Principles of Taxation

The tax consequences of a business activity are generally the same as the tax consequences of an investment activity.

Income generated from an investment activity is primarily attributable to invested capital rather than the owner's personal involvement in the activity.

Electing to reinvest dividends in additional shares of stock does not defer income recognition.

The interest earned on a state or local government bond is exempt from federal taxation.

The interest earned on investments in U.S.debt obligations is subject to state taxation.

Qualified dividend income earned by individual taxpayers is taxed at a maximum income tax rate of 20%.

Only accrual basis individuals are required to accrue original issue discount on a bond as annual interest income.

Cash basis individuals must accrue market discount on a bond as annual interest income over the life of the bond.

The cash surrender value of a life insurance policy is taxable to the policy beneficiary upon the death of the insured individual.

Mr.Adams paid $53,500 in premiums on a whole life insurance policy.When he canceled the policy,he received its cash surrender value of $61,600.He must recognize $61,600 income as a result of the cancellation.

An owner of a life insurance policy that includes an investment element must recognize income equal to the annual increase in the policy's cash surrender value.

Ms.Martin received $80,000 from a $100,000 life insurance policy as an accelerated death benefit.None of the $80,000 is taxable to her.

Brokerage fees paid when stock is purchased are added to the basis of the stock.

If an investor sells some of the securities in a block but can't identify which ones were sold,she is presumed to have sold the securities with the latest acquisition date.

On April 19 of this year,Sandy learned that her stock investment had become worthless.The stock is deemed to be worthless on December 31 of this year.

Two years ago,James loaned $60,000 to his friend.The debt is now uncollectible.If the loan created a bona fide debt,James recognizes a short-term capital loss.

The tax rate on capital gains is determined solely by reference to the capital asset's holding period.

Individual taxpayers may carry nondeductible capital losses forward indefinitely up to the $3,000 maximum loss per year.

An individual with a 10% rate marginal tax rate on ordinary income will pay no tax on long-term capital gains.

Unrecaptured Section 1250 gain is taxed at a maximum rate of 28%.