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Solution Manual for Fundamentals of Taxation 2019 Edition 12th Edition by Cruz

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SOLUTIONS MANUAL FOR FUNDAMENTALS OF TAXATION 2019 12TH EDITION CRUZ

 

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Fundamentals of Taxation 2019 12/E Cruz 2019 SOLUTIONS MANUAL

Authors: Cruz, Deschamps, Niswander, Prendergast, Schisler
ISBN: 1259917088 | 9781259917080

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SOLUTIONS MANUAL FOR FUNDAMENTALS OF TAXATION 2019 12TH EDITION CRUZ

 
  • You get immediate access to download your SOLUTIONS MANUAL.
  • To clarify, this is the SOLUTIONS MANUAL, not the textbook.
  • You will receive a complete SOLUTIONS MANUAL; in other words, all chapters will be there.
  • SOLUTIONS MANUALS come in PDF format; therefore, you don’t need specialized software to open them.
  • We get our SOLUTIONS MANUALS directly from their publishers; in short, you will get the original test bank.
 

Fundamentals of Taxation 2019 12/E Cruz 2019 SOLUTIONS MANUAL

Authors: Cruz, Deschamps, Niswander, Prendergast, Schisler ISBN: 1259917088 | 9781259917080

Solution Manual for Taxation of Business Entities 2019 Edition 10th Edition by Spilker

