, Solution manual for South-Western Federal
Taxation 2024 Comprehensive Volume , 47th
Edition James C. Young
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: Young, Persellin, Nellen, Maloney, Cuccia, Lassar, Cripe, SWFT Comprehensive Volume
2024, 9780357900413; Chapter 1: An Introduction to Taxation and Understanding the Federal Tax Law
Solution and Answer Guide
YOUNG, PERSELLIN, NELLEN, MALONEY, CUCCIA , LASSAR, CRIPE, SWFT COMPREHENSIVE
VOLUME 2024, 9780357900413; CHAPTER 1: AN INTRODUCTION TO TAXATION AND
UNDERSTANDING THE FEDERAL TAX LAW
TABLE OF CONTENTS
Discussion Questions...........................................................................................................1
Research Problems ........................................................................................................... 10
Solution To Ethics & Equity Feature ................................................................................. 11
Solutions To Becker CPA Review Questions ....................................................................12
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
the Internal Revenue Code in Appendix D, using 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.
© 2024 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: Young, Persellin, Nellen, Maloney, Cuccia, Lassar, Cripe, SWFT Comprehensive Volume
2024, 9780357900413; Chapter 1: An Introduction to Taxation and Understanding the Federal Tax Law
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 this state appears to violate the certainty and simplicity
principles.
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
Agarwals may be trying to avoid ad valorem taxes on their boat. They should review
the property tax laws of these two states to determine if the property tax on the boat
is owed based on where the boat is moored or where the owner resides (or possibly
both). In addition, some other factor, such as where the boat is registered or titled,
might be important.
© 2024 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: Young, Persellin, Nellen, Maloney, Cuccia, Lassar, Cripe, SWFT Comprehensive Volume
2024, 9780357900413; Chapter 1: An Introduction to Taxation and Understanding the Federal Tax Law
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) Jayla 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)
(1) Income Taxes: Income taxes and employment taxes both fall into this category of
tax because they are based on the taxpayer’s income.
(2) Consumption Taxes: Sales tax and VAT fall into this category because they apply
when the taxpayer purchases something. Most excise taxes fall into this category
because they relate to the purchase of something such as gasoline, tobacco,
alcohol, or airline tickets. State severance taxes also fall into this category given
that the extraction is for consumption. But some, such as the 1 percent excise tax
that some corporations will pay on stock buybacks, are not related to
consumption.
(3) Wealth (or Valuation) Taxes: Property taxes fall into this category because the tax
base is the value of the property. Also, estate and gift taxes are computed on the
value of the property given.
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 Garcías’ 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. For
example, if the Garcías 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) Caleb 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. Caleb 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.
© 2024 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: Young, Persellin, Nellen, Maloney, Cuccia, Lassar, Cripe, SWFT Comprehensive Volume
2024, 9780357900413; Chapter 1: An Introduction to Taxation and Understanding the Federal Tax Law
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 2023 is $5,113,800; for 2022, it is $4,769,800.
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) $646,000. 19 donees (5 married children + 5 spouses + 9 grandchildren)
$17,000 (annual exclusion for 2023) 2 donors (Elijah and Anastasia) = $646,000.
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, and California followed up
with its own audit.
25. (LO 4) If Mike is drafted by a team in one of the listed states, he will escape state
income tax on income earned within that state (e.g., training camp, home games). He
will not, however, escape the income tax (state and local) imposed by jurisdictions
where he plays away games. Called the “jock tax,” it is applied to out-of-state athletes
and entertainers.
26. (LO 4, 5)
a. This type of question has no relevance to the state income tax but is a reminder to
individual taxpayers about the use tax and a simple way for individual taxpayers to
pay any use tax due on internet and mail-order purchases. Without the line on the
state income tax return, individual taxpayers would be required to file a separate
use tax return.
© 2024 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: Young, Persellin, Nellen, Maloney, Cuccia, Lassar, Cripe, SWFT Comprehensive Volume
2024, 9780357900413; Chapter 1: An Introduction to Taxation and Understanding the Federal Tax Law
b. As the preparer of the state income tax return, you should not leave questions
unanswered unless there is a good reason for doing so. It appears that Hannah has
no justifiable reason.
27. (LO 4) The checkoff boxes add complexity to the return and mislead taxpayers into
presuming that they are not paying for the donation.
