SOUTH-WESTERN FEDERAL
TAXATION 2017 CORPORATIONS
PARTNERSHIPS ESTATES AND
TRUSTS 40TH EDITION HOFFMAN
SOLUTIONS MANUAL
, CHAPTER 1
UNDERSTANDING AND WORKING WITH THE FEDERAL TAX LAW
SOLUTIONS TO PROBLEM MATERIALS
DISCUSSION QUESTIONS
1. (LO 1) When enacting tax legislation, Congress often is guided by the concept of revenue neutrality
so that any changes neither increase nor decrease the net revenues raised under the prior rules.
Revenue neutrality does not mean that any one taxpayer’s tax liability remains the same. Since this
liability depends upon the circumstances involved, one taxpayer’s increased tax liability could be
another’s tax saving. Revenue-neutral tax reform does not reduce deficits, but at least it does not
aggravate the problem.
2. (LO 2) Economic, social, equity, and political factors play a significant role in the formulation of tax
laws. Furthermore, the IRS and the courts have had impacts on the evolution of tax laws. For
example, control of the economy has been an important economic consideration in passing a number
of laws (e.g., rapid depreciation, changes in tax rates).
3. (LO 2) The tax law encourages technological progress by allowing immediate (or accelerated)
deductions and tax credits for research and development expenditures.
4. (LO 2) Saving leads to capital formation and thus makes funds available to finance home construction
and industrial expansion. For example, the tax laws provide incentives to encourage savings by giving
private retirement plans preferential treatment.
5. (LO 2)
a. Section 1244 allows ordinary loss treatment on the worthlessness of small business
corporation stock. Since such stock normally would be a capital asset, the operation of § 1244
converts a less desirable capital loss into a more attractive ordinary loss. Such tax treatment
was designed to aid small businesses in raising needed capital through the issuance of stock.
b. The corporate income tax rates favor those corporations with taxable income under $75,000.
On a relative basis, it is the smaller corporations that will benefit the most from the graduated
corporate tax rates. Further, the $11,750 in tax savings that result from the graduated rate
structure is phased out for corporations with taxable income in excess of $100,000.
c. By allowing corporations to split or combine (i.e., merge or consolidate) without adverse tax
consequences, small corporations are in a position to compete more effectively with larger
counterparts.
6. (LO 2) Reasonable persons can, and often do, disagree about what is fair or unfair. In the tax area,
moreover, equity is generally tied to a particular taxpayer’s personal situation. For example, one
equity difference relates to how a business is organized (i.e., partnership versus corporation). Two
businesses may be equal in size, similarly situated, and competitors in the production of goods or
services, but they may not be comparably treated under the tax law if one is a partnership and the
other is a corporation. The corporation is subject to a separate Federal income tax; the partnership is
1-1
, not. The tax law can and does make a distinction between these business forms. Equity, then, is not
what appears fair or unfair to any one taxpayer or group of taxpayers. It is, instead, what the tax law
recognizes.
7. (LO 2) This deduction can be explained by social considerations. The deduction shifts some of the
financial and administrative burden of socially desirable programs from the public (the government)
sector to the private (the citizens) sector.
8. (LO 2) Private retirement plans’ preferential treatment encourages saving. Not only are contributions
to Keogh (H.R. 10) plans and certain Individual Retirement Plans (IRA) deductible, but income from
these contributions accumulates on a tax-free basis.
9. (LO 2) The availability of percentage depletion on the extraction and sale of oil and gas and specified
mineral deposits and a write-off (rather than capitalization) of certain exploration costs encourage the
development of natural resources.
10. (LO 2) Favorable treatment of corporate reorganizations provides an economic benefit. By allowing
corporations to combine and split without adverse consequences, corporations are in a position to
more effectively compete with other businesses.
11. (LO 2) Although the major objective of the Federal tax law is the raising of revenue, other
considerations explain many provisions. In particular, economic, social, equity, and political factors play
a significant role. Added to these factors is the impact the Treasury Department, Internal Revenue
Service, and the courts have had and will continue to have on the evolution of Federal tax law.
