, SOLUTION MANUAL FOR South-Western Federal
Taxation 2025 Corporations, Partnerships, Estates
and Trusts 48th Edition by Annette Nellen
Notes
1- The file is chapter after chapter.
2- We have shown you few pages sample.
3- The file contains all Appendix and Excel sheet
if it exists.
4- We have all what you need, we make update
at every time. There are many new editions
waiting you.
5- If you think you purchased the wrong file You
can contact us at every time, we can replace it
with true one.
Our email:
, Solution and Answer Guide: Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2025, 9780357989074; Chapter 1: Understanding and Working with the Federal Tax Law
Solution and Answer Guide
NELLEN, YOUNG, CRIPE, LASSAR, PERSELLIN, CUCCIA, SWFT CORPORATIONS, PARTNERSHIPS,
ESTATES & TRUSTS 2025, 9780357989074; CHAPTER 1: UNDERSTANDING AND WORKING
WITH THE FEDERAL T AX LAW
TABLE OF CONTENTS
Discussion Questions...........................................................................................................1
Problems ............................................................................................................................. 8
Research Problems ........................................................................................................... 14
Check Figures.................................................................................................................... 16
Solution To Ethics & Equity Feature .................................................................................17
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 amortization
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.
© 2025 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: Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2025, 9780357989074; Chapter 1: Understanding and Working with the Federal Tax Law
b. The S corporation election (see footnote 5 and a detailed discussion in Chapter 11)
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) Allowing a deduction for charitable contributions 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.
© 2025 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: Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2025, 9780357989074; 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)
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 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 installment 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 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
© 2025 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: Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2025, 9780357989074; 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.
• Imputed interest rules.
• Limitation on the deductibility of interest on investment indebtedness.
• Gift and estate taxes.
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 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 9).
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.
26. (LO 5) A President’s veto can be overridden by a two-thirds vote in both the House
and Senate.
27. (LO 5)
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 4
website, in whole or in part.
, Solution and Answer Guide: Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2025, 9780357989074; Chapter 1: Understanding and Working with the Federal Tax Law
28. (LO 5) Yes. Some Code Sections omit the subsection designation and use, instead,
the paragraph designation as the first subpart [e.g., §§ 212(1) and 1221(1)].
29. (LO 5) When the 1954 Code was drafted, the omission of some Code section numbers
was intentional. This omission provided flexibility to incorporate later changes into the
Code without disrupting its organization. This technique is retained in the 1986 code.
30. (LO5) Proposed, Final, and Temporary Regulations are published in the Federal Register
(federalregister.gov) and are reproduced in major tax services. Final Regulations are
issued as Treasury Decisions (TDs).
31. (LO 5)
a. A Temporary Regulation, with 1 referring to the type of regulation (i.e., income tax), 707
is the related code section number, 5 is the subsection number, T means temporary,
(a) is the paragraph designation, and (2) is the subparagraph designation.
b. Revenue Ruling number 11, appearing on page 174 of Volume 1 of the Cumulative
Bulletin issued in 1960.
c. Technical Advice Memorandum number 3 issued during the 37th week of 1988.
32. (LO 5) SWFT, LLP
5191 Natorp Boulevard
Mason, OH 45040
October 17, 2024
Ms. Jennifer Olde
3246 Highland Drive
Clifton, VA 20124
Dear Ms. Olde:
In response to your recent request, the fact-finding determination of a lower trial
court is binding on a Federal Court of Appeals. A Federal Court of Appeals is limited to
a review of the record of trial compiled by a trial court. Rarely will an appellate court
disturb a lower court’s fact-finding determination.
Should you need more information, do not hesitate to contact me.
Sincerely,
Marilyn S. Crumbley
Tax Partner
33. (LO 5)
TAX FILE MEMORANDUM
DATE: September 5, 2024
FROM: Sarah Flinn
RE: Telephone conversation with Will Thomas regarding the failure of the IRS to
appeal
I explained to Mr. Thomas that there were numerous reasons why the IRS may decide
not to appeal a decision it loses in a District Court. For example, the workload may be
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 5
website, in whole or in part.
, Solution and Answer Guide: Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2025, 9780357989074; Chapter 1: Understanding and Working with the Federal Tax Law
too heavy. Or the IRS may have decided that this particular case is not a good decision
to appeal (e.g., sympathetic taxpayer). Third, the IRS might not want to appeal this
case to the appropriate Court of Appeals. I stressed that the failure to appeal does not
necessarily mean that the IRS agrees with the results reached.
