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SOLUTIONS MANUAL WITH TEST BANK INCOME TAX FUNDAMENTALS 2013 EDITION Gerald E. Whittenburg Gerald E. Whittenburg San Diego State University Martha Altus-Buller San Diego, California San Diego, California Steve Gill San Diego State University ________________________________________________________________________________ Australia Brazil Japan Korea Mexico Singapore Spain United Kingdom United States

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SOLUTIONS MANUAL WITH TEST BANK

INCOME TAX FUNDAMENTALS

2013 EDITION

Gerald E. Whittenburg Gerald E. Whittenburg San Diego State University

Martha Altus-Buller San Diego, California San Diego, California

Steve Gill San Diego State University

________________________________________________________________________________ Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States

ISBN-13: 978-1-133-37250-9 ISBN-10: 1-133-37250-3

© 2013, 2012 South-Western, Cengage Learning

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iii

CONTENTS

PREFACE ............................................................................................................................................................ iv CHAPTER OUTLINES AND SUGGESTED MINIMUM ASSIGNMENTS ....................................................... 1 SOLUTIONS FOR QUESTIONS AND PROBLEMS ............................................................................................ 25 Chapter 1: The Individual Income Tax Return ..................................................................................................... 27

Chapter 2: Gross Income and Exclusions ............................................................................................................. 37

Chapter 3: Business Income and Expenses, Part I ................................................................................................ 51

Chapter 4: Business Income and Expenses, Part II ............................................................................................... 81

Chapter 5: Itemized Deductions and Other Incentives ......................................................................................... 99

Chapter 6: Credits and Special Taxes ................................................................................................................... 119

Chapter 7: Accounting Periods and Methods and Depreciation ........................................................................... 145

Chapter 8: Capital Gains and Losses .................................................................................................................... 163

Chapter 9: Withholding, Estimated Payments, and Payroll Taxes ....................................................................... 195

Chapter 10: Partnership Taxation ........................................................................................................................... 221

Chapter 11: The Corporate Income Tax ................................................................................................................. 233

Chapter 12: Tax Administration and Tax Planning ................................................................................................ 247 SOLUTIONS FOR ADDITIONAL COMPREHENSIVE TAX RETURN PROBLEMS .................................... 249

Chapter 1: The Individual Income Tax Return ..................................................................................................... 283

Chapter 2: Gross Income and Exclusions ............................................................................................................. 311

Chapter 3: Business Income and Expenses, Part I ................................................................................................ 341

Chapter 4: Business Income and Expenses, Part II ............................................................................................... 375

Chapter 5: Itemized Deductions and Other Incentives ......................................................................................... 401

Chapter 6: Credits and Special Taxes ................................................................................................................... 433

Chapter 7: Accounting Periods and Methods and Depreciation ........................................................................... 459

Chapter 8: Capital Gains and Losses .................................................................................................................... 485

Chapter 9: Withholding, Estimated Payments, and Payroll Taxes ....................................................................... 511

Chapter 10: Partnership Taxation ........................................................................................................................... 529

Chapter 11: The Corporate Income Tax ................................................................................................................. 551

Chapter 12: Tax Administration and Tax Planning ................................................................................................ 573

TEST BANK ................................................................................................................................................................ 283

PREFACE

This manual contains the solutions to the multiple choice questions, writing assignments, problems, and comprehensive problems in the text and also provides a source of exam questions for your class. Some of the test bank questions require additional tables or schedules. The tax calculations and phase-outs have become so complex that professors may prefer open book tests in some circumstances. If you wish to make the manual available for student review, the pages in the manual are perforated so that test materials may be removed from the manual to retain their integrity.

The test bank is also available for use on personal computers through ExamView®. If you would like a copy of this computerized test generator, please contact your Cengage Learning representative.

