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

117. In terms of revenue neutrality, comment on a tax cut enacted by Congress that:
a. Contains revenue offsets.
b. Includes a sunset provision.
ANSWER: a.
Ideally, to achieve revenue neutrality, all tax cuts should be accompanied by revenue offsets.
b.
A sunset provision does not account for the immediate revenue losses generated by a tax cut.
It merely provides that such losses will not continue beyond a specified date when the tax cut
expires and the former tax law is reinstated.
118. The tax law contains various tax credits, deductions, and exclusions that are designed to encourage taxpayers to
obtain additional education. On what grounds can these provisions be justified?
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Ch 1 Introduction To Taxation
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ANSWER: Social and economic considerations are the justification. As to the latter, a better educated workforce carries a
positive economic impact.
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119. The tax law contains various provisions that encourage home ownership.
a. On what basis can this objective be justified?
b. Are there any negative considerations? Explain.
ANSWER: a. Home ownership can be justified on economic and social grounds.
b.
Granting tax advantages to persons who are purchasing their homes places the taxpayers who
rent at a disadvantage. The result is inequality in treatment.
120. The tax law allows an income tax deduction (or a credit) for foreign income taxes. Explain why.
ANSWER: The deduction (or a credit) for foreign income taxes can be justified on the grounds that it mitigates the double
tax imposed on the same income.
121. The tax law allows, under certain conditions, deferral of gain recognition for involuntary conversions.
a. What is the justification for this relief measure?
b. What happens if the proceeds are not entirely reinvested?
ANSWER: a.
By recognizing that the taxpayer’s relative economic situation has not changed and that they
lack the wherewithal to pay a tax, any recognition of realized gain is deferred.
b.
If the proceeds from an involuntary conversion are not fully reinvested in property that is similar
or related in service or use, recognized gain results. Such recognized gain cannot exceed realized
gain and will be limited to the amount of the proceeds not reinvested. Recognition is based on
the notion that the taxpayer now has the wherewithal to pay the tax that results.
122. How do the net operating loss provisions in the tax law mitigate the effect of the annual accounting concept?
ANSWER: Without the allowance of a loss carryforward, the losses would disappear. As shown by Example 26, this
result places a business with profit and loss fluctuations on a more level playing field with one that maintains a
stable income pattern.
123. In connection with facilitating the function of the IRS in the administration of the tax laws, comment on the utility
of the following:
a. An increase in the amount of the standard deduction.
b.
Dollar and percentage limitations on the deduction of personal casualty losses in Federally
declared disaster areas.
c. Availability of interest and penalties for taxpayer noncompliance.
ANSWER: a.
An increase in the amount of the standard deduction reduces the number of
taxpayers who choose to itemize their personal deductions. This, in turn,
reduces the deductions the IRS has to check.
b.
Limitations placed on casualty and theft losses curtail the number of taxpayers
who can claim the deduction.
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Ch 1 Introduction To Taxation
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c.
The imposition of extra penalties, in addition to the tax owed, definitely deters
taxpayer noncompliance.
124. Congress reacts to judicial decisions that interpret the tax law in different ways. When it approves of a decision,
Congress may act to amend the Code to incorporate the holding. When it disapproves, Congress may amend the Code to
nullify its effect. Give an example of each one of these congressional reactions.
ANSWER: Congress approved of the judicial conclusion that most stock dividends should be nontaxable and amended the
Code to this effect. However, it disagreed as to when leasehold improvements should be taxed to a lessor.
Consistent with the wherewithal to pay concept, the improvements are to be taxed on the termination of the
lease. Thus, Congress overturned a judicial holding that would have taxed such improvements in the year they
are made by the lessee.
125. Ultimately, most taxes are paid by individuals. Explain what this means in terms of income and payroll taxes paid by