34. (LO 5, 8)
a. If the taxpayer decides to choose a District Court as the trial court for litigation,
the District Court of Utah would be the forum to hear the case. Unless the prior
decision has been reversed on appeal, one would expect the same court to follow
its earlier holding.
b. If the taxpayer decides to choose the Court of Federal Claims as the trial court for
litigation, the decision previously rendered by this Court should have a direct
bearing on the outcome. If the taxpayer selects a different trial court (i.e., the
appropriate U.S. District Court or the U.S. Tax Court), the decision rendered by the
Court of Federal Claims would be persuasive but not controlling. It is assumed that
the results reached by the Court of Federal Claims were not reversed on appeal.
c. The decision of a Court of Appeals carries more weight than one rendered by a trial
court. Since the taxpayer lives in California, however, any appeal from a District
Court or the U.S. Tax Court would go to the Ninth Court of Appeals. Although the
Ninth Court of Appeals might be influenced by what the Second Court of Appeals
has decided, it is not compelled to follow the Second Circuit’s holding.
d. Since the U.S. Supreme Court is the top appellate court, complete reliance can be
placed on its decisions. Nevertheless, one should investigate any decision to see
whether the Code has been modified to change the results reached. The rare
possibility also exists that the Court may have changed its position in a later
decision.
e. When the IRS acquiesces in a decision of the Tax Court, it agrees with the results
reached. As long as the acquiescence remains in effect, taxpayers can be assured
that this represents the position of the IRS on the issue involved. Keep in mind,
however, that the IRS can change its mind and can, at any time, withdraw the
acquiescence and substitute a nonacquiescence.
f. The issuance of a nonacquiescence reflects that the IRS does not agree with the
results reached by a Tax Court decision. Consequently, taxpayers are placed on
notice that the IRS will continue to challenge the issue involved.
35. (LO 6, 7) Aleshia has a number of approaches available, depending on the available
materials.
• Aleshia can begin with the index volumes of the available tax services: RIA, CCH,
or BNA Portfolios.
• A key word search on an online service should be helpful—Thomson Reuters
Checkpoint, CCH IntelliConnect, LexisNexis, or Westlaw (or WestlawNext).
• She should browse through IRS publications (available on the IRS website).
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 6
website, in whole or in part.
, Solution and Answer Guide: Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2025, 9780357989074; Chapter 1: Understanding and Working with the Federal Tax Law
• Aleshia could explore various tax periodicals (see text page 1-27) to locate
appropriate articles written about § 351 transfers to a controlled corporation.
• Additional information might be available on the internet (but she should be
cautious regarding sources).
36. (LO 7) Some tax researchers begin with a keyword search on an online tax service. If
the problem is not complex, the researcher may bypass a tax service and turn directly
to the Internal Revenue Code and the Treasury Regulations (both are available online;
see Exhibit 1.7). For the beginner, this process saves time and will solve many of the
basic problems. If the researcher does not have access to the Code or Regulations,
the resources of a tax service may be necessary. Several of the major tax services
publish paperback editions of the Code and Treasury Regulations that can
be purchased at modest prices.
37. (LO 5, 8)
a. Primary source.
b. Secondary source.
c. Primary source.
d. Secondary source (but substantial authority for purposes of the accuracy-related
penalty in § 6662).
e. Secondary source.
38. (LO 9) The key components of effective tax planning are as follows:
• Avoid the recognition of income (usually by resorting to a nontaxable source or
nontaxable event).
• Defer recognition of income (or accelerate deductions).
• Convert the classification of income (or deductions) to a more advantageous
form (e.g., ordinary income into capital gain).
• Choose the business entity with the desired tax attributes.
• Preserve formalities by generating and maintaining supporting documentation.
• Act in a manner consistent with the intended objective.
Don’t just focus on tax considerations. Keep generally accepted accounting
principles, sound business judgment, and overall economic outcomes in mind as well.
39. (LO 10) Task-based simulations on the CPA exam are case studies that allow
candidates to demonstrate their knowledge and skills by generating responses to
questions rather than simply selecting an answer. They typically require candidates to
use spreadsheets and/or to research authoritative literature provided in the CPA exam
(e.g., Internal Revenue Code, Treasury Department Regulations, IRS publications, and
Federal tax forms). In addition, the task-based simulations provide increased
background material and data that require candidates to determine what information
is or is not relevant to the questions.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 7
website, in whole or in part.
