| Complete Chapters Solutions Included
| Complete Instructor Guide Included
| Latest Edition -2026
,“ This Page Intentionally Left Blank ”
,| Complete Chapters Solutions Included | | Instructor Guide Included |
Solution and Answer Guide: Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2026, 9798214044033; 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 2026, 9798214044033; CHAPTER 1: UNDERSTANDING AND WORKING WITH
THE FEDERAL TAX 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.
© 2026 1
, Solution and Answer Guide: Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2026, 9798214044033; 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, which expires at the end of 2025,
but may be extended). 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 (which
will expire after 2025, although it may be extended). Only allowing a full tax credit
would achieve complete neutrality.
© 2026 2
| Complete Instructor Guide Included
| Latest Edition -2026
,“ This Page Intentionally Left Blank ”
,| Complete Chapters Solutions Included | | Instructor Guide Included |
Solution and Answer Guide: Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2026, 9798214044033; 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 2026, 9798214044033; CHAPTER 1: UNDERSTANDING AND WORKING WITH
THE FEDERAL TAX 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.
© 2026 1
, Solution and Answer Guide: Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2026, 9798214044033; 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, which expires at the end of 2025,
but may be extended). 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 (which
will expire after 2025, although it may be extended). Only allowing a full tax credit
would achieve complete neutrality.
© 2026 2
