Solution Manual For
South-Western Federal Taxation 2026: Individual Income
Taxes 49th Edition
by James Young
,Solution And Answer Guide
RAABE, NELLEN, YOUNG, CRIPE, LASSAR, PERSELLIN, CUCCIA, SWFT CORPORATIONS, PARTNERSHIPS,
ESTATES & TRUSTS 2026, 9780357900673; CHAPTER 1: UNDERSTANDING AND WORKING 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
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 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 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.
3. (LO 2) The Tax Law Encourages Technological Progress By Allowing Immediate (Or Accelerated)
Deductions And Tax Credits For Research And Development 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.
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 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 Accumulates 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 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).
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 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.
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) 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 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
South-Western Federal Taxation 2026: Individual Income
Taxes 49th Edition
by James Young
,Solution And Answer Guide
RAABE, NELLEN, YOUNG, CRIPE, LASSAR, PERSELLIN, CUCCIA, SWFT CORPORATIONS, PARTNERSHIPS,
ESTATES & TRUSTS 2026, 9780357900673; CHAPTER 1: UNDERSTANDING AND WORKING 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
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 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 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.
3. (LO 2) The Tax Law Encourages Technological Progress By Allowing Immediate (Or Accelerated)
Deductions And Tax Credits For Research And Development 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.
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 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 Accumulates 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 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).
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 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.
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) 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 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