, Solution and Answer Guide: Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2025, 9780357989074; Chapter 1: Understanding and Working with the Federal Tax Law
PROBLEMS
40. (LO 2)
a. Juniper has a realized gain of $200,000 determined as follows:
Amount received on the exchange:
FMV of real estate received $900,000
Cash 100,000 $1,000,000
Amount given up on the exchange:
Basis of real estate (800,000)
Realized gain $ 200,000
Juniper’s recognized gain is limited to the lesser of realized gain of $200,000 or the
other property (boot) received of $100,000. As a result, the recognized gain is
limited to other property (boot) received of $100,000 [the amount of cash (boot)
received by Juniper]. Refer to § 1031.
b. Birch has a realized loss of $300,000, determined as follows:
Amount received on the exchange $ 1,000,000
Amounts given up on the exchange:
Real estate (basis) $1,200,000
Cash 100,000
Basis of property given up (1,300,000)
Realized loss $ (300,000)
None of Birch’s realized loss can be recognized.
c. Under the wherewithal to pay concept, forcing Juniper to recognize a gain of
$100,000 makes sense. Because of the $100,000 cash received, not only has
Juniper’s economic position changed, but it now has the means to pay the tax on
the portion of the realized gain that is recognized.
The disallowance of Birch’s realized loss is consistent with the usual approach
of the wherewithal to pay concept. This disallowance is the price that must be
paid for tax-free treatment, and a carryover basis and adjustment under § 1031(d)
prevents a deterioration of Birch’s tax position. Note: After the exchange, Birch has
a basis of $1,300,000 in the real estate received from Juniper [i.e., $1,200,000
(basis in the real estate given up) + $100,000 (cash given up)].
41. (LO 2, 3)
a. W. Wherewithal to pay concept.
b. CE. Control of the economy.
c. ESB. Encouragement of small business.
d. SC. Social considerations.
e. EI. Encouragement of certain industries.
f. AF. Administrative feasibility.
g. SC. Social considerations.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 8
website, in whole or in part.
Taxation 2025 Corporations, Partnerships, Estates
and Trusts 48th Edition by Annette Nellen
Notes
1- The file is chapter after chapter.
2- We have shown you few pages sample.
3- The file contains all Appendix and Excel sheet
if it exists.
4- We have all what you need, we make update
at every time. There are many new editions
waiting you.
5- If you think you purchased the wrong file You
can contact us at every time, we can replace it
with true one.
Our email:
, Solution and Answer Guide: Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2025, 9780357989074; Chapter 1: Understanding and Working with the Federal Tax Law
Solution and Answer Guide
NELLEN, YOUNG, CRIPE, LASSAR, PERSELLIN, CUCCIA, SWFT CORPORATIONS, PARTNERSHIPS,
ESTATES & TRUSTS 2025, 9780357989074; CHAPTER 1: UNDERSTANDING AND WORKING
WITH THE FEDERAL T AX LAW
TABLE OF CONTENTS
Discussion Questions...........................................................................................................1
Problems ............................................................................................................................. 8
Research Problems ........................................................................................................... 14
Check Figures.................................................................................................................... 16
Solution To Ethics & Equity Feature .................................................................................17
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 amortization
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.
© 2025 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: Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2025, 9780357989074; Chapter 1: Understanding and Working with the Federal Tax Law
b. The S corporation election (see footnote 5 and a detailed discussion in Chapter 11)
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) Allowing a deduction for charitable contributions 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.
© 2025 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: Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2025, 9780357989074; 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)
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 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 installment 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 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
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website, in whole or in part.
, Solution and Answer Guide: Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2025, 9780357989074; 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.
• Imputed interest rules.
• Limitation on the deductibility of interest on investment indebtedness.
• Gift and estate taxes.
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 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 9).
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.
26. (LO 5) A President’s veto can be overridden by a two-thirds vote in both the House
and Senate.
27. (LO 5)
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website, in whole or in part.
, Solution and Answer Guide: Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2025, 9780357989074; Chapter 1: Understanding and Working with the Federal Tax Law
28. (LO 5) Yes. Some Code Sections omit the subsection designation and use, instead,
the paragraph designation as the first subpart [e.g., §§ 212(1) and 1221(1)].
