Pearson s Federal Taxation Comprehensive (2019 edition) Textbook Updates

Transcription

1 Pearson s Federal Taxation Comprehensive (2019 edition) Textbook Updates Several chapters Table of Updates Sorted by Chapter (Individuals chapters are first, followed by Corporations chapters) Rev. Proc Notice Chapter 1 An Introduction to Taxation Chapter 2 Determination of Tax Page 19 Page 30 Chapter 3 Gross Income: Inclusions Problem I:3-35 Problem I:3-56 Chapter 4 Gross Income: Exclusions Problem I:4-56 Chapter 5 Property Transactions: Capital Gains and Losses Page 11 Chapter 6 Deductions and Losses Problem I:6-53 Chapter 7 Itemized Deductions Chapter 8 Losses and Bad Debts Chapter 9 Business and Employee Expenses and Deferred Compensation 1

2 Chapter 10 Depreciation, Cost Recovery, Amortization, and Depletion Various pages qualified improvement property Page 14 PowerPoint slide #4 PowerPoint slide #20 PowerPoint slide #28 Chapter 11 Accounting Periods and Methods Chapter 12 Property Transactions: Nontaxable Exchanges Chapter 13 Property Transactions: Section 1231 and Recapture Chapter 14 Special Tax Computation Methods, Tax Credits, and Payment of Tax Problem I:14-69 Chapter 1 Tax Research Chapter 2 Corporate Formations and Capital Structure Page 6 Page 21 Page 32 Page 35 Problem C:2-28 Problem C:2-30 Problem C:2-43 Chapter 3 The Corporate Income Tax Page 6 Page 12 Page 44 Problem C:3-8 Problem C:3-34 Problem C:3-57 Appendix B, pp

3 Chapter 4 Corporate Nonliquidating Distributions Page 24 Page 25 Page 35 Page 46 Problem C:4-47 Problem C:4-53 Problem C:4-58 Chapter 5 Other Corporate Tax Levies Problem C:5-31 Problem C:5-33 Chapter 6 Corporate Liquidating Distributions Problem C:6-32 Problem C:6-36 Problem C:6-54 Chapter 7 Corporate Acquisitions and Reorganizations Chapter 8 Consolidated Tax Returns Problem C:8-32 Problem C:8-47 Problem C:8-54 Chapter 9 Partnership Formation and Operation Page 14 Page 18 Problem C:9-57 Chapter 10 Special Partnership Issues Problem C:10-43 Chapter 11 S Corporations Problem C:11-29 Problem C:11-32 Chapter 12 The Gift Tax Chapter 13 The Estate Tax 3

4 Chapter 14 Income Taxation of Trusts and Estates Chapter 15 Administrative Procedures 4

5 Posted 8/2/2018: Table of Updates Sorted by Date of Posting on Web Site Individuals Chapter 5 Property Transactions: Capital Gains and Losses Page 11 Individuals Chapter 10 Depreciation, Cost Recovery, Amortization, and Depletion Various pages qualified improvement property Individuals Chapter 14 Special Tax Computation Methods, Tax Credits & Payment of Tax Problem I:14-69 Corporations Chapter 3 The Corporate Income Tax Page 6 Page 12 Page 44 Problem C:3-8 Problem C:3-57 Corporations Chapter 8 Consolidated Tax Returns Problem C:8-54 Corporations Chapter 9 Partnership Formation and Operation Page 14 Posted 8/21/2018: Corporations Chapter 4 Corporate Nonliquidating Distributions Problem C:4-58 Posted 9/4/2018: Individuals Chapter 2 Determination of Tax Page 19 Posted 9/10/2018: Corporations Chapter 8 Consolidated Tax Returns Problem C:8-32 Posted 9/14/2018: Corporations Chapter 3 The Corporate Income Tax Appendix B, pp

6 Posted 9/20/2018: Corporations Chapter 2 Corporate Formations and Capital Structure Page 21 Problem C:2-43 Corporations Chapter 9 Partnership Formation and Operation Problem C:9-57 Posted 9/28/2018: Individuals Chapter 3 Gross Income: Inclusions Problem I:3-35 Corporations Chapter 4 Corporate Nonliquidating Distributions Problem C:4-47 Posted 10/17/2018: Individuals Chapter 4 Gross Income: Exclusions Problem I:4-56 Individuals Chapter 6 Deductions and Losses Problem I:6-53 Posted 11/6/2018: Several chapters Notice Corporations Chapter 2 Corporate Formations and Capital Structure Problem C:2-28 Problem C:2-30 Corporations Chapter 3 The Corporate Income Tax Problem C:3-34 Chapter 6 Corporate Liquidating Distributions Problem C:6-32 Problem C:6-36 Problem C:6-54 Posted 11/20/2018: Several chapters Rev. Proc (cont.) 6

