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

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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.

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DescriptionEdition: 42nd Edition Format: Downloadable ZIP Fille Resource Type: Solution manual Duration: Unlimited downloads Delivery: Instant DownloadEdition: 37th Edition Format: Downloadable ZIP Fille Resource Type: Solution manual Duration: Unlimited downloads Delivery: Instant DownloadEdition: 11th Edition Format: Downloadable ZIP Fille Resource Type: Solution manual Duration: Unlimited downloads Delivery: Instant DownloadEdition: 26th Edition Format: Downloadable ZIP Fille Resource Type: Solution manual Duration: Unlimited downloads Delivery: Instant DownloadEdition: 42nd Edition Format: Downloadable ZIP Fille Resource Type: Solution manual Duration: Unlimited downloads Delivery: Instant DownloadBy: Spilker Edition: 11th Edition Format: Downloadable ZIP Fille Resource Type: Solution Manual Duration: Unlimited downloads Delivery: Instant Download
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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 Income Tax Fundamentals 2019 37th Edition Whittenburg

Solution Manual for Income Tax Fundamentals 2019, 37th Edition, Gerald E. Whittenburg, Steven Gill, ISBN-10: 1337703060, ISBN-13: 9781337703062
Table of Contents
1. The Individual Income Tax Return.
2. Gross Income and Exclusions.
3. Business Income and Expenses, Part I.
4. Business Income and Expenses, Part II.
5. Itemized Deductions and Other Incentives.
6. Credits and Special Taxes.
7. Accounting Periods and Methods and Depreciation.
8. Capital Gains and Losses.
9. Withholding, Estimated Payments, and Payroll Taxes.
10. Partnership Taxation.
11. The Corporate Income Tax.
12. Tax Administration and Tax Planning.
Appendix A: Tax Rate Schedules and Tax Tables.
Appendix B: Earned Income Credit Table.
Appendix C: Withholding Tables.
Appendix D: Additional Comprehensive Tax Return Problems.
Appendix E: Solutions to Self-Study Problems.
Glossary of Tax Terms.
Index.
List of Forms.
List of Schedules.

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 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.

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 Taxation of Individuals 2020 Edition 11th Edition By Spilker

U.S. Corporation Income Tax Return For calendar year 2018 or tax year beginning , 2018, ending , 20 ▶ Go to www.irs.gov/Form1120 for instructions and the latest information. OMB No. 1545-0123 2018 TYPE OR PRINT Name Number, street, and room or suite no. If a P.O. box, see instructions. City or town, state or province, country, and ZIP or foreign postal code A Check if: 1a Consolidated return (attach Form 851) . b Life/nonlife consolidated return . . . 2 Personal holding co. (attach Sch. PH) . . 3 Personal service corp. (see instructions) . . 4 Schedule M-3 attached B Employer identification number C Date incorporated D Total assets (see instructions) $ E Check if: (1) Initial return (2) Final return (3) Name change (4) Address change Income 1a Gross receipts or sales . . . . . . . . . . . . . . . . 1a b Returns and allowances . . . . . . . . . . . . . . . . 1b c Balance. Subtract line 1b from line 1a . . . . . . . . . . . . . . . . . . . . 1c 2 Cost of goods sold (attach Form 1125-A) . . . . . . . . . . . . . . . . . . . . 2 3 Gross profit. Subtract line 2 from line 1c . . . . . . . . . . . . . . . . . . . . 3 4 Dividends and inclusions (Schedule C, line 23, column (a)) . . . . . . . . . . . . . . . 4 5 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6 Gross rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 7 Gross royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 8 Capital gain net income (attach Schedule D (Form 1120)) . . . . . . . . . . . . . . . 8 9 Net gain or (loss) from Form 4797, Part II, line 17 (attach Form 4797) . . . . . . . . . . . 9 10 Other income (see instructions—attach statement) . . . . . . . . . . . . . . . . . 10 11 Total income. Add lines 3 through 10 . . . . . . . . . . . . . . . . . . . ▶ 11 Deductions (See instructions for limitations on deductions.) 12 Compensation of officers (see instructions—attach Form 1125-E) . . . . . . . . . . . ▶ 12 13 Salaries and wages (less employment credits) . . . . . . . . . . . . . . . . . . 