SOLUTIONS MANUAL
Pearson's Federal Taxation 2025 Corporations,
Partnerships, Estates, & Trusts
, Solution And Answer Guide: Raabe, Nellen, Young, Cripe, Lassar, Persellin, Cuccia, Swft Corporations, Partnerships,
Estates & Trusts 2025, 9780357900673; Chapter 1: Understanding And Working With The Federal Tax Law
Solution And Answer Guide
Raabe, Nellen, Young, Cripe, Lassar, Persellin, Cuccia, Swft Corporations,
Partnerships, Estates & Trusts 2025, 9780357900673; Chapter 1: Understanding
And W orking With The Federal Tax Law
Table Of Contents
Discussion Questions ........................................................................................................................................ 1
Problems ..................................................................................................................................................................8
Research Problems ........................................................................................................................................... 13
Check Figures ...................................................................................................................................................... 15
Solution To Ethics & Equity Feature .......................................................................................................... 16
Discussion Questions
(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 On 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.
(Lo 2) Economic, Social, Equity, And Political Factors Play A Significant Role In The Formulation Of
Tax Laws. Furthermore, The Treasury Department, 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). But Ultimately The Tax Law Is Written By Congress.
(Lo 2) The Tax Law Encourages Technological Progress By Allowing Immediate (Or Accelerated)
Deductions And Tax Credits For Research And Development Expenditures.
(Lo 2) Saving Leads To Capital Formation And 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.
(Lo 2)
Code § 1244 Allows Ordinary Loss Treatment On The Worthlessness Of Small Business
Corporation Stock (Discussed In Chapter 4). Since This Stock Normally Would Be A Capital
Asset, The Operation Of § 1244 Converts A Less Desirable Capital Loss Into A More
Attractive Ordinary Loss. This Tax Treatment Was Designed To Aid Small Businesses In
Raising Needed Capital Through The Issuance Of Stock.
© 2025 Cengage. All Rights Reserved. May Not Be Scanned, Copied Or Duplicated, Or Posted To A Publicly Accessible 1
,Website, In Whole Or In Part.
olution And Answer Guide: Raabe, Nellen, Young, Cripe, Lassar, Persellin, Cuccia, Swft Corporations, Partnerships,
Estates & Trusts 2025, 9780357900673; Chapter 1: Understanding And Working With The Federal Tax Law
ȀĀ⸀ Ā ᜀ Ā∀ Ġ ᜀ Ā ᜀ Ā ᜀ
he S Corporation Election (See Footnote 5 And A Detailed Discussion In Chapter 12) Allows
The Profits (Or Losses) Of The Corporation To Flow Through To Its Individual Shareholders
(Avoiding The Corporate Income Tax). In Addition, The Qualified Business Income
Deduction May Apply To Any Flow-Through Profits (Allowing A Maximum 20% Deduction To
The Shareholders). However, With The Corporate Tax Rate Being 21% (And Individual
Marginal Tax Rates Potentially Being Higher), Individuals Need To Compare The Benefits
Of Avoiding The Corporate Tax Rate With The Taxes On Any S Corporation Flow-Through
Profits.
(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 Of 21%; The Partnership Is 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. Equity Is,
Instead, What The Tax Law Recognizes.
(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.
(Lo 2) Preferential Treatment Of Private Retirement Plans Encourages Saving. Not Only Are
Contributions To Keogh (H.R. 10) Plans And Certain Individual Retirement Accounts (Ira)
Deductible, But Income From These Contributions Accumulates On A Tax-Free Basis.
(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.
(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 Reduce Their Taxes And Possibly More Effectively Compete With Other
Businesses (Both Nationally And Internationally).
(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, The Internal Revenue Service, And The Courts Have Had And Will Continue To
Have On The Evolution Of Federal Tax Law.
(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. The $10,000 Overall Limitation On State And Local
Taxes Also Reduces The Tax Benefit Of These Taxes. Only Allowing A Full Tax Credit Would
Achieve Complete Neutrality.
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. The
, Standard Deduction Is In Lieu Of Itemized Deductions, Which Include Any Allowed
Deductions For State And Local Income Taxes.
If The Taxpayer Is In The 10% Tax Bracket, $1 Of A Deduction For State Or Local Taxes
Would Save $0.10 Of Federal Income Tax Liability. In The 32% Tax Bracket, The Saving
Becomes $0.32. The Deduction Approach (As Opposed To The Allowance Of A Credit)
Favors High-Bracket Taxpayers.
(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 (See Example 4).
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 Should The Transfer Occur. Heather Owned The Assets
Before The Transfer And Still Would Own The Assets After A Transfer To A Controlled
Corporation. See Chapter 4 For A More Detailed Discussion Of § 351.
(Lo 2) Yes. Once Incorporated, The Business May Be Subject To The Federal Corporate
Income Tax. However, The 21% Corporate Tax Rate 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. With A Partnership,
There Is No Double Tax. Income And Expenses Flow Through To The Partners And Are Taxed
At The Partner Level.
(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.
(Lo 2) Generally, A Recognized (Taxable) Gain Cannot Exceed The Realized Gain.
(Lo 2) Recognition Of Gain Ultimately Occurs When The Property Is Disposed Of.
(Lo 2) One Year.
(Lo 2) The Installment Method On The Sale Of Property Permits The Gain To Be
Recognized Over The Payout Period.
(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.
(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, That Harold And Ruth Are Husband And Wife And That Their Only
© 2025 Cengage. All Rights Reserved. May Not Be Scanned, Copied Or Duplicated, Or Posted To A Publicly Accessible 3
Website, In Whole Or In Part.