Chapter 1 Business Income, Deductions, and Accounting Methods     SOLUTIONS MANUAL Discussion Questions
  1. [LO 1] What is an “ordinary and necessary” business expenditure?
          “Ordinary” and “necessary” imply that an expense must be customary and helpful, respectively.  Because these terms are subjective, the tests are ambiguous.  However, ordinary is interpreted by the courts as including expenses which may be unusual for a specific taxpayer (but not for that type of business) and necessary is not interpreted as only essential expenses.  These limits can be contrasted with the reasonable limit on amounts and the bona fide requirement for profit motivation. 
  1. [LO1] Explain how cost of goods sold is treated whena business sells inventory.
          Under the return of capital principle, cost of goods sold represents a reduction in gross income rather than a business expense.  For example, if a taxpayer sells inventory for $100,000 and reports a cost of goods sold of $40,000, the business’s gross income is $60,000 ($100,000 – 40,000) not $100,000.
  1. [LO 1] Whether a business expense is “reasonable in amount” is often a difficult question. Explain why determining reasonableness is difficult and describe a circumstance where reasonableness is likely to be questioned by the IRS.
          Reasonableness is an issue of fact and circumstance, and extravagance is difficult to determine because of the subjectivity and multitude of factors involved in determining price. Reasonableness is most likely to be an issue when a payment is made to a related individual or the taxpayer enjoys some personal benefit incidental to the expenditure. 
  1. [LO 1] Jake is a professional dog trainer who purchases and trains dogs for use by law enforcement agencies. Last year Jake purchased 500 bags of dog food from a large pet food company at an average cost of $30 per bag.  This year, however, Jake purchased 500 bags of dog food from a local pet food company at an average cost of $45 per bag.  Under what circumstances would the IRS likely challenge the cost Jake’s dog food as unreasonable?
          A common test for reasonableness is whether the expenditure is comparable to an arm's length amount – a price charged by objective (unrelated) individuals who do not receive any incidental personal benefits.  Hence, the IRS is most likely to challenge the cost of the dog food if Jake’srelatives control or own the local pet food company and was benefiting from the increased price.
  1. [LO 2] What kinds of deductions are prohibited as a matter of public policy? Why might Congress deem it important to disallow deductions for expenditures that are against public policy?
          The IRC lists bribes, kickbacks, and “other” illegal payments as nondeductible.  Congress didn’t want the tax benefits associated with deductions to benefit or subsidize wrongdoing.  Of course, this rationale doesn’t really explain the prohibition against deducting political contributions which is probably better explained by the potential perception that political efforts are being subsidized by taxpayers.
  1. [LO2] Provide an example of an expense associated with the production of tax-exempt income, and explain what might happen if Congress repealed the prohibition against deducting expenses incurred to produce tax-exempt income.
          Two common examples are interest expense associated with debt used to purchase municipal bonds and life insurance premiums paid on key man insurance.  If this prohibition were repealed, then taxpayers would have an incentive to borrow to invest in municipal bonds or borrow to invest in employee life insurance.  This former practice would lead to higher demand for municipal bonds (less yield) and less revenue for the government.  The latter practice would lead to higher demand for insurance (higher premiums?) and less revenue for the government.  Both practices could lead to a perception of inequity between those taxpayers able to utilize the tax arbitrage to reduce taxes and those who could not use the practice.
  1. [LO 2] {Research} Peggy is a rodeo clown, and this year she expended $1,000 on special “funny” clothes and outfits. Peggy would like to deduct the cost of these clothes as work-related because she refuses to wear the clothes unless she is working. Under what circumstances can Peggy deduct the cost of her clown clothes?
          Taxpayers may deduct the cost of uniforms or special clothing they use in their business when the clothing is not appropriate to wear as ordinary clothing outside the place of business.  In Peggy’s case, the clown clothes are analogous to special uniforms or protective garments and could be deductible. See D. Techner, TC Memo 1997-498.  Erhard Seminar Training, TC Memo 1986-526 provides an example of clothes that were not deductible because they were appropriate for normal wear. However, the cost of clothing would not likely be deductible if the clothes were unacceptable solely because of the taxpayer’s sense of fashion. 
  1. [LO 2] Jimmy is a sole proprietor of a small dry-cleaning business. This month Jimmy paid for his groceries by writing checks from the checking account dedicated to the dry-cleaning business.  Why do you suppose Jimmy is using his business checking account rather than his personal checking account to pay for personal expenditures?
          Jimmy might be trying to reduce his bank charges by using one account for both personal and business expenditures, but he could also be trying to disguise personal expenditures as business expenses.  By commingling business and personal expenditures, Jimmy will need to separate personal and business expenditures before claiming any business deductions.
  1. [LO 2] Troy operates an editorial service that employs two editors. These editors often entertain authors to encourage them to use Troy's service. This year Troy reimbursed the editors $3,000 for the cost of meals and $6,200 for the cost of entertaining authors. Describe whether Troy can deduct the cost of the meals and entertainment.
          To deduct any portion of the cost of meals as a business expense, the amount must be reasonable under the circumstances, an employee must be present when the meal is furnished, andthe meal must be directly associated with the active conduct of the taxpayer’s business. Similar to business meals, entertainment associated with business activities contains a significant element of enjoyment. The Tax Cuts and Jobs Act enacted in late 2017 made entertainment nondeductible as a business expense. Hence, if the authors are clients or potential clients, the expenses are reasonable in amount and connected with the conduct of business, then Troy should be able to deduct $1,500 (50% of the cost of the meals and none of the entertainment).
  1. [LO 2] Jenny uses her car for both business and personal purposes. She purchased the auto this year and drove 11,000 miles on business trips and 9,000 miles for personal transportation.  Describe how Jenny will determine the amount of deductible expenses associated with the auto.
          Because only the expense relating to business use is deductible, the taxpayer must allocate the expenses between the business and personal use portions.  A common method of allocation is relative use.  In this instance Jenny would calculate the business portion based upon the ratio of business miles to total miles (11/20 or 55 percent).  She would then deduct the costs of operating the vehicle for business purposes plus depreciation on the business portion (55 percent) of the vehicle’s tax basis.  Alternatively, in lieu of deducting these costs, Jenny may elect to deduct a standard amount for each business mile she drives.  The standard mileage rate (54.5 cents per mile for 2018) represents the per-mile cost of operating an automobile (including depreciation or lease payments).  Once Jenny has made this election, she must continue to use it throughout the life of the auto.
  1. [LO 1, LO 2] What expenses are deductible when a taxpayer combines both business and personal activities on a trip? How do the rules for international travel differ from the rules for domestic travel?
          If the taxpayer has both business and personal motives for a trip, but the primary or dominant motive is business, the taxpayer may deduct the transportation costs to get to the place of business, but she may deduct only meals (50%), lodging, transportation on site, and incidental expenditures for the business portion of the travel.  If the taxpayer’s primary purpose for the trip is personal, the taxpayer may not deduct transportation costs to travel to and from the location but the taxpayer may deduct meals (50%), lodging, transportation, and incidental expenditures for the business portion of the trip.  For international travel in excess of one week, the taxpayer must allocate the cost of the transportation between personal (nondeductible) and business (deductible) activities.  Taxpayers generally determine the nondeductible portion of the transportation costs by multiplying the travel costs by a ratio of personal activity days to total days travelling.  Finally, remember that travel days are considered business activity days for both domestic and international travel.
  1. [LO 2] Clyde lives and operates a sole proprietorship in Dallas, Texas. This year Clyde found it necessary to travel to Fort Worth (about 25 miles away) for legitimate business reasons.  Is Clyde’s trip likely to qualify as “away from home,” and why would this designation matter?
          Besides the cost of transportation, the deduction for travel expenses includes meals (50%), lodging, and incidental expenses.  However, travel expenses are only deductible if the taxpayer is away from home overnight while traveling.  For this purpose, a taxpayer is considered to be away from home overnight if the trip is of sufficient duration to require sleep or rest.  It’s likely that Clyde’s trip will not satisfy this condition and that he will not be able to deduct half the cost of meals and the entire cost of lodging.