28. (LO 4)
a. They uncover taxpayers who were previously unknown to the taxing authority. In
addition, amnesty programs can bring taxpayers who are not in compliance with
tax laws into compliance.
b. Amnesty provisions can apply to other than income taxes (e.g., sales, franchise,
severance).
c. No general amnesty program has been offered for any Federal taxes.
29. (LO 4)
a. FICA offers some measure of retirement security, and FUTA provides a modest
source of income in the event of loss of employment.
b. FICA is imposed on both employer and employee, while FUTA is imposed only on
the employer.
c. FICA is administered by the Federal government. FUTA, however, is handled by
both the Federal and state government.
d. This applies only to FUTA. The merit system rewards employers who have low
employee turnover because this reduces the payout of unemployment benefits.
30. (LO 4)
a. Unlike the Social Security portion of FICA, there is no dollar limit on the imposition
of the Medicare tax.
b. The 0.9% Medicare addition applies to taxpayers with wages or net self-
employment income in excess of $200,000 ($250,000 for married filing jointly).
31. (LO 4) Only children under age 18 who are employed in a parent’s unincorporated trade
or business are excluded from FICA. Other family members, including spouses, must
be covered.
32. (LO 4)
a. Severance taxes are transaction taxes that are based on the notion that the state
has an interest in its natural resources. The tax is imposed on the extraction of
minerals.
b. Franchise taxes are levied on the right to do business in the state. Typically, they
are imposed on corporations and are based on their capitalization.
c. Occupational fees are applicable to trades or businesses and are licenses to
practice. Most are not significant revenue producers, and the amounts collected
are utilized to defray the cost of regulating the profession.
© 2024 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: Young, Persellin, Nellen, Maloney, Cuccia, Lassar, Cripe, SWFT Comprehensive Volume
2024, 9780357900413; Chapter 1: An Introduction to Taxation and Understanding the Federal Tax Law
d. Customs duties are taxes on the importation of certain foreign goods. They are
imposed by the Federal government and are not found at the state and local level.
e. Export duties are taxes imposed on the export of certain commodities (e.g., oil,
coffee). They are common in less-developed nations and are not levied by the
United States.
33. (LO 4)
a. The United States is the only country in the OECD (Organization of Economic
Cooperation and Development) that does not have a value added tax (VAT). Over
140 countries use a VAT. In spite of its extensive use by other countries, the
adoption of a VAT by the United States appears doubtful. Instead, the United
States places high reliance on the income tax as its major revenue source.
b. A VAT taxes the increment in value as goods move through the production and
manufacturing stages to the marketplace. Although the tax is paid by the producer,
it is reflected in the selling price of the goods. Therefore, a VAT is a tax on
consumption.
c. Because it is an effective generator of revenue, the VAT has been criticized as
leading to more government spending.
34. (LO 4)
a. Both the national sales tax and the VAT are taxes on consumption. Both taxes
impose more of a burden on low-income taxpayers who must spend a larger
proportion of their incomes on essential purchases relative to higher-income
taxpayers. As a result, the taxes are regressive in effect.
b. The regressive effect might be partly remedied by granting some sort of credit,
rebate, or exemption to low-income taxpayers.
35. (LO 4, 5)
a. Serena may have record-keeping issues related to the cash transactions. The short-
term holiday workers should be on the payroll because they are employees, and
Serena owes FICA and FUTA on their wages and must file Forms 940 and 941 with
the IRS. Serena must also timely issue a W–2 wage form to each of her employees.
b. High. First, Serena is self-employed. Second, she operates partially on a cash basis.
Third, the opportunity to understate income and/or overstate expenses is high.
Fourth, she has some workers who appear to be misclassified and for whom she
may not have issued tax reporting forms.
36. (LO 5)
a. A correspondence audit is probably involved. These audits involve a limited number
of issues (i.e., taxpayer failed to report some dividend income) and most often are
easily resolved.
b. An audit that is conducted in an IRS office is called an office audit.
c. The revenue agent’s report (RAR) accepts the taxpayer’s return as filed.
d. When a special agent becomes involved, this usually means that fraud is
suspected.
© 2024 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: Young, Persellin, Nellen, Maloney, Cuccia, Lassar, Cripe, SWFT Comprehensive Volume
2024, 9780357900413; Chapter 1: An Introduction to Taxation and Understanding the Federal Tax Law
37. (LO 5) In many unresolved audit disagreements at the agent level, the taxpayer should
consider an appeal to the Independent Office of Appeals. Although it is part of the IRS,
it is authorized to resolve audit disputes. It has greater settlement authority than does
the agent. In many cases, a compromise reached at the Independent Office of Appeals
can avoid a costly and time-consuming judicial proceeding.
