,ACCESS Test Bank for Pearson's Federal Taxation 2023 Comprehensive 36thEditi
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 ThemSuprememCourtmheldmthemincomemtaxmtombemunconstitutionalminm1895mbecausemthemincomemta
xmwasmconsideredmtombemamdirectmtax.mAtmthatmtime,mthemU.S.mConstitutionmrequiredmthatmanmincome
mtaxmbemapportionedmamongmthemstatesminmproportionmtomtheirmpopulations.mThismtypemofmtaxmsyste
mmwouldmbemextremelymdifficultmtomadministermbecausemdifferentmratesmofmtaxmwouldmapplymtomindiv
idualmtaxpayersmdependingmonmtheirmstatesmofmresidence.mmp.mI:1-2.
I:1-2mThempay-as-you-
gomwithholdingmwasmneededminm1943mtomavoidmsignificantmtaxmcollectionmproblemsmasmthemtaxmbas
embroadenedmfromm6%mofmthempopulationminm1939mtom74%minm1945.mPay-as-you-
gompermittedmthemfederalmgovernmentmtomdeductmtaxesmdirectlymoutmofmanmemployee'smwages.m p.mI:
1-3.
I:1-
3mUndermamprogressivemtaxmratemstructure,mthemtaxmratemincreasesmasmthemtaxpayer'smincomemincreas
es.mCurrently,mform2022,mtaxmratesmofm10%,m12%,m22%,m24%,m32%,m35%morm37%mapplymdepending
muponmthemtaxpayer'smfilingmstatusmandmtaxablemincomemlevels.m Undermamproportionalmtaxmratem orm"flat
mtax"mstructure,mthemsamemtaxmratemappliesmtomallmtaxpayersmregardlessmofmtheirmincomemlevels.mUnd
ermamregressivemtaxmratemstructure,mthemtaxmratemdecreasesmwithmanmincreaseminmincomemlevel.mThemc
onceptmofmverticalmequitymholdsmthatmtaxpayersmwithmhighermincomemlevelsmshouldmpaymamhighermpr
oportionmofmtaxmandmthatmthemtaxmshouldmbembornembymthosemwhomhavemthem"abilitymtompay."mThus,m
CongressmanmPatrick'smoppositionmtomthemflatmtaxmismphilosophicallymcorrect;mundermamflatmtaxmsyste
m,mallmtaxpayersmpaymtaxesmatmthemsamemrate,mregardlessmofmthemabilitymtompay.m pp.mI:1-4mandmI:1-5.
I:1-
4mItmismpossiblemformthemgovernmentmtomraisemtaxesmwithoutmraisingmtaxmrates.mBecausemtheremaremt
womcomponentsminmcomputingmamtaxpayer'smtax,mthemtaxmbasemandmthemtaxmrate,mtaxesmcanmbemraise
dmbymincreasingmeithermthemratemormthembase.m Thus,mevenmthoughmthemGovernormproclaimedmthatmtaxm
ratesmhavemremainedmatmthemsamemlevel,madjustmentsmtomthemtaxmbase,msuchmasmthemeliminationmofmded
uctions,mresultminmtaxmincreasesmwhichmcanmbemasmmuch,mormmore,masmincreasesminmtaxmrates.m p.mI:1-
4.
I:1-
5mThemmarginalmtaxmratemismofmgreatermsignificanceminmmeasuringmthemtaxmeffectmformCarmen'smdeci
sion.mThemmarginalmtaxmratemismthempercentagemthatmismappliedmtomanmincrementalmamountmofmtaxabl
emincomemthatmismaddedmtomormsubtractedmfrommthemtaxmbase.m Throughmthemmarginalmtaxmrate,mthemta
xpayermmaymmeasuremthemtaxmeffectmofmthemcharitablemcontributionmtomhermchurch.mIfmhermmarginal
mtaxmratemism24%,mshemwillmsavem24¢mformeachm$1mcontributedmtomhermchurch.mThemaveragemtaxmrate
mismsimplymthemtotalmtaxmliabilitymdividedmbymtaxablemincome.m pp.mI:1-5mandmI:1-6.
Copyrightm©m2023mPearsonmEducation,mIn
c.