Pearson's Federal Taxation 2025 Corporations,
Partnerships, Estates, & Trusts
, Solution And Answer Guide: Raabe, Nellen, Young, Cripe, Lassar, Persellin, Cuccia, Swft Corporations, Partnerships,
Estates & Trusts 2025, 9780357900673; Chapter 1: Understanding And Working With The Federal Tax Law
Solution And Answer Guide
Raabe, Nellen, Young, Cripe, Lassar, Persellin, Cuccia, Swft Corporations,
Partnerships, Estates & Trusts 2025, 9780357900673; Chapter 1: Understanding
And W orking With The Federal Tax Law
Table Of Contents
Discussion Questions ........................................................................................................................................ 1
Problems ..................................................................................................................................................................8
Research Problems ........................................................................................................................................... 13
Check Figures ...................................................................................................................................................... 15
Solution To Ethics & Equity Feature .......................................................................................................... 16
Discussion Questions
(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 On 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.
(Lo 2) Economic, Social, Equity, And Political Factors Play A Significant Role In The Formulation Of
Tax Laws. Furthermore, The Treasury Department, 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). But Ultimately The Tax Law Is Written By Congress.
(Lo 2) The Tax Law Encourages Technological Progress By Allowing Immediate (Or Accelerated)
Deductions And Tax Credits For Research And Development Expenditures.
(Lo 2) Saving Leads To Capital Formation And 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.
(Lo 2)
Code § 1244 Allows Ordinary Loss Treatment On The Worthlessness Of Small Business
Corporation Stock (Discussed In Chapter 4). Since This Stock Normally Would Be A Capital
Asset, The Operation Of § 1244 Converts A Less Desirable Capital Loss Into A More
Attractive Ordinary Loss. This Tax Treatment Was Designed To Aid Small Businesses In
Raising Needed Capital Through The Issuance Of Stock.
© 2025 Cengage. All Rights Reserved. May Not Be Scanned, Copied Or Duplicated, Or Posted To A Publicly Accessible 1
,Website, In Whole Or In Part.
olution And Answer Guide: Raabe, Nellen, Young, Cripe, Lassar, Persellin, Cuccia, Swft Corporations, Partnerships,
Estates & Trusts 2025, 9780357900673; Chapter 1: Understanding And Working With The Federal Tax Law
ȀĀ⸀ Ā ᜀ Ā∀ Ġ ᜀ Ā ᜀ Ā ᜀ
he S Corporation Election (See Footnote 5 And A Detailed Discussion In Chapter 12) Allows
The Profits (Or Losses) Of The Corporation To Flow Through To Its Individual Shareholders
(Avoiding The Corporate Income Tax). In Addition, The Qualified Business Income
Deduction May Apply To Any Flow-Through Profits (Allowing A Maximum 20% Deduction To
The Shareholders). However, With The Corporate Tax Rate Being 21% (And Individual
Marginal Tax Rates Potentially Being Higher), Individuals Need To Compare The Benefits
Of Avoiding The Corporate Tax Rate With The Taxes On Any S Corporation Flow-Through
Profits.
(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 Of 21%; The Partnership Is 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. Equity Is,
Instead, What The Tax Law Recognizes.
(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.
(Lo 2) Preferential Treatment Of Private Retirement Plans Encourages Saving. Not Only Are
Contributions To Keogh (H.R. 10) Plans And Certain Individual Retirement Accounts (Ira)
Deductible, But Income From These Contributions Accumulates On A Tax-Free Basis.
(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.
(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 Reduce Their Taxes And Possibly More Effectively Compete With Other
Businesses (Both Nationally And Internationally).
(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, The Internal Revenue Service, And The Courts Have Had And Will Continue To
Have On The Evolution Of Federal Tax Law.
(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. The $10,000 Overall Limitation On State And Local
Taxes Also Reduces The Tax Benefit Of These Taxes. Only Allowing A Full Tax Credit Would
Achieve Complete Neutrality.
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. The
, Standard Deduction Is In Lieu Of Itemized Deductions, Which Include Any Allowed
Deductions For State And Local Income Taxes.
If The Taxpayer Is In The 10% Tax Bracket, $1 Of A Deduction For State Or Local Taxes
Would Save $0.10 Of Federal Income Tax Liability. In The 32% Tax Bracket, The Saving
Becomes $0.32. The Deduction Approach (As Opposed To The Allowance Of A Credit)
Favors High-Bracket Taxpayers.
(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 (See Example 4).
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 Should The Transfer Occur. Heather Owned The Assets
Before The Transfer And Still Would Own The Assets After A Transfer To A Controlled
Corporation. See Chapter 4 For A More Detailed Discussion Of § 351.
(Lo 2) Yes. Once Incorporated, The Business May Be Subject To The Federal Corporate
Income Tax. However, The 21% Corporate Tax Rate 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. With A Partnership,
There Is No Double Tax. Income And Expenses Flow Through To The Partners And Are Taxed
At The Partner Level.
(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.
(Lo 2) Generally, A Recognized (Taxable) Gain Cannot Exceed The Realized Gain.
(Lo 2) Recognition Of Gain Ultimately Occurs When The Property Is Disposed Of.
(Lo 2) One Year.
(Lo 2) The Installment Method On The Sale Of Property Permits The Gain To Be
Recognized Over The Payout Period.
(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.
(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, That Harold And Ruth Are Husband And Wife And That Their Only
© 2025 Cengage. All Rights Reserved. May Not Be Scanned, Copied Or Duplicated, Or Posted To A Publicly Accessible 3
Website, In Whole Or In Part.