38. (LO 5) The purpose of a statute of limitations is to preclude parties from prosecuting
stale claims. The passage of time makes the defense of such claims difficult because
witnesses and other evidence may no longer be available. In the Federal tax area,
statutes of limitations cover additional assessments by the IRS and the pursuit of
refund claims by taxpayers.
39. (LO 5)
a. The normal three-year statute of limitations will begin to run on the original due
date of the return (usually the fifteenth day of the fourth month after year-end;
April 15). When the return is filed early, the normal filing date controls.
b. Now the statute of limitations starts to run on the filing date. If the due date
controlled (see part a. above), the taxpayer could shorten the assessment period
by filing late.
c. If a return that is due is not filed, the statute of limitations does not start to run. It
does not matter that the failure to file was due to an innocent error on the part of
the taxpayer or adviser.
d. Regardless of the fact that an innocent misunderstanding was involved, there is no
statute of limitations when a return is not filed.
40. (LO 5) No. Interest is not paid if the refund is made within 45 days of when the return
was filed. However, a return is not considered filed until its due date. As a result, the
period from April 15 to May 28, 2023 does not satisfy the 45-day requirement.
41. (LO 5, 6)
a. Normally, the three-year statute of limitations applies to additional assessments
the IRS can make. However, if a substantial omission from gross income is made,
the statute of limitations is increased to six years. A substantial omission is
defined as omitting in excess of 25% of the gross income reported on the return.
b. No, it would not. The proper procedure would be to advise Andy to disclose the
omission to the IRS. Absent the client’s consent, do not make the disclosure
yourself.
c. If Andy refuses to make the disclosure and the omission has a material carryover
effect to the current year, you should withdraw from the engagement.
42. (LO 5) $4,000, determined as follows:
Failure to pay penalty [0.5% $40,000 2 months] $ 400
Plus:
Failure to file penalty [5% $40,000 2 months] $4,000
Less failure to pay penalty for the same period (400) 3,600
Total penalties $4,000
© 2024 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: Young, Persellin, Nellen, Maloney, Cuccia, Lassar, Cripe, SWFT Comprehensive Volume
2024, 9780357900413; Chapter 1: An Introduction to Taxation and Understanding the Federal Tax Law
43. (LO 5)
a. $100,000 (20% $500,000).
b. $375,000 (75% $500,000). The answer presumes that civil (not criminal) fraud is
involved.
44. (LO 5, 6)
a. No. Because no return was filed, the statute of limitations never runs. But even if a
return had been filed, the three-year period for the 2019 tax return would not
expire until April 15, 2023, three years after the normal due date for filing.
b. Although you can only recommend that the return be filed, you cannot force him to
do so. However, you should not undertake the engagement for 2020 through 2022
if you cannot correctly reflect the tax liability due to the omission for 2019.
45. (LO 5, 6) The practice of outsourcing the preparation of tax returns is ethical if three
steps are taken.
• Maintain client confidentiality.
• Verify the accuracy of the work done.
• Notify the client, preferably in writing, of the outsourcing.
46. (LO 7)
a. This is the ideal approach to handling a tax cut—for every dollar lost, a new dollar
is gained.
b. All the sunset provision does is reinstate the law as it existed prior to the tax cut.
Here, the possibility exists that Congress will rescind (or postpone) the sunset
provision before it takes effect.
c. Indexation is a procedure whereby the IRS makes annual adjustments to certain
key tax components to take into account inflation, as required by law. Some of the
more important components that are adjusted include tax brackets and the
standard deduction amounts.
47. (LO 7)
a. To encourage pension plans is to stimulate saving (economic consideration). Also, it
provides security from the private sector for retirement to supplement public
programs which tend to provide lesser benefits (social considerations). An opposing
consideration is that only higher income individuals are able to fully fund their
pension plans and thus gain the greater tax benefit from the favorable rules for
retirement savings.
b. To make education more widely available is to promote a socially desirable
objective. A better educated workforce also serves to improve the country’s
economic capabilities. As a result, education tax incentives can be justified on both
social and economic grounds. A weakness in the current incentives is that they are
only for college education, rather than also in preparation for other careers
including health care, personal care, construction, and skilled trades (e.g.,
mechanics, electricians, and plumbers).
