REVISION MATERIAL FOR SOUTH-
WESTERN FEDERAL TAXATION 2021:
COMPREHENSIVE, 44TH EDITION,
DAVID M. MALONEY, WILLIAM H.
HOFFMAN, JR., JAMES C. YOUNG,
ANNETTE NELLEN, WILLIAM A.
RAABE, MARK PERSELLIN
, CHAPTER 1
AN INTRODUCTION TO TAXATION
AND UNDERSTANDING THE FEDERAL TAX LAW
SOLUTIONS TO PROBLEM MATERIALS
DISCUSSION QUESTIONS
1. (LO 1) Various answers are possible, including using the Key Terms at the end of each chapter,
referring to the Glossary (Appendix C), looking up the footnote resources to primary authority
(e.g., Internal Revenue Code, Regulations, and Ruling/Procedures in Appendix D), utilizing chapter
features (e.g., Global Tax Issues, Ethics & Equity, Tax Planning, and Framework 1040), examining
the tax forms used in the chapters, and completing additional end-of-chapter assignments. All of these
resources will help students engage more deeply with the materials and help their understanding.
2. (LO 1, 4)
a. John must now document rental receipts and separate his home expenses between personal
and rental use, and he may be subject to the transient occupancy tax.
b. Theresa has become self-employed. Now she will be subject to self-employment tax and may
have to make quarterly installment payments of estimated income and self-employment tax.
Theresa will be required to make payroll tax payments if she hires individuals to work in her
business.
c. Paul’s employer might have some moving expenses that it can deduct (in general, Paul cannot
deduct moving expenses). Paul’s personal taxes will change because Florida does not impose
an income tax but California does.
3. (LO 1, 4) The income tax consequences that result are Marvin’s principal concern. Any rent he
receives is taxed as income, but operating expenses and depreciation will generate deductions that
offset some or all of the income or even yield a loss. Marvin must also consider the effect of other
taxes. Because the property is being converted from residential to commercial use, he can expect an
increase in the ad valorem property taxes levied by the local (and perhaps even the state) taxing
authorities. Besides the real estate taxes, personal property taxes could be imposed on the furnishings.
4. (LO 2) To finance our participation in World War II, the scope of the income tax was expanded
considerably—from a limited coverage of 6% to over 74% of the population. Hence, the description
of the income tax as being a “mass tax” became appropriate.
5. (LO 2) For wage earners, the tax law requires employers to withhold a specified dollar amount from
wages paid to the employee to cover income taxes and payroll taxes. Persons with nonwage income
generally are required to make quarterly payments to the IRS for estimated taxes. Both procedures
ensure that taxpayers will be financially able to meet their annual tax liabilities. That is, the amounts
withheld are meant to prepay the employee’s income taxes and payroll taxes related to the wages
earned.
6. (LO 3) The tax law of State X appears to violate the certainty and simplicity principles.
1-1
, An Introduction to Taxation and Understanding the Federal Tax Law 1-2
7. (LO 3) A tax is regressive if it represents a larger percentage of the income of a low-income taxpayer
relative to the income of a high-income taxpayer. Examples of regressive taxes include sales and
excise taxes. A tax is progressive if it represents a larger percentage of the income of a high-income
taxpayer relative to the income of a low-income taxpayer. The Federal income tax is an example of a
progressive tax.
8. (LO 4)
a. The parsonage probably was not listed on the property tax rolls because it was owned by a tax-
exempt church. Apparently, the taxing authorities are not aware that ownership has changed.
b. Ethan should notify the authorities of his purchase. This will force him to pay back taxes but
may eliminate future interest and penalties.
9. (LO 4) Although the Baker Motors bid is the lowest, from a long-term financial standpoint, it is the
best. The proposed use of the property by the state and the church probably will make it exempt from
the school district’s ad valorem tax. This would hardly be the case with a car dealership. In fact,
commercial properties (e.g., car dealerships) often are subject to higher tax rates.
10. (LO 4)
a. In this case, the “tax holiday” probably concerns exemption from ad valorem taxes.
“Generous” could involve an extended period of time (e.g., 10 years) and include both realty
and personalty.
b. The school district could be affected in two ways. First, due to the erosion of the tax base,
less revenue would be forthcoming. Second, new workers would mean new families and
more children to educate.