7 Posted 11/20/2018 (cont.): Individuals Chapter 10 Depreciation, Cost Recovery, Amortization, and Depletion PowerPoint slide #4 PowerPoint slide #20 PowerPoint slide #28 Corporations Chapter 5 Other Corporate Tax Levies Problem C:5-33 Posted 2/13/2018: Individuals Chapter 2 Determination of Tax Page 30 Individuals Chapter 3 Gross Income: Inclusions Problem I:3-56 Individuals Chapter 10 Depreciation, Cost Recovery, Amortization, and Depletion Page 14 Corporations Chapter 2 Corporate Formations and Capital Structure Page 6 Page 32 Page 35 Corporations Chapter 4 Corporate Nonliquidating Distributions Page 24 Page 25 Page 35 Page 46 Problem C:4-53 Problem C:4-58 Corporations Chapter 5 Other Corporate Tax Levies Problem C:5-31 Corporations Chapter 8 Consolidated Tax Returns Problem C:8-47 Corporations Chapter 9 Partnership Formation and Operation Page 18 Corporations Chapter 10 Special Partnership Issues Problem C:10-43 (cont.) 7

8 Posted 2/13/2018 (cont.): Corporations Chapter 11 S Corporations Problem C:11-29 Problem C:

9 Textbook Updates (Individuals chapters are first, followed by Corporations chapters) Several chapters Rev. Proc (11/20/2018) The IRS has issued its annual Revenue Procedure with the inflation-adjusted amounts for the tax rate schedules, standard deduction, etc. Here is a link to Rev. Proc , which has these inflation-adjusted amounts for 2019: Notice (11/6/2018) The IRS has issued its annual notice with the inflation-adjusted amounts for qualified retirement plans, e.g., maximum IRA contribution. Here is a link to Notice , which has these amounts for 2019: Individuals chapters Chapter 1 An Introduction to Taxation Chapter 2 Determination of Tax Page 19 (9/4/2018) In the paragraph before Example I:2-25, item (2) should say $1,400 per qualifying child (if the taxpayer has one or two qualifying children). Also, Example I:2-25 should read as follows: Georgia s two qualifying children under age 17 entitle her to a child credit of $4,000. Her salary is $25,000 and income tax before credits is $700. The credit offsets all $700 of Georgia s income tax before credits. In addition, Georgia is entitled to a refund of $2,800 of the $3,300 balance of the credit [lesser of $3,375 (15% ($25,000 $2,500) or $2,800 (2 $1,400)]. Page 30 (2/13/2019) In the paragraph following the Tax Treatment of Gains and Losses heading, the dollar threshold for the 20% rate for a head of household is $452,400 (not $425,400). Chapter 3 Gross Income: Inclusions Problem I:3-35 (9/28/2018) Replace the language in the Solutions Manual s answer for part d, with the following: 9

10 Whether the receipt of a post-dated check constitutes constructive receipt depends on the facts and circumstances. In Fischer, 14 T.C. 792 (1950), the taxpayer agreed to hold a check because the other party said he was low on funds. The Tax Court held that the amount was taxable the following year, when the other party told Fischer that he could deposit the check. Individuals who post-date checks likely point out the date on the check to the recipient and explain that they are low on funds. Otherwise, the recipient might deposit the check without ever noticing the date. A check deposited and honored by the bank is taxable regardless of the date on the check. A check that comes back NSF is not taxable. Problem I:3-56 (2/13/2019) In the Solutions Manual s answer, Gary might be allowed a $500 credit for his half-sister because she might be his qualifying relative. The half-sister s gross income must be less than $4,150 for her to be Gary s qualifying relative, which may be reasonable to assume if she lives in a nursing home. If she is Gary s dependent, he is allowed an other dependent credit of $500, making his refund $493 ($14,007 $500 $14,000). Chapter 4 Gross Income: Exclusions Problem I:4-56 (10/17/2018) In the Solution Manual s answer, the standard deduction should be $18,000 (not $12,000) because Pat qualifies as a head of household. This means taxable income should be $36,600 (not $42,600). Chapter 5 Property Transactions: Capital Gains and Losses Page 11 (8/2/2018) In Example I:5-32, the calculation of the allocation for Machine No. 3 should have $10,000 in the numerator (not $30,000). The $500 allocation for the machine is correct. Chapter 6 Deductions and Losses Problem I:6-53 (10/17/2018) In the list of income and expenses, the second item (prizes and awards) should be 300 rather than (300), i.e., it is income. The Solutions Manual s answer correctly treats this as income when it says that Chuck must report all $1,100 of income as part of gross income. Chapter 7 Itemized Deductions 10

