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Deduction Limitations: General (Portfolio 504)

Tax Management Portfolio, Deduction Limitations: General, No. 504-3rd, analyzes deduction limitations.

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DESCRIPTION

Tax Management Portfolio, Deduction Limitations: General, No. 504-3rd, analyzes deduction limitations. For deduction limitations that are the subject of other Portfolios, the description provides an overview and an introduction to the terminology and substantive requirements of the statutory or other provision that applies. For the other deduction limitations the provision is analyzed in depth.

The analysis of the deduction limitations is organized according to the type of deduction. These include computational limitations, reflection of other tax benefits, capitalization restrictions, public policy grounds, and personal expenses.


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AUTHORS

JAMES EDWARD MAULE
James Edward Maule, B.S., University of Pennsylvania (1973); J.D., Villanova University (1976); LL.M. (Taxation), George Washington University (1979); lecturer, Villanova University Graduate Tax Program and Tax Forum CLE Programs; lecturer, Philadelphia Bar Association Tax Section; member, Advisory Board on U.S. Income, Tax Management Inc.; former attorney-advisor, United States Tax Court, Judge Herbert L. Chabot; former attorney-advisor, Chief Counsel to the Internal Revenue Service; former Editorial Advisory Board member and Columnist, Journal of Limited Liability Companies; former lecturer, ALI-ABA; former lecturer, Tax Management Inc. & Continuing Legal Education Satellite Network; former lecturer, Pennsylvania Bar Institute; former lecturer, Georgetown University Law Center Institute on State and Local Taxation; former lecturer, The Dickinson School of Law CLE Programs; member, American Bar Association, Section of Taxation, Committee on S Corporations (Consultant and former Chair, Subcommittee on Subchapter S and State Law; former Chair, Subcommittee on Comparison of Partnerships and S Corporations); member, American Bar Association, Section of Taxation, Committee on Teaching Taxation (Chair, Subcommittee on Manuscripts and Unpublished Teaching Materials; member, Subcommittee on Important Developments); member, American Bar Association, Section of Taxation, Tax Practice Management Committee; member, American Bar Association, Section of Taxation, Formation of Tax Policy Committee; member, American Bar Association, Section of Taxation, Committee on Tax Structure and Simplification; former Chair, American Bar Association, Section of Taxation, Phaseout Tax Elimination Project; former member, American Bar Association, Section of Taxation, Task Force on Pass-Through Entities; former member, American Bar Association, Section of Taxation, Task Force on Legislative Recommendation No. 86-1; former member, Philadelphia Bar Association Tax Section; author and owner, TaxJEM Inc., publisher of computer assisted legal instruction programs; owner, JEMBook Publishing company, publisher of law and genealogy books; author of numerous books, monographs, and book chapters; contributor to various tax periodicals.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

