,ACCESS Test Bank for Pearson's Federal Taxation 2023 Comprehensive 36th Editi
m m m m m m m m m m
on Rupert m
Chapter I:1m
An Introduction to Taxation
m m m
Discussion Questions
m
I:1-
1m ThemSuprememCourt mheld mthemincomemtaxmtombemunconstitutionalminm1895mbecausemthemincomemt
axmwasmconsidered mtombemamdirect mtax.m At mthat mtime,mthemU.S.mConstitutionmrequired mthat manminco
memtaxmbemapportioned mamongmthemstatesminmproportionmtomtheirmpopulations.m Thismtypemof mtaxmsy
stemmwould mbemextremely mdifficult mtomadministermbecausemdifferent mratesmof mtaxmwould mapply mtomin
dividualmtaxpayersmdependingmonmtheirmstatesmof mresidence.m p.mI:1-2.
I:1-2m Thempay-as-you-
gomwithholdingmwasmneeded minm1943mtomavoid msignificant mtaxmcollectionmproblemsm asm them taxm ba
sem broadened m fromm 6%m of m them populationm inm 1939m tom 74%m inm 1945.mPay-as-you-
gompermitted mthemfederalmgovernment mtomdeduct mtaxesmdirectlymout mof manmemployee'smwages.m p.mI:
1-3.
I:1-
3m Undermamprogressivemtaxmratemstructure,mthemtaxmratemincreasesmasmthemtaxpayer'smincomem increas
es.m Currently,mform2022,mtaxmratesmof m10%,m12%, m22%,m24%, m32%,m35% morm37%mapplymdependin
gmuponmthemtaxpayer'smfilingmstatusmand mtaxablemincomemlevels. mUndermamproportionalmtaxmratemorm"fl
at mtax"mstructure,mthemsamemtaxmratemappliesmtomallmtaxpayersmregardlessmof mtheirmincomem levels.mU
ndermamregressivemtaxmratemstructure,mthemtaxmratemdecreasesmwithmanmincreaseminm incomemlevel.m Th
emconcept mof mverticalmequitymholdsmthat mtaxpayersmwithmhighermincomemlevelsm should mpaymamhigher
mproportionmof mtaxmand mthat mthemtaxmshould mbembornembymthosemwhomhavemthem"abilitymtompay."m Th
us,mCongressmanmPatrick'smopposition mtomthemflat mtaxmismphilosophically mcorrect;munderma mflat mtaxms
ystem,mallmtaxpayersmpaymtaxesmat mthemsamemrate,mregardlessmof mthemabilitymtompay.m pp.mI:1-
4mand mI:1-5.
I:1-
4m It mismpossiblemformthemgovernment mtomraisemtaxesmwithout mraisingmtaxmrates.m Becausemtheremaremt
womcomponentsminmcomputingmamtaxpayer'smtax,mthemtaxmbasemand mthemtaxmrate,mtaxesmcanmbemraise
d mbymincreasingmeithermthemrate mormthe mbase.m Thus,mevenmthoughmthemGovernor mproclaimed mthat mtaxm
ratesmhavemremained mat mthemsame mlevel,madjustmentsmtomthemtaxmbase,msuchmas mthemeliminationmof mde
ductions,mresult minmtaxmincreasesmwhichmcanmbem asmmuch,morm more,masmincreases minmtaxmrates.m p.mI:
1-4.
I:1-
5m Themmarginalmtaxmratemismof mgreatermsignificance minm measuringmthemtaxmeffect mformCarmen'smdec
ision.m Them marginalmtaxmratem ismthempercentagemthat mismapplied mtomanmincrementalmamount mof mtaxa
blemincome mthat mis madded mtomormsubtracted mfrommthemtax mbase.m Through mthemmarginalmtax mrate,mthemt
axpayermmay mmeasuremthemtaxmeffect mof mthemcharitablemcontributionmtomherm church.m If mhermmargin
almtaxmratemis m24%,mshe mwill msavem24¢ mformeachm$1mcontributed mtomhermchurch.m Themaveragemtaxmra
Copyright m©m2023 mPearson mEducation,mIn
c.
I:1-1
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,temismsimplymthemtotalmtaxmliabilitymdivided mbymtaxablemincome.m pp.mI:1-5mand mI:1-6.