13 14 Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . 14 15 Bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 16 Rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 17 Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . 17 18 Interest (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . 18 19 Charitable contributions . . . . . . . . . . . . . . . . . . . . . . . . . 19 20 Depreciation from Form 4562 not claimed on Form 1125-A or elsewhere on return (attach Form 4562) . . 20 21 Depletion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 22 Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 23 Pension, profit-sharing, etc., plans . . . . . . . . . . . . . . . . . . . . . 23 24 Employee benefit programs . . . . . . . . . . . . . . . . . . . . . . . 24 25 Reserved for future use . . . . . . . . . . . . . . . . . . . . . . . . . 25 26 Other deductions (attach statement) . . . . . . . . . . . . . . . . . . . . . 26 27 Total deductions. Add lines 12 through 26 . . . . . . . . . . . . . . . . . . ▶ 27 28 Taxable income before net operating loss deduction and special deductions. Subtract line 27 from line 11. 28 29a Net operating loss deduction (see instructions) . . . . . . . . . 29a b Special deductions (Schedule C, line 24, column (c)) . . . . . . . 29b c Add lines 29a and 29b . . . . . . . . . . . . . . . . . . . . . . . . . 29c Tax, Refundable Credits, and Payments 30 Taxable income. Subtract line 29c from line 28. See instructions . . . . . . . . . . . . 30 31 Total tax (Schedule J, Part I, line 11) . . . . . . . . . . . . . . . . . . . . . 31 32 2018 net 965 tax liability paid (Schedule J, Part II, line 12) . . . . . . . . . . . . . . . 32 33 Total payments, credits, and section 965 net tax liability (Schedule J, Part III, line 23) . . . . . . . 33 34 Estimated tax penalty. See instructions. Check if Form 2220 is attached . . . . . . . . ▶ 34 35 Amount owed. If line 33 is smaller than the total of lines 31, 32, and 34, enter amount owed . . . . 35 36 Overpayment. If line 33 is larger than the total of lines 31, 32, and 34, enter amount overpaid . . . . 36 37 Enter amount from line 36 you want: Credited to 2019 estimated tax ▶ Refunded ▶ 37 Sign Here Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. ▲ Signature of officer Date ▲ Title May the IRS discuss this return with the preparer shown below? See instructions. Yes No Paid Preparer Use Only Print/Type preparer’s name Preparer’s signature Date Check if self-employed PTIN Firm’s name ▶ Firm’s address ▶ Firm’s EIN ▶ Phone no. For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11450Q Form 1120 (2018) Form 1120 (2018) Page 2 Schedule C Dividends, Inclusions, and Special Deductions (see instructions) (a) Dividends and inclusions (b) % (c) Special deductions (a) × (b) 1 Dividends from less-than-20%-owned domestic corporations (other than debt-financed stock) . . . . . . . . . . . . . . . . . . . . . . . . 2 Dividends from 20%-or-more-owned domestic corporations (other than debt-financed stock) . . . . . . . . . . . . . . . . . . . . . . . . 3 Dividends on certain debt-financed stock of domestic and foreign corporations . . 4 Dividends on certain preferred stock of less-than-20%-owned public utilities . . . 5 Dividends on certain preferred stock of 20%-or-more-owned public utilities . . . . 6 Dividends from less-than-20%-owned foreign corporations and certain FSCs . . . 7 Dividends from 20%-or-more-owned foreign corporations and certain FSCs . . . 8 Dividends from wholly owned foreign subsidiaries . . . . . . . . . . . 9 Subtotal. Add lines 1 through 8. See instructions for limitations . . . . . . . 10 Dividends from domestic corporations received by a small business investment company operating under the Small Business Investment Act of 1958 . . . . . 11 Dividends from affiliated group members . . . . . . . . . . . . . . 12 Dividends from certain FSCs . . . . . . . . . . . . . . . . . 13 Foreign-source portion of dividends received from a specified 10%-owned foreign corporation (excluding hybrid dividends) (see instructions) . . . . . . . . . 14 Dividends from foreign corporations not included on line 3, 6, 7, 8, 11, 12, or 13 (including any hybrid dividends) . . . . . . . . . . . . . . . . . 