II. Computational Limitations

A. Limitations Based on a Percentage of an Income Amount

1. 2% Floor on Miscellaneous Itemized Deductions

a. In General

b. Miscellaneous Itemized Deductions

(1) Preclusion of Deductions Allowable in Computing Adjusted Gross Income

(2) Preclusion of Certain Itemized Deductions

(3) Impairment-Related Work Expenses

(4) Specifically Described Miscellaneous Itemized Deductions

(a) In General

(b) Unreimbursed Employee Expenses

(c) Expenses for the Production or Collection of Income

(d) Expenses for the Determination of Tax

(e) Expenses Related to § 183 Not-for-Profit Activities

c. Computation of 2% Floor

(1) Individuals

(2) Estates and Trusts

d. Coordination with Other Deduction Limitations

(1) Other Deduction Floors

(2) Deduction Ceilings

e. Allocation of Expenses

f. Treatment of Pass-through Entities

(1) In General

(2) Pass-through Entity

(3) Entities Not Subject to § 67(c) Prohibition

(a) Qualified Estates and Nongrantor Trusts

(b) Publicly Offered RICs

(4) Affected Investor

(5) Affected Expenses

(6) Application to Partnerships

(7) Application to S Corporations

(8) Application to Grantor Trusts

(9) Application to Common Trust Funds

(a) Computation of an Affected Investor's Taxable Income

(b) Reporting Requirements

(10) Application to Nonpublicly Offered RICs

(a) Nonpublicly Offered RIC

(b) Computation of Affected Investor's Taxable Income

(c) Affected RIC Expenses

(i) In General

(ii) RIC Expenses

(iii) Safe Harbor Election

(iv) Net Operating Loss Reduction

(v) De Minimis Exception

(d) Allocation of Affected RIC Expenses to Affected Investors

(i) In General

(ii) Reasonable Allocation Method

(iii) Reliance on Reasonable Estimates

(e) Reporting Requirements: Information Return

(f) Reporting Requirements: Statement to Affected Investor

(g) Reporting Requirements: Statement to Nominee of Affected Investor

(h) Reporting Requirements: Forms

(11) Application to REMICs

(a) In General

(b) Pass-through Interest Holder

(i) REMIC Not a Single-Class REMIC

(ii) Single-Class REMIC

(c) Allocable Investment Expenses

(d) Computation of a Pass-through Interest Holder's Taxable Income

(i) Taxable Year Ending with a Calendar Year or Quarter

(ii) Taxable Year Ending Other Than with Calendar Quarter

(iii) Other Rules

(e) Computation of a Pass-through Interest Holder's Proportionate Share of Allocable Investment Expenses

