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

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.
 
206. 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.
 
207. 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.
c.
​The imposition of extra penalties, in addition to the tax owed, definitely deters
taxpayer noncompliance.
 
208. 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.
 
209. Can a taxpayer start the three-year statute of limitations on additional assessments by the IRS by filing his income tax return early (i.e., before the due date)? Can the period be shortened by filing late (i.e., after the due date)?
ANSWER:  The answer is no in both cases. When filing early, the statute starts to run on the due date of the return. When filing late however, the filing date controls.
 
210. Congressman Smith wants to impose a new tax on sugar drinks. Analyze this proposal against the principles of equity, simplicity, and neutrality.
ANSWER:  Equity – The tax is regressive in that it will represent a larger portion of a low-income individual’s income relative to a higher-income individual.


 Simplicity – While it sounds simple because the ingredients on a container should indicate if there is sugar, issues might arise as to how other forms of sugar, such as corn syrup, affect application of the tax. Also, the amount of sugar in beverages can vary, so some might argue that the tax should not apply if the sugar level is minimal. Will the tax apply to drinks already subject to the alcohol taxes? (Include some discussion of problems of defining sugar drink in the answer.)


Neutrality – The tax will likely reduce sales of sugar drinks.
 
211. Ultimately, most taxes are paid by individuals. Explain what this means in terms of income and payroll taxes paid by a corporation.
ANSWER:  A corporation pays many types of taxes, but like any other expenditure, some of these taxes are ultimately paid by an individual. Income taxes are included in the price the corporation charges for goods and services. Or all or part might result in reduced earnings affecting investors or through reduced wages affecting employees. The payroll taxes paid by the corporate employer are likely borne by workers in the form of lower wages. That is, if the employer did not have to pay the taxes, it could pay higher wages to employees. These taxes might also be borne by customers and investors.