Advanced Tax Strategies – Glossary
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Glossary
accounting income Items of income and expense allocable to trust income beneficiaries as specified in the trust document.
accrual method of accounting An overall method of accounting under which revenues are realized in the year the earnings process is complete, and expenses are matched against revenues in the year in which the liability for the expense is incurred.
accumulated adjustments account (AAA) The portion of an S corporation’s retained earnings on which the shareholders have paid tax.
accumulated E&P A corporation’s undistributed E&P for all taxable years preceding the current year.
accumulated earnings tax A penalty tax levied on corporations accumulating income beyond the reasonable needs of the business to avoid paying dividends to their shareholders. The tax is levied in addition to the regular corporate income tax.
adjusted basis The initial tax basis of an asset reduced by cost recovery deductions allowable with respect to the basis.
adjusted current earnings A measurement of earnings conceptually similar to a corporation’s economic income for the years that is used in calculating the ACE adjustment for corporate AMT.
adjusted gross income (AGI) Total income less adjustments as computed on page 1, Form 1040. AGI is an intermediate step in the calculation of individual taxable income.
administrative authority Interpretations of the Internal Revenue Code issued by the Treasury Department.
advance pricing agreement (APA) An agreement between a taxpayer and the IRS on the transfer pricing method to be used for any set of transactions to which Section 482 applies.
affiliated group A parent corporation and its 80 percent or more controlled subsidiaries that are eligible to file a federal consolidated income tax return.
aggregate theory of partnerships A partnership is transparent, with no separate and distinct identity from that of its partners. Under the aggregate theory, a partner’s interest in a partnership represents a proportionate interest in partnership property.
all-events test The test for determining if an accrued expense is deductible. The test is satisfied if (1) all events have occurred that establish the fact of the liability, (2) the amount of the liability can be determined with reasonable accuracy, and (3) economic performance has occurred with respect to the liability.
allowance method The GAAP method for computing bad debt expense. The expense is based on the estimated losses from current year receivables.
alternate valuation date Generally, the date six months after the date of a decedent’s death. Any assets disposed of by the estate during this six-month period are valued on the date of disposition. The estate executor may elect to value estate assets on the alternate valuation date, if such election results in a lower estate value and lower tax liability.
alternative minimum tax (AMT) A second federal tax system parallel to the regular income tax system. Congress enacted the AMT to ensure that every individual and corporation pays at least a nominal amount of tax each year.
alternative minimum taxable income (AMTI) The tax base for the AMT: regular taxable income increased or decreased by AMT adjustments and increased by AMT tax preferences.
amortization The ratable deduction of the capitalized cost of an intangible asset over its determinable life.
amount realized The sum of any money plus the FMV of any property received by a seller on the sale or exchange of property.
AMT adjustments Increases or decreases to regular taxable income in the computation of AMTI.
AMT exemption A minimum amount of AMTI on which AMT is not assessed. The corporate AMT exemption amount is $40,000 for corporations with AMTI not in excess of $150,000. Above this threshold, the exemption is phased out at a rate of 25 cents for every dollar of excess AMTI.
AMT preferences Items increasing regular taxable income in the computation of AMTI.
apportionment formula A mathematical formula combining sales, payroll, and property factors to determine the percentage of an entity’s taxable income to be reported within a state.
arm’s-length transaction A transaction occurring between unrelated parties that are dealing in their own self-interest.
at-risk amount The dollar amount that a taxpayer would lose with respect to an investment in an active business if the business failed.
attribution rules The various sets of statutory rules for determining a person’s indirect ownership of corporate stock or a partnership interest.
automatic termination of a partnership A partnership termination that occurs when there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits within a 12-month period.
average rate The tax rate determined by dividing total tax by taxable income.
bankruptcy The legal process through which a debtor petitions a federal court to restructure or discharge its debt.
bargain element The excess of the FMV of optioned shares of corporate stock over the strike price at date of exercise.