(f) Reporting Requirements: In General

(g) Reporting Requirements: Single-Class REMIC

(h) Reporting Requirements: Nominees

2. Overall Limitation on Itemized Deductions

a. In General

b. Applicable Amount

c. Taxpayers to Whom the § 68 Limitation Applies

d. Computation of Limitation

e. Certain Itemized Deductions Excepted

f. Coordination with Other Limitations

3. Dividends Received Deduction Limitation

a. In General

b. Limited Dividends Received Deductions

c. Dividends Received Limitation Amount

(1) In General

(2) Modified Taxable Income

(3) Applicable Percentage

(4) Application

B. Limitations Equal to an Income or Similar Amount

1. Not-for-Profit Activity Deduction Limitation

a. In General

b. Limitation Amounts

(1) In General

(2) Application

c. Activity

d. Not-for-Profit Activity

(1) In General

(2) Net Income Presumption

(3) Initial Period Presumption

(a) In General

(b) Election

(c) Procedure

2. Dwelling Unit Deduction Limitation

a. In General

b. Exceptions

c. Dwelling Unit

d. Limitation Amounts

e. Qualified Use

(1) Business Use of Dwelling Unit

(2) Business Storage Use

(3) Rental Use

(4) Day Care Use

f. Computational Limitations

(1) Rental Use

(2) Day Care Use

g. Used as a Residence

(1) In General

(2) Use for Personal Purposes

(3) Rental for Use as Principal Residence

(a) In General

(b) Shared Equity Financing Agreement

(c) Qualified Ownership Interest

h. Rental of Principal Residence

i. Carryforward of Disallowed Deductions

j. Coordination with § 183 Limitation

3. Passive Loss Limitation

a. In General

b. Covered Taxpayers

c. Passive Activity

(1) In General

(2) Trade or Business

(3) Oil and Gas Working Interest Exception

(4) Material Participation

(a) In General

(b) Special Situations

(c) Covered Corporations

(5) Real Property Business Activity

d. Passive Activity Losses

(1) In General

(2) Passive Activity Deductions

(3) Passive Gross Income

e. Exceptions

(1) Net Active Income Exception

(2) Rental Real Estate Active Participation Exception

(a) In General

(b) Dollar Limitation

(c) Estates

(d) Active Participation

f. Carryforward of Disallowed Losses

(1) In General

(2) Activity No Longer Passive

(3) Taxpayer No Longer Covered

(4) Disposition of Activity

(a) In General

(b) Fully Taxable Dispositions

(c) Disposition by Death

(d) Installment Sale

(e) Disposition by Gift

(f) Distribution by Trust or Estate

(g) Partial Dispositions

4. Capital Loss Limitations

a. In General

b. Carryback and Carryforward of Disallowed Capital Loss Deductions

(1) Corporations

(a) In General

(b) Restrictions

(c) Special Rules

(d) Foreign Expropriation Capital Loss

(2) Noncorporate Taxpayers

5. Hedging Transaction Loss Limitation

a. In General

b. Limited Individual

c. Hedging Loss

(1) In General

(2) Hedging Transaction

d. Exceptions

(1) Unrecognized Gains

(2) Property Other Than Stock or Securities

e. Carryforward of Disallowed Hedging Losses

6. Limitation on Expenses of Subdivisions Excluded from Inventory

7. Social Club and Membership Organization Deduction Limitation

a. In General

b. Specified Deductions

c. Applicable Social Clubs and Membership Organizations

(1) In General

(2) Exceptions

d. Carryforward of Disallowed Deductions

8. Disqualifying Incentive Stock Option Stock Disposition Employer Deduction Limitation

9. Tax-Exempt Use Loss Limitation

a. In General

b. Tax-Exempt Use Loss

c. Tax-Exempt Use Property

d. Exception

(1) In General

(2) Fund Availability Requirement

(3) Substantial Equity Requirement

(4) Minimal Risk Requirement

(5) Seven-Year Class Life Requirement

C. Limitations Equal to a Specified Amount

1. Automobile and Listed Property Depreciation Deduction Limitations

a. In General

b. Specified Annual Amount

(1) In General

(2) Special Rules

(3) Multiple Owners

c. Carryforward of Disallowed Automobile Depreciation Deductions

(1) In General

(2) Restrictions

d. Applicable Listed Property

(1) In General

(2) Listed Property

(a) In General

(b) Passenger Automobile

(c) Exceptions

(i) Computers and Peripheral Equipment Used at Regular Business Establishment

(ii) Property Used in Transportation Business

(3) Qualified Business Use

(a) In General

(b) 5% Owner Use

(i) In General

(ii) Exception

(iii) 5% Owner and Related Person

(c) Employee Use

2. Parachute Payment Limitation

a. In General

b. Excess Parachute Payments

(1) In General

(2) Parachute Payment

(a) Contingent Compensation

(i) In General

(ii) Presumptions

(iii) Exceptions

(b) Violative Agreements

(3) Exceptions

(a) Small Business and Similar Corporations

(i) In General

(ii) Shareholder Approval Requirements

(b) Qualified Plan Payments

(4) Base Amount

(5) Base Period

(6) Base Amount Allocated to Parachute Payment

(7) Disqualified Individual

(8) Employers Participating in Troubled Assets Relief Program

c. Payments

d. Affiliated Groups

3. At-Risk Limitation

a. In General

b. Covered Taxpayers

c. Applicable Activity

(1) Enumerated Activities

(2) Other Activities

(3) Separation and Aggregation Rules

d. Exceptions

(1) Closely Held Corporation Equipment Leasing

(a) In General

(b) Equipment Leasing

(c) Controlled Groups

