SOLUTION AND ANSWER GUIDE
RAABE, NELLEN, YOUNG, CRIPE, LASSAR, PERSELLIN, CUCCIA, SWFT CORPORATIONS ,
PARTNERSHIPS , ESTATES & TRUSTS 2025, 9780357900673;
C HAPTER 1: U N DERSTANDINGAND W ORKING W ITH THE F EDERAL TAX LAW
TABLE OF CONTENT S
DISCUSSION QUESTIONS ........................................................................................................ 1
PROBLEMS ................................................................................................................................. 8
RESEARCH PROBLEMS ........................................................................................................... 13
CHECK FIGURES ...................................................................................................................... 15
SOLUTION TO ETHICS & EQUITY FEATURE ................................................................. 16
D ISCUSSION QUESTIONS
1. (LO 1) When Enacting Tax Legislatio n, Congress Often Is Guided By The Concept
Of Revenue Neutrality So That Any Change s 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
Depend s On The Circum stances Involved, One Taxpayer’ s Increase d 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) Econom ic, Social, Equity, And Political Factors Play A Significant Role In
The Formulation Of Tax Laws. Furtherm ore, The Treasury Departm ent, The IRS,
And The Courts Have Had Impacts On The Evolution Of Tax Laws. For Exam ple,
Control Of The Econom y Has Been An Important Econom ic Consideratio n 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 Accelerate d) Deductions And Tax Credits For Research And Develo pm ent
Expenditure s.
4. (LO 2) Saving Leads To Capital Formation And Makes Funds Available To
Finance Home Construction And Industrial Expansio n. For Exam ple, The Tax
Laws Provide Incentives To Encoura ge Savings By Givin g Private Retire m en t
Plans Prefere ntia l Treatm e nt.
5. (LO 2)
a. Code § 1244 Allows Ordinary Loss Treatm e nt On The Worthle ssness Of Small
1
, Business Corporatio n Stock (Discussed In Chapter 4). Since This Stock
Normally Would Be A Capital Asset, The Operatio n Of § 1244 Converts A Less
Desirable Capital Loss Into A More Attractive Ordinary Loss. This Tax
Treatm ent Was Designed To Aid Small Businesse s In Raising Needed Capital
Through The Issuance Of Stock.
2
, b. The S Corporatio n Election (See Footnote 5 And A Detaile d Discussion In
Chapter 12) Allows The Profits (Or Losses) Of The Corporatio n To Flow
Through To Its Individual Sharehold ers (Avoid ing The Corporate Incom e Tax).
In Addition, The Qualifie d Business Incom e Deductio n May Apply To Any
Flow-T hro ugh Profits (Allowing A Maxim um 20% Deduction To The
Sharehold ers). However, With The Corporate Tax Rate Being 21% (And
Individ ual Marginal Tax Rates Potentially Being Higher), Individuals Need To
Compare The Benefits Of Avoiding The Corporate Tax Rate With The Taxes
On Any S Corporatio n Flow-T hro ugh 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 Situatio n. For Exam ple, One Equity Difference Relates To
How A Business Is Organized (I.E., Partnership Versus Corporation). Two
Businesses May Be Equal In Size, Similarly Situate d, And Competitors In The
Production Of Goods Or Services, But They May Not Be Compar ably Treated
Under The Tax Law If One Is A Partnership And The Other Is A Corporation.
The Corporation Is Subject To A Separate Federal Incom e Tax Of 21%; The
Partnership Is Not. The Tax Law Can And Does Make A Distinction Betwee n
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 Explaine d By Social Consid erations. The
Deduction Shifts Som e Of The Finan cia l And Adm inistra tiv e Burde n Of Socially
Desira ble Progra m s From The Public (The Governm e nt) Secto r To The Private
(The Citizen s) Secto r.
8. (LO 2) Preferential Treatm ent Of Private Retirem ent Plans Encourage s Saving.
Not Only Are Contrib utions To Keogh (H.R. 10) Plans And Certain Individual
Retirem ent Accounts (IRA) Deductible, But Incom e From These Contributions
Accum ulates On A Tax-Fre e Basis.
9. (LO 2) The Availability Of Percentage Depletion On The Extraction And Sale Of
Oil And Gas And Specified Mine ral Deposits And A Write -O ff (Rathe r Than
Capita liz atio n) Of Certa in Explo ratio n Costs Encoura ge The Deve lop m en t Of
Natura l Resource s.
10. (LO 2) Favorable Treatm ent Of Corporate Reorganizations Provides An Econom ic
Benefit. By Allowin g Corp ora tio ns To Com b ine And Split Witho ut Adve rse
Conse qu en ces, Corpo ratio ns Are In A Positio n To Reduce Their Taxes And
Possibly More Effective ly Com p ete With Other Busin esse s (Both Nation ally And
Interna tion ally).
11. (LO 2) Altho ugh The Major Objective Of The Federal Tax Law Is The Raisin g Of
Reve nue, Other Considerations Explain Many Provisions. In Particular,
Economic, Social, Equity, And Politica l Factors Play A Significan t Role. Adde d
To These Factors Is The Impact The Treasury Departm ent, The Internal
Revenue Service, And The Courts Have Had And Will Contin ue To Have On The
Evolutio n Of Federal Tax Law.
3
, 12. (LO 2) The Dedu ctio n Allow e d For Federal Incom e Tax Purpo se s For State And
Local Incom e Taxes Is Not Design ed To Neutraliz e The Effect Of Multip le
Taxatio n On The Sam e Incom e. At Most, This Deduct io n Provid e s Only Partial
Relie f. The $10, 0 00 Overall Limitation On State And Local Taxes Also Reduce s
The Tax Bene fit Of These Taxes. Only Allowin g A Full Tax Credit Would
Achie ve Com p le te Neutrality.
