South-Western Federal Taxation 2022 Essentials of Taxation Individuals and Business Entities 25th ed

ANSWER: b
98. A Federal deduction for state and local sales taxes paid.
ANSWER: c
99. Tax credits available for the purchase of a vehicle that uses alternative (nonfossil) fuels.
ANSWER: a
100. Tax credits for home improvements that conserve energy.
ANSWER: a
Name:
Class:
Date:
Ch 1 Introduction To Taxation
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101. More rapid expensing for tax purposes of the costs of installing pollution control devices.
ANSWER: a
Subjective Short Answer
102. Taylor, a widow, makes cash gifts to her five married children (including their spouses) and to her seven
grandchildren. What is the maximum amount Taylor can give for calendar year 2021 without using her unified transfer tax
credit?
ANSWER: $255,000 [$15,000 (annual exclusion) × 17 donees].
103. Paige is the sole shareholder of Citron Corporation. During the year, she leases a building to Citron for a monthly
rental of $80,000. If the fair rental value of the building is $60,000, what are the income tax consequences to the parties
involved?
ANSWER: The rent charged by Paige is not “arms length”; as such, Citron Corporation’s rent deduction is $60,000 (not
$80,000). The $20,000 difference is a nondeductible dividend distribution. For Paige, the change merely
requires reclassification. Instead of $80,000 of rent income, she has $60,000 of rent income and $20,000 of
dividend income.
Essay
104. The Federal income tax is based on a pay-as-you-go system and has become a “mass tax.” Explain this statement.
ANSWER: The pay-as-you-go system is present in the wage and other withholding procedures. In the case of self-
employed persons, it is manifested in the required quarterly payments for estimated taxes. The income tax
became a mass tax during World War II when its coverage was extended to 74% of the population (from less
than 6% in 1939).
105. Due to population change, Goose Creek School District has decided to close one of its high schools. Since it has no
further need of the property, the school is listed for sale. The two bids it receives are as follows:
United Methodist Church $1,700,000
Planet Motors 1,600,000
The United Methodist Church would use the property to establish a sectarian middle school. Planet, a well-known car
dealership, would revamp the property and operate it as a branch location.
If you were a member of the School District board, what factors would you consider in evaluating the two bids?
ANSWER: Although the bid from the United Methodist Church is higher, several other factors need to be considered.
Does, for example, Goose Creek School District exempt property owned by churches from its ad valorem
taxes? If so, losing this property from the tax base could prove very costly over the long run. Also, it is
probable that income-producing property (such as a car dealership) would be taxed at a higher rate than that
owned by a nonprofit organization (a school operated by a church). This assumes, of course, that the school
would be taxed at all. The auto dealership also would generate sales tax.
106. Morgan inherits her father’s personal residence including all of the furnishings. She plans to add a swimming pool
and sauna to the property and rent it as a furnished house. What are some of the ad valorem property tax issues Morgan
can anticipate?
ANSWER: The real estate taxes probably will increase for several reasons. The capital improvements and the conversion
from residential to rental will trigger the increase. Furthermore, the furnishings may generate an ad valorem
tax on personalty. (Depending on applicable law, furniture might not be subject to tax unless used for business
purposes—such as in this case.)
Name:
Class:
Date:
Ch 1 Introduction To Taxation
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107. In 2019, Deborah became 65 years old. In 2020 she added a swimming pool and in 2021 she converted the residence
to rental property and moved into an assisted living facility. Since 2018, Deborah’s ad valorem property taxes have
decreased once and increased twice. Explain.
ANSWER: The decrease probably came in 2019 when Deborah reached age 65. The increases probably occurred in 2020
when she added the pool and in 2021 when the residence was converted to rental property with the property
reassessed due to the change in use and/or removal of the homestead exemption.
108. A lack of compliance in the payment of use taxes can be resolved by several means. In this regard,
comment on the following:
a. Registration of automobiles.
b. Reporting of Internet purchases on state income tax returns.
ANSWER: a.