Solutions Manual
South-Western Federal Taxation:
Individual Income Taxes
2012 Edition
concepts are applied in real-world scenarios. Group discussions and practicing sample case studies can aid in refining analytical skills.________________________________________2. Law Exams2.
William H. Hoffman, Jr., J.D., Ph.D., CPA
University of Houston
James E. Smith Ph.D., CPA
College of William and Mary
Prepared by
Mark B. Persellin
St. Mary's University
Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States
, © 2012, 2011 South-Western, Cengage Learning ISBN-13: 978-1-111-82453-2
ISBN-10: 1-111-82453-3
ALL RIGHTS RESERVED. No part of this work covered by the
copyright herein may be reproduced, transmitted, stored, or South-Western Cengage Learning
used in any form or by any means graphic, electronic, or 5191 Natorp Boulevard
mechanical, including but not limited to photocopying, recording, Mason, OH 45040
scanning, digitizing, taping, Web distribution, information USA
networks, or information storage and retrieval systems, except
as permitted under Section 107 or 108 of the 1976 United States Cengage Learning is a leading provider of customized
Copyright Act, without the prior written permission of the learning solutions with office locations around the
publisher except as may be permitted by the license terms globe, including Singapore, the United Kingdom,
below. Australia, Mexico, Brazil, and Japan. Locate your local
office at: international.cengage.com/region.
Cengage Learning products are represented in
For product information and technology assistance, contact us at Canada by Nelson Education, Ltd.
Cengage Learning Academic Resource Center,
1-800-423-0563. For your course and learning solutions, visit
www.cengage.com.
For permission to use material from this text or product, submit all
requests online at www.cengage.com/permissions.
Purchase any of our products at your local
Further permissions questions can be emailed to
college store or at our preferred online store
.
www.CengageBrain.com.
concepts are applied in real-world scenarios. Group discussions and practicing sample case studies can aid in refining analytical skills.________________________________________2. Law
Exams2.
NOTE: UNDER NO CIRCUMSTANCES MAY THIS MATERIAL OR ANY PORTION THEREOF BE SOLD, LICENSED, AUCTIONED,
OR OTHERWISE REDISTRIBUTED EXCEPT AS MAY BE PERMITTED BY THE LICENSE TERMS HEREIN.
READ IMPORTANT LICENSE INFORMATION
Dear Professor or Other Supplement Recipient: may not sell, license, auction, or otherwise redistribute the
Supplement in any form. We ask that you take reasonable steps
Cengage Learning has provided you with this product (the to protect the Supplement from unauthorized use, reproduction,
“Supplement”) for your review and, to the extent that you adopt or distribution. Your use of the Supplement indicates your
the associated textbook for use in connection with your course acceptance of the conditions set forth in this Agreement. If you
(the “Course”), you and your students who purchase the do not accept these conditions, you must return the Supplement
textbook may use the Supplement as described below. unused within 30 days of receipt.
Cengage Learning has established these use limitations in
response to concerns raised by authors, professors, and other All rights (including without limitation, copyrights, patents, and
users regarding the pedagogical problems stemming from trade secrets) in the Supplement are and will remain the sole
unlimited distribution of Supplements. and exclusive property of Cengage Learning and/or its
licensors. The Supplement is furnished by Cengage Learning
Cengage Learning hereby grants you a nontransferable license on an “as is” basis without any warranties, express or implied.
to use the Supplement in connection with the Course, subject to This Agreement will be governed by and construed pursuant to
the following conditions. The Supplement is for your personal, the laws of the State of New York, without regard to such
noncommercial use only and may not be reproduced, posted State’s conflict of law rules.
electronically or distributed, except that portions of the
Supplement may be provided to your students IN PRINT FORM Thank you for your assistance in helping to safeguard the
ONLY in connection with your instruction of the Course, so long integrity of the content contained in this Supplement. We trust
as such students are advised that they may not copy or you find the Supplement a useful teaching tool.