11 Chapter 8 Losses and Bad Debts Chapter 9 Business and Employee Expenses and Deferred Compensation Chapter 10 Depreciation, Cost Recovery, Amortization, and Depletion Various pages qualified improvement property (8/2/2018) The conference committee report for the Tax Cuts and Jobs Act indicates that Congress intended for qualified improvement property (QIP) to be depreciable over 15 years rather than 39 years and for QIP to be eligible for bonus depreciation. However, due to a drafting error, Sec. 168(e)(3)(E) of the amended Internal Revenue Code does not include QIP as 15-year property, so it may not be eligible for 15-year depreciation or bonus depreciation. Some news reports have speculated that this will be addressed through technical corrections legislation or regulatory authority. An article on this issue and the effect on White Castle restaurants appears in the Wall Street Journal ( Tax Law Oversight Hinders Firms Plans, July 11, 2018). You may consider using it in class. This issue affects the following content in Chapter I:10: p. 8: The third paragraph states that qualified property for bonus depreciation includes QIP. p. 11: The first full paragraph states that QIP is eligible for bonus depreciation and is depreciated over 15 years. Example I:10-18 uses the treatment that Congress intended. p. 17: In Topic Review I:10-2, the summary of qualified property states that it includes QIP. p. 29: Problems I:10-11 and I:10-13 involve QIP. Also, footnote 7 on p. 6 and the first full paragraph on p. 11 note that taxpayers may elect Sec. 179 expensing for QIP, and there was not a drafting error for this (see Sec. 179(f)(1)). Page 14 (2/13/2019) The reference to footnote 25 should be at the end of Example I:10-27 (not at the end of the first paragraph of Example I:10-26). PowerPoint slide #4 (11/20/2018) Add the following as a third bullet point: 100% bonus depreciation is allowed for qualified property placed in service from September 28, 2017 through December 31, PowerPoint slide #20 (11/20/2018) The two bullet points are not yet technically correct. As noted in the 8/2/2018 posting for this 11

12 chapter, Congress intended for qualified improvement property to be depreciable over 15 years and be eligible for bonus depreciation but did not actually do so due to a drafting error. Also, change the second bullet point to say Special provisions permit Sec. 179 expensing for nonresidential real property, which ordinarily has a 39-year depreciable life. PowerPoint slide #28 (11/20/2018) The third bullet point should say the SUVs are limited to $25,000 immediate expensing under 179 (not $100,000). Chapter 11 Accounting Periods and Methods Chapter 12 Property Transactions: Nontaxable Exchanges Chapter 13 Property Transactions: Section 1231 and Recapture Chapter 14 Special Tax Computation Methods, Tax Credits, and Payment of Tax Problem I:14-69 (8/2/2018) The first column of facts for Harold J. Milton should be as follows (the textbook s alignment for the last three items is off by one line): Salary $177,000 Interest income from State Bank 12,000 Dividend income (qualified) 18,000 Deductible IRA contribution 5,000 Tax-exempt interest income from municipal bonds 24,000 Charitable contributions 27,000 Medical expenses (before 18,000 the floor) In the second column of facts, Miscellaneous deductions other (before the floor) should be $12,000 (not $7,000). 12

13 Corporations chapters Chapter 1 Tax Research Chapter 2 Corporate Formations and Capital Structure Page 6 (2/13/2019) The third point under Tax Disadvantages should say an NOL can carry back if incurred before 2018 (a post-2017 NOL generally does not carry back). Page 21 (9/20/2018) The sentence before Example C:2-31 should read as follows: This rule also applies if the corporation reduces a property s basis under the loss property limitation rule discussed below. 34b 34b Reg. Sec (c)(3)(i). Page 32 (2/13/2019) The second paragraph under the Securities heading should say an NOL can carry back two years if incurred before A post-2017 NOL generally carries forward indefinitely, but its use in a carryforward year is subject to an 80% of taxable income limitation (see Chapter C:3 for further discussion). Page 35 (2/13/2019) The second point under Avoiding Nonrecognition of Gain Under Sec. 351 should say the top tax rate applicable to corporate-level capital gains is 21% (not 35%). Problem C:2-28 (11/6/2018) The beginning of the Solution Manual s answer should say that the sole proprietorship option and the S corporation option with distribution result in in the lowest total tax (not the C corporation option). The remainder of the solution shows that this is the case. Problem C:2-30 (11/6/2018) In Part h of the Solution Manual s answer, Subpart g should say that the machinery s holding period begins four years ago, when Fran purchased it. Although Jet s basis is reduced to the machinery s FMV under Sec. 362(e)(2), Reg. Sec (c)(3)(i) nevertheless states that such basis is determined by reference to the transferor s basis for purposes of Sec. 1223(2). Problem C:2-43 (9/20/2018) The Solutions Manual s answer for part f should say that Barbara s stock has a split holding 13

