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Chapter 2: Income Tax Concepts
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38. For each of the following tax treatments, determine the concept, construct, or doctrine that provides the rationale for the treatment: a. Lester purchases some stock for a total cost of $2,500. On December 31, 2011, the stock is worth $2,800. In August 2012, he sells the stock to his brother Rufus for $2,000. Lester has no income from the stock in 2011, and he is not allowed to deduct the $500 loss on the sale of the stock to Rufus in 2012. The realization concept is responsible for not recognizing the gain in market value in 2011. Lester will not recognize any gain or loss on the stock until it is realized through sale or other disposition. The nonrecognition of loss on the sale to Rufus is due to the related party rules. Because Rufus is a related party, losses on any sales to him would be disallowed. That is, related parties are assumed not to transact at arm’s-length when losses are involved. b. Kerry is an employee of Ross Company. During the year, Ross withholds federal income taxes of $3,500 from her salary. Her tax liability for the year is only $3,200, so she receives a refund of $300. Under the pay-as-you-go concept, amounts withheld from an employee as tax are credited against the tax liability on the tax return. If Kerry has paid in more than her actual liability, she is entitled to a refund of the prepaid taxes. c. Catherine is a city government employee. She often uses the city’s photocopier to make personal photocopies and has her secretary type an occasional personal letter. The value of these services for the current year is approximately $55 but is not included in Catherine’s gross income. This is an example of administrative convenience. Although the personal use of the photocopier would constitute income under the all-inclusive income concept, the cost of collecting the tax on such benefits would likely exceed the tax collected on such income. In Chapter 4, this is covered as a de minimis fringe benefit exclusion. d. Dante’s allowable personal deductions are only $2,800 this year, so he deducts the standard deduction in computing his taxable income. The use of the standard deduction amount in lieu of deducting actual allowable itemized deductions is based on administrative convenience. It also is somewhat based on ability-to-pay in that it provides relief to those taxpayers who do not incur large amounts of itemized deductions; these taxpayers are typically on the low end of the income scale. © 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.
Full file at https://testbankuniv.eu/Concepts-in-Federal-Taxation-2013-20th-Edition-Murphy-Solutions-Manual