SOLUTIONS MANUAL
South-Western Federal Taxation 2024: Corporations, Partnerships, Estates and Trusts
WILLIAM RAABE, ANNETTE NELLEN, JAMES YOUNG, BRAD CRIPE, SHARON LASSAR
47th Edition
, Solution and Answer Guide: Raabe, Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2024, 9780357900673; Chapter 1: Understanding and Working with the Federal Tax Law
Solution and Answer Guide
RAABE, NELLEN, YOUNG, CRIPE, LASSAR, PERSELLIN, CUCCIA, SWFT CORPORATIONS, PARTNERSHIPS,
ESTATES & TRUSTS 2024, 9780357900673; CHAPTER 1: UNDERSTANDING AND WORKING WITH
THE FEDERAL TAX LAW
TABLE OF CONTENTS
Discussion Questions ............................................................................................. 1
Problems ............................................................................................................... 8
Research Problems ............................................................................................... 13
Check Figures........................................................................................................ 15
Solution To Ethics & Equity Feature ..................................................................... 16
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 immediate (or
accelerated) 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.
© 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: Raabe, Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2024, 9780357900673; Chapter 1: Understanding and Working with the Federal Tax Law
b. The S corporation election (see footnote 5 and a detailed discussion in Chapter
12) 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). 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) This deduction 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. Only allowing a full tax credit would achieve complete neutrality.
© 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: Raabe, Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2024, 9780357900673; Chapter 1: Understanding and Working with the Federal Tax Law
a. With the standard deduction, a taxpayer is indirectly obtaining the benefit of a
deduction for any state or local income taxes he or she may have paid. The
standard deduction is in lieu of itemized deductions, which include any allowed
deductions for state and local income taxes.
b. If the taxpayer is in the 10% tax bracket, $1 of a deduction for state or local
taxes would save $0.10 of Federal income tax liability. In the 32% tax bracket,
the saving becomes $0.32. The deduction approach (as opposed to the allowance
of a credit) favors high-bracket taxpayers.
13. (LO 2) Under the general rule, a transfer of a partnership’s assets to a new
corporation could result in a taxable gain. However, if certain conditions are met, §
351 postpones the recognition of any gain (or loss) on the transfer of property by
Heather to a controlled corporation (see Example 4).
The wherewithal to pay concept recognizes the inequity of taxing a transaction
when Heather lacks the means with which to pay any tax. Besides, Heather’s
economic position would not change significantly should the transfer occur.
Heather owned the assets before the transfer and still would own the assets
after a transfer to a controlled corporation. See Chapter 4 for a more detailed
discussion of § 351.
14. (LO 2) Yes. Once incorporated, the business may be subject to the Federal
corporate income tax. However, the 21% corporate tax rate might be lower than
Heather’s individual tax rates, especially if dividends are not paid to Heather.
The corporate income tax could be avoided altogether by electing to be an S
corporation. An S corporation is generally not taxed at the corporate level; instead,
the income flows through the corporate veil and is taxed at the shareholder level. An
S election allows a business to operate as a corporation but be taxed like a
partnership. With a partnership, there is no double tax. Income and expenses flow
through to the partners and are taxed at the partner level.
15. (LO 2) Examples include like-kind exchanges, involuntary conversions, transfers
of property to a controlled corporation, transfers of property to a partnership,
and tax- free reorganization.
16. (LO 2) Generally, a recognized (taxable) gain cannot exceed the realized gain.
17. (LO 2) Recognition of gain ultimately occurs when the property is disposed of.
18. (LO 2) One year.
19. (LO 2) The installment method on the sale of property permits the gain to
be recognized over the payout period.
20. (LO 2) Requiring a taxpayer to make a contribution to a Keogh retirement plan by
the end of the year would force an accurate determination of net self-employment
income long before the income tax return must be prepared and filed.
21. (LO 2) The difference between common law and community property systems
centers around the property rights possessed by married persons. In a common law
system, each spouse owns whatever he or she earns. Under a community property
system, one-half of the earnings of each spouse is considered owned by the other
spouse. Assume, for example, that Harold and Ruth are husband and wife and that
their only
© 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.