12. (LO 2) The deduction allowed for Federal income tax purposes for state and local income taxes is not
designed to neutralize the effect of multiple taxation on the same income. At most, this deduction
provides only partial relief. Only the allowance of a full tax credit would achieve complete neutrality.
a. With the standard deduction, a taxpayer is, indirectly, obtaining the benefit of a deduction for
any state or local income taxes he or she may have paid. This is so because the standard
deduction is in lieu of itemized deductions, which include the deductions for state and local
income taxes.
b. If the taxpayer is in the 10% tax bracket, one dollar of a deduction for state or local taxes
would save ten cents of Federal income tax liability. In the 33% tax bracket, the saving
becomes thirty-three cents. The deduction approach (as opposed to the allowance of a credit)
favors high bracket taxpayers.
13. (LO 2) Under the general rule, a transfer of a partnership’s assets to a new corporation could result in
a taxable gain. However, if certain conditions are met, § 351 postpones the recognition of any gain (or
loss) on the transfer of property by Heather to a controlled corporation.
The wherewithal to pay concept recognizes the inequity of taxing a transaction when Heather lacks
the means with which to pay any tax. Besides, Heather’s economic position would not change
significantly as a result of such a transfer. Heather owned the assets before the transfer and still would
own the assets after a transfer to a controlled corporation.
14. (LO 2) Yes, once incorporated, the business may be subject to the Federal corporate income tax.
However, the corporate tax rates might be lower than Heather’s individual tax rates, especially if
dividends are not paid to Heather.
The corporate income tax could be avoided altogether by electing to be an S corporation. An
S corporation is generally not taxed at the corporate level; instead, the income flows through the
corporate veil and is taxed at the shareholder level. An S election allows a business to operate as a
corporation but be taxed like a partnership.
, 15. (LO 2) Examples include like-kind exchanges, involuntary conversions, transfers of property to a
controlled corporation, transfers of property to a partnership, and tax-free reorganization.
16. (LO 2) Generally, a recognized (taxable) gain cannot exceed the realized gain.
17. (LO 2) Recognition of gain ultimately occurs when the property is disposed of.
18. (LO 2) One year.
19. (LO 2) The installment method on the sale of property permits the gain to be recognized over the
payout period.
20. (LO 2) Requiring a taxpayer to make a contribution to a Keogh retirement plan by the end of the year
would force an accurate determination of net self-employment income long before the income tax
return must be prepared and filed.
21. (LO 2) The difference between common law and community property systems centers around the
property rights possessed by married persons. In a common law system, each spouse owns whatever
he or she earns. Under a community property system, one-half of the earnings of each spouse is
considered owned by the other spouse. Assume, for example, Harold and Ruth are husband and wife,
and their only income is the $80,000 annual salary Harold receives. If they live in New York (a common
law state), the $80,000 salary belongs to Harold. If, however, they live in Texas (a community property
state), the $80,000 salary is divided equally, in terms of ownership, between Harold and Ruth.
22. (LO 2) Deterrence provisions include:
Alternative minimum tax.
Imputed interest rules.
Limitation on the deductibility of interest on investment indebtedness.
Gift and estate tax.
Unreasonable accumulated earnings tax.
Personal holding company tax.
23. (LO 4) Primarily concerned with business readjustments, the continuity of interest concept permits
tax-free treatment only if the taxpayer retains a substantial continuing interest in the property transferred
to the new business. Due to the continuing interest retained, the transfer should not have tax
consequences because the position of the taxpayer has not changed. This concept applies to transfers
to controlled corporations (Chapter 4), corporate reorganizations (Chapter 7), and transfers to
partnerships (Chapter 10).
24. (LO 3) Under § 482 the IRS has the authority to allocate income and deductions among businesses
owned or controlled by the same interests when the allocation is necessary to prevent the evasion of
taxes or to clearly reflect the income of each business. Pursuant to § 482, therefore, the IRS might
allocate interest income to White Corporation even though none was provided for in the loan
agreement.
25. (LO 5) False. Federal tax legislation generally originates in the House of Representatives, where it is
first considered by the House Ways and Means Committee. Tax bills can originate in the Senate only
when they are attached as riders to other legislative proposals as was the case with the American
Taxpayer Relief Act of 2012.