(d) Qualified Leasing Group

(e) Qualified Leasing Member

(2) Active Businesses of Qualified C Corporations

(a) In General

(b) Qualifying Business

(c) Qualified C Corporation

e. Aggregate Amount at Risk

(1) In General

(2) At-Risk Amounts Borrowed

(3) Qualified Nonrecourse Financing

(a) In General

(b) Activity of Holding Real Property

(c) Qualified Nonrecourse Financing: Conditions

(d) Qualified Person

(4) Excluded Amounts

(a) Borrowing from Interested or Related Person

(b) Protection Against Loss

(5) Amounts Deductible

f. Carryforward of Disallowed Deductions

4. Repurchased Bond Premium Deduction Limitation

a. In General

b. Convertible and Nonconvertible Obligation

c. Adjusted Issue Price

d. Repurchase Premium

e. Normal Call Premium

(1) In General

(2) One Year's Interest Exception

(3) Comparable Nonconvertible Obligation

f. Exceptions

(1) Cost of Borrowing Premium

(a) In General

(b) Attributable Portion

(c) Factors Taken into Account

(2) Repurchases Arising from Contracts Before Effective Date

5. Trust Charitable Contribution Deduction Limitation

a. In General

b. Unrelated Business Income

c. Computation of Disallowed Charitable Contributions Deductions

(1) In General

(2) Unrelated Business Taxable Income Charitable Contributions Deduction

6. Partner's Adjusted Basis Loss Limitation

7. S Corporation Shareholder Adjusted Basis Loss Limitation

8. Reciprocal Insurance Company Attorney-in-Fact Deduction Limitation

a. In General

b. Reciprocal Insurance Company

c. Attorney-in-Fact Deduction Limitation

d. Election

e. Exception

D. Limitations Based on Specified Reductions

1. Reduction of Percentage Depletion Deductions

2. Reduction of Financial Institution Preference Item Deductions

a. In General

b. Financial Institution Preference Items

(1) In General

(2) Interest Paid or Incurred on Indebtedness

(3) Interest

3. Reduction of Pollution Control Facility Amortization Deductions

4. Reduction of Mineral Deductions

a. In General

b. Mineral Deductions

E. Compensation-Related Limitations

1. Specified Foreign Affiliate Employees § 404 Deduction Limitation

2. Specified Domestic Subsidiary Employees § 404 Deduction Limitation

3. Personal Service Company Employee-Owner Compensation Deduction Limitation

a. In General

b. Applicable Amounts

c. Limitation Conditions

(1) In General

(2) Minimum Distribution Requirements

(a) In General

(b) Deferral Period

(c) Applicable Percentage

(d) Adjusted Taxable Income

d. Maximum Deductible Amount

e. Carryforward of Disallowed Deductions

4. Employee Remuneration in Excess of $1 Million

a. In General

b. Covered Employees

c. Applicable Employee Remuneration

5. Executive Compensation of Employers Participating in Troubled Assets Relief Program

6. Excess Compensation of Applicable Individuals Employed by Covered Health Insurance Providers

III. Deductions Disallowed Because of Other Tax Benefit

A. Deductions Attributable to Excluded Income

1. Deductions Attributable to Excluded Compensation

a. Educational Assistance Exclusion

b. Dependent Care Assistance Exclusion

c. Stock Option Exclusion

d. Congressional Allowances

2. Deductions Attributable to Excluded Investment Income

a. Expenses and Interest Related to Tax-Exempt Income

(1) In General

(2) Expenses Related to Tax-Exempt Income

(a) In General

(b) Regulated Investment Companies

(3) Interest Related to Tax-Exempt Income

(a) In General

(b) Short Sales

(4) Exception

(5) Financial Institution's Interest Expense Allocable to Tax-Exempt Interest

(a) In General

(b) Financial Institution

(c) Interest Expense

(d) Tax-Exempt Obligation

(e) Qualified Tax-Exempt Obligations

(i) In General

(ii) Private Activity Bonds

(iii) Qualified Small Issuer

(iv) Designated Obligations

(v) Qualified Financing Issue Issued in 2009 or 2010

b. Amortizable Tax-Exempt Bond Premium

c. Coverdell Education Savings Account Distributions

3. Expenses Attributable to Excludible Foreign Income

a. Expenses Related to Excluded Possessions Income

b. Expenses Related to Excluded Virgin Islands Income

c. Expenses Related to Excluded Puerto Rico Income

d. Expenses Related to Excluded FSC Foreign Trade Income

e. Expenses Related to Excluded Subpart F Insurance Company Income

f. Possessions Corporations

4. Expenditures Constituting Contributions in Aid of Construction

5. Expenditures Attributable to Energy Conservation Subsidies

6. Expenses Attributable to Conrail Reorganization

7. Expenses Attributable to Federal Financial Assistance

B. Deductions Attributable to Amounts for Which Credit Allowed

1. Alternative Motor Vehicle Credit

2. Enhanced Oil Recovery Credit Costs

3. Disabled Individuals Access Credit Expenditures

4. Excess Employer Social Security Tax Credit

5. Small Employer Pension Plan Startup Cost Credit

6. Employer-Provided Child Care Credit

7. Employment Credits Compensation

a. In General

b. Controlled Groups and Commonly Controlled Businesses

8. Qualified Clinical Testing Expenses Credit

a. In General

b. Controlled Groups and Commonly Controlled Businesses

9. Research Credit Expenses

a. In General

b. Election of Reduced Credit

(1) In General

(2) Election

(3) Previous Elections

