ACCT553

Week 1 Homework Solutions

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Chapter 1 (5 points)
1. Briefly discuss the purpose of the 16th Amendment.
The 16th Amendment was passed by Congress on July 12, 1909, and states, "The Congress shall have
power to lay and collect taxes on incomes, from whatever source derived, without apportionment amount
the several States, and without regard to any census or enumeration." This serves as the basis for the
income tax laws of the United States (1,151).

Chapter 2 (5 points)
2. Explain the two safe harbors available to an individual taxpayer to avoid a penalty for underpayment of
estimated tax.
An individual taxpayer may avoid penalties associated with the underpayment of estimated tax if he or
she makes four equal, quarterly installments that are equal to 90% of the current year tax or 100% (110%
if AGI is over $150 K) of the prior year tax (2,365).

Chapter 3 (5 points)
3. Explain the distinction between an above-the-line deduction (i.e., for AGI) and a below-the-line
deduction (i.e., from AGI). Which one is more valuable?
An above-the-line deduction is reported on page 1 of Form 1040 and reduces adjusted gross income
(AGI). A below-the-line deduction (i.e., itemized deductions) is claimed only if a taxpayer is choosing to
itemize his or her deductions rather than claim the standard deduction. An above-the-line deduction is
more valuable because many tax benefits, credits, deductions, and so forth are phased out based on
AGI; therefore, the lower your AGI is, the greater your likelihood is of qualifying for other benefits, credits,
and deductions. Further, there can be an overall limitation on itemized deductions that can scale back
what you are able to deduct. Additionally, if you claim the standard deduction, then a below-the-line
deduction (from AGI) is of no benefit to you (3,015).

Chapter 13 (5 points)

4. What is an installment sale? Is it a form of income deferral? When can't you elect this form of
reporting?
An installment sale, under IRC 453(b), is a disposition of property where at least one payment is received
after the close of the taxable year in which the disposition occurs.
Yes, an installment sale spreads gain recognition over several tax periods, so it is a form of income
deferral.
An installment sale cannot be used by dealers, for sales of depreciable property to a controlled entity, or
for sales of stock or securities traded on an established market (13,601).