© 2024 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 2024 Comprehensive Volume , 47th
Edition James C. Young
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: Young, Persellin, Nellen, Maloney, Cuccia, Lassar, Cripe, SWFT Comprehensive Volume
2024, 9780357900413; Chapter 1: An Introduction to Taxation and Understanding the Federal Tax Law
Solution and Answer Guide
YOUNG, PERSELLIN, NELLEN, MALONEY, CUCCIA , LASSAR, CRIPE, SWFT COMPREHENSIVE
VOLUME 2024, 9780357900413; CHAPTER 1: AN INTRODUCTION TO TAXATION AND
UNDERSTANDING THE FEDERAL TAX LAW
TABLE OF CONTENTS
Discussion Questions...........................................................................................................1
Research Problems ........................................................................................................... 10
Solution To Ethics & Equity Feature ................................................................................. 11
Solutions To Becker CPA Review Questions ....................................................................12
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
the Internal Revenue Code in Appendix D, using 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.
© 2024 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: Young, Persellin, Nellen, Maloney, Cuccia, Lassar, Cripe, SWFT Comprehensive Volume
2024, 9780357900413; Chapter 1: An Introduction to Taxation and Understanding the Federal Tax Law
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 this state appears to violate the certainty and simplicity
principles.
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
Agarwals may be trying to avoid ad valorem taxes on their boat. They should review
the property tax laws of these two states to determine if the property tax on the boat
is owed based on where the boat is moored or where the owner resides (or possibly
both). In addition, some other factor, such as where the boat is registered or titled,
might be important.
© 2024 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: Young, Persellin, Nellen, Maloney, Cuccia, Lassar, Cripe, SWFT Comprehensive Volume
2024, 9780357900413; Chapter 1: An Introduction to Taxation and Understanding the Federal Tax Law
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) Jayla 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)
(1) Income Taxes: Income taxes and employment taxes both fall into this category of
tax because they are based on the taxpayer’s income.
(2) Consumption Taxes: Sales tax and VAT fall into this category because they apply
when the taxpayer purchases something. Most excise taxes fall into this category
because they relate to the purchase of something such as gasoline, tobacco,
alcohol, or airline tickets. State severance taxes also fall into this category given
that the extraction is for consumption. But some, such as the 1 percent excise tax
that some corporations will pay on stock buybacks, are not related to
consumption.
(3) Wealth (or Valuation) Taxes: Property taxes fall into this category because the tax
base is the value of the property. Also, estate and gift taxes are computed on the
value of the property given.
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 Garcías’ 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. For
example, if the Garcías 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) Caleb 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. Caleb 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.
© 2024 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: Young, Persellin, Nellen, Maloney, Cuccia, Lassar, Cripe, SWFT Comprehensive Volume
2024, 9780357900413; Chapter 1: An Introduction to Taxation and Understanding the Federal Tax Law
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 2023 is $5,113,800; for 2022, it is $4,769,800.
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) $646,000. 19 donees (5 married children + 5 spouses + 9 grandchildren)
$17,000 (annual exclusion for 2023) 2 donors (Elijah and Anastasia) = $646,000.
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, and California followed up
with its own audit.
25. (LO 4) If Mike is drafted by a team in one of the listed states, he will escape state
income tax on income earned within that state (e.g., training camp, home games). He
will not, however, escape the income tax (state and local) imposed by jurisdictions
where he plays away games. Called the “jock tax,” it is applied to out-of-state athletes
and entertainers.
26. (LO 4, 5)
a. This type of question has no relevance to the state income tax but is a reminder to
individual taxpayers about the use tax and a simple way for individual taxpayers to
pay any use tax due on internet and mail-order purchases. Without the line on the
state income tax return, individual taxpayers would be required to file a separate
use tax return.
© 2024 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: Young, Persellin, Nellen, Maloney, Cuccia, Lassar, Cripe, SWFT Comprehensive Volume
2024, 9780357900413; Chapter 1: An Introduction to Taxation and Understanding the Federal Tax Law
b. As the preparer of the state income tax return, you should not leave questions
unanswered unless there is a good reason for doing so. It appears that Hannah has
no justifiable reason.
27. (LO 4) The checkoff boxes add complexity to the return and mislead taxpayers into
presuming that they are not paying for the donation.