c. Controlled Groups and Commonly Controlled Businesses

10. Deemed Paid Accrued Foreign Income Taxes

11. Foreign Income Taxes on Subpart F Income Distributive Share

12. Low-Sulfur Diesel Fuel Production Credit

13. Mine-Rescue Team Training Credit

14. Agricultural Chemicals Security Credit

15. Qualifying Therapeutic Discovery Project Credit

16. Premium Assistance Credit

17. Small Employer Health Insurance Credit

C. Deductions Attributed to Favorably Characterized Amounts

1. Unharvested Crop Production Expenses

2. Coal and Domestic Iron Ore Disposition Contract Expenses

IV. Deductions Disallowed on Account of Capitalization Rules

A. Capital Expenditures

1. In General

2. Exceptions

a. Deduction for Taxable Year Paid or Incurred

b. Deferral of Deduction

3. Amounts Chargeable to Capital Account: In General

4. Costs to Acquire or Sell Tangible Real and Personalty

a. In General

b. Construction Costs

c. Ancillary Costs

d. One-Year Exception

5. Improvements and Repairs

a. In General

b. Specific Types of Improvements

(1) Land Improvements

(2) Roofs, Floors, Walls, and Rooms

(3) Building System Components

(4) Equipment

c. Expenditures for Repair and Maintenance: Current Law

(1) In General

(2) Factual Nature of Determination

(3) Determinative Tests and Factors

(a) Material Enhancement Factors

(b) Relative Cost

(c) Emergency Repairs

(d) Accidents

(e) Damage Prevention

(f) Security

(4) Expenditures Materially Enhancing Value

(a) In General

(b) Real Property

(c) Equipment

(d) Involuntariness

(i) In General

(ii) Building and Similar Codes

(iii) Government Safety and Other Regulations

(iv) State Law

(v) Pursuant to Litigation

(5) Expenditures Materially Enhancing Use

(a) In General

(b) Change in Nature of Use

(c) Combination of Property

(d) Adaptation of Existing Use to Changes in Surroundings

(e) Productivity Improvements

(f) Interior Improvements

(g) Improvements for Tenants

(h) Anticipated Sale as New Use

(i) Governmentally Required Changes

(6) Materially Enhancing Life Expectancy or Useful Life

(a) In General

(b) Increase in Useful Life

(c) Separable Improvements with Useful Life Exceeding One Year

(d) Restoration of Original Useful Life

(e) Parts and Components

(7) Expenditures Materially Enhancing Strength

(8) Expenditures Materially Enhancing Capacity

(9) Replacements of Increased Quality

(a) Roofs, Floors, and Walls

(b) Building Systems

(c) Equipment

(10) Expenditures That Are Part of One Major Undertaking

(a) In General

(b) Complete Reconditioning

(i) Real Property

(ii) Personal Property

(c) Remodeling Projects

(d) Ancillary Costs

(e) Allocation

d. Expenditures for Improvements, Maintenance, Betterment and Restoration: Proposed Regulations

(1) Improvements

(a) In General

(b) Unit of Property

(i) Functional Interdependence and Discrete or Major Functions Standards

(ii) Special Rules

(iii) Examples

(iv) Regulatory Compliance

(v) Repairs/Maintenance Performed During Improvement

(vi) Aggregating Related Amounts

(2) Safe Harbor for Routine Maintenance

(a) In General

(b) Exceptions

(c) Rotable Spare Parts and Class Life

(d) Examples

(3) Capitalization of Betterments

(a) In General

(b) Unavailability of Replacement Parts

(c) Appropriate Comparisons

(d) Examples

(4) Capitalization of Restorations

(a) In General

(b) Rebuild to Like-New Condition

(c) Replacement of Major Component or Substantial Structural Part

(d) Examples

(5) Capitalization of Amounts to Adapt Property to New or Different Use

(a) In General

(b) Examples

(6) Optional Regulatory Accounting Method

(a) In General

(b) Eligibility

(c) Description of Method

6. Acquisition, Creation and Enhancement of Intangible Property

a. In General

b. Separate and Distinct Intangible Asset

c. Acquired Intangible Assets

d. Specified Created Intangible Assets

(1) In General

(2) Financial Interests

(3) Prepaid Expenses

(4) Certain Memberships and Privileges

(5) Certain Rights Obtained from a Governmental Agency

(6) Certain Contract Rights

(7) Certain Contract Terminations

(8) Certain Payments for Real Property

(9) Defense or Perfection of Title to Intangible Property

e. Amounts Paid to Facilitate Acquisition or Creation of Intangible Assets

(1) In General

(2) Facilitate

(3) Transaction

(4) Simplifying Conventions

(a) In General

(b) Employee Compensation and Overhead

(c) De Minimis Costs

(d) Election to Capitalize Employee Compensation, Overhead, and De Minimis Costs

f. Exception for 12-Month Rule

(1) In General

(2) Exceptions

(3) Termination Payments

(4) Rights of Indefinite Duration

(5) Liabilities Incurred by Accrual Method Taxpayers

(6) Rights Subject to Renewal

(a) In General

(b) Safe-Harbor Pooling Method

(7) Election to Capitalize

g. Pooling Rules

7. Certain Trade or Business Acquisition and Reorganization Transactions

a. In General

b. Facilitate

c. Special Rules for Certain Costs

(1) Borrowing Costs

(2) Asset Sale Costs

(3) Mandatory Stock Distributions

(4) Bankruptcy Reorganization Costs

(5) Open-End Regulated Investment Company Stock Issuance Costs

(6) Integration Costs

(7) Registrar and Transfer Agent Fees for the Maintenance of Capital Stock Records

