Basic Tax Definitions

Anti-Injunction Act is an act that prohibits federal courts from issuing an injunction against proceedings in any state court, except within three specifically described exceptions.  The “Tax Anti-Injunction Act” is codified in I.R.C. 7421(a) and provides that, with 14 specified exceptions, “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.”

Capital Appreciation Bonds, per MSRB definition, is “a municipal security on which the investment return on an initial principal amount is reinvested at a stated compounded rate until maturity. At maturity the investor receives a single payment (the ‘maturity value’) representing both the initial principal amount and the total investment return. CABs typically are sold at a deeply discounted price with maturity values in multiples of $5,000. CABs are distinct from traditional zero coupon bonds because the investment return is considered to be in the form of compounded interest rather than accreted original issue discount. For this reason only the initial principal amount of a CAB would be counted against a municipal issuer’s statutory debt limit, rather than the total par value, as in the case of a traditional zero coupon bond. See: COMPOUND ACCRETED VALUE. Compare: CURRENT INTEREST BOND; ZERO COUPON BOND.”

Capital expenditure means any cost of a type that is properly chargeable to capital account (or would be so chargeable with a proper election or with the application of the definition of placed in service under Section 1.150-2(c)) under general federal income tax principles.  For example, costs incurred to acquire, construct, or improve land, buildings, and equipment generally are capital expenditures.  Whether an expenditure is a capital expenditure is determined at the time the expenditure is paid with respect to the property. Future changes in law do not affect whether an expenditure is a capital expenditure.  See Section 1.150-1(b) of the Regulations.  (Siehe auch den Aufschrieb bezueglich capitalization fuer Raabe.)

Basis point is 100th of one percent (0.01%).  Basis points are referred to as “bips” or “bps.”  For illustration purposes, 45 bps is 0.45%, and 125 bps is 1.25%.  “A basis point (often denoted as bp or ‱; rarely, permyriad) is a unit relating to interest rates that is equal to 1/100th of a percentage point per annum. It is frequently but not exclusively used to express differences in interest rates of less than 1% pa. It avoids the ambiguity between relative and absolute discussions about rates. For example, a ‘1% increase’ from a 10% interest rate could refer to an increase either from 10% to 10.1% (relative), or from 10% to 11% (absolute).  It is common practice in the financial industry to use basis points to denote a rate change in a financial instrument, or the difference (spread) between two interest rates, including the yields of fixed-income securities. Since certain loans and bonds may commonly be quoted in relation to some index or underlying security, they will often be quoted as a spread over (or under) the index. For example, a loan that bears interest of 0.50% per annum above LIBOR is said to be 50 basis points over LIBOR, which is commonly expressed as ‘L+50bps’ or simply ‘L+50’.” (Wikipedia)

Exemplary vs. exclusionary lists: Section 7701(c) provides that the term “including” when used in a definition in Title 26 is not to be deemed to exclude other things otherwise within he meaning of the term defined.

Inquisitorial Income Tax is a tax on income that depends on the state’s ability to inquire into the taxpayer’s source of income and financial affairs.  The term seems to be used most often in connection with criticisms of the income tax.  See this article regarding characteristics of the “inquisitorial” income tax during the Civil War years.

Interest:  The case most often cited for the definition of “Interest” is the Supreme Court’s decision in Deputy v. du Pont.  Interest is “compensation for the use or forbearance of money.”  See David Garlock, Federal Income Taxation of Debt Instruments, 101.  Are commitment fees or standby charges “interest”?  No.  “Fees you incur to have business funds availability on a standby basis, but not for the actual use of the funds, are not deductible as interest payments.  You may be able to deduct them as business expenses.”  See IRS Publication 535.

Pigovian Tax” (also spelled, Pigouvian tax) is a tax applied to a market activity that is generating negative externalities (costs for somebody else). The tax is intended to correct an inefficient market outcome, and does so by being set equal to the negative externalities. In the presence of negative externalities, the social cost of a market activity is not covered by the private cost of the activity. In such a case, the market outcome is not efficient and may lead to over-consumption of the product. An oft-cited example of such an externality is for environmental pollution.  (See Wikipedia.)

Placed in servicemeans, with respect to a facility, the date on which, based on all facts and circumstances, (1) the facility has reached a degree of completion which would permit its operation at substantially its design level; and (2) the facility is in fact in operation at such level.  See Treas. Reg. 1.150-2(c).  Note that the definition applies with respect to facilities only. Query whether you can use a placed in service date that is later than the issue date for equipment that does not become part of the facility.  It may be more conservative to apply the issue date as the placed in service date for such equipment (or furnishings).