distribute any portion of the Supplement to any third party. You
Printed in the United States of America
1 2 3 4 5 6 7 15 14 13 12 11
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,CONTENTS
Chapter 1: An Introduction to Taxation and Understanding the Federal Tax Law.......................1-1
Chapter 2: Working with the Tax Law ........................................................................................ 2-1
Chapter 3: Tax Formula and Tax Determination; An Overview of Property Transactions.......... 3-1
Chapter 4: Gross Income: Concepts and Inclusions..................................................................... 4-1
Chapter 5: Gross Income: Exclusions .......................................................................................... 5-1
Chapter 6: Deductions and Losses: In General .............................................................................6-1
Chapter 7: Deductions and Losses: Certain Business Expenses and Losses ............................... 7-1
Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion ...................................... 8-1
Chapter 9: Deductions: Employee and Self-Employed-Related Expenses .................................. 9-1
Chapter 10: Deductions and Losses: Certain Itemized Deductions ........................................... 10-1
Chapter 11: Investor Losses ....................................................................................................... 11-1
Chapter 12: Alternative Minimum Tax ...................................................................................... 12-1
Chapter 13: Tax Credits and Payment Procedures ......................................................................13-1
Chapter 14: Property Transactions: Determination of Gain or Loss and Basis Considerations 14-1
Chapter 15: Property Transactions: Nontaxable Exchanges. ..................................................... 15-1
Chapter 16: Property Transactions: Capital Gains and Losses ...................................................16-1
Chapter 17: Property Transactions: Section 1231 and Recapture Provisions ............................ 17-1
Chapter 18: Accounting Periods and Methods ........................................................................... 18-1
Chapter 19: Deferred Compensation .......................................................................................... 19-1
Chapter 20: Corporations and Partnerships................................................................................ 20-1
concepts are applied in real-world scenarios. Group discussions and practicing sample case studies can aid in refining
analytical skills.________________________________________2. Law Exams2.
iii
, 1-2
concepts are applied in real-world scenarios. Group discussions and practicing sample case studies can aid in refining analytical skills.________________________________________2. Law Exams2.
CHAPTER 1
AN INTRODUCTION TO TAXATION
AND UNDERSTANDING THE FEDERAL TAX LAW
SOLUTIONS TO PROBLEM MATERIALS
Status: Q/P
Question/ Learning Present in Prior
Problem Objective Topic Edition Edition
1 LO 1 Interplay of different types of taxes New
2 LO 2 Constitutionality of Federal income tax for Unchanged 2
corporations
3 LO 2 Income tax as a ―mass tax‖ Unchanged 3
4 LO 2 Pay-as-you-go system Unchanged 5
5 LO 3 Criteria for ―good‖ tax system Unchanged 6
6 LO 3 Adam Smith and canon of certainty New
7 LO 3 Proportional and progressive rates contrasted New
8 LO 4 Ad valorem tax on realty: conversion from New
tax-exempt to residential status
9 LO 4 Conversion of tax-exempt realty to Unchanged 9
commercial status and effect on ad
valorem property tax
10 LO 4 Ad valorem tax on realty: effect of tax Unchanged 10
holiday
11 LO 4 Ad valorem tax on realty: effect of valuation New
reassessment
12 LO 4 Ad valorem tax: assessment in terms of Unchanged 12
revenue production
13 LO 4 Excise taxes: both Federal and state New
14 LO 4 Excise taxes: hotel occupancy and car rental Unchanged 13
15 LO 4 Excise and general sales taxes compared New
16 LO 4 Avoiding sales tax through use of out-of- Unchanged 14
state purchase
17 LO 4 Avoiding local sales taxes Unchanged 16
18 LO 4 Avoiding sales tax through Internet purchase Unchanged 17
19 LO 4 Estate and inheritance taxes contrasted New
20 LO 4 Federal gift tax: availability of the marital Modified 20
deduction for transfers between spouses
Instructor: For difficulty, timing, and assessment information about each item, see p. 1-4.