basic research credit A tax credit equal to 20 percent of cash payments to a qualified basic research organization, such as a college or university, to support basic research.
beneficiary A party to whom trust income or property is to be distributed and for whose benefit the trust property is managed.
blockage rule A valuation rule that allows a discount on the per share price at which smaller blocks of stock would be expected to trade in valuing a large block of stock for estate tax purposes.
boot Cash or other nonqualifying property included as part of a nontaxable exchange of property.
brother-sister group A type of controlled group in which the same individual shareholders have common ownership of two or more corporations.
built-in gain or loss The difference between FMV and carryover basis of property contributed to an entity by an owner.
built-in gains tax A tax imposed on any net recognized built-in gain of an S corporation during the 10-year period after its conversion from a C corporation.
business purpose doctrine A transaction should not be effective for tax purposes unless it is intended to achieve a genuine and independent business purpose other than tax avoidance.
buy-sell agreement A binding agreement restricting the conditions and terms under which owners may dispose of equity interests in a business entity.
bypass trust A trust granting an income interest to the surviving spouse and a remainder interest to other beneficiaries.
capital account The financial record of each partner’s equity interest in partnership property.
capital account maintenance rules The regulatory accounting rules by which partnership must determine and maintain each partner’s capital account.
capital transactions Transactions that change the ownership of a business entity.
carryover basis Tax basis of property in the hands of a transferee determined by reference to the tax basis of the property in the hands of the transferor.
cash merger A taxable acquisition in which both the target corporation and the target’s shareholders recognize gain or loss.
cash method of accounting An overall method of accounting under which revenue is accounted for when payment is received and expenses are accounted for when payment is made.
ceiling rule Under the traditional Section 704(c) allocation method, the tax allocation of income, gain, deduction, or loss to a partner cannot exceed the actual taxable income, gain, loss, or deduction recognized by the partnership.
Chapter 11 reorganization A bankruptcy proceeding in which the owners and creditors of a business agree to a court-approved plan to restructure the business’s debt.
Chapter 7 liquidation A bankruptcy proceeding in which a business’s assets are sold, and the proceeds are distributed to the business’s creditors according to a priority established by the court.
charitable deduction A deduction allowed in computing gift and estate tax, for transfers to qualified charitable and other non-profit organizations, such as religious, scientific, literary, or educational institutions.
combined group A type of controlled group that includes both parent-subsidiary and brother-sister corporations.
community property Property acquired after marriage, except by gift or inheritance, by a married couple residing in a community property state.
comparable profits method A method for determining the transfer price for controlled transactions based on measures of profitability of uncontrolled taxpayers engaged in similar activities with other uncontrolled taxpayers.
comparable uncontrolled price method A method for determining the transfer price for controlled transactions based on the price for comparable uncontrolled transactions.
comparable uncontrolled transaction A transaction between uncontrolled taxpayers used as a benchmark to price similar transactions between related parties.
complex trust Any trust not qualifying as a simple trust.
consolidated group an affiliated group of corporations in any year in which the group files a consolidated tax return.
consolidated taxable income (CTI) The taxable income reported by a consolidated group of corporations.
constructively repatriated income Income of a controlled foreign corporation that is subject to U.S. income tax when earned, regardless of whether such income is actually repatriated to U.S. shareholders.
continuity of business enterprise requirement A requirement for a reorganization under which the acquiring corporation must continue the target’s historic business or use a significant portion of the target’s assets in its own business.
continuity of interest requirement A requirement for a reorganization under which target shareholders must receive stock in the acquiring corporation as a major part of the consideration for their target stock.
control premium The portion of the FMV of a part interest in a business attributable to the fact that the interest gives the owner control of the business.
controlled foreign corporation (CFC) Any foreign corporation in which U.S. shareholders own more than 50 percent of the total voting power or value of the corporate stock.