14 period because she received it in exchange for cash and Sec property in a transaction qualifying for Sec. 351 (see footnote 31 on page 19). The answer correctly states that Sam s holding period starts on the day after the exchange date. The Solutions Manual s answer for part g should say, in the last item (part f), that the holding period for Barbara s stock starts the day after the exchange date because the transaction did not qualify for Sec. 351 and Sec. 1223(1) thus does not apply. The answer correctly states that Sam s holding period starts on the day after the exchange date. Chapter 3 The Corporate Income Tax Page 6 (8/2/2018) In Example C:3-2, the last sentence should say that the $40,000 net capital gain is taxed using the 21% corporate tax rate described previously (rather than the regular corporate tax rates). Page 12 (8/2/2018) In Example C:3-9, the last sentence should refer to April 15 of next year (not March 15). Page 44 (8/2/2018) In Step 10, the State effective tax rate should be 6.55% (not 5.55%), and the Total effective tax rate should be 25.95% (not 24.95%). The calculations shown for these effective tax rates are correct. Problem C:3-8 (8/2/2018) The problem should read Describe three ways in which the treatment of charitable contributions by individuals and corporate taxpayers differ. Problem C:3-34 (11/6/2018) In the Solution Manual s answer for part a, remove the word temporary before Treasury Regulations. Problem C:3-57 (8/2/2018) In the debit column, Federal income taxes should be $108,465 (instead of $165,920), and Net income should be $511,535 (instead of $454,080). Appendix B, pages (9/14/2018) On page 38, lines 4a and 11 should be $361,490 (not $372,000). This is the net income for Example C:3-42. On page 40, line 32 should report the $9,000 as a temporary difference (not a permanent difference). This affects the following lines on pages 39 and 40: 14

15 (a) (b) (c) (d) Page 40: Line 32: 25,000 (9,000) 16,000 Line 38: 289, ,000 (97,510) 293,000 Page 39: Line 27: (289,510) (101,000) 97,510 (293,000) Line 29a: 361,490 (81,000) 94, ,000 Line 30: 361,490 (81,000) 94, ,000 A revised Sch. M-3 is available. (The page numbers in red boxes at the top right corner are for the Comprehensive version of the textbook, which differs from the page numbers for the Corporations version.) Chapter 4 Corporate Nonliquidating Distributions Page 24 (2/13/2019) In the third line preceding Example C:4-37, the three dividends-received deduction percentages should be 50%, 65%, or 100% (not 70%, 80%, or 100%). Page 25 (2/13/2019) In the fourth line, the dividends-received deduction should be $11,700 (0.65 $18,000). It should not be $14,400 (0.80 $18,000). Page 35 (2/13/2019) The second line of the second column should refer to 37% (not 39.6%). Page 46 (2/13/2019) In Problem C:4-58 (which starts on page 45), part b should refer to a $30,736 qualified business income (QBI) deduction; it should not be $35,200. The deduction is limited to 20% of taxable income (computed without the QBI deduction) in excess of the net capital gain. See also the item below regarding the Solution Manual s answer for Problem C:4-58. Problem C:4-47 (9/28/2018) In the Solutions Manual s answer, the last sentence should refer to a 65% dividends-received deduction for the distribution (not 80%). Problem C:4-53 (2/13/2019) In the Solutions Manual s answer for part b, Bailey is entitled to a 65% dividends-received deduction (not 80%). Problem C:4-58 (8/21/2018 & 2/13/2019) In part b, Brian s self-employment tax should be $20,635 (not $20,486). The Solution Manual s answer for this part of the problem should be as follow (amounts in bold italics are affected): 15