I:1-1
mynursytest.store
,I:1-
6m Giftmandmestatemtaxesmaremleviedmwhenmamtransfermofmwealthm(property)mtakesmplacemandmarembot
hmpartmofmthemunifiedmtransfermtaxmsystem.mThemtaxmbasemformcomputingmthemgiftmtaxmismthemfairmma
rketmvaluemofmallmgiftsmmademinmthemcurrentmyearmminusmanmannualmdoneemexclusionmofm$16,000m(2
022)m perm donee,m minusm am maritalm deductionm form giftsm tom spousem andm am charitablem contribution
s
Copyrightm©m2023mPearsonmEducation,mIn
c.
I:1-2
mynursytest.store
, ACCESS Test Bank for Pearson's Federal Taxation 2023 Comprehensive 36thEditi
m m m m m m m m m m
on Rupert m
deductionmifmapplicable,mplusmthemvaluemofmallmtaxablemgiftsminmpriormyears.m Themtaxmbasemformthemes
tatemtaxmismthemdecedent'smgrossmestate,mminusmdeductionsmformexpenses,mandmammaritalmormcharitabl
emdeductionmifmapplicable,mplusmtaxablemgiftsmmademafterm1976.m pp.mI:1-7mthroughmI:1-10.
I:1-
7mmma.mmmmmmmCathy,mthemdonor,mismprimarilymliablemformthemgiftmtaxmonmthemtwomgifts.m Themchildrenm
aremcontingentlymliablemformpaymentmofmthemgiftmtaxminmthemeventmthemdonormfailsmtompay.
b.
Beforem consideringm them unifiedm taxm creditm equivalentm ofm $12.06m millionm form 2022,
m am
giftmtaxmresultsmonmthemtwomgiftsmformthemcurrentmyearm2022mcomputedmasmfollows:
Totalmgifts $100,000
Minus:mAnnualmgiftmtaxmexclusionm($16,000mxm2mdonees)
(m32,000)m
Giftmtaxmbase $m68,000
SincemCathymhasmnevermmademgiftsminmpriormyears,mnomgiftmtaxmwillmbemduembecausemofmthemsubstan
tialmunifiedmtaxmcreditmthatmismavailable.m pp.mI:1-8mandmI:1-9.
I:1-8m Carlosmwouldmreportmamtaxablemgainmofm$2,000m($27,000m-
m$25,000).m Hismtaxmbasisminmthemstockmthatmheminheritedmismthemfairmmarketmvaluemonmthemdatemofmhi
smfather’smdeath.mpp.mI:1-9mandmI:1-m10.
I:1-
9ma.mMostmestatesmaremnotmsubjectmtomthemfederalmestatemtaxmbecausemofmgenerousmcreditmandmdeduc
tionmprovisions,msuchmasmthemunifiedmtaxmcreditmandmthemunlimitedmmaritalmdeduction.m Themunifiedmtax
mcreditmequivalentmform2022mism$12.06mmillion.m Thismmeansmthat,matmamminimum,mformdecedentsmdying
inm2022,mnomestatemofm$12.06mmillionmormlessmwillmbemsubjectmtomthemfederalmestatemtax.
m
b.mmmmmmmThismismamcontroversialmquestionmthatmhasmproponentsmonmbothmsidesmofmthemissue.m
Thosemthatmbelievemthemestatemtaxmshouldmbemreducedmormeliminatedmbasicallymarguemthatmthemestatem
taxmismamdoublemtax,mthatmis,mthempropertymofmthemdecedentmhasmalreadymbeenmsubjectmtomincomemtax
ationmduringmhismormhermlifetimemandmshouldmnotmbemsubjectedmtomfurthermtaxationmatmdeath.mOnmthe
mothermhand,mproponentsmofmretainingmormincreasingmthemestatemtaxmbelieveminmthemabilitymtompaympr
inciple.mp.mI:1-10.
I:1-10m a. Progressive.
b. Progressive.
c. Proportional.
d. Proportional.
e. Proportional.m(However,mstatemandmlocalmsalesmtaxesmaremconsideredmregressivemwh
enmmeasuredmagainstmincome).
pp.mI:1-4mandmI:1-5mandmI:1-12.