11. (LO 4) A possible explanation is that Sophia made capital improvements (e.g., added a swimming
pool) to her residence and her parents became retirees (e.g., reached age 65).
12. (LO 4) Presuming that the dockage facilities are comparable in Massachusetts, the Morgans may be
trying to avoid ad valorem taxes. Taxes on nonbusiness property vary from one state to another and
are frequently avoided.
13. (LO 4) In general, Federal excise taxes apply to fewer items than in the past. Lawmakers have
focused on and increased certain Federal excise taxes (e.g., those on tobacco products, gasoline, and
air travel).
14. (LO 4) Ginger could have been overcharged, but it is likely that at least part of the excess is
attributable to a hotel occupancy tax and a car rental tax. In major cities, these types of excise taxes
have become a popular way of financing capital improvements such as sports arenas and stadiums.
Consequently, the amount of the taxes could be significant.
15. (LO 4) An excise tax is limited to a particular transaction (e.g., sale of gasoline), whereas a general
sales tax covers a multitude of transactions (e.g., sale of all nonfood goods).
a. The following states do not impose a general sales tax: Alaska, Delaware, Montana, New
Hampshire, and Oregon.
b. There is no Federal general sales tax.
, An Introduction to Taxation and Understanding the Federal Tax Law 1-3
16. (LO 4)
a. Jackson County must be in a state that imposes a lower (or no) sales tax. With certain major
purchases (i.e., big-ticket items), any use tax imposed by the state of the Grays’ residence
could come into play.
b. In some states, the sales tax rate varies depending on the county and/or city.
Note: Generally, buyers are subject to the sales and use tax rate where they live. Thus, for example, if
the Grays buy goods in a different state with a zero or lower sales tax rate than in their state, they owe
use tax to their home state for the difference.
17. (LO 4) Ben probably purchased his computer out of state through a catalog or via the internet. In such
cases, state collection of the sales (use) tax is not likely. Ben needs to pay use tax on his own (which
is equal to the sales tax).
18. (LO 4) If the tax is imposed on the right to pass property at death, it is classified as an estate tax. If it
taxes the right to receive property from a decedent, it is termed an inheritance tax.
a. Some states impose both an estate tax and an inheritance tax. Some states (e.g., Florida and
Texas) levy neither tax.
b. The Federal government imposes an estate tax.
19. (LO 4) Jake either has a severe misunderstanding as to the rules regarding transfer taxes or is lying to
Jessica to delay any parting with his wealth. The marital deduction allows interspousal transfers
(whether by gift or at death) free of any tax (either gift or estate). As a result, in the case of spousal
transfers, there is no tax reason to prefer transfers at death over lifetime gifts.
20. (LO 4)
a. The purpose of the unified transfer tax credit is to eliminate the tax on all but substantial gifts
and estates.
b. Yes. The credit for 2020 is $4,577,800; for 2019, it is $4,505,800.
c. Yes. The credit is available to cover transfers by gift or by death (or both), but the amount
can be used only once.
21. (LO 4) $570,000. 19 donees (5 married children + 5 spouses + 9 grandchildren) $15,000 (annual
exclusion for 2020) 2 donors (Elijah and Anastasia) = $570,000.
22. (LO 4) The individual income tax is progressive in nature; the corporate income tax is assessed at a
flat 21% rate. In addition, the corporate income tax does not make any distinction as to deductions—
only business deductions are allowed. Nor does it require the computation of adjusted gross income
(AGI) or provide for the standard deduction and the deduction for qualified business income.
23. (LO 4)
a. For state income tax purposes, “piggyback” means making use of what was done for Federal
income tax purposes. By “decoupling,” a state decides not to allow a particular Federal
provision (e.g., exclusion, deduction, credit) for state income tax purposes.
b. States often use IRS audit results to identify errors that might also exist on the taxpayer’s
state tax return.
c. Most states allow their residents some form of tax credit for income taxes paid to other states.
24. (LO 4) What happened here likely is not a coincidence. The IRS probably notified the state of
California regarding Hernando’s omission of income. Thus, California followed up with its own audit.