28. (LO 4)
a. They uncover taxpayers who were previously unknown to the taxing authority. In
addition, amnesty programs can bring taxpayers who are not in compliance with
tax laws into compliance.
b. Amnesty provisions can apply to other than income taxes (e.g., sales, franchise,
severance).
c. No general amnesty program has been offered for any Federal taxes.
29. (LO 4)
a. FICA offers some measure of retirement security, and FUTA provides a modest
source of income in the event of loss of employment.
b. FICA is imposed on both employer and employee, while FUTA is imposed only on
the employer.
c. FICA is administered by the Federal government. FUTA, however, is handled by
both the Federal and state government.
d. This applies only to FUTA. The merit system rewards employers who have low
employee turnover because this reduces the payout of unemployment benefits.
30. (LO 4)
a. Unlike the Social Security portion of FICA, there is no dollar limit on the imposition
of the Medicare tax.
b. The 0.9% Medicare addition applies to taxpayers with wages or net self-
employment income in excess of $200,000 ($250,000 for married filing jointly).
31. (LO 4) Only children under age 18 who are employed in a parent’s unincorporated trade
or business are excluded from FICA. Other family members, including spouses, must
be covered.
32. (LO 4)
a. Severance taxes are transaction taxes that are based on the notion that the state
has an interest in its natural resources. The tax is imposed on the extraction of
minerals.
b. Franchise taxes are levied on the right to do business in the state. Typically, they
are imposed on corporations and are based on their capitalization.
c. Occupational fees are applicable to trades or businesses and are licenses to
practice. Most are not significant revenue producers, and the amounts collected
are utilized to defray the cost of regulating the profession.
© 2024 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: Young, Persellin, Nellen, Maloney, Cuccia, Lassar, Cripe, SWFT Comprehensive Volume
2024, 9780357900413; Chapter 1: An Introduction to Taxation and Understanding the Federal Tax Law
d. Customs duties are taxes on the importation of certain foreign goods. They are
imposed by the Federal government and are not found at the state and local level.
e. Export duties are taxes imposed on the export of certain commodities (e.g., oil,
coffee). They are common in less-developed nations and are not levied by the
United States.
33. (LO 4)
a. The United States is the only country in the OECD (Organization of Economic
Cooperation and Development) that does not have a value added tax (VAT). Over
140 countries use a VAT. In spite of its extensive use by other countries, the
adoption of a VAT by the United States appears doubtful. Instead, the United
States places high reliance on the income tax as its major revenue source.
b. A VAT taxes the increment in value as goods move through the production and
manufacturing stages to the marketplace. Although the tax is paid by the producer,
it is reflected in the selling price of the goods. Therefore, a VAT is a tax on
consumption.
c. Because it is an effective generator of revenue, the VAT has been criticized as
leading to more government spending.
34. (LO 4)
a. Both the national sales tax and the VAT are taxes on consumption. Both taxes
impose more of a burden on low-income taxpayers who must spend a larger
proportion of their incomes on essential purchases relative to higher-income
taxpayers. As a result, the taxes are regressive in effect.
b. The regressive effect might be partly remedied by granting some sort of credit,
rebate, or exemption to low-income taxpayers.
35. (LO 4, 5)
a. Serena may have record-keeping issues related to the cash transactions. The short-
term holiday workers should be on the payroll because they are employees, and
Serena owes FICA and FUTA on their wages and must file Forms 940 and 941 with
the IRS. Serena must also timely issue a W–2 wage form to each of her employees.
b. High. First, Serena is self-employed. Second, she operates partially on a cash basis.
Third, the opportunity to understate income and/or overstate expenses is high.
Fourth, she has some workers who appear to be misclassified and for whom she
may not have issued tax reporting forms.
36. (LO 5)
a. A correspondence audit is probably involved. These audits involve a limited number
of issues (i.e., taxpayer failed to report some dividend income) and most often are
easily resolved.
b. An audit that is conducted in an IRS office is called an office audit.
c. The revenue agent’s report (RAR) accepts the taxpayer’s return as filed.
d. When a special agent becomes involved, this usually means that fraud is
suspected.
© 2024 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: Young, Persellin, Nellen, Maloney, Cuccia, Lassar, Cripe, SWFT Comprehensive Volume
2024, 9780357900413; Chapter 1: An Introduction to Taxation and Understanding the Federal Tax Law
37. (LO 5) In many unresolved audit disagreements at the agent level, the taxpayer should
consider an appeal to the Independent Office of Appeals. Although it is part of the IRS,
it is authorized to resolve audit disputes. It has greater settlement authority than does
the agent. In many cases, a compromise reached at the Independent Office of Appeals
can avoid a costly and time-consuming judicial proceeding.