16 Brian s $152,946 taxable income and $48,932 total tax liability are calculated as follows: Operating gross profit $290,000 Minus: Business deductions: Depreciation $ 25,000 Other operating expenses 89,000 Total deductions (114,000) Net income from business $176,000 Plus: Long-term capital gain 30,000 Minus: One-half self-employment tax ( 10,318) AGI $195,682 Minus: Standard deduction $ 12,000 Qualified business income deduction a 30,736 Total deductions ( 42,736) Taxable income $152,946 Ordinary taxable income ($152,946 - $30,000 LTCG) $122,946 Tax on ordinary income [$14, ($122,946 - $82,500)] $ 23,797 Tax on long-term capital gain ($30,000 x 0.15) 4,500 Total income tax $ 28,297 Self-employment tax b 20,635 Total tax $ 48,932 a $176,000 x 0.20 = $35,200, limited to 0.20 x ($195,682 $12,000 $30,000) = $30,736. The qualified business income deduction is not a deduction for AGI. b $176,000 net income from business x = $162,536; ($128,400 x 0.124) + ($162,536 x 0.029) = $20,635. Chapter 5 Other Corporate Tax Levies Problem C:5-31 (2/13/2019) In the Solution Manual s answer, the second part of the accumulated earnings credit s determination should be $66,300 ($90,000 ($30,000 $6,300)), not $90,000. As this is less than the first part of the determination, the accumulated earnings credit is still $125,000. Problem C:5-33 (11/20/2018) In the Solutions Manual s answer for part i, the references to a consent dividend and to a deficiency dividend should be for $79,945 (not $80,810), which is the UPHCI from part h. 16

17 Chapter 6 Corporate Liquidating Distributions Problem C:6-32 (11/6/2018) The question for part c should read as follows: What is the basis to Stacy and Monique for each property received in the liquidation in Parts a and b? Problem C:6-36 (11/6/2018) In the first sentence of part b, ignore the word equal. Problem C:6-54 (11/6/2018) In the paragraph before Required, the remaining cash should be $364,315 instead of $367,315. In the Solution Manual s answer for part c, the 21% tax on the taxable gain should be $39,690 instead of $36,690, which also makes the total liquidation proceeds $364,315 instead of $367,315. The revised solution follows: c. 2021: E&P gain on asset sale ($1,366,000 - $1,337,000) 29,000 Tax on taxable gain * ( 39,690) Balance before liquidating distribution $328,315 (disappears upon liquidation) * Sales proceeds $1,366,000 Adjusted basis of assets 1,177,000 Taxable gain $ 189,000 Tax on gain (21%) $ 39,690 Liquidation Able (60%) Baker (40%) Liquidation proceeds (1) $218,589 $145,726 Basis of stock surrendered (2) ( 16,000) ( 22,000) LTCG on liquidation (3) $202,589 $123,726 Tax on LTCG at 23.8% (4) $ 48,216 $ 29,447 After-tax proceeds (1-4) $170,373 $ 116,279 Chapter 7 Corporate Acquisitions and Reorganizations Chapter 8 Consolidated Tax Returns Problem C:8-32 (9/10/2018) The problem should refer to Problem C:8-31 (not C:8-32). 17

18 Problem C:8-47 (2/13/2019) The first line of the solution manual s answer should say $293,600 (not $290,800). The solution later correctly calculates consolidated taxable income as $293,600. Problem C:8-54 (8/2/2018) The third sentence should specify July 10 of Year 2 (not Year 3). Chapter 9 Partnership Formation and Operation Page 14 (8/2/2018) In Example C:9-17 (which starts on the previous page), note b should read as: Partnership interest months deferred = Total. Page 18 (2/13/2019) Under Prop. Reg. Sec A-3(b)(2)(ii), which came out after publication of the 2019 edition, the exclusion for capital gains and losses includes any item treated as capital gain or loss under Sec Example C:9-20 thus should show a QBI deduction of $25,000 ($125, ), not $25,400. Taxable income is $155,169 (not $154,769). Also, the Additional Comment on page 19 is no longer relevant. Problem C:9-57 (9/20/2018) In the Instructor s Resource Manual s solution, Line 1c should be $2,337,000 (not $2,237,000). This is merely a typo; the Line 3 amount is based on the correct Line 1c amount. Chapter 10 Special Partnership Issues Problem C:10-43 (2/13/2019) In part a of the Solutions Manual s answer, the portion of John s gain treated as unrecaptured Sec gain should be $36,000 ($60, ), not $60,000. Chapter 11 S Corporations Problem C:11-29 (2/13/2019) In part c of the Solutions Manual s answer, the election will take affect on the first day of 2020 (not 2019). Problem C:11-32 (2/13/2019) In the last sentence of the first paragraph of the Solutions Manual s answer, Peter and Alice cannot reelect S corporation status after a five-year waiting period because all shareholders (including the partnership) must consent and because a partnership is an ineligible shareholder. 18

19 Chapter 12 The Gift Tax Chapter 13 The Estate Tax Chapter 14 Income Taxation of Trusts and Estates Chapter 15 Administrative Procedures 19