Solution Manual for South Western Federal Taxation 2019 Individual Income Taxes 42nd Edition by Young

CHAPTER 1 AN INTRODUCTION TO TAXATION AND UNDERSTANDING THE FEDERAL TAX LAW LECTURE NOTES OVERVIEW The primary objective of this chapter is to provide an overview of the Federal tax system. Among the topics discussed are the following: • The importance and relevance of taxation. • A brief history of the Federal income tax. • The types of taxes imposed at the Federal, state, and local levels. • Some highlights of tax law administration. • Tax concepts that help explain the reasons for various tax provisions. • The influence the Internal Revenue Service (IRS) and the courts have had in the evolution of current tax law. SUMMARY OF CHANGES IN THE CHAPTER The following are notable changes in the chapter from the 2018 Edition. For major changes, see the Preface of the text. • Updated Exhibit 1.1 (Federal Tax Revenues) and Exhibit 1.4 (IRS Audit Types and Rates) with current data. • Revised text to reflect the Tax Cuts and Jobs Act (TCJA) of 2017 and revised various inflation-adjusted information in the chapter. • Identified critical thinking questions and problems. • Added a new Research Problem to analyze a soda tax or sweetened beverage tax proposal against the AICPA’s Principles of Good Tax Policy. THE BIG PICTURE The Big Picture discussion in Chapter 1 addresses several situations commonly encountered by taxpayers that also create taxable income consequences. For example, students may not be familiar with the concept that gift giving (even in families) creates tax consequences for the gift giver or that working in another state subjects a taxpayer to tax in more than just his or her home state. While students may not yet have significant exposure to all the tax issues raised in the Big Picture scenario, the exercise provides an opportunity to help students think about why tax consequences might arise and how to go about expanding their knowledge of tax law. For example, employing children in a family business raises questions about FICA withholding as 1-2 2019 Individual Income Taxes: Instructor’s Guide with Lecture Notes © 2019 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. well as what constitutes reasonable compensation. The student might make the link to FICA withholding after reading the chapter. However, a quick search on the IRS’s web page results in a page that provides information about tax consequences that arise when hiring family members (http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Family-Help). The FICA withholding discussion might lead to a discussion of incentives related to family members’ salaries which could nicely lead into a discussion of why the IRS might be interested in auditing a family business/closely held business. The scenario could also be integrated into a discussion of what is the “best” tax system, especially because the Carters are currently employed while the Walkers are retirees. The instructor could use this fact to address why differently situated taxpayers may have varying preferences about what type of tax system is the “best” tax system. APPROACHING THE STUDY OF TAXATION What Is Taxation? 1. “Taxes are what we pay for civilized society.” – Oliver Wendell Holmes, Jr. 2. The primary purpose of taxation—to raise revenue for government operations. 3. Taxation is often used as a tool to influence the behavior of individuals and businesses. a. Income tax credits are designed to encourage people to purchase a fuel-efficient car. b. A tobacco excise tax may discourage individuals from smoking. Taxation in Our Lives 4. Individuals are affected most directly by taxes when they need to pay them. a. Direct tax is paid to the government by the person who pays the tax (i.e., personal income tax and property taxes). b. Indirect tax includes things such as a state sales tax on the purchase of tangible goods such as clothing. The tax is collected and remitted to the government by the seller. The buyer is charged the tax along with the purchase price of the goods or services or it may be embedded in the price charged.