1-1
South-Western Federal Taxation:
Individual Income Taxes
2012 Edition
concepts are applied in real-world scenarios. Group discussions and practicing sample case studies can aid in refining analytical skills.________________________________________2. Law Exams2.
William H. Hoffman, Jr., J.D., Ph.D., CPA
University of Houston
James E. Smith Ph.D., CPA
College of William and Mary
Prepared by
Mark B. Persellin
St. Mary's University
Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States
, © 2012, 2011 South-Western, Cengage Learning ISBN-13: 978-1-111-82453-2
ISBN-10: 1-111-82453-3
ALL RIGHTS RESERVED. No part of this work covered by the
copyright herein may be reproduced, transmitted, stored, or South-Western Cengage Learning
used in any form or by any means graphic, electronic, or 5191 Natorp Boulevard
mechanical, including but not limited to photocopying, recording, Mason, OH 45040
scanning, digitizing, taping, Web distribution, information USA
networks, or information storage and retrieval systems, except
as permitted under Section 107 or 108 of the 1976 United States Cengage Learning is a leading provider of customized
Copyright Act, without the prior written permission of the learning solutions with office locations around the
publisher except as may be permitted by the license terms globe, including Singapore, the United Kingdom,
below. Australia, Mexico, Brazil, and Japan. Locate your local
office at: international.cengage.com/region.
Cengage Learning products are represented in
For product information and technology assistance, contact us at Canada by Nelson Education, Ltd.
Cengage Learning Academic Resource Center,
1-800-423-0563. For your course and learning solutions, visit
www.cengage.com.
For permission to use material from this text or product, submit all
requests online at www.cengage.com/permissions.
Purchase any of our products at your local
Further permissions questions can be emailed to
college store or at our preferred online store
.
www.CengageBrain.com.
concepts are applied in real-world scenarios. Group discussions and practicing sample case studies can aid in refining analytical skills.________________________________________2. Law
Exams2.
NOTE: UNDER NO CIRCUMSTANCES MAY THIS MATERIAL OR ANY PORTION THEREOF BE SOLD, LICENSED, AUCTIONED,
OR OTHERWISE REDISTRIBUTED EXCEPT AS MAY BE PERMITTED BY THE LICENSE TERMS HEREIN.
READ IMPORTANT LICENSE INFORMATION
Dear Professor or Other Supplement Recipient: may not sell, license, auction, or otherwise redistribute the
Supplement in any form. We ask that you take reasonable steps
Cengage Learning has provided you with this product (the to protect the Supplement from unauthorized use, reproduction,
“Supplement”) for your review and, to the extent that you adopt or distribution. Your use of the Supplement indicates your
the associated textbook for use in connection with your course acceptance of the conditions set forth in this Agreement. If you
(the “Course”), you and your students who purchase the do not accept these conditions, you must return the Supplement
textbook may use the Supplement as described below. unused within 30 days of receipt.
Cengage Learning has established these use limitations in
response to concerns raised by authors, professors, and other All rights (including without limitation, copyrights, patents, and
users regarding the pedagogical problems stemming from trade secrets) in the Supplement are and will remain the sole
unlimited distribution of Supplements. and exclusive property of Cengage Learning and/or its
licensors. The Supplement is furnished by Cengage Learning
Cengage Learning hereby grants you a nontransferable license on an “as is” basis without any warranties, express or implied.
to use the Supplement in connection with the Course, subject to This Agreement will be governed by and construed pursuant to
the following conditions. The Supplement is for your personal, the laws of the State of New York, without regard to such
noncommercial use only and may not be reproduced, posted State’s conflict of law rules.
electronically or distributed, except that portions of the
Supplement may be provided to your students IN PRINT FORM Thank you for your assistance in helping to safeguard the
ONLY in connection with your instruction of the Course, so long integrity of the content contained in this Supplement. We trust
as such students are advised that they may not copy or you find the Supplement a useful teaching tool.
