CONTENTS PREFACE xiv CHAPTER 1 c AN INTRODUCTION TO TAXATION 1-1 History of Taxation in the United States 1-2 Early Periods 1-2 Revenue Acts from 1913 to the Present 1-3 Revenue Sources 1-3 Types of Tax Rate Structures 1-4 The Structure of Individual Income Tax Rates 1-4 The Structure of Corporate Tax Rates 1-5 Marginal, Average, and Effective Tax Rates for Taxpayers 1-5 Determination of Taxable Income and Tax Due 1-6 Other Types of Taxes 1-7 State and Local Income and Franchise Taxes 1-7 Wealth Transfer Taxes 1-7 Other Types of Taxes 1-11 Criteria for a Tax Structure 1-12 Equity 1-12 Certainty 1-13 Convenience 1-13 Economy 1-13 Simplicity 1-14 Objectives of the Federal Income Tax Law 1-14 Entities in the Federal Income Tax System 1-16 Taxpaying Entities 1-17 Flow-Through Entities 1-20 Other Entities 1-23 Tax Law Sources 1-24 Enactment of a Tax Law 1-24 Steps in the Legislative Process 1-24 Administration of the Tax Law and Tax Practice Issues 1-26 Organization of the Internal Revenue Service 1-26 Enforcement Procedures 1-27 Selection of Returns for Audit 1-27 Statute of Limitations 1-28 Interest 1-28 Penalties 1-28 Administrative Appeal Procedures 1-29 Components of a Tax Practice 1-29 Tax Compliance and Procedure 1-29 Tax Research 1-30 Tax Planning and Consulting 1-30 Personal Financial Planning 1-31 Computer Applications in Tax Practice 1-31 Tax Return Preparation 1-31 Tax Planning Applications 1-31 Tax Research Applications 1-31 Problem Materials 1-32 Discussion Questions 1-32 Problems 1-34 Tax Strategy and Critical Thinking Problem 1-36 Case Study Problem 1-36 Tax Research Problem 1-36 CHAPTER 2 c DETERMINATION OF TAX 2-1 Formula for Individual Income Tax 2-2 Basic Formula 2-2 Definitions 2-3 Tax Formula Illustrated 2-6 Deductions from Adjusted Gross Income 2-7 Itemized Deductions 2-7 Standard Deduction 2-10 Dependency Requirements 2-12 Child Tax Credit and Credit for Other Dependents 2-18 Determining the Amount of Tax 2-19 Filing Status 2-20 Married Filing Jointly 2-20 Surviving Spouse 2-22 Head of Household 2-22 Single Taxpayer 2-23 Married Filing Separately 2-23 Abandoned Spouse 2-23 Children with Unearned Income 2-24 Additional Medicare Tax and Net Investment Income Tax 2-27 Business Income and Business Entities 2-27 Treatment of Capital Gains and Losses 2-30 Definition of Capital Assets 2-30 Tax Treatment of Gains and Losses 2-31 Tax Planning Considerations 2-31 Shifting Income Between Family Members 2-31 Splitting Income 2-31 Maximizing Itemized Deductions 2-32 Filing Joint or Separate Returns 2-32 Co