Solution and Answer Guide: Raabe, Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2024, 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 2024, 9780357900673; CHAPTER 1: UNDERSTANDING
AND WORKING WITH THE FEDERAL TAX LAW
AP
TABLE OF CONTENTS
Discussion Questions...........................................................................................................1
Problems ............................................................................................................................. 8
Research Problems ............................................................................................................13
EX
Check Figures.....................................................................................................................15
Solution To Ethics & Equity Feature ................................................................................ 16
SO
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
LU
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.
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
TI
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
O
Congress.
3. (LO 2) The tax law encourages technological progress by allowing immediate (or
accelerated) deductions and tax credits for research and development expenditures.
N
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.
S
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.
© 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 1
website, in whole or in part.
, Solution and Answer Guide: Raabe, Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2024, 9780357900673; Chapter 1: Understanding and Working with the Federal Tax Law
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 (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
AP
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
EX
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.
SO
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 accumulates on a tax-free
LU
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.
TI
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).
O
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
N
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
S
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.
© 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 2
website, in whole or in part.
, Solution and Answer Guide: Raabe, Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2024, 9780357900673; Chapter 1: Understanding and Working with the Federal Tax Law
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 allowance of a credit)
AP
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).
EX
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.
SO
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
LU
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-
TI
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.
O
18. (LO 2) One year.
19. (LO 2) The installment method on the sale of property permits the gain to be
N
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
S
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, that Harold and Ruth are husband and wife and that their only
© 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 3
website, in whole or in part.
, Solution and Answer Guide: Raabe, Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2024, 9780357900673; Chapter 1: Understanding and Working with the Federal Tax Law
income is the $90,000 annual salary Harold receives. If they live in New York (a
common law state), the $90,000 salary belongs to Harold. If, however, they live in
Texas (a community property state), the $90,000 salary is divided equally, in terms of
ownership, between Harold and Ruth.
22. (LO 2) Deterrence provisions include the following:
• Alternative minimum tax.
AP
• Imputed interest rules.
• Limitation on the deductibility of interest on investment indebtedness.
• Gift and estate taxes.
EX
23. (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. As a result, the IRS might allocate interest income to White Corporation even
though none was provided for in the loan agreement. See Example 11 and footnote 24.
24. (LO 4) Primarily concerned with business readjustments, the continuity of interest
SO
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).
LU
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.
Only rarely does Federal tax legislation originate in the Senate. The Tax Equity and
Fiscal Responsibility Act of 1982 originated in the Senate; its constitutionality was
upheld by the courts.
TI
26. (LO 5) A President’s veto can be overridden by a two-thirds vote in both the House and
Senate.
27. (LO 5)
O
N
S
© 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 4
website, in whole or in part.
Estates & Trusts 2024, 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 2024, 9780357900673; CHAPTER 1: UNDERSTANDING
AND WORKING WITH THE FEDERAL TAX LAW
AP
TABLE OF CONTENTS
Discussion Questions...........................................................................................................1
Problems ............................................................................................................................. 8
Research Problems ............................................................................................................13
EX
Check Figures.....................................................................................................................15
Solution To Ethics & Equity Feature ................................................................................ 16
SO
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
LU
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.
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
TI
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
O
Congress.
3. (LO 2) The tax law encourages technological progress by allowing immediate (or
accelerated) deductions and tax credits for research and development expenditures.
N
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.
S
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.
© 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 1
website, in whole or in part.
, Solution and Answer Guide: Raabe, Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2024, 9780357900673; Chapter 1: Understanding and Working with the Federal Tax Law
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 (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
AP
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
EX
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.
SO
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 accumulates on a tax-free
LU
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.
TI
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).
O
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
N
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
S
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.
© 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 2
website, in whole or in part.
, Solution and Answer Guide: Raabe, Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2024, 9780357900673; Chapter 1: Understanding and Working with the Federal Tax Law
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 allowance of a credit)
AP
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).
EX
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.
SO
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
LU
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-
TI
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.
O
18. (LO 2) One year.
19. (LO 2) The installment method on the sale of property permits the gain to be
N
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
S
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, that Harold and Ruth are husband and wife and that their only
© 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 3
website, in whole or in part.
, Solution and Answer Guide: Raabe, Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2024, 9780357900673; Chapter 1: Understanding and Working with the Federal Tax Law
income is the $90,000 annual salary Harold receives. If they live in New York (a
common law state), the $90,000 salary belongs to Harold. If, however, they live in
Texas (a community property state), the $90,000 salary is divided equally, in terms of
ownership, between Harold and Ruth.
22. (LO 2) Deterrence provisions include the following:
• Alternative minimum tax.
AP
• Imputed interest rules.
• Limitation on the deductibility of interest on investment indebtedness.
• Gift and estate taxes.
EX
23. (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. As a result, the IRS might allocate interest income to White Corporation even
though none was provided for in the loan agreement. See Example 11 and footnote 24.
24. (LO 4) Primarily concerned with business readjustments, the continuity of interest
SO
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).
LU
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.
Only rarely does Federal tax legislation originate in the Senate. The Tax Equity and
Fiscal Responsibility Act of 1982 originated in the Senate; its constitutionality was
upheld by the courts.
TI
26. (LO 5) A President’s veto can be overridden by a two-thirds vote in both the House and
Senate.
27. (LO 5)
O
N
S
© 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 4
website, in whole or in part.