Solution Manual for South Western Federal Taxation 2019 Corporations Partnerships Estates and Trusts 42nd Edition by Raabe

CHAPTER 1 UNDERSTANDING AND WORKING WITH THE FEDERAL TAX LAW Federal Taxation 2019 Corporations Partnerships Estates and Trusts SOLUTIONS TO PROBLEM MATERIALS 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 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). 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 thus 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. Section 1244 allows ordinary loss treatment on the worthlessness of small business corporation stock. Since such stock normally would be a capital asset, the operation of § 1244 converts a less desirable capital loss into a more attractive ordinary loss. Such tax treatment was designed to aid small businesses in raising needed capital through the issuance of stock. b. The S corporation election 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 will 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 will 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. 1-2 2019 Corporations Volume/Solutions Manual © 2019 Cengage®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 Plans (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 (effective in 2018) also reduces the tax benefit of these taxes. Only allowing a full tax credit would achieve complete neutrality. 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 $.10 of Federal income tax liability. In the 32% tax bracket, the saving becomes $.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. 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. 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.

Solution Manual for Taxation of Individuals 10th Edition by Spilker

ANSWERS TO QUESTIONS
  1. The time value of money is the idea that a dollar received today is worth more than a dollar to be received at any later date because it can be invested today to earn interest over time.
  2. Future value—The future value of a number of dollars is the amount that it will increase to in the future at i interest rate for n periods. The future value is the principal plus accumulated interest compounded each period.
Present value—The present value of a number of dollars, to be received at some specified date in the future, is that amount discounted to the present at i interest rate for n periods. It is the inverse of future value. In compound discounting, the interest is subtracted rather than added as in compounding.
  1. $10,000 x 2.59374 = $25,937 (rounded to the nearest dollar).
  2. $8,000 x .38554 = $3,084 (rounded to the nearest dollar).
  3. An annuity is a term that refers to equal periodic cash payments or receipts of an equal amount each period for two or more periods. In contrast to a future value of $1, or a present value of $1 (which involves a single contribution or amount), an annuity involves a series of equal contributions for a series of equal periods. An annuity may refer to a future value or a present value.
 
  6.   Table Values
Concept i = 5% n =4 i = 10%; n =7 i = 14%; n = 10
FV of $1 1.21551 1.94872  3.70722
PV of $1 0.82270 0.51316   0.26974
FV of annuity of $1 4.31013 9.48717 19.33730
PV of annuity of $1 3.54595 4.86842   5.21612
  1. $1,000 x 14.48656 = $14,487. (rounded to the nearest dollar)
  Authors’ Recommended Solution Time (Time in minutes)    
  Mini-exercises   Exercises   Problems
No. Time No. Time No. Time
1 2 1 10 CP1 20
2 2 2 15 CP2 20
3 6 3 15 CP3 20
4 6 4 15 CP4 15
5 6 7 8 9 10 11 12   3 3 3 3 3 3 3 3 5 6 7   5 10 8 PA1 PA2 PA3 PA4 PB1 PB2 PB3 PB4   20 20 20 15 20 20 20 15
          ANSWERS TO MINI-EXERCISES MC–1            
$500,000 ´ 0.46319 (Table C.2, n=10, i=8%) = $231,595
MC–2            
 $15,000 ´   6.14457 (Table C.4, n=10, i=10%) = $92,169
MC–3
     $100,000 (no PV) = $100,000
   $100,000 ´ 0.92593 (Table C.2, n=1, i=8%) = 92,593
   $ 30,000 ´ 9.81815 (Table C.4, n=20, i=8%) =   294,545
Total = $487,138
MC–4
$25,000 ´ 15.93742 (Table C.3, n=10, i=10%) = $398,436
$15,000 ´ 57.27500 (Table C.3, n=20, i=10%) = $859,125
It is much better to save $15,000 for 20 years.

Solution Manual for Concepts in Federal Taxation 2019 26th Edition by Murphy

CHAPTER 1 UNDERSTANDING AND WORKING WITH THE FEDERAL TAX LAW SOLUTIONS TO PROBLEM MATERIALS 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 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). 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 thus 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. Section 1244 allows ordinary loss treatment on the worthlessness of small business corporation stock. Since such stock normally would be a capital asset, the operation of § 1244 converts a less desirable capital loss into a more attractive ordinary loss. Such tax treatment was designed to aid small businesses in raising needed capital through the issuance of stock. b. The S corporation election 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 will 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 will 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. 1-2 2019 Corporations Volume/Solutions Manual © 2019 Cengage®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 Plans (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 (effective in 2018) also reduces the tax benefit of these taxes. Only allowing a full tax credit would achieve complete neutrality. 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 $.10 of Federal income tax liability. In the 32% tax bracket, the saving becomes $.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. 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. 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.
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