I:1-
11mDecrease.m WhenmCarolynmoperatesmhermbusinessmasmamsolemproprietor,mshemismconsideredmtombe
mself-employed.m Amself-
Copyrightm©m2023mPearsonmEducation,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 ThemSuprememCourtmheldmthemincomemtaxmtombemunconstitutionalminm1895mbecausemthemincomemta
xmwasmconsideredmtombemamdirectmtax.mAtmthatmtime,mthemU.S.mConstitutionmrequiredmthatmanmincome
mtaxmbemapportionedmamongmthemstatesminmproportionmtomtheirmpopulations.mThismtypemofmtaxmsyste
mmwouldmbemextremelymdifficultmtomadministermbecausemdifferentmratesmofmtaxmwouldmapplymtomindiv
idualmtaxpayersmdependingmonmtheirmstatesmofmresidence.mmp.mI:1-2.
I:1-2mThempay-as-you-
gomwithholdingmwasmneededminm1943mtomavoidmsignificantmtaxmcollectionmproblemsmasmthemtaxmbas
embroadenedmfromm6%mofmthempopulationminm1939mtom74%minm1945.mPay-as-you-
gompermittedmthemfederalmgovernmentmtomdeductmtaxesmdirectlymoutmofmanmemployee'smwages.m p.mI:
1-3.
I:1-
3mUndermamprogressivemtaxmratemstructure,mthemtaxmratemincreasesmasmthemtaxpayer'smincomemincreas
es.mCurrently,mform2022,mtaxmratesmofm10%,m12%,m22%,m24%,m32%,m35%morm37%mapplymdepending
muponmthemtaxpayer'smfilingmstatusmandmtaxablemincomemlevels.m Undermamproportionalmtaxmratem orm"flat
mtax"mstructure,mthemsamemtaxmratemappliesmtomallmtaxpayersmregardlessmofmtheirmincomemlevels.mUnd
ermamregressivemtaxmratemstructure,mthemtaxmratemdecreasesmwithmanmincreaseminmincomemlevel.mThemc
onceptmofmverticalmequitymholdsmthatmtaxpayersmwithmhighermincomemlevelsmshouldmpaymamhighermpr
oportionmofmtaxmandmthatmthemtaxmshouldmbembornembymthosemwhomhavemthem"abilitymtompay."mThus,m
CongressmanmPatrick'smoppositionmtomthemflatmtaxmismphilosophicallymcorrect;mundermamflatmtaxmsyste
m,mallmtaxpayersmpaymtaxesmatmthemsamemrate,mregardlessmofmthemabilitymtompay.m pp.mI:1-4mandmI:1-5.
I:1-
4mItmismpossiblemformthemgovernmentmtomraisemtaxesmwithoutmraisingmtaxmrates.mBecausemtheremaremt
womcomponentsminmcomputingmamtaxpayer'smtax,mthemtaxmbasemandmthemtaxmrate,mtaxesmcanmbemraise
dmbymincreasingmeithermthemratemormthembase.m Thus,mevenmthoughmthemGovernormproclaimedmthatmtaxm
ratesmhavemremainedmatmthemsamemlevel,madjustmentsmtomthemtaxmbase,msuchmasmthemeliminationmofmded
uctions,mresultminmtaxmincreasesmwhichmcanmbemasmmuch,mormmore,masmincreasesminmtaxmrates.m p.mI:1-
4.
I:1-
5mThemmarginalmtaxmratemismofmgreatermsignificanceminmmeasuringmthemtaxmeffectmformCarmen'smdeci
sion.mThemmarginalmtaxmratemismthempercentagemthatmismappliedmtomanmincrementalmamountmofmtaxabl
emincomemthatmismaddedmtomormsubtractedmfrommthemtaxmbase.m Throughmthemmarginalmtaxmrate,mthemta
xpayermmaymmeasuremthemtaxmeffectmofmthemcharitablemcontributionmtomhermchurch.mIfmhermmarginal
mtaxmratemism24%,mshemwillmsavem24¢mformeachm$1mcontributedmtomhermchurch.mThemaveragemtaxmrate
mismsimplymthemtotalmtaxmliabilitymdividedmbymtaxablemincome.m pp.mI:1-5mandmI:1-6.
Copyrightm©m2023mPearsonmEducation,mIn
c.
