South-Western Federal Taxation 2022: Individual Income Taxes 45th edition by James C. Young Test ban

ANSWER:  A severance tax is one imposed when natural resources (e.g., oil, gas, iron ore, coal) are extracted. It is based on the notion that the state has an interest in such resources. For some states, the revenue from severance taxes can be significant. Alaska, for example, relies heavily on its severance taxes and has been able to avoid both a state income tax and a general sales tax.
 
187. What is the difference between an inheritance tax and an estate tax? Who imposes these taxes?
ANSWER:  An inheritance tax is a tax on the right to receive property from a decedent. An estate tax is imposed on the right to pass property at death. The Federal government imposes estate taxes and states impose inheritance taxes. Some states impose both, whereas others impose neither.
 
188. Antonio dies with an estate worth $20 million. Under his will, $10 million passes to his wife and $10 million goes to his church. What is Antonio’s Federal estate tax result?
ANSWER:  None. After a marital deduction of $10 million and a charitable deduction of $10 million, Antonio’s taxable estate is $0.
 
189. What might cause an individual to owe income taxes in more than one state?
ANSWER:  Working in more than one state or owning income-generating property in more than one state can cause this.
 
190. Virtually all state income tax returns contain checkoff boxes for donations to various causes. On what grounds has this procedure been criticized?
ANSWER:  In many cases, the procedure is overused (i.e., a multiplicity of boxes). This overuse adds complexity to the return. Also, in most cases, the donation is being drawn from any income tax refund that might be due. Thus, taxpayers may not fully appreciate that they are paying for such checkoffs.
 
191. State and local governments are sometimes forced to find ways to generate additional revenue. Comment on the pros and cons of the following procedures:
 
a.Decouple what would be part of the piggyback format of the state income tax.
b.Tax amnesty provisions.
c.Internet shaming.
 
ANSWER:  a.
​The decoupling process is easily accomplished regarding new Federal tax changes that have never taken effect at the state level. Taxpayers are not apt to miss what they never have enjoyed.
b.
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​Tax amnesty provisions generate considerable revenue. It also unmasks many taxpayers who have not previously paid taxes. Now that the taxing jurisdiction is aware of their existence, they will tend to pay taxes in the future.
c.
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​By use of a public internet site, the taxing authority posts the names of those taxpayers that are delinquent as to various taxes (e.g., sales, income). This public humiliation (or threat of) very often results in compliance.
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192. Briana lives in one state and works in the adjoining state. Both states tax the income she earns from her job. Does Briana have any relief from this apparent double taxation of the same income?
ANSWER:  Most states allow their residents some form of tax credit for the income taxes paid to other states. In Briana’s case, the credit would be allowed by the state where she lives for the taxes paid to the state where she works.
 
193. In late June 2021, Art is audited by the state and a large deficiency is assessed. In November of the same year, his Federal income tax return is audited by the IRS. What has probably happened?
ANSWER:  The IRS has been notified by the state concerning the results of the June audit.
 
194. Two months after the burglary of his personal residence, Eric is audited by the IRS. Among the items taken in the burglary was a shoe box containing approximately $50,000 in cash. Eric is the owner and operator of a cash-and-carry liquor store. Eric wonders why he was audited. Can you help explain?
ANSWER:  Although Eric’s audit by the IRS could be the result of sheer chance, this appears unlikely. Press coverage of the burglary, particularly if the items stolen were enumerated, could have put the IRS on notice. Why would anyone keep such a large amount of cash at his personal residence? Also, Eric is in a business where tax evasion is easily accomplished.
 
195. Rick, the sole proprietor of an adult entertainment club, is audited by the IRS. On the third day of the field audit, the regular IRS agent is accompanied by a special agent. Should Rick be concerned by this new development? Explain.
ANSWER:  Yes, he should. Special agents rarely appear during an audit unless the regular agent suspects that fraud may be involved. Considering the type of business Rick conducts, the heavy use of cash probably exists. With cash involved, tax evasion is easier to carry out.