I:1-
6m Gift mand mestatemtaxesmaremlevied mwhenmamtransfermof mwealthm(property)mtakesmplace mand marembot
hmpart mof mthemunified mtransfermtaxmsystem.m Themtaxmbasemformcomputingmthemgift mtaxmismthemfairm ma
rket mvaluemof mall mgiftsmmademinmthemcurrent myearmminusmanmannualmdoneemexclusionmof m$16,000m(2
022)m perm donee,m minusm am maritalm deductionm form giftsm tom spousem and m am charitablem contributions
Copyright m©m2023 mPearson mEducation,mIn
c.
I:1-2
mynursytest.store
, ACCESS Test Bank for Pearson's Federal Taxation 2023 Comprehensive 36th Editi
m m m m m m m m m m
on Rupert m
deductionmif mapplicable,mplus mthemvaluemof mall mtaxablemgiftsmin mpriormyears.m Themtaxmbase mformthemest
atemtaxmismthemdecedent'smgrossmestate,mminusmdeductionsmformexpenses,mand mammaritalmormcharitabl
emdeductionmif mapplicable,mplusmtaxablemgiftsmmademafterm1976.m pp.mI:1-7mthroughmI:1-10.
I:1-
7m m a.m m m Cathy,mthemdonor,mismprimarilym liablemformthemgift mtaxmonmthemtwomgifts.m Themchildrenm
aremcontingentlymliablemformpayment mof mthemgift mtaxminmthemevent mthemdonormfailsmtompay.
b.
Beforemconsideringmthemunified mtaxmcredit mequivalent mof m$12.06mmillionmform2022,m
amgift mtaxmresultsmonmthemtwomgiftsmformthemcurrent myearm2022mcomputed masmfollows:
Totalmgifts $100,000
Minus:mAnnualmgift mtaxmexclusionm($16,000mxm2mdonees)
m( 32,000
m m
)mGift mtaxmbase $m 68,000
SincemCathymhasmneverm mademgiftsminmpriormyears,mnomgift mtaxmwillmbe mduembecausemof mthemsubstan
tialmunified mtaxmcredit mthat mismavailable.m pp.mI:1-8mand mI:1-9.
I:1-8m Carlosmwould mreport mamtaxablemgainmof m$2,000m($27,000m-
m$25,000).m Hismtaxmbasisminmthemstockmthat mheminherited mismthemfairmmarket mvaluemonmthemdatemof mhi
smfather’smdeath.m pp.mI:1-9mand mI:1-m10.
I:1-
9m a.m m Most mestatesmaremnotmsubject mtomthemfederalmestatemtaxmbecausemof mgenerousmcredit mand mded
uctionmprovisions,msuchmasmthemunified mtaxmcredit mand mthemunlimited mmaritalmdeduction.m Themunified m
taxmcredit mequivalent mform2022mism$12.06mmillion. m Thismmeansmthat,mat mamminimum,mformdecedentsmdyi
ngminm2022,mnomestatemof m$12.06mmillionmormlessmwillmbemsubject mtomthemfederalmestatemtax.
b.m m Thismismamcontroversialmquestionmthat mhasmproponentsmonmbothmsidesmof mthemissue.m T
hosemthat mbelieve mthemestatemtaxmshould mbemreduced mormeliminated mbasicallymarguemthat mthemestatemta
xmismamdoublemtax,mthat mis,mthempropertymof mthemdecedent mhasmalreadymbeenmsubject mtomincomemtaxat
ionmduringmhismormher mlifetimemand mshould mnot mbemsubjected mtomfurthermtaxationmat mdeath.m Onmthem
othermhand,mproponentsmof mretainingmormincreasingmthemestatemtaxmbelieveminmthemabilitymtompaymprin
ciple.m p.mI:1-10.
I:1-10m a. Progressive.
b. Progressive.
c. Proportional.
d. Proportional.
e. Proportional.m(However,mstatemand mlocalmsalesmtaxesmaremconsidered mregressivemwh
enmmeasured magainst mincome).
pp.mI:1-4mand mI:1-5mand mI:1-12.
I:1-
11m Decrease.m WhenmCarolyn moperatesmhermbusinessmas mamsolemproprietor,mshe mis mconsidered mtomb
emself-employed.m Amself-
Copyright m©m2023 mPearson mEducation,mIn
c.
