Solution 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.