15 Section 965(a) inclusion . . . . . . . . . . . . . . . . . . . 16a Subpart F inclusions derived from the sale by a controlled foreign corporation (CFC) of the stock of a lower-tier foreign corporation treated as a dividend (attach Form(s) 5471) (see instructions) . . . . . . . . . . . . . . . . . . . . . b Subpart F inclusions derived from hybrid dividends of tiered corporations (attach Form(s) 5471) (see instructions) . . . . . . . . . . . . . . . . . . . c Other inclusions from CFCs under subpart F not included on line 15, 16a, 16b, or 17 (attach Form(s) 5471) (see instructions). . . . . . . . . . . . . . . 17 Global Intangible Low-Taxed Income (GILTI) (attach Form(s) 5471 and Form 8992) . . 18 Gross-up for foreign taxes deemed paid . . . . . . . . . . . . . . 19 IC-DISC and former DISC dividends not included on line 1, 2, or 3 . . . . . . 20 Other dividends . . . . . . . . . . . . . . . . . . . . . 21 Deduction for dividends paid on certain preferred stock of public utilities . . . . 22 Section 250 deduction (attach Form 8993) . . . . . . . . . . . . . 23 Total dividends and inclusions. Add lines 9 through 20. Enter here and on page 1, line 4 . . . . . . . . . . . . . . . . . . . . . . . . 24 Total special deductions. Add lines 9 through 22, column (c). Enter here and on page 1, line 29b . . . . . . . Form 1120 (2018) Form 1120 (2018) Page 3 Schedule J Tax Computation and Payment (see instructions) Part I–Tax Computation 1 Check if the corporation is a member of a controlled group (attach Schedule O (Form 1120)). See instructions ▶ 2 Income tax. See instructions . . . . . . . . . . . . . . . . . . . . . . . . 2 3 Base erosion minimum tax (attach Form 8991) . . . . . . . . . . . . . . . . . . . 3 4 Add lines 2 and 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5 a Foreign tax credit (attach Form 1118) . . . . . . . . . . . . . 5a b Credit from Form 8834 (see instructions) . . . . . . . . . . . . 5b c General business credit (attach Form 3800) . . . . . . . . . . . 5c d Credit for prior year minimum tax (attach Form 8827) . . . . . . . . 5d e Bond credits from Form 8912 . . . . . . . . . . . . . . . 5e 6 Total credits. Add lines 5a through 5e . . . . . . . . . . . . . . . . . . . . . 6 7 Subtract line 6 from line 4 . . . . . . . . . . . . . . . . . . . . . . . . . 7 8 Personal holding company tax (attach Schedule PH (Form 1120)) . . . . . . . . . . . . . . 8 9 a Recapture of investment credit (attach Form 4255) . . . . . . . . . 9a b Recapture of low-income housing credit (attach Form 8611) . . . . . . 9b c Interest due under the look-back method—completed long-term contracts (attach Form 8697) . . . . . . . . . . . . . . . . . . . . . 9c d Interest due under the look-back method—income forecast method (attach Form 8866) . . . . . . . . . . . . . . . . . . . . . . 9d e Alternative tax on qualifying shipping activities (attach Form 8902) . . . . 9e f Other (see instructions—attach statement) . . . . . . . . . . . 9f 10 Total. Add lines 9a through 9f . . . . . . . . . . . . . . . . . . . . . . . . 10 11 Total tax. Add lines 7, 8, and 10. Enter here and on page 1, line 31 . . . . . . . . . . . . . 11 Part II–Section 965 Payments (see instructions) 12 2018 net 965 tax liability paid from Form 965-B, Part II, column (k), line 2. Enter here and on page 1, line 32 . 12 Part III–Payments, Refundable Credits, and Section 965 Net Tax Liability 13 2017 overpayment credited to 2018 . . . . . . . . . . . . . . . . . . . . . . 13 14 2018 estimated tax payments . . . . . . . . . . . . . . . . . . . . . . . . 14 15 2018 refund applied for on Form 4466 . . . . . . . . . . . . . . . . . . . . . . 15 ( ) 16 Combine lines 13, 14, and 15 . . . . . . . . . . . . . . . . . . . . . . . . 16 17 Tax deposited with Form 7004 . . . . . . . . . . . . . . . . . . . . . . . . 17 18 Withholding (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . 18 19 Total payments. Add lines 16, 17, and 18 . . . . . . . . . . . . . . . . . . . . 19 20 Refundable credits from: a Form 2439 . . . . . . . . . . . . . . . . . . . . . 20a b Form 4136 . . . . . . . . . . . . . . . . . . . . . 20b c Form 8827, line 8c . . . . . . . . . . . . . . . . . . 20c d Other (attach statement—see instructions) . . . . . . . . . . . 20d 21 Total credits. Add lines 20a through 20d . . . . . . . . . . . . . . . . . . . . . 