I:1-3
mynursytest.store
m m m m m m m m m m
on Rupert m
Chapter I:1m
An Introduction to Taxation
m m m
Discussion Questions
m
I:1-
1m ThemSuprememCourt mheld mthemincomemtaxmtombemunconstitutionalminm1895mbecausemthemincomemt
axmwasmconsidered mtombemamdirect mtax.m At mthat mtime,mthemU.S.mConstitutionmrequired mthat manminco
memtaxmbemapportioned mamongmthemstatesminmproportionmtomtheirmpopulations.m Thismtypemof mtaxmsy
stemmwould mbemextremely mdifficult mtomadministermbecausemdifferent mratesmof mtaxmwould mapply mtomin
dividualmtaxpayersmdependingmonmtheirmstatesmof mresidence.m p.mI:1-2.
I:1-2m Thempay-as-you-
gomwithholdingmwasmneeded minm1943mtomavoid msignificant mtaxmcollectionmproblemsm asm them taxm ba
sem broadened m fromm 6%m of m them populationm inm 1939m tom 74%m inm 1945.mPay-as-you-
gompermitted mthemfederalmgovernment mtomdeduct mtaxesmdirectlymout mof manmemployee'smwages.m p.mI:
1-3.
I:1-
3m Undermamprogressivemtaxmratemstructure,mthemtaxmratemincreasesmasmthemtaxpayer'smincomem increas
es.m Currently,mform2022,mtaxmratesmof m10%,m12%, m22%,m24%, m32%,m35% morm37%mapplymdependin
gmuponmthemtaxpayer'smfilingmstatusmand mtaxablemincomemlevels. mUndermamproportionalmtaxmratemorm"fl
at mtax"mstructure,mthemsamemtaxmratemappliesmtomallmtaxpayersmregardlessmof mtheirmincomem levels.mU
ndermamregressivemtaxmratemstructure,mthemtaxmratemdecreasesmwithmanmincreaseminm incomemlevel.m Th
emconcept mof mverticalmequitymholdsmthat mtaxpayersmwithmhighermincomemlevelsm should mpaymamhigher
mproportionmof mtaxmand mthat mthemtaxmshould mbembornembymthosemwhomhavemthem"abilitymtompay."m Th
us,mCongressmanmPatrick'smopposition mtomthemflat mtaxmismphilosophically mcorrect;munderma mflat mtaxms
ystem,mallmtaxpayersmpaymtaxesmat mthemsamemrate,mregardlessmof mthemabilitymtompay.m pp.mI:1-
4mand mI:1-5.
I:1-
4m It mismpossiblemformthemgovernment mtomraisemtaxesmwithout mraisingmtaxmrates.m Becausemtheremaremt
womcomponentsminmcomputingmamtaxpayer'smtax,mthemtaxmbasemand mthemtaxmrate,mtaxesmcanmbemraise
d mbymincreasingmeithermthemrate mormthe mbase.m Thus,mevenmthoughmthemGovernor mproclaimed mthat mtaxm
ratesmhavemremained mat mthemsame mlevel,madjustmentsmtomthemtaxmbase,msuchmas mthemeliminationmof mde
ductions,mresult minmtaxmincreasesmwhichmcanmbem asmmuch,morm more,masmincreases minmtaxmrates.m p.mI:
1-4.
I:1-
5m Themmarginalmtaxmratemismof mgreatermsignificance minm measuringmthemtaxmeffect mformCarmen'smdec
ision.m Them marginalmtaxmratem ismthempercentagemthat mismapplied mtomanmincrementalmamount mof mtaxa
blemincome mthat mis madded mtomormsubtracted mfrommthemtax mbase.m Through mthemmarginalmtax mrate,mthemt
axpayermmay mmeasuremthemtaxmeffect mof mthemcharitablemcontributionmtomherm church.m If mhermmargin
almtaxmratemis m24%,mshe mwill msavem24¢ mformeachm$1mcontributed mtomhermchurch.m Themaveragemtaxmra
Copyright m©m2023 mPearson mEducation,mIn
c.
I:1-1
mynursytest.store
,temismsimplymthemtotalmtaxmliabilitymdivided mbymtaxablemincome.m pp.mI:1-5mand mI:1-6.
