[Type the document title]
SOLUTION MANUAL FOR SOUTH-WESTERN
FEDERAL TAXATION 2025, CORPORATIONS,
PARTNERSHIPS, ESTATES, AND TRUSTS 48TH
EDITION BY NELLEN LATEST EDITION
2025/2026
1
, [Type the document title]
SOLU TIO N AND ANSW ER GUID E
RAABE, NELLEN, YOUNG , CRIPE, LASSAR, PERSELLIN, CUCCIA , SWFT CORPORATIONS, PARTNERSHIPS, ESTATES & TRUSTS
2025/2026, 9780357900673; CHAPTER 1: UNDERSTANDING AND WORKING WITH THE FEDERAL TAX LAW
T able Of C ontents
Discussion Questions ........................................................................................................................... 1
Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Research Problems............................................................................................................................ 13
Check Figures ................................................................................................................................... 15
Solution To Ethics & Equity Feature ....................................................................................................16
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 On The Circum stances 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 Treasury Department, The IRS, And The Courts Have Had Impacts
On The Evolution Of Tax Laws. For Example, Control Of The Econom y 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.
3. (LO 2) The Tax Law Encourages Technological Progress By Allowing Immediate (Or Accelerated)
Deductions And Tax Credits For Research And Developm ent Expenditures.
4. (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.
5. (LO 2)
a. 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.
2
, [Type the document title]
b. The 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 (Allowin g 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.
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 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.
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) 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 Accum ulates 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 Reorganization s 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).
11. (LO 2) Although The Major Objective Of The Federal Tax Law Is The Raising Of Revenue, Other
Considerations Explain Many Provisions. In Particular, Econom ic, 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.
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. 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.
3
, [Type the document title]
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. The Standard
Deduction Is In Lieu Of Itemized Deductions, Which Include Any Allowed Deductions For
State And Local Income Taxes.
b. 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 Allowan ce 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 (See
Example 4).
The Wherewith al 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.
14. (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.
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 Installm ent 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 System s 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. Assum e, For Example, That Harold
4
SOLUTION MANUAL FOR SOUTH-WESTERN
FEDERAL TAXATION 2025, CORPORATIONS,
PARTNERSHIPS, ESTATES, AND TRUSTS 48TH
EDITION BY NELLEN LATEST EDITION
2025/2026
1
, [Type the document title]
SOLU TIO N AND ANSW ER GUID E
RAABE, NELLEN, YOUNG , CRIPE, LASSAR, PERSELLIN, CUCCIA , SWFT CORPORATIONS, PARTNERSHIPS, ESTATES & TRUSTS
2025/2026, 9780357900673; CHAPTER 1: UNDERSTANDING AND WORKING WITH THE FEDERAL TAX LAW
T able Of C ontents
Discussion Questions ........................................................................................................................... 1
Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Research Problems............................................................................................................................ 13
Check Figures ................................................................................................................................... 15
Solution To Ethics & Equity Feature ....................................................................................................16
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 On The Circum stances 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 Treasury Department, The IRS, And The Courts Have Had Impacts
On The Evolution Of Tax Laws. For Example, Control Of The Econom y 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.
3. (LO 2) The Tax Law Encourages Technological Progress By Allowing Immediate (Or Accelerated)
Deductions And Tax Credits For Research And Developm ent Expenditures.
4. (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.
5. (LO 2)
a. 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.
2
, [Type the document title]
b. The 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 (Allowin g 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.
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 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.
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) 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 Accum ulates 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 Reorganization s 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).
11. (LO 2) Although The Major Objective Of The Federal Tax Law Is The Raising Of Revenue, Other
Considerations Explain Many Provisions. In Particular, Econom ic, 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.
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. 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.
3
, [Type the document title]
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. The Standard
Deduction Is In Lieu Of Itemized Deductions, Which Include Any Allowed Deductions For
State And Local Income Taxes.
b. 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 Allowan ce 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 (See
Example 4).
The Wherewith al 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.
14. (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.
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 Installm ent 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 System s 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. Assum e, For Example, That Harold
4
