement penalty.

The binding source of tax law itself, including statutes, regulations, court decisions, and certain administrative pronouncements; it carries more weight than commentary that merely interprets the law.

Explanatory material that interprets tax law without binding effect, such as treatises, journals, and editorial services; it is persuasive at most and cannot override statutes, regulations, or court decisions.

An official interpretation of an Internal Revenue Code provision issued by the Treasury Department; final and temporary regulations are generally binding, while proposed regulations carry less weight until finalized.

A published IRS position applying the law to a stated set of facts; taxpayers may generally rely on it, and the IRS will not ordinarily contest a position taken in good-faith reliance on it.

Written IRS guidance issued to a specific taxpayer on that taxpayer's facts; it may not be cited or used as precedent by any other taxpayer, though it reveals the Service's reasoning.

The principle that the Tax Court follows the precedent of the federal circuit court of appeals to which the taxpayer's case would be appealable, rather than a uniform national interpretation.

Treasury regulations governing practice before the IRS; they set duties on practitioners regarding competence, diligence, confidentiality, conflicts of interest, fees, advertising, and written advice, and authorize disciplinary sanctions.

Under Circular 230, a person authorized to practice before the IRS, such as an attorney, certified public accountant, enrolled agent, or enrolled actuary; practice includes representing taxpayers and preparing or filing documents.

The IRS office that administers and enforces Circular 230, investigates practitioner misconduct, and recommends sanctions ranging from private reprimand to disbarment from practice before the Service.

Advice on a federal tax matter delivered in writing; under Circular 230 its reliance standard varies with whether the advice is reasonable and in good faith, and disclosure rules apply to marketed opinions.

A written authorization, commonly Form 2848, letting a representative receive confidential tax information and act for a taxpayer before the IRS on specified matters and periods.

A penalty generally equal to 20 percent of an underpayment attributable to negligence, disregard of rules, substantial understatement, or a valuation misstatement; reasonable cause and good faith may defeat it.

An understatement exceeding the greater of 10 percent of tax required to be shown or a fixed statutory threshold; the penalty may be avoided by substantial authority or adequate disclosure with a reasonable basis.

A return position lacking any reasonable basis, such as a constitutional objection to the income tax; asserting one may trigger a penalty and can support practitioner discipline under Circular 230.

Broadly, a partnership or other entity, plan, or arrangement with a significant purpose of avoiding or evading federal income tax; special penalty, disclosure, and reliance rules apply to such arrangements.

All income from whatever source derived, unless specifically excluded by law; it includes compensation, business profits, interest, rents, royalties, and gains from property dealings.

The doctrine that income is taxed to the person who earns it or who owns the property producing it; a transfer of the right to receive income does not shift the tax burden.

A cash-method rule treating income as received when it is made available without substantial restriction, even if the taxpayer does not take physical possession.

A statutory provision removing a particular item from gross income, such as certain employer-provided health coverage, gifts, inheritances, or qualified fringe benefits; exclusions differ from deductions because the amount is never taxed.

A noncash benefit provided to an employee, such as health insurance, group-term life insurance, or a qualified transportation benefit; many are excluded from income, sometimes subject to statutory limits.

The core test for deducting a trade or business expense: it must be common and accepted in the business and helpful or appropriate to it, though not necessarily indispensable.

An activity carried on with continuity, regularity, and a profit motive; characterizing an activity this way unlocks business deductions and opens the door to Section 1231 treatment on asset sales.

A limit on deductions for an activity not engaged in for profit; expenses are deductible only in a prescribed order and generally only to the extent of gross income from the activity.

A cost that creates or improves an asset with a useful life beyond the current year; it must be capitalized and recovered through depreciation, amortization, or basis on disposition rather than deducted immediately.

The cost or other original basis of property increased by capital improvements and decreased by allowed or allowable depreciation and certain other recoveries; it measures unrecovered investment.

The excess of the amount realized from a sale or exchange, including cash and the fair market value of property received less selling costs, over the adjusted basis of the property given up.

The portion of realized gain that must be included in gross income because no nonrecognition provision applies; it may be less than realized gain when a transaction qualifies for deferral.

A deferral transaction in which real property held for productive use or investment is exchanged for other real property of that kind, with gain recognized only to the extent of boot received.

Money or nonqualifying property received in an otherwise tax-deferred exchange; boot triggers recognition of gain to the extent of realized gain, but never produces a recognized loss.

A destruction, theft, seizure, requisition, or condemnation of property; gain may be deferred if replacement property is acquired within the statutory period and the proceeds are reinvested.

Property held by a taxpayer, whether or not connected with a trade or business, excluding inventory, depreciable business property, certain self-created intangibles, and other statutory exceptions.

The length of time property is owned, used to classify gain or loss as short-term or long-term; it generally begins the day after acquisition and ends on the sale date.

Long-term capital gain in excess of net short-term capital loss, taxed at preferential maximum rates; short-term gains are taxed at ordinary rates.

Gain from the sale of real or depreciable property used in a trade or business and held long enough; such gains are treated as long-term capital gain, while net 1231 losses are ordinary.

A rule recharacterizing gain on the sale of depreciable property as ordinary income to the extent of prior depreciation deductions, preventing preferential capital gain treatment on recovered cost.

An election to expense the cost of qualifying tangible personal property used in a trade or business, subject to annual dollar and investment ceilings and a taxable income limitation.

An accounting method reporting income when actually or constructively received and deducting expenses when paid; certain taxpayers with inventory or large gross receipts must use accrual.

An accounting method reporting income when the right to receive it becomes fixed and the amount is determinable, and deducting liabilities when all events have occurred and the amount is determinable.

A requirement limiting accrual-method deductions until the underlying economic activity occurs, such as provision of services or property, or payment, depending on the type of liability.

Goods held for sale or used in producing goods for sale; its cost is recovered through cost of goods sold, and taxpayers generally must use a permissible method such as specific identification or FIFO.

The category determining rate brackets and many thresholds: single, married filing jointly, married filing separately, head of household, or qualifying surviving spouse.

A favorable status for an unmarried taxpayer who maintains a household for a qualifying dependent or other qualifying person for more than half the year, offering wider brackets and a larger standard deduction.

A status available for up to two years after a spouse's death to a taxpayer who maintains a household for a dependent child, allowing joint-return rates.

A fixed deduction amount set by filing status and indexed for inflation, reduced for certain dependents; taxpayers choose it or itemize, whichever produces the lower tax.

Allowable personal expenses such as home mortgage interest, state and local taxes within limits, charitable contributions, and medical expenses above a floor, claimed instead of the standard deduction.

Quarterly prepayment of tax by taxpayers whose withholding is insufficient; underpayment can trigger a penalty unless an exception based on prior-year tax or annualized income applies.

Tax withheld by an employer or payer from wages or other payments and remitted to the government on the taxpayer's behalf, credited against the annual income tax liability.