(8) Termination Payments and Mutually Exclusive Transaction Payments

d. Simplifying Conventions

(1) In General

(2) Employee Compensation and Overhead

(3) De Minimis Exception

(4) Election to Capitalize Employee Compensation, Overhead, and De Minimis Costs

e. Certain Acquisitive Transactions

f. Success-Based Fees

B. Produced Property Capitalization Limitation

1. In General

2. Allocable Costs

3. Produced Property

a. In General

b. Self-Produced Property

c. Property Acquired for Resale

4. Exceptions

a. Research and Experimental Expenditures

b. Deductible Oil, Gas, and Mineral Costs

c. Timber and Ornamental Trees

d. Farming Business Qualified Products

(1) In General

(2) Preproductive Period

(3) Farming Business

e. Plants Lost by Casualty

(1) In General

(2) Minority Owners

f. Plants Produced in Farming Business

(1) In General

(2) Limitation on Scope of Exception

g. Interest

(1) In General

(2) Qualified Interest Costs

(3) Allocation Rules

(4) Avoided Cost Method

h. Qualified Expenses of Qualified Creators

(1) In General

(2) Qualified Creator

(3) Qualified Corporations

i. Cushion Gas

j. Construction in Progress

C. Demolition Expenditures

D. Repurchase of Corporation's Stock

E. Straddle Carrying Costs Capitalization

1. In General

2. Straddle Carrying Costs

a. In General

b. Straddle Carrying Outlays

c. Straddle Income

3. Exception

4. Application with Other Provisions

F. Short Sale Payment Capitalization

1. In General

2. Short Sale Payment

3. Covered Short Sales

a. In General

b. Extraordinary Dividends

c. Suspension of Short Sale Period

4. Exception

G. Carrying Charges

1. In General

2. Taxes and Carrying Charges Chargeable to Capital Account

a. Unimproved and Unproductive Real Property

b. Real Property

c. Personal Property

d. Any Property

3. Items Not Treated as Chargeable to Capital Account

4. Election

V. Public Policy Restrictions

A. Deductions Disallowed for Nontax Policy Reasons

1. Judicially Developed Disallowances

a. In General

b. Scope of Application of Disallowance

c. Illegal Business Activities

(1) Illegal Business

(2) Transacting Business in Illegal Manner

(3) Rebates

(4) Compensation in Furtherance of Illegal Purpose

(5) Illegal Equipment

d. Other Illegal Activities

e. Racial Discrimination

(1) Contributions to Schools

(2) Contributions to Governments

2. Illegal Bribes, Kickbacks, and Other Payments

a. In General

b. Illegal Government Bribe or Kickback

(1) In General

(2) Official or Employee of a Government

c. Illegal Payment

(1) In General

(2) Law of the United States

(3) Generally Enforced State Law

d. Illegal Medicare Payment

e. Payments

(1) Accrued Expenses

(2) Indirect Payments

f. Burden of Proof

3. Fines and Similar Penalties

a. In General

b. Fine or Similar Penalty

(1) In General

(2) Exceptions

(3) Restitution

c. Government

4. Antitrust Treble Damage Payments

a. In General

b. Antitrust Treble Damage Payment

(1) In General

(2) Qualified Antitrust Violation

(a) In General

(b) Antitrust Violation

(c) Related Antitrust Violation

(3) Conviction

c. Exceptions

5. Lobbying Expenses

a. In General

b. Influencing Legislation

c. Covered Executive Branch Official

d. Exceptions

6. Indirect Contributions to Political Parties

a. In General

b. Indirect Political Party Contributions

(1) In General

(2) Inurement of Proceeds

(a) Political Party

(b) Political Candidate

c. Political Party

(1) In General

(2) Political Contributions and Gifts

7. Expenses of Illegal Drug Sale Trade or Business

a. In General

b. Illegal Drug Sale Trade or Business

(1) In General

(2) Controlled Substance

c. In Carrying On

8. Charitable Contributions on Behalf of Federal Employees

a. In General

b. Excludible Amount

c. Federal Government Employee

9. Contributions to Communist Organizations

B. Deductions Disallowed to Prevent Income Tax Avoidance and Evasion

1. Acquisitions Made to Evade or Avoid Income Tax

a. In General

b. Tainted Acquisition

(1) In General

(2) Control

(3) Qualified Stock Purchase and Liquidation

c. Allowance and Allocation of Deduction

2. Reallocated Deductions

3. Employer Security Dividends Made to Evade Tax

C. Deductions Disallowed for Tax Equity Purposes

1. Disallowance of Double Deductions

a. Interrelationship with Previous Internal Revenue Codes

b. Trusts and Estates

(1) Interrelationship with Estate Tax Deductions

(2) Distributions Deductions

c. Insurance Companies

2. Discriminatory Taxation of U.S. Persons

a. In General

b. Subjects of a Foreign Country

c. U.S. Persons

d. Discriminatory Taxation

e. Exercise of Power

D. Deductions Disallowed as Condition for Tax Benefit

1. High-Speed Intercity Rail Facility Depreciation

2. Arbitrage Bond Rebates Paid to United States