4
RAABE, NELLEN, YOUNG, CRIPE, LASSAR, PERSELLIN, CUCCIA, SWFT CORPORATIONS ,
PARTNERSHIPS , ESTATES & TRUSTS 2025, 9780357900673;
C HAPTER 1: U N DERSTANDINGAND W ORKING W ITH THE F EDERAL TAX LAW
TABLE OF CONTENT S
DISCUSSION QUESTIONS ........................................................................................................ 1
PROBLEMS ................................................................................................................................. 8
RESEARCH PROBLEMS ........................................................................................................... 13
CHECK FIGURES ...................................................................................................................... 15
SOLUTION TO ETHICS & EQUITY FEATURE ................................................................. 16
D ISCUSSION QUESTIONS
1. (LO 1) When Enacting Tax Legislatio n, Congress Often Is Guided By The Concept
Of Revenue Neutrality So That Any Change s 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
Depend s On The Circum stances Involved, One Taxpayer’ s Increase d 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) Econom ic, Social, Equity, And Political Factors Play A Significant Role In
The Formulation Of Tax Laws. Furtherm ore, The Treasury Departm ent, The IRS,
And The Courts Have Had Impacts On The Evolution Of Tax Laws. For Exam ple,
Control Of The Econom y Has Been An Important Econom ic Consideratio n 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 Accelerate d) Deductions And Tax Credits For Research And Develo pm ent
Expenditure s.
4. (LO 2) Saving Leads To Capital Formation And Makes Funds Available To
Finance Home Construction And Industrial Expansio n. For Exam ple, The Tax
Laws Provide Incentives To Encoura ge Savings By Givin g Private Retire m en t
Plans Prefere ntia l Treatm e nt.
5. (LO 2)
a. Code § 1244 Allows Ordinary Loss Treatm e nt On The Worthle ssness Of Small
1
, Business Corporatio n Stock (Discussed In Chapter 4). Since This Stock
Normally Would Be A Capital Asset, The Operatio n Of § 1244 Converts A Less
Desirable Capital Loss Into A More Attractive Ordinary Loss. This Tax
Treatm ent Was Designed To Aid Small Businesse s In Raising Needed Capital
Through The Issuance Of Stock.
2
, b. The S Corporatio n Election (See Footnote 5 And A Detaile d Discussion In
Chapter 12) Allows The Profits (Or Losses) Of The Corporatio n To Flow
Through To Its Individual Sharehold ers (Avoid ing The Corporate Incom e Tax).
In Addition, The Qualifie d Business Incom e Deductio n May Apply To Any
Flow-T hro ugh Profits (Allowing A Maxim um 20% Deduction To The
Sharehold ers). However, With The Corporate Tax Rate Being 21% (And
Individ ual Marginal Tax Rates Potentially Being Higher), Individuals Need To
Compare The Benefits Of Avoiding The Corporate Tax Rate With The Taxes
On Any S Corporatio n Flow-T hro ugh 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 Situatio n. For Exam ple, One Equity Difference Relates To
How A Business Is Organized (I.E., Partnership Versus Corporation). Two
Businesses May Be Equal In Size, Similarly Situate d, And Competitors In The
Production Of Goods Or Services, But They May Not Be Compar ably Treated
Under The Tax Law If One Is A Partnership And The Other Is A Corporation.
The Corporation Is Subject To A Separate Federal Incom e Tax Of 21%; The
Partnership Is Not. The Tax Law Can And Does Make A Distinction Betwee n
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 Explaine d By Social Consid erations. The
Deduction Shifts Som e Of The Finan cia l And Adm inistra tiv e Burde n Of Socially
Desira ble Progra m s From The Public (The Governm e nt) Secto r To The Private
(The Citizen s) Secto r.
8. (LO 2) Preferential Treatm ent Of Private Retirem ent Plans Encourage s Saving.
Not Only Are Contrib utions To Keogh (H.R. 10) Plans And Certain Individual
Retirem ent Accounts (IRA) Deductible, But Incom e From These Contributions
Accum ulates On A Tax-Fre e Basis.
9. (LO 2) The Availability Of Percentage Depletion On The Extraction And Sale Of
Oil And Gas And Specified Mine ral Deposits And A Write -O ff (Rathe r Than
Capita liz atio n) Of Certa in Explo ratio n Costs Encoura ge The Deve lop m en t Of
Natura l Resource s.
10. (LO 2) Favorable Treatm ent Of Corporate Reorganizations Provides An Econom ic
Benefit. By Allowin g Corp ora tio ns To Com b ine And Split Witho ut Adve rse
Conse qu en ces, Corpo ratio ns Are In A Positio n To Reduce Their Taxes And
Possibly More Effective ly Com p ete With Other Busin esse s (Both Nation ally And
Interna tion ally).
11. (LO 2) Altho ugh The Major Objective Of The Federal Tax Law Is The Raisin g Of
Reve nue, Other Considerations Explain Many Provisions. In Particular,
Economic, Social, Equity, And Politica l Factors Play A Significan t Role. Adde d
To These Factors Is The Impact The Treasury Departm ent, The Internal
Revenue Service, And The Courts Have Had And Will Contin ue To Have On The
Evolutio n Of Federal Tax Law.
3
, 12. (LO 2) The Dedu ctio n Allow e d For Federal Incom e Tax Purpo se s For State And
Local Incom e Taxes Is Not Design ed To Neutraliz e The Effect Of Multip le
Taxatio n On The Sam e Incom e. At Most, This Deduct io n Provid e s Only Partial
Relie f. The $10, 0 00 Overall Limitation On State And Local Taxes Also Reduce s
The Tax Bene fit Of These Taxes. Only Allowin g A Full Tax Credit Would
Achie ve Com p le te Neutrality.
4