South-Western Federal Taxation 2024: Corporations, Partnerships, Estates and Trusts
WILLIAM RAABE, ANNETTE NELLEN, JAMES YOUNG, BRAD CRIPE, SHARON LASSAR
47th Edition
, Solution and Answer Guide: Raabe, Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2024, 9780357900673; Chapter 1: Understanding and Working with the Federal Tax Law
Solution and Answer Guide
RAABE, NELLEN, YOUNG, CRIPE, LASSAR, PERSELLIN, CUCCIA, SWFT CORPORATIONS, PARTNERSHIPS,
ESTATES & TRUSTS 2024, 9780357900673; CHAPTER 1: UNDERSTANDING AND WORKING WITH
THE FEDERAL TAX LAW
TABLE OF CONTENTS
Discussion Questions ............................................................................................. 1
Problems ............................................................................................................... 8
Research Problems ............................................................................................... 13
Check Figures........................................................................................................ 15
Solution To Ethics & Equity Feature ..................................................................... 16
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 immediate (or
accelerated) 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.
© 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: Raabe, Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2024, 9780357900673; Chapter 1: Understanding and Working with the Federal Tax Law
b. The S corporation election (see footnote 5 and a detailed discussion in Chapter
12) 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). 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) This deduction 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. Only allowing a full tax credit would achieve complete neutrality.
© 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: Raabe, Nellen, Young, Cripe, Lassar, Persellin, Cuccia, SWFT Corporations, Partnerships,
Estates & Trusts 2024, 9780357900673; Chapter 1: Understanding and Working with the Federal Tax Law
a. With the standard deduction, a taxpayer is indirectly obtaining the benefit of a
deduction for any state or local income taxes he or she may have paid. The
standard deduction is in lieu of itemized deductions, which include any allowed
deductions for state and local income taxes.
b. If the taxpayer is in the 10% tax bracket, $1 of a deduction for state or local
taxes would save $0.10 of Federal income tax liability. In the 32% tax bracket,
the saving becomes $0.32. The deduction approach (as opposed to the allowance
of a credit) favors high-bracket taxpayers.
13. (LO 2) Under the general rule, a transfer of a partnership’s assets to a new
corporation could result in a taxable gain. However, if certain conditions are met, §
351 postpones the recognition of any gain (or loss) on the transfer of property by
Heather to a controlled corporation (see Example 4).
The wherewithal to pay concept recognizes the inequity of taxing a transaction
when Heather lacks the means with which to pay any tax. Besides, Heather’s
economic position would not change significantly should the transfer occur.
Heather owned the assets before the transfer and still would own the assets
after a transfer to a controlled corporation. See Chapter 4 for a more detailed
discussion of § 351.
14. (LO 2) Yes. Once incorporated, the business may be subject to the Federal
corporate income tax. However, the 21% corporate tax rate might be lower than
Heather’s individual tax rates, especially if dividends are not paid to Heather.
The corporate income tax could be avoided altogether by electing to be an S
corporation. An S corporation is generally not taxed at the corporate level; instead,
the income flows through the corporate veil and is taxed at the shareholder level. An
S election allows a business to operate as a corporation but be taxed like a
partnership. With a partnership, there is no double tax. Income and expenses flow
through to the partners and are taxed at the partner level.
15. (LO 2) Examples include like-kind exchanges, involuntary conversions, transfers
of property to a controlled corporation, transfers of property to a partnership,
and tax- free reorganization.
16. (LO 2) Generally, a recognized (taxable) gain cannot exceed the realized gain.
17. (LO 2) Recognition of gain ultimately occurs when the property is disposed of.
18. (LO 2) One year.
19. (LO 2) The installment method on the sale of property permits the gain to
be recognized over the payout period.
20. (LO 2) Requiring a taxpayer to make a contribution to a Keogh retirement plan by
the end of the year would force an accurate determination of net self-employment
income long before the income tax return must be prepared and filed.
21. (LO 2) The difference between common law and community property systems
centers around the property rights possessed by married persons. In a common law
system, each spouse owns whatever he or she earns. Under a community property
system, one-half of the earnings of each spouse is considered owned by the other
spouse. Assume, for example, that Harold and Ruth are husband and wife and that
their only
© 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.