E. Deductions Disallowed for Failure to Continue Compliance with Conditions for Tax Benefit

1. Interest on Mortgage Financed with Mortgage Revenue Bond Proceeds

2. Interest on Mortgage Financed with Qualified Residential Rental Project Private Activity Bond Proceeds

3. Interest on Mortgage Financed with Qualified § 501(c)(3) Bond Proceeds

4. Interest on Mortgages Financed with Private Activity Bond Proceeds

a. Failure to Continue Complying Use

b. Failure to Continue Complying Ownership

5. Interest on Mortgages Financed with Qualified Small Issue Bond Proceeds

VI. Disallowance of Personal Deductions

A. Personal, Living, and Family Expenses

1. In General

2. Personal Expenses

a. Self-Improvement Expenses

(1) Appearance

(2) Physical Health

(3) Prestige and Reputation

b. Entertainment and Meal Expenses

c. Subscription Costs

d. Insurance Costs

e. Hobby Expenses

f. Travel Away from Home

g. Attorney's Fees and Related Expenses

(1) In General

(2) Expenses Related to Family Matters

(a) Children

(b) Incompetency and Related Proceedings

(c) Family Property Management

(d) Marital Situations

(i) Marriage Contracts

(ii) Divorce or Separation

(iii) Child Support and Custody

3. Living Expenses

a. Household Expenses

(1) In General

(2) Multiple-Use Property

(3) Increased Living Expenses

b. Groceries and Clothing

c. Equipment Purchased by Members of the Armed Forces

d. Telephone Expenses

(1) In General

(2) Local Telephone Service

(3) Optional Services

e. Commuting and Parking Costs

f. Vehicle Expenses

g. Losses on the Acquisition and Disposition of Residences

4. Family Expenses

a. Payments to Family Members

b. Education Expenses

c. Child Care Expenses

d. Credit Card Expenses

B. Entertainment, Travel, Meal, and Similar Expenses

1. Entertainment, Amusement, and Recreation Activities and Facilities

a. Disallowance with Respect to Entertainment Items

(1) In General

(2) Disqualified Entertainment Item

(a) In General

(b) Entertainment Items

(3) Clubs

(4) Exceptions

(a) Food and Beverages for Employees

(b) Expenses Treated as Compensation

(c) Reimbursed Expenses

(d) Recreational and Social Expenses for Employees

(e) Organizational Business Meetings

(f) Meetings of Tax-Exempt Business Associations

(g) Items Available to Public

(h) Entertainment Sold to Customers

(i) Expenses Includible in Recipient's Gross Income

(j) Amounts Deductible in Any Event

b. Disallowance with Respect to Entertainment Tickets

(1) In General

(2) Excess Entertainment Ticket Expense

(a) In General

(b) Entertainment Ticket

(c) Applicable Face Amount

(3) Exceptions

(a) Qualified Charitable Event

(b) Amounts Deductible in Any Event

c. Disallowance of 50% of Deduction

(1) In General

(2) Exceptions

(a) Expenses Treated as Compensation

(b) Reimbursed Expenses

(c) Recreational and Social Expenses for Employees

(d) Items Available to Public

(e) Entertainment Sold to Customers

(f) Expenses Includible in Recipient's Gross Income

(g) Expenses for Tickets to Qualified Charitable Events

(h) Amounts Deductible in Any Event

d. Disallowance if Substantiation Requirement Not Met

(1) In General

(2) Exception for Amounts Deductible in Any Event

2. Travel Expenses

a. Disallowance with Respect to Luxury Water Transportation

(1) In General

(2) Luxury Water Transportation Expenses

(3) Exceptions

(a) Cruise Ship Conventions

(b) Expenses Treated as Compensation

(c) Reimbursed Expenses

(d) Recreational and Social Expenses for Employees

(e) Items Available to Public

(f) Entertainment Sold to Customers

(g) Expenses Includible in Recipient's Gross Income

(h) Amounts Deductible in Any Event

b. Disallowance with Respect to Convention Attendance

(1) In General

(2) Disqualified Foreign Convention Expenses

(a) In General

(b) Situation Factors

(c) North American Area

(3) Disqualified Cruise Ship Convention Expenses

(a) In General

(b) Requisite Written Statements

(c) Limitation

(d) Cruise Ship

(4) Taxpayer to Whom Disallowance Applies

(5) Amounts Deductible in Any Event

c. Disallowance with Respect to Foreign Travel

(1) In General

(2) Specified Foreign Travel

(3) Exceptions

(a) Travel of One Week or Less

(b) Travel That Is Less than 25% Personal

(c) Amounts Deductible in Any Event

(4) Travel Outside the United States

d. Disallowance with Respect to Educational Travel

e. Disallowance with Respect to Travel Expenses of Spouse, Dependent, or Others

f. Disallowance if Substantiation Requirement Not Met

(1) In General

(2) Exception for Amounts Deductible in Any Event

3. Food and Beverages

a. Disallowance with Respect to Business Meals

(1) In General

(2) Qualified Business Meal Expense

(3) Exceptions

(a) Expenses Treated as Compensation

(b) Reimbursed Expenses

(c) Recreational and Social Expenses for Employees