WESTERN FEDERAL TAXATION 2021:
COMPREHENSIVE, 44TH EDITION,
DAVID M. MALONEY, WILLIAM H.
HOFFMAN, JR., JAMES C. YOUNG,
ANNETTE NELLEN, WILLIAM A.
RAABE, MARK PERSELLIN
, CHAPTER 1
AN INTRODUCTION TO TAXATION
AND UNDERSTANDING THE FEDERAL TAX LAW
SOLUTIONS TO PROBLEM MATERIALS
DISCUSSION QUESTIONS
1. (LO 1) Various answers are possible, including using the Key Terms at the end of each chapter,
referring to the Glossary (Appendix C), looking up the footnote resources to primary authority
(e.g., Internal Revenue Code, Regulations, and Ruling/Procedures in Appendix D), utilizing chapter
features (e.g., Global Tax Issues, Ethics & Equity, Tax Planning, and Framework 1040), examining
the tax forms used in the chapters, and completing additional end-of-chapter assignments. All of these
resources will help students engage more deeply with the materials and help their understanding.
2. (LO 1, 4)
a. John must now document rental receipts and separate his home expenses between personal
and rental use, and he may be subject to the transient occupancy tax.
b. Theresa has become self-employed. Now she will be subject to self-employment tax and may
have to make quarterly installment payments of estimated income and self-employment tax.
Theresa will be required to make payroll tax payments if she hires individuals to work in her
business.
c. Paul’s employer might have some moving expenses that it can deduct (in general, Paul cannot
deduct moving expenses). Paul’s personal taxes will change because Florida does not impose
an income tax but California does.
3. (LO 1, 4) The income tax consequences that result are Marvin’s principal concern. Any rent he
receives is taxed as income, but operating expenses and depreciation will generate deductions that
offset some or all of the income or even yield a loss. Marvin must also consider the effect of other
taxes. Because the property is being converted from residential to commercial use, he can expect an
increase in the ad valorem property taxes levied by the local (and perhaps even the state) taxing
authorities. Besides the real estate taxes, personal property taxes could be imposed on the furnishings.
4. (LO 2) To finance our participation in World War II, the scope of the income tax was expanded
considerably—from a limited coverage of 6% to over 74% of the population. Hence, the description
of the income tax as being a “mass tax” became appropriate.
5. (LO 2) For wage earners, the tax law requires employers to withhold a specified dollar amount from
wages paid to the employee to cover income taxes and payroll taxes. Persons with nonwage income
generally are required to make quarterly payments to the IRS for estimated taxes. Both procedures
ensure that taxpayers will be financially able to meet their annual tax liabilities. That is, the amounts
withheld are meant to prepay the employee’s income taxes and payroll taxes related to the wages
earned.
6. (LO 3) The tax law of State X appears to violate the certainty and simplicity principles.
1-1
, An Introduction to Taxation and Understanding the Federal Tax Law 1-2
7. (LO 3) A tax is regressive if it represents a larger percentage of the income of a low-income taxpayer
relative to the income of a high-income taxpayer. Examples of regressive taxes include sales and
excise taxes. A tax is progressive if it represents a larger percentage of the income of a high-income
taxpayer relative to the income of a low-income taxpayer. The Federal income tax is an example of a
progressive tax.
8. (LO 4)
a. The parsonage probably was not listed on the property tax rolls because it was owned by a tax-
exempt church. Apparently, the taxing authorities are not aware that ownership has changed.
b. Ethan should notify the authorities of his purchase. This will force him to pay back taxes but
may eliminate future interest and penalties.
9. (LO 4) Although the Baker Motors bid is the lowest, from a long-term financial standpoint, it is the
best. The proposed use of the property by the state and the church probably will make it exempt from
the school district’s ad valorem tax. This would hardly be the case with a car dealership. In fact,
commercial properties (e.g., car dealerships) often are subject to higher tax rates.
10. (LO 4)
a. In this case, the “tax holiday” probably concerns exemption from ad valorem taxes.
“Generous” could involve an extended period of time (e.g., 10 years) and include both realty
and personalty.
b. The school district could be affected in two ways. First, due to the erosion of the tax base,
less revenue would be forthcoming. Second, new workers would mean new families and
more children to educate.