I:1-
6m Gift mand mestatemtaxesmaremlevied mwhenmamtransfermof mwealthm(property)mtakesmplace mand marembot
hmpart mof mthemunified mtransfermtaxmsystem.m Themtaxmbasemformcomputingmthemgift mtaxmismthemfairm ma
rket mvaluemof mall mgiftsmmademinmthemcurrent myearmminusmanmannualmdoneemexclusionmof m$16,000m(2
022)m perm donee,m minusm am maritalm deductionm form giftsm tom spousem and m am charitablem contributions
Copyright m©m2023 mPearson mEducation,mIn
c.
I:1-2
mynursytest.store
, ACCESS Test Bank for Pearson's Federal Taxation 2023 Comprehensive 36th Editi
m m m m m m m m m m
on Rupert m
deductionmif mapplicable,mplus mthemvaluemof mall mtaxablemgiftsmin mpriormyears.m Themtaxmbase mformthemest
atemtaxmismthemdecedent'smgrossmestate,mminusmdeductionsmformexpenses,mand mammaritalmormcharitabl
emdeductionmif mapplicable,mplusmtaxablemgiftsmmademafterm1976.m pp.mI:1-7mthroughmI:1-10.
I:1-
7m m a.m m m Cathy,mthemdonor,mismprimarilym liablemformthemgift mtaxmonmthemtwomgifts.m Themchildrenm
aremcontingentlymliablemformpayment mof mthemgift mtaxminmthemevent mthemdonormfailsmtompay.
b.
Beforemconsideringmthemunified mtaxmcredit mequivalent mof m$12.06mmillionmform2022,m
amgift mtaxmresultsmonmthemtwomgiftsmformthemcurrent myearm2022mcomputed masmfollows:
Totalmgifts $100,000
Minus:mAnnualmgift mtaxmexclusionm($16,000mxm2mdonees)
m( 32,000
m m
)mGift mtaxmbase $m 68,000
SincemCathymhasmneverm mademgiftsminmpriormyears,mnomgift mtaxmwillmbe mduembecausemof mthemsubstan
tialmunified mtaxmcredit mthat mismavailable.m pp.mI:1-8mand mI:1-9.
I:1-8m Carlosmwould mreport mamtaxablemgainmof m$2,000m($27,000m-
m$25,000).m Hismtaxmbasisminmthemstockmthat mheminherited mismthemfairmmarket mvaluemonmthemdatemof mhi
smfather’smdeath.m pp.mI:1-9mand mI:1-m10.
I:1-
9m a.m m Most mestatesmaremnotmsubject mtomthemfederalmestatemtaxmbecausemof mgenerousmcredit mand mded
uctionmprovisions,msuchmasmthemunified mtaxmcredit mand mthemunlimited mmaritalmdeduction.m Themunified m
taxmcredit mequivalent mform2022mism$12.06mmillion. m Thismmeansmthat,mat mamminimum,mformdecedentsmdyi
ngminm2022,mnomestatemof m$12.06mmillionmormlessmwillmbemsubject mtomthemfederalmestatemtax.
b.m m Thismismamcontroversialmquestionmthat mhasmproponentsmonmbothmsidesmof mthemissue.m T
hosemthat mbelieve mthemestatemtaxmshould mbemreduced mormeliminated mbasicallymarguemthat mthemestatemta
xmismamdoublemtax,mthat mis,mthempropertymof mthemdecedent mhasmalreadymbeenmsubject mtomincomemtaxat
ionmduringmhismormher mlifetimemand mshould mnot mbemsubjected mtomfurthermtaxationmat mdeath.m Onmthem
othermhand,mproponentsmof mretainingmormincreasingmthemestatemtaxmbelieveminmthemabilitymtompaymprin
ciple.m p.mI:1-10.
I:1-10m a. Progressive.
b. Progressive.
c. Proportional.
d. Proportional.
e. Proportional.m(However,mstatemand mlocalmsalesmtaxesmaremconsidered mregressivemwh
enmmeasured magainst mincome).
pp.mI:1-4mand mI:1-5mand mI:1-12.
I:1-
11m Decrease.m WhenmCarolyn moperatesmhermbusinessmas mamsolemproprietor,mshe mis mconsidered mtomb
emself-employed.m Amself-
Copyright m©m2023 mPearson mEducation,mIn
c.
I:1-3
mynursytest.store