21 22 2018 net 965 tax liability from Form 965-B, Part I, column (d), line 2. See instructions . . . . . . . . 22 23 Total payments, credits, and section 965 net tax liability. Add lines 19, 21, and 22. Enter here and on page 1, line 33 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Form 1120 (2018) Form 1120 (2018) Page 4 Schedule K Other Information (see instructions) 1 Check accounting method: a Cash b Accrual c Other (specify) ▶ Yes No 2 See the instructions and enter the: a Business activity code no. ▶ b Business activity ▶ c Product or service ▶ 3 Is the corporation a subsidiary in an affiliated group or a parent-subsidiary controlled group? . . . . . . . . . . If “Yes,” enter name and EIN of the parent corporation ▶ 4 At the end of the tax year: a Did any foreign or domestic corporation, partnership (including any entity treated as a partnership), trust, or tax-exempt organization own directly 20% or more, or own, directly or indirectly, 50% or more of the total voting power of all classes of the corporation’s stock entitled to vote? If “Yes,” complete Part I of Schedule G (Form 1120) (attach Schedule G) . . . . . . b Did any individual or estate own directly 20% or more, or own, directly or indirectly, 50% or more of the total voting power of all classes of the corporation’s stock entitled to vote? If “Yes,” complete Part II of Schedule G (Form 1120) (attach Schedule G) . 5 At the end of the tax year, did the corporation: a Own directly 20% or more, or own, directly or indirectly, 50% or more of the total voting power of all classes of stock entitled to vote of any foreign or domestic corporation not included on Form 851, Affiliations Schedule? For rules of constructive ownership, see instructions. If “Yes,” complete (i) through (iv) below. (i) Name of Corporation (ii) Employer Identification Number (if any) (iii) Country of Incorporation (iv) Percentage Owned in Voting Stock b Own directly an interest of 20% or more, or own, directly or indirectly, an interest of 50% or more in any foreign or domestic partnership (including an entity treated as a partnership) or in the beneficial interest of a trust? For rules of constructive ownership, see instructions. If “Yes,” complete (i) through (iv) below. (i) Name of Entity (ii) Employer Identification Number (if any) (iii) Country of Organization (iv) Maximum Percentage Owned in Profit, Loss, or Capital 6 During this tax year, did the corporation pay dividends (other than stock dividends and distributions in exchange for stock) in excess of the corporation’s current and accumulated earnings and profits? See sections 301 and 316 . . . . . . . . If “Yes,” file Form 5452, Corporate Report of Nondividend Distributions. See the instructions for Form 5452. If this is a consolidated return, answer here for the parent corporation and on Form 851 for each subsidiary. 7 At any time during the tax year, did one foreign person own, directly or indirectly, at least 25% of the total voting power of all classes of the corporation’s stock entitled to vote or at least 25% of the total value of all classes of the corporation’s stock? . For rules of attribution, see section 318. If “Yes,” enter: (a) Percentage owned ▶ and (b) Owner’s country ▶ (c) The corporation may have to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Enter the number of Forms 5472 attached ▶ 8 Check this box if the corporation issued publicly offered debt instruments with original issue discount . . . . . . ▶ If checked, the corporation may have to file Form 8281, Information Return for Publicly Offered Original Issue Discount Instruments. 9 Enter the amount of tax-exempt interest received or accrued during the tax year ▶ $ 10 Enter the number of shareholders at the end of the tax year (if 100 or fewer) ▶ 11 If the corporation has an NOL for the tax year and is electing to forego the carryback period, check here (see instructions) ▶ If the corporation is filing a consolidated return, the statement required by Regulations section 1.1502-21(b)(3) must be attached or the election will not be valid. 12 Enter the available NOL carryover from prior tax years (do not reduce it by any deduction reported on page 1, line 29a.) . . .
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