11. (LO 4) A possible explanation is that Sophia made capital improvements (e.g., added a swimming
pool) to her residence and her parents became retirees (e.g., reached age 65).
12. (LO 4) Presuming that the dockage facilities are comparable in Massachusetts, the Morgans may be
trying to avoid ad valorem taxes. Taxes on nonbusiness property vary from one state to another and
are frequently avoided.
13. (LO 4) In general, Federal excise taxes apply to fewer items than in the past. Lawmakers have
focused on and increased certain Federal excise taxes (e.g., those on tobacco products, gasoline, and
air travel).
14. (LO 4) Ginger could have been overcharged, but it is likely that at least part of the excess is
attributable to a hotel occupancy tax and a car rental tax. In major cities, these types of excise taxes
have become a popular way of financing capital improvements such as sports arenas and stadiums.
Consequently, the amount of the taxes could be significant.
15. (LO 4) An excise tax is limited to a particular transaction (e.g., sale of gasoline), whereas a general
sales tax covers a multitude of transactions (e.g., sale of all nonfood goods).
a. The following states do not impose a general sales tax: Alaska, Delaware, Montana, New
Hampshire, and Oregon.
b. There is no Federal general sales tax.
, An Introduction to Taxation and Understanding the Federal Tax Law 1-3
16. (LO 4)
a. Jackson County must be in a state that imposes a lower (or no) sales tax. With certain major
purchases (i.e., big-ticket items), any use tax imposed by the state of the Grays’ residence
could come into play.
b. In some states, the sales tax rate varies depending on the county and/or city.
Note: Generally, buyers are subject to the sales and use tax rate where they live. Thus, for example, if
the Grays buy goods in a different state with a zero or lower sales tax rate than in their state, they owe
use tax to their home state for the difference.
17. (LO 4) Ben probably purchased his computer out of state through a catalog or via the internet. In such
cases, state collection of the sales (use) tax is not likely. Ben needs to pay use tax on his own (which
is equal to the sales tax).
18. (LO 4) If the tax is imposed on the right to pass property at death, it is classified as an estate tax. If it
taxes the right to receive property from a decedent, it is termed an inheritance tax.
a. Some states impose both an estate tax and an inheritance tax. Some states (e.g., Florida and
Texas) levy neither tax.
b. The Federal government imposes an estate tax.
19. (LO 4) Jake either has a severe misunderstanding as to the rules regarding transfer taxes or is lying to
Jessica to delay any parting with his wealth. The marital deduction allows interspousal transfers
(whether by gift or at death) free of any tax (either gift or estate). As a result, in the case of spousal
transfers, there is no tax reason to prefer transfers at death over lifetime gifts.
20. (LO 4)
a. The purpose of the unified transfer tax credit is to eliminate the tax on all but substantial gifts
and estates.
b. Yes. The credit for 2020 is $4,577,800; for 2019, it is $4,505,800.
c. Yes. The credit is available to cover transfers by gift or by death (or both), but the amount
can be used only once.
21. (LO 4) $570,000. 19 donees (5 married children + 5 spouses + 9 grandchildren) $15,000 (annual
exclusion for 2020) 2 donors (Elijah and Anastasia) = $570,000.
22. (LO 4) The individual income tax is progressive in nature; the corporate income tax is assessed at a
flat 21% rate. In addition, the corporate income tax does not make any distinction as to deductions—
only business deductions are allowed. Nor does it require the computation of adjusted gross income
(AGI) or provide for the standard deduction and the deduction for qualified business income.
23. (LO 4)
a. For state income tax purposes, “piggyback” means making use of what was done for Federal
income tax purposes. By “decoupling,” a state decides not to allow a particular Federal
provision (e.g., exclusion, deduction, credit) for state income tax purposes.
b. States often use IRS audit results to identify errors that might also exist on the taxpayer’s
state tax return.
c. Most states allow their residents some form of tax credit for income taxes paid to other states.
24. (LO 4) What happened here likely is not a coincidence. The IRS probably notified the state of
California regarding Hernando’s omission of income. Thus, California followed up with its own audit.