29. (LO 5) When the 1954 Code was drafted, the omission of some Code section numbers
was intentional. This omission provided flexibility to incorporate later changes into the
Code without disrupting its organization. This technique is retained in the 1986 code.
30. (LO5) Proposed, Final, and Temporary Regulations are published in the Federal Register
(federalregister.gov) and are reproduced in major tax services. Final Regulations are
issued as Treasury Decisions (TDs).
31. (LO 5)
a. A Temporary Regulation, with 1 referring to the type of regulation (i.e., income tax), 707
is the related code section number, 5 is the subsection number, T means temporary,
(a) is the paragraph designation, and (2) is the subparagraph designation.
b. Revenue Ruling number 11, appearing on page 174 of Volume 1 of the Cumulative
Bulletin issued in 1960.
c. Technical Advice Memorandum number 3 issued during the 37th week of 1988.
32. (LO 5) SWFT, LLP
5191 Natorp Boulevard
Mason, OH 45040
October 17, 2024
Ms. Jennifer Olde
3246 Highland Drive
Clifton, VA 20124
Dear Ms. Olde:
In response to your recent request, the fact-finding determination of a lower trial
court is binding on a Federal Court of Appeals. A Federal Court of Appeals is limited to
a review of the record of trial compiled by a trial court. Rarely will an appellate court
disturb a lower court’s fact-finding determination.
Should you need more information, do not hesitate to contact me.
Sincerely,
Marilyn S. Crumbley
Tax Partner
33. (LO 5)
TAX FILE MEMORANDUM
DATE: September 5, 2024
FROM: Sarah Flinn
RE: Telephone conversation with Will Thomas regarding the failure of the IRS to
appeal
I explained to Mr. Thomas that there were numerous reasons why the IRS may decide
not to appeal a decision it loses in a District Court. For example, the workload may be
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website, in whole or in part.
, Solution and Answer Guide: Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2025, 9780357989074; Chapter 1: Understanding and Working with the Federal Tax Law
too heavy. Or the IRS may have decided that this particular case is not a good decision
to appeal (e.g., sympathetic taxpayer). Third, the IRS might not want to appeal this
case to the appropriate Court of Appeals. I stressed that the failure to appeal does not
necessarily mean that the IRS agrees with the results reached.
34. (LO 5, 8)
a. If the taxpayer decides to choose a District Court as the trial court for litigation,
the District Court of Utah would be the forum to hear the case. Unless the prior
decision has been reversed on appeal, one would expect the same court to follow
its earlier holding.
b. If the taxpayer decides to choose the Court of Federal Claims as the trial court for
litigation, the decision previously rendered by this Court should have a direct
bearing on the outcome. If the taxpayer selects a different trial court (i.e., the
appropriate U.S. District Court or the U.S. Tax Court), the decision rendered by the
Court of Federal Claims would be persuasive but not controlling. It is assumed that
the results reached by the Court of Federal Claims were not reversed on appeal.
c. The decision of a Court of Appeals carries more weight than one rendered by a trial
court. Since the taxpayer lives in California, however, any appeal from a District
Court or the U.S. Tax Court would go to the Ninth Court of Appeals. Although the
Ninth Court of Appeals might be influenced by what the Second Court of Appeals
has decided, it is not compelled to follow the Second Circuit’s holding.
d. Since the U.S. Supreme Court is the top appellate court, complete reliance can be
placed on its decisions. Nevertheless, one should investigate any decision to see
whether the Code has been modified to change the results reached. The rare
possibility also exists that the Court may have changed its position in a later
decision.
e. When the IRS acquiesces in a decision of the Tax Court, it agrees with the results
reached. As long as the acquiescence remains in effect, taxpayers can be assured
that this represents the position of the IRS on the issue involved. Keep in mind,
however, that the IRS can change its mind and can, at any time, withdraw the
acquiescence and substitute a nonacquiescence.
f. The issuance of a nonacquiescence reflects that the IRS does not agree with the
results reached by a Tax Court decision. Consequently, taxpayers are placed on
notice that the IRS will continue to challenge the issue involved.
35. (LO 6, 7) Aleshia has a number of approaches available, depending on the available
materials.
• Aleshia can begin with the index volumes of the available tax services: RIA, CCH,
or BNA Portfolios.