The manual also contains a brief topical outline for each chapter designed to assist you in presenting the course material. Suggested minimum case and problem assignments, selected to provide a representative sample of the text’s problem material, follow each chapter outline. Gerald E. Whittenburg Martha Altus-Buller Steve Gill

iv

Chapter Outlines 1

CHAPTER OUTLINES

AND

SUGGESTED MINIMUM ASSIGNMENTS

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

2 Chapter Outlines

Chapter Outlines 3

CHAPTER 1

THE INDIVIDUAL INCOME TAX RETURN

BRIEF TOPICAL OUTLINE

A. Learning Objectives and OverviewB. History and Objectives of the Tax System

1. Social objectives2. Economic objectives

C. Reporting and Taxable Entities1. The individual2. The corporation3. The partnership

D. The Tax Formula for Individuals1. Gross income2. Deductions for adjusted gross income3. Adjusted gross income4. Standard deduction or itemized deductions5. Exemptions6. Taxable income7. Gross tax liability

E. Who Must File1. Who must file (see Figures 1.1, 1.2 and 1.3)

F. Filing Status and Tax Computation1. Filing Status

- Single taxpayers- Married filing jointly- Married filing separately- Head of household- Surviving spouse/Qualifying widow(er)s

2. Tax Computation3. Qualifying dividends

G. Personal and Dependency Exemptions1. Personal exemptions2. Dependency exemptions

- Relationship test for qualifying children- Domicile test- Age test- Joint return test- Citizenship test- Self-support test

3. Dependency exemptions for qualifying relatives- Relationship or member of household test- Gross income test- Support test- Joint return test- Citizenship test

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

4 Chapter Outlines

H. The Standard Deduction1. Amounts2. Additional amounts for old age and blindness3. Individuals not eligible for the standard deduction4. Special limitations for dependents

I. A Brief Overview of Capital Gains and Losses1. Adjusted basis2. Amount realized3. Ordinary versus capital gains and losses

J. Tax and the Internet1. IRS Web site

- Forms & Pubs2. Other useful tax information sites

K. Electronic Filing (e-Filing)1. Individual tax preparation software2. Tax professionals

SUGGESTED MINIMUM ASSIGNMENT:

Problems 2, 4, 7, 9, 10, 12, 13, 15, and 16Optional: Writing assignmentComprehensive problems 1 and 2A or 2BOptional: Cumulative Software Problem

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter Outlines 5

CHAPTER 2

GROSS INCOME AND EXCLUSIONS

BRIEF TOPICAL OUTLINE

A. Learning Objectives and OverviewB. The Nature of Gross Income

1. Internal Revenue Code definition2. Inclusions (see Table 2.1)3. Exclusions (see Table 2.2)

C. Interest and Dividend Income1. Schedule B not always required2. U.S. Savings Bonds3. Qualifying dividends (special zero or 15% tax rate)

D. Alimony1. Definition of alimony2. Divorces before 19853. Divorces after 19844. Alimony recapture

5. Property transfers6. Child support

E. Prizes and Awards1. General rule2. Exception for certain employee awards

F. Annuities1. The General Rule2. The Simplified Method3. Employee annuities

G. Life Insurance1. General rule2. Policies transferred for valuable consideration

H. Gifts and Inheritances1. Property received2. Subsequent income from property

I. Scholarships1. Amounts received for tuition, books and course-required supplies2. Amounts received for room and board

J. Accident and Health InsuranceK. Meals and Lodging

1. Test for exclusion of meals- Convenience of the employer- On the business premises

2. Test for exclusion of lodging- On the business premises- Condition of employment

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

6 Chapter Outlines

L. Municipal Bond Interest1. Exclusion of interest2. After-tax return

M. Unemployment CompensationN. Employee Fringe Benefits

1. Employer-provided spending accounts- Dependent care accounts- Medical flexible spending accounts- Public transportation and parking at work

2. Group term life insurance3. No-additional-cost services4. Qualified employee discounts5. Working condition fringe benefits6. De minimis fringe benefits7. Tuition reduction8. Athletic facilities9. Retirement planning fringe benefit

O. Social Security Benefits1. Partial inclusion in income2. Consequences of receiving tax-exempt interest income

SUGGESTED MINIMUM ASSIGNMENT:

Problems 1, 2, 3, 6, 8, 9, 10, 14, 15, and 18Optional: Writing assignmentComprehensive problems 1 and 2A or 2BOptional: Cumulative Software Problem

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.