Placed in service for purposes of the deduction for depreciation and investment tax credits, means the taxable year that the property is placed in a condition or state of readiness and available for a specifically assigned function. See Treas. Reg. secs. 1.46-3(d)(1)(ii) and 1.167(a)-11(e)(1)(i).

Pre-issuance accrued interest means amounts representing interest that accrued on an obligation for a period not greater than one year before its issue date but only if those amounts are paid within one year after the issue date.  See Section 1.148-1(b) of the Regulations.

Proceeds” for purposes of I.R.C. 142 means sale proceeds and investment proceeds – basically the same as how the term is used in I.R.C 148.  Therefore, if 95% of net proceeds must be spent for one purpose or another, use proceeds plus investment proceeds less the reserve fund.  For purposes of I.R.C. 141, however, see the special definition in Treas. Reg. 1.141-1(b).

Negative arbitrage is the “phenomenon of earning less than the bond yield.  If market conditions force a fund into a negative arbitrage position, the issuer will normally stand to benefit from blending that fund with some other fund that it can invest at positive arbitrage, generally using longer term investments.  The negative arbitrage in the short-term fund can shelter positive arbitrage in the long-term fund that would otherwise be subject to yield restriction or rebate.” (Ballard, ABCs of Arbitrage).

De Minimis is defined in Treas. Reg. 1.148-1(b) with reference to original issue discount or market discount.  For purposes of references to original issue discount, the second prong of the definition (“… plus (ii) any original issue premium that is attributable exclusively to reasonable underwriters’ compensation”) usually only applies in competitive transactions where the underwriter discount has been included in the bid calculation.  This second prong does not usually arise in negotiated transactions and can normally be disregarded in such negotiated transactions.

Pre-Ullman Bond” is a bond that was issued prior to the effective date of the Mortgage Subsidy Bond Tax Act.  There is an exemption from the 10-year rule for pre-Ulman bonds.  See Feldstein & Fabozzi, “Handbook for Municipal Bonds” for more information.

Depreciation” vs.Amortization – When a business purchases an asset, the life span of the asset is determined.  Each year, a business will determine the portion of the asset that is “used up” and allocate the cost of the asset over the life of the asset.  The IRS calles this “cost recovery.”  The reduction in the cost of the asset is recorded on the balance sheet.  If the asset is a tangible asset, this recording is referred to as “depreciation.”  If the asset is an intangible asset, the recording is referred to as “amortization.”  Cars are depreciated.  Patents are amortized.

Gross Negligence” vs. “Ordinary Negligence” – Negligence is a failure to exercise reasonable care.  The standard for ordinary negligence is the “reasonable person” standard, taking into account the circumstances of the person (i.e., if the wrongdoer is a professional, the “reasonable person” standard is based on what a reasonable person who is a professional would do).  Gross negligence, however, is reckless and willful misconduct.  A Supreme Court judge pointed out the extent of gross negligence versus “ordinary” negligence by saying, “even a dog knows the difference between being tripped over and being kicked.”

Real Estate Investment Trust” – (from Wikipedia) Under U.S. Federal income tax law, a real estate investment trust (REIT) /ˈrt/ is “any corporation, trust or association that acts as an investment agent specializing in real estate and real estate mortgages” under Internal Revenue Code section 856.[1]The rules for federal income taxation of REITs are found primarily in Part II (sections 856 through 859) of Subchapter M of Chapter 1 of the Internal Revenue Code. Because a REIT is entitled to deduct dividends paid to its owners, a REIT may avoid incurring all or part of its liabilities for U.S. federal income tax. To qualify as a REIT, an organization makes an “election” to do so by filing a Form 1120-REIT with the Internal Revenue Service, and by meeting certain other requirements. The purpose of this designation is to reduce or eliminate corporate tax, thus avoiding double taxation of owner income. In return, REITs are required to distribute at least 90% of their taxable income into the hands of investors. A REIT is a company that owns, and in most cases, operates income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and even timberlands. Some REITs also engage in financing real estate. The REIT structure was designed to provide a real estate investment structure similar to the structure mutual funds provide for investment in stocks

Tax Ownership” – See this posting for a description of what “ownership” means for federal income tax purposes.  A key component to tax ownership is the taxpayer’s residual risk value.  See CCA 201351022, Dec. 23, 2013, for a description of the residual risk value factor.


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