distribute any portion of the Supplement to any third party. You
Printed in the United States of America
1 2 3 4 5 6 7 15 14 13 12 11
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,CONTENTS
Chapter 1: An Introduction to Taxation and Understanding the Federal Tax Law.......................1-1
Chapter 2: Working with the Tax Law ........................................................................................ 2-1
Chapter 3: Tax Formula and Tax Determination; An Overview of Property Transactions.......... 3-1
Chapter 4: Gross Income: Concepts and Inclusions..................................................................... 4-1
Chapter 5: Gross Income: Exclusions .......................................................................................... 5-1
Chapter 6: Deductions and Losses: In General .............................................................................6-1
Chapter 7: Deductions and Losses: Certain Business Expenses and Losses ............................... 7-1
Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion ...................................... 8-1
Chapter 9: Deductions: Employee and Self-Employed-Related Expenses .................................. 9-1
Chapter 10: Deductions and Losses: Certain Itemized Deductions ........................................... 10-1
Chapter 11: Investor Losses ....................................................................................................... 11-1
Chapter 12: Alternative Minimum Tax ...................................................................................... 12-1
Chapter 13: Tax Credits and Payment Procedures ......................................................................13-1
Chapter 14: Property Transactions: Determination of Gain or Loss and Basis Considerations 14-1
Chapter 15: Property Transactions: Nontaxable Exchanges. ..................................................... 15-1
Chapter 16: Property Transactions: Capital Gains and Losses ...................................................16-1
Chapter 17: Property Transactions: Section 1231 and Recapture Provisions ............................ 17-1
Chapter 18: Accounting Periods and Methods ........................................................................... 18-1
Chapter 19: Deferred Compensation .......................................................................................... 19-1
Chapter 20: Corporations and Partnerships................................................................................ 20-1
concepts are applied in real-world scenarios. Group discussions and practicing sample case studies can aid in refining
analytical skills.________________________________________2. Law Exams2.
iii
, 1-2
concepts are applied in real-world scenarios. Group discussions and practicing sample case studies can aid in refining analytical skills.________________________________________2. Law Exams2.
CHAPTER 1
AN INTRODUCTION TO TAXATION
AND UNDERSTANDING THE FEDERAL TAX LAW
SOLUTIONS TO PROBLEM MATERIALS
Status: Q/P
Question/ Learning Present in Prior
Problem Objective Topic Edition Edition
1 LO 1 Interplay of different types of taxes New
2 LO 2 Constitutionality of Federal income tax for Unchanged 2
corporations
3 LO 2 Income tax as a ―mass tax‖ Unchanged 3
4 LO 2 Pay-as-you-go system Unchanged 5
5 LO 3 Criteria for ―good‖ tax system Unchanged 6
6 LO 3 Adam Smith and canon of certainty New
7 LO 3 Proportional and progressive rates contrasted New
8 LO 4 Ad valorem tax on realty: conversion from New
tax-exempt to residential status
9 LO 4 Conversion of tax-exempt realty to Unchanged 9
commercial status and effect on ad
valorem property tax
10 LO 4 Ad valorem tax on realty: effect of tax Unchanged 10
holiday
11 LO 4 Ad valorem tax on realty: effect of valuation New
reassessment
12 LO 4 Ad valorem tax: assessment in terms of Unchanged 12
revenue production
13 LO 4 Excise taxes: both Federal and state New
14 LO 4 Excise taxes: hotel occupancy and car rental Unchanged 13
15 LO 4 Excise and general sales taxes compared New
16 LO 4 Avoiding sales tax through use of out-of- Unchanged 14
state purchase
17 LO 4 Avoiding local sales taxes Unchanged 16
18 LO 4 Avoiding sales tax through Internet purchase Unchanged 17
19 LO 4 Estate and inheritance taxes contrasted New
20 LO 4 Federal gift tax: availability of the marital Modified 20
deduction for transfers between spouses
Instructor: For difficulty, timing, and assessment information about each item, see p. 1-4.
1-1