• A key word search on an online service should be helpful—Thomson Reuters
Checkpoint, CCH IntelliConnect, LexisNexis, or Westlaw (or WestlawNext).
• She should browse through IRS publications (available on the IRS website).
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website, in whole or in part.
, Solution and Answer Guide: Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2025, 9780357989074; Chapter 1: Understanding and Working with the Federal Tax Law
• Aleshia could explore various tax periodicals (see text page 1-27) to locate
appropriate articles written about § 351 transfers to a controlled corporation.
• Additional information might be available on the internet (but she should be
cautious regarding sources).
36. (LO 7) Some tax researchers begin with a keyword search on an online tax service. If
the problem is not complex, the researcher may bypass a tax service and turn directly
to the Internal Revenue Code and the Treasury Regulations (both are available online;
see Exhibit 1.7). For the beginner, this process saves time and will solve many of the
basic problems. If the researcher does not have access to the Code or Regulations,
the resources of a tax service may be necessary. Several of the major tax services
publish paperback editions of the Code and Treasury Regulations that can
be purchased at modest prices.
37. (LO 5, 8)
a. Primary source.
b. Secondary source.
c. Primary source.
d. Secondary source (but substantial authority for purposes of the accuracy-related
penalty in § 6662).
e. Secondary source.
38. (LO 9) The key components of effective tax planning are as follows:
• Avoid the recognition of income (usually by resorting to a nontaxable source or
nontaxable event).
• Defer recognition of income (or accelerate deductions).
• Convert the classification of income (or deductions) to a more advantageous
form (e.g., ordinary income into capital gain).
• Choose the business entity with the desired tax attributes.
• Preserve formalities by generating and maintaining supporting documentation.
• Act in a manner consistent with the intended objective.
Don’t just focus on tax considerations. Keep generally accepted accounting
principles, sound business judgment, and overall economic outcomes in mind as well.
39. (LO 10) Task-based simulations on the CPA exam are case studies that allow
candidates to demonstrate their knowledge and skills by generating responses to
questions rather than simply selecting an answer. They typically require candidates to
use spreadsheets and/or to research authoritative literature provided in the CPA exam
(e.g., Internal Revenue Code, Treasury Department Regulations, IRS publications, and
Federal tax forms). In addition, the task-based simulations provide increased
background material and data that require candidates to determine what information
is or is not relevant to the questions.
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website, in whole or in part.
, Solution and Answer Guide: Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2025, 9780357989074; Chapter 1: Understanding and Working with the Federal Tax Law
PROBLEMS
40. (LO 2)
a. Juniper has a realized gain of $200,000 determined as follows:
Amount received on the exchange:
FMV of real estate received $900,000
Cash 100,000 $1,000,000
Amount given up on the exchange:
Basis of real estate (800,000)
Realized gain $ 200,000
Juniper’s recognized gain is limited to the lesser of realized gain of $200,000 or the
other property (boot) received of $100,000. As a result, the recognized gain is
limited to other property (boot) received of $100,000 [the amount of cash (boot)
received by Juniper]. Refer to § 1031.
b. Birch has a realized loss of $300,000, determined as follows:
Amount received on the exchange $ 1,000,000
Amounts given up on the exchange:
Real estate (basis) $1,200,000
Cash 100,000
Basis of property given up (1,300,000)
Realized loss $ (300,000)
None of Birch’s realized loss can be recognized.
c. Under the wherewithal to pay concept, forcing Juniper to recognize a gain of
$100,000 makes sense. Because of the $100,000 cash received, not only has
Juniper’s economic position changed, but it now has the means to pay the tax on
the portion of the realized gain that is recognized.
The disallowance of Birch’s realized loss is consistent with the usual approach
of the wherewithal to pay concept. This disallowance is the price that must be
paid for tax-free treatment, and a carryover basis and adjustment under § 1031(d)
prevents a deterioration of Birch’s tax position. Note: After the exchange, Birch has
a basis of $1,300,000 in the real estate received from Juniper [i.e., $1,200,000
(basis in the real estate given up) + $100,000 (cash given up)].
41. (LO 2, 3)
a. W. Wherewithal to pay concept.
b. CE. Control of the economy.
c. ESB. Encouragement of small business.
d. SC. Social considerations.
e. EI. Encouragement of certain industries.
f. AF. Administrative feasibility.
g. SC. Social considerations.
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