I:1-1
mynursytest.store
,I:1-
6m Giftmandmestatemtaxesmaremleviedmwhenmamtransfermofmwealthm(property)mtakesmplacemandmarembot
hmpartmofmthemunifiedmtransfermtaxmsystem.mThemtaxmbasemformcomputingmthemgiftmtaxmismthemfairmma
rketmvaluemofmallmgiftsmmademinmthemcurrentmyearmminusmanmannualmdoneemexclusionmofm$16,000m(2
022)m perm donee,m minusm am maritalm deductionm form giftsm tom spousem andm am charitablem contribution
s
Copyrightm©m2023mPearsonmEducation,mIn
c.
I:1-2
mynursytest.store
, ACCESS Test Bank for Pearson's Federal Taxation 2023 Comprehensive 36thEditi
m m m m m m m m m m
on Rupert m
deductionmifmapplicable,mplusmthemvaluemofmallmtaxablemgiftsminmpriormyears.m Themtaxmbasemformthemes
tatemtaxmismthemdecedent'smgrossmestate,mminusmdeductionsmformexpenses,mandmammaritalmormcharitabl
emdeductionmifmapplicable,mplusmtaxablemgiftsmmademafterm1976.m pp.mI:1-7mthroughmI:1-10.
I:1-
7mmma.mmmmmmmCathy,mthemdonor,mismprimarilymliablemformthemgiftmtaxmonmthemtwomgifts.m Themchildrenm
aremcontingentlymliablemformpaymentmofmthemgiftmtaxminmthemeventmthemdonormfailsmtompay.
b.
Beforem consideringm them unifiedm taxm creditm equivalentm ofm $12.06m millionm form 2022,
m am
giftmtaxmresultsmonmthemtwomgiftsmformthemcurrentmyearm2022mcomputedmasmfollows:
Totalmgifts $100,000
Minus:mAnnualmgiftmtaxmexclusionm($16,000mxm2mdonees)
(m32,000)m
Giftmtaxmbase $m68,000
SincemCathymhasmnevermmademgiftsminmpriormyears,mnomgiftmtaxmwillmbemduembecausemofmthemsubstan
tialmunifiedmtaxmcreditmthatmismavailable.m pp.mI:1-8mandmI:1-9.
I:1-8m Carlosmwouldmreportmamtaxablemgainmofm$2,000m($27,000m-
m$25,000).m Hismtaxmbasisminmthemstockmthatmheminheritedmismthemfairmmarketmvaluemonmthemdatemofmhi
smfather’smdeath.mpp.mI:1-9mandmI:1-m10.
I:1-
9ma.mMostmestatesmaremnotmsubjectmtomthemfederalmestatemtaxmbecausemofmgenerousmcreditmandmdeduc
tionmprovisions,msuchmasmthemunifiedmtaxmcreditmandmthemunlimitedmmaritalmdeduction.m Themunifiedmtax
mcreditmequivalentmform2022mism$12.06mmillion.m Thismmeansmthat,matmamminimum,mformdecedentsmdying
inm2022,mnomestatemofm$12.06mmillionmormlessmwillmbemsubjectmtomthemfederalmestatemtax.
m
b.mmmmmmmThismismamcontroversialmquestionmthatmhasmproponentsmonmbothmsidesmofmthemissue.m
Thosemthatmbelievemthemestatemtaxmshouldmbemreducedmormeliminatedmbasicallymarguemthatmthemestatem
taxmismamdoublemtax,mthatmis,mthempropertymofmthemdecedentmhasmalreadymbeenmsubjectmtomincomemtax
ationmduringmhismormhermlifetimemandmshouldmnotmbemsubjectedmtomfurthermtaxationmatmdeath.mOnmthe
mothermhand,mproponentsmofmretainingmormincreasingmthemestatemtaxmbelieveminmthemabilitymtompaympr
inciple.mp.mI:1-10.
I:1-10m a. Progressive.
b. Progressive.
c. Proportional.
d. Proportional.
e. Proportional.m(However,mstatemandmlocalmsalesmtaxesmaremconsideredmregressivemwh
enmmeasuredmagainstmincome).
pp.mI:1-4mandmI:1-5mandmI:1-12.
I:1-
11mDecrease.m WhenmCarolynmoperatesmhermbusinessmasmamsolemproprietor,mshemismconsideredmtombe
mself-employed.m Amself-
Copyrightm©m2023mPearsonmEducation,mIn
c.
I:1-3
mynursytest.store