TAXATION 2017 CORPORATIONS
PARTNERSHIPS ESTATES AND
TRUSTS 40TH EDITION HOFFMAN
SOLUTIONS MANUAL
, CHAPTER 1
UNDERSTANDING AND WORKING WITH THE FEDERAL TAX LAW
SOLUTIONS TO PROBLEM MATERIALS
DISCUSSION QUESTIONS
1. (LO 1) When enacting tax legislation, Congress often is guided by the concept of revenue neutrality
so that any changes neither increase nor decrease the net revenues raised under the prior rules.
Revenue neutrality does not mean that any one taxpayer’s tax liability remains the same. Since this
liability depends upon the circumstances involved, one taxpayer’s increased tax liability could be
another’s tax saving. Revenue-neutral tax reform does not reduce deficits, but at least it does not
aggravate the problem.
2. (LO 2) Economic, social, equity, and political factors play a significant role in the formulation of tax
laws. Furthermore, the IRS and the courts have had impacts on the evolution of tax laws. For
example, control of the economy has been an important economic consideration in passing a number
of laws (e.g., rapid depreciation, changes in tax rates).
3. (LO 2) The tax law encourages technological progress by allowing immediate (or accelerated)
deductions and tax credits for research and development expenditures.
4. (LO 2) Saving leads to capital formation and thus makes funds available to finance home construction
and industrial expansion. For example, the tax laws provide incentives to encourage savings by giving
private retirement plans preferential treatment.
5. (LO 2)
a. Section 1244 allows ordinary loss treatment on the worthlessness of small business
corporation stock. Since such stock normally would be a capital asset, the operation of § 1244
converts a less desirable capital loss into a more attractive ordinary loss. Such tax treatment
was designed to aid small businesses in raising needed capital through the issuance of stock.
b. The corporate income tax rates favor those corporations with taxable income under $75,000.
On a relative basis, it is the smaller corporations that will benefit the most from the graduated
corporate tax rates. Further, the $11,750 in tax savings that result from the graduated rate
structure is phased out for corporations with taxable income in excess of $100,000.
c. By allowing corporations to split or combine (i.e., merge or consolidate) without adverse tax
consequences, small corporations are in a position to compete more effectively with larger
counterparts.
6. (LO 2) Reasonable persons can, and often do, disagree about what is fair or unfair. In the tax area,
moreover, equity is generally tied to a particular taxpayer’s personal situation. For example, one
equity difference relates to how a business is organized (i.e., partnership versus corporation). Two
businesses may be equal in size, similarly situated, and competitors in the production of goods or
services, but they may not be comparably treated under the tax law if one is a partnership and the
other is a corporation. The corporation is subject to a separate Federal income tax; the partnership is
1-1
, not. The tax law can and does make a distinction between these business forms. Equity, then, is not
what appears fair or unfair to any one taxpayer or group of taxpayers. It is, instead, what the tax law
recognizes.
7. (LO 2) This deduction can be explained by social considerations. The deduction shifts some of the
financial and administrative burden of socially desirable programs from the public (the government)
sector to the private (the citizens) sector.
8. (LO 2) Private retirement plans’ preferential treatment encourages saving. Not only are contributions
to Keogh (H.R. 10) plans and certain Individual Retirement Plans (IRA) deductible, but income from
these contributions accumulates on a tax-free basis.
9. (LO 2) The availability of percentage depletion on the extraction and sale of oil and gas and specified
mineral deposits and a write-off (rather than capitalization) of certain exploration costs encourage the
development of natural resources.
10. (LO 2) Favorable treatment of corporate reorganizations provides an economic benefit. By allowing
corporations to combine and split without adverse consequences, corporations are in a position to
more effectively compete with other businesses.
11. (LO 2) Although the major objective of the Federal tax law is the raising of revenue, other
considerations explain many provisions. In particular, economic, social, equity, and political factors play
a significant role. Added to these factors is the impact the Treasury Department, Internal Revenue
Service, and the courts have had and will continue to have on the evolution of Federal tax law.