(d) Items Available to Public

(e) Entertainment Sold to Customers

(f) Expenses Includible in Recipient's Gross Income

(g) Other Amounts

(h) Amounts Deductible in Any Event

b. Disallowance of 50% of Deduction

(1) In General

(2) Exceptions

(a) Expenses Treated as Compensation

(b) Reimbursed Expenses

(c) Recreational and Social Expenses for Employees

(d) Items Available to Public

(e) Entertainment Sold to Customers

(f) Expenses Includible in Recipient's Gross Income

(g) Expenses Excludable from Recipient's Gross Income

(h) Expenses for Tickets to Qualified Charitable Events

(i) Moving Expenses

(j) Expenses for Food and Beverages Provided Away from Land

(k) Amounts Deductible in Any Event

4. Disallowance with Respect to Business Gifts

a. Limitation on Deductions for Gifts

(1) In General

(2) Excess Gift Expense

(3) Gift

(a) In General

(b) Exceptions

(4) Multiple Donors

(5) Amounts Deductible in Any Event

b. Disallowance if Substantiation Requirement Not Met

(1) In General

(2) Exception for Amounts Deductible in Any Event

5. Disallowance with Respect to Employee Achievement Awards

a. In General

b. Excess Employee Achievement Award Cost

c. Employee Achievement Award

(1) In General

(2) Length-of-Service Achievement

(3) Safety Achievement

d. Qualified Plan Award

C. Disallowance of Certain Taxes

1. In General

2. Disqualified Taxes

a. In General

b. Foreign Income Tax

c. Specified Excise Tax

D. Insurance Policy Payments

1. In General

2. Disqualified Insurance Policy Payments

a. Disqualified Life Insurance Policy Premiums

b. Single Premium Insurance Contract Indebtedness Interest

(1) In General

(2) Single-Premium Insurance Contract

c. Cash Value Funded Insurance Contract Indebtedness Interest

(1) In General

(2) Disqualified Insurance Contract

(3) Disqualified Borrowing Plan

d. Disqualified Life Insurance Policy Indebtedness Interest

e. Unborrowed Policy Cash Value Interest

(1) In General

(2) Business Policy Exceptions

(3) Natural Person Contracts

3. Shrinkage of Life or Terminable Interest Income

VII. Deductions Disallowed Because of Relationships

A. Disallowed Related Person Loss Deductions

1. In General

2. Related Persons

3. Exceptions

B. Disallowed Related-Partnership Transaction Losses

1. In General

2. Related-Partnership Transaction

3. Exception

VIII. Other Deduction Disallowances

A. Disallowance of Losses from Wash Sales

1. In General

2. Wash Sales

3. Exception

B. Disallowance of Disqualified Organization Charitable Contributions

1. In General

2. Disqualified Organizations

3. Disqualified Charitable Contributions

C. Disallowance of Deduction for Forfeited Substantial Restriction Election Property

D. Disallowance of Dividends Received Deductions

1. In General

2. Disqualified Dividend

a. In General

b. Tax-Exempt Dividend

(1) In General

(2) Federal Home Loan Bank Exceptions

(a) Current Earnings and Profits Exception

(b) Accumulated Earnings and Profits Exception

c. Short-Term Dividend

(1) In General

(2) Holding Periods

d. DISC Dividend

e. Qualifying FSC Dividend

E. Disallowance of Foreign Advertising Expenses

1. In General

2. Foreign Advertising Expenses

F. Disallowance of Retiree Health Account Amounts

1. In General

2. Retiree Health Account Amounts

3. Qualified Transfer

G. Disallowance of Worthless Political Party Debt Deductions

1. In General

2. Political Party

a. In General

b. Political Contributions and Expenditures

3. Exceptions

a. Banks

b. Trade Accounts Receivable

H. Disallowance of Illegal Federal Irrigation Subsidy Deductions

I. Disallowance of Special Interest Expense Deductions

1. Disallowance of Interest Charge on Accumulation Distributions from Foreign Trusts

2. Disallowance of Certain Interest on Estate Tax Liability

3. Disallowance of Low-Income Housing Credit Recapture Interest Deduction

J. Disallowance of Life Insurance Company Deficiency Reserve Deductions

K. Disallowance of Interest Deductions on Disqualified Debt Instruments

L. Disallowance of Deductions for United Mine Worker Asset Transfers


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Finding List of Related Tax Management Portfolios

Worksheet 2 IRS Publication 17, Your Federal Income Tax Excerpt - Limit on Itemized Deductions

Worksheet 3 IRS Publication 529, Miscellaneous Deductions

Worksheet 4 Excerpt from IRS Publication 544, Sales and Other Dispositions of Assets, Chapter 4 (Reporting Gains and Losses)

Worksheet 5 Sample § 142(i)(2) Election to Forego Depreciation Deduction By Nongovernmental Owner

Worksheet 6 Sample § 266 Election to Capitalize Carrying Charges

Bibliography

OFFICIAL

Statutes:

Public Laws:

Other:

Reports:

Treasury Regulations:

IRS Rulings:

Cases:

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