controlled group Two or more corporations that must share the progressive corporate tax brackets and other tax benefits that are expressed as a dollar amount.
controlled subsidiary For tax purposes, a subsidiary corporation in which the parent corporation owns at least 80 percent of the total voting power and value of the stock.
corporate welfare Criticism of tax incentives for business as providing tax savings to special interests and large corporations at the expense of middle- and working-class families.
corporation An organization formed under the corporation laws of a state or national government. For federal tax purposes, a corporation is a taxable entity unless it has a Subchapter S election in effect. A taxable corporation is referred to as a regular or a C corporation.
corpus Trust property.
cost-plus method A method for determining the transfer price for controlled transactions by examining the gross profit markup earned in comparable uncontrolled transactions.
credit shelter trust See bypass trust.
Crummey trust A trust providing its beneficiaries the right to demand distributions of trust income equal to the lesser of the annual gift exclusion or the amount gifted into the trust that year. Transfers into such trusts qualify as a gift of a present interest for purposes of the annual gift tax exclusion.
cumulative taxable gifts The sum of current and prior year taxable gifts.
current distribution A distribution by a partnership to a partner that does not extinguish the partner’s interest in the partnership.
current E&P A corporation’s annual taxable income reduced by federal income tax and adjusted for certain statutory items.
deductions in respect of a decedent Expenses associated with income in respect of a decedent that are not claimed on the decedent’s final tax return.
deemed paid gift tax credit Credit allowed against the estate tax for the lesser of gift taxes actually paid on post-1976 cumulative taxable gifts or gift taxes that would have been paid on such gifts under the current transfer tax rates.
deferred compensation Any arrangement in which an employee performs current services in exchange for the promise of a future compensatory payment.
deferred tax asset An excess of tax payable over tax expense per books resulting from a temporary difference between book income and taxable income.
deferred tax liability An excess of tax expense per books over tax payable resulting from a temporary difference between book income and taxable income.
deficiency dividend A cash distribution made by a corporation within 90 days after the determination that the corporation is liable for the personal holding company tax for a previous year. The distribution is treated as a dividend paid during such previous year.
deficit restoration obligation A partner’s legal obligation to contribute an amount equal to the negative balance in the partner’s capital account to the partnership immediately before the partnership liquidates.
defined-benefit plan A qualified plan under which the employer promises participating employees a targeted benefit, usually in the form of a pension, when they retire.
defined-contribution plan A qualified plan under which the employer promises to make an annual contribution to each participating employee’s retirement account.
disabled access credit A tax incentive for small businesses to remove existing barriers to handicapped access. The credit equals 50 percent of qualified expenditures in excess of $250, with a maximum annual credit of $5,000.
discharge of debt income Gross income resulting from the satisfaction (discharge) of a debt for less than the face amount of the debt.
disguised sale A contribution of property by a partner to a partnership followed by a related distribution from the partnership to the partner. The contribution and distribution must be treated as taxable sale of a part interest in the property.
disregarded entity An entity that has no identity for federal tax purposes.
distributable net income (DNI) The maximum amount of 1) the trust distribution deduction, and 2) income from the trust taxable to the beneficiaries. DNI attempts to measure the current increase in trust value available for distribution to income beneficiaries.
distribution deduction An income tax deduction equal to the lesser of 1) the taxable portion of DNI, or 2) the taxable portion of actual or required distributions.
distributive share A partner’s share of any item of taxable income, gain, deduction, or loss recognized by a partnership.
dividend Any distribution of cash or property made by a corporation to its shareholders to the extent the distribution is paid out of E&P.
earnings and profits (E&P) The measure of a corporation’s financial capacity to pay a return on the shareholders’ invested capital without returning the capital itself.
economic nexus Taxing jurisdiction established by the use of intangible assets, such as trademarks or licenses, within a state.
economic performance The third requirement of the all-events test. Economic performance with respect to a liability generally occurs when all activities required to be performed in connection with the liability are completed.