12. (LO 2) The deduction allowed for Federal income tax purposes for state and local income taxes is not
designed to neutralize the effect of multiple taxation on the same income. At most, this deduction
provides only partial relief. Only the allowance of a full tax credit would achieve complete neutrality.
a. With the standard deduction, a taxpayer is, indirectly, obtaining the benefit of a deduction for
any state or local income taxes he or she may have paid. This is so because the standard
deduction is in lieu of itemized deductions, which include the deductions for state and local
income taxes.
b. If the taxpayer is in the 10% tax bracket, one dollar of a deduction for state or local taxes
would save ten cents of Federal income tax liability. In the 33% tax bracket, the saving
becomes thirty-three cents. The deduction approach (as opposed to the allowance of a credit)
favors high bracket taxpayers.
13. (LO 2) Under the general rule, a transfer of a partnership’s assets to a new corporation could result in
a taxable gain. However, if certain conditions are met, § 351 postpones the recognition of any gain (or
loss) on the transfer of property by Heather to a controlled corporation.
The wherewithal to pay concept recognizes the inequity of taxing a transaction when Heather lacks
the means with which to pay any tax. Besides, Heather’s economic position would not change
significantly as a result of such a transfer. Heather owned the assets before the transfer and still would
own the assets after a transfer to a controlled corporation.
14. (LO 2) Yes, once incorporated, the business may be subject to the Federal corporate income tax.
However, the corporate tax rates might be lower than Heather’s individual tax rates, especially if
dividends are not paid to Heather.
The corporate income tax could be avoided altogether by electing to be an S corporation. An
S corporation is generally not taxed at the corporate level; instead, the income flows through the
corporate veil and is taxed at the shareholder level. An S election allows a business to operate as a
corporation but be taxed like a partnership.
, 15. (LO 2) Examples include like-kind exchanges, involuntary conversions, transfers of property to a
controlled corporation, transfers of property to a partnership, and tax-free reorganization.
16. (LO 2) Generally, a recognized (taxable) gain cannot exceed the realized gain.
17. (LO 2) Recognition of gain ultimately occurs when the property is disposed of.
18. (LO 2) One year.
19. (LO 2) The installment method on the sale of property permits the gain to be recognized over the
payout period.
20. (LO 2) Requiring a taxpayer to make a contribution to a Keogh retirement plan by the end of the year
would force an accurate determination of net self-employment income long before the income tax
return must be prepared and filed.
21. (LO 2) The difference between common law and community property systems centers around the
property rights possessed by married persons. In a common law system, each spouse owns whatever
he or she earns. Under a community property system, one-half of the earnings of each spouse is
considered owned by the other spouse. Assume, for example, Harold and Ruth are husband and wife,
and their only income is the $80,000 annual salary Harold receives. If they live in New York (a common
law state), the $80,000 salary belongs to Harold. If, however, they live in Texas (a community property
state), the $80,000 salary is divided equally, in terms of ownership, between Harold and Ruth.
22. (LO 2) Deterrence provisions include:
Alternative minimum tax.
Imputed interest rules.
Limitation on the deductibility of interest on investment indebtedness.
Gift and estate tax.
Unreasonable accumulated earnings tax.
Personal holding company tax.
23. (LO 4) Primarily concerned with business readjustments, the continuity of interest concept permits
tax-free treatment only if the taxpayer retains a substantial continuing interest in the property transferred
to the new business. Due to the continuing interest retained, the transfer should not have tax
consequences because the position of the taxpayer has not changed. This concept applies to transfers
to controlled corporations (Chapter 4), corporate reorganizations (Chapter 7), and transfers to
partnerships (Chapter 10).
24. (LO 3) Under § 482 the IRS has the authority to allocate income and deductions among businesses
owned or controlled by the same interests when the allocation is necessary to prevent the evasion of
taxes or to clearly reflect the income of each business. Pursuant to § 482, therefore, the IRS might
allocate interest income to White Corporation even though none was provided for in the loan
agreement.
25. (LO 5) False. Federal tax legislation generally originates in the House of Representatives, where it is
first considered by the House Ways and Means Committee. Tax bills can originate in the Senate only
when they are attached as riders to other legislative proposals as was the case with the American
Taxpayer Relief Act of 2012.