38. (LO 5) The purpose of a statute of limitations is to preclude parties from prosecuting
stale claims. The passage of time makes the defense of such claims difficult because
witnesses and other evidence may no longer be available. In the Federal tax area,
statutes of limitations cover additional assessments by the IRS and the pursuit of
refund claims by taxpayers.
39. (LO 5)
a. The normal three-year statute of limitations will begin to run on the original due
date of the return (usually the fifteenth day of the fourth month after year-end;
April 15). When the return is filed early, the normal filing date controls.
b. Now the statute of limitations starts to run on the filing date. If the due date
controlled (see part a. above), the taxpayer could shorten the assessment period
by filing late.
c. If a return that is due is not filed, the statute of limitations does not start to run. It
does not matter that the failure to file was due to an innocent error on the part of
the taxpayer or adviser.
d. Regardless of the fact that an innocent misunderstanding was involved, there is no
statute of limitations when a return is not filed.
40. (LO 5) No. Interest is not paid if the refund is made within 45 days of when the return
was filed. However, a return is not considered filed until its due date. As a result, the
period from April 15 to May 28, 2023 does not satisfy the 45-day requirement.
41. (LO 5, 6)
a. Normally, the three-year statute of limitations applies to additional assessments
the IRS can make. However, if a substantial omission from gross income is made,
the statute of limitations is increased to six years. A substantial omission is
defined as omitting in excess of 25% of the gross income reported on the return.
b. No, it would not. The proper procedure would be to advise Andy to disclose the
omission to the IRS. Absent the client’s consent, do not make the disclosure
yourself.
c. If Andy refuses to make the disclosure and the omission has a material carryover
effect to the current year, you should withdraw from the engagement.
42. (LO 5) $4,000, determined as follows:
Failure to pay penalty [0.5% $40,000 2 months] $ 400
Plus:
Failure to file penalty [5% $40,000 2 months] $4,000
Less failure to pay penalty for the same period (400) 3,600
Total penalties $4,000
© 2024 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: Young, Persellin, Nellen, Maloney, Cuccia, Lassar, Cripe, SWFT Comprehensive Volume
2024, 9780357900413; Chapter 1: An Introduction to Taxation and Understanding the Federal Tax Law
43. (LO 5)
a. $100,000 (20% $500,000).
b. $375,000 (75% $500,000). The answer presumes that civil (not criminal) fraud is
involved.
44. (LO 5, 6)
a. No. Because no return was filed, the statute of limitations never runs. But even if a
return had been filed, the three-year period for the 2019 tax return would not
expire until April 15, 2023, three years after the normal due date for filing.
b. Although you can only recommend that the return be filed, you cannot force him to
do so. However, you should not undertake the engagement for 2020 through 2022
if you cannot correctly reflect the tax liability due to the omission for 2019.
45. (LO 5, 6) The practice of outsourcing the preparation of tax returns is ethical if three
steps are taken.
• Maintain client confidentiality.
• Verify the accuracy of the work done.
• Notify the client, preferably in writing, of the outsourcing.
46. (LO 7)
a. This is the ideal approach to handling a tax cut—for every dollar lost, a new dollar
is gained.
b. All the sunset provision does is reinstate the law as it existed prior to the tax cut.
Here, the possibility exists that Congress will rescind (or postpone) the sunset
provision before it takes effect.
c. Indexation is a procedure whereby the IRS makes annual adjustments to certain
key tax components to take into account inflation, as required by law. Some of the
more important components that are adjusted include tax brackets and the
standard deduction amounts.
47. (LO 7)
a. To encourage pension plans is to stimulate saving (economic consideration). Also, it
provides security from the private sector for retirement to supplement public
programs which tend to provide lesser benefits (social considerations). An opposing
consideration is that only higher income individuals are able to fully fund their
pension plans and thus gain the greater tax benefit from the favorable rules for
retirement savings.
b. To make education more widely available is to promote a socially desirable
objective. A better educated workforce also serves to improve the country’s
economic capabilities. As a result, education tax incentives can be justified on both
social and economic grounds. A weakness in the current incentives is that they are
only for college education, rather than also in preparation for other careers
including health care, personal care, construction, and skilled trades (e.g.,
mechanics, electricians, and plumbers).
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