SOLUTIONS MANUAL
PRINCIPLES OF TAXATION FOR BUSINESS AND INVESTMENT
PLANNING
2026 EDITION
CHAPTER 1: TAXES AND TAXING JURISDICTIONS
QUESTIONS AND PROBLEMS FOR DISCUSSION
1. Tax payments differ from government fines and penalties because they aren’t intended to
deter or punish unacceptable behavior. Tax payments differ from fees or user charges
because they don’t entitle the payer to a specific government good or service, such as a
postage stamp or a driver’s license. Tax payments also differ from fees or user charges
because they are compulsory.
2. This payment has characteristics of a tax, a penalty, and a user fee. The compulsory
payment is not specifically punitive but does apply selectively to those companies most
likely responsible for the polluted condition of Green River. However, these same
companies may be the entities that benefit most from the environmental clean-up.
3. This payment more closely resembles a fee for a government service than a transaction-
based tax because the transaction occurs between a private party and the jurisdiction itself,
rather than between private parties engaging in a market transaction. The payment also
entitles the payer to a specific benefit (the right to marry under law).
4. To the extent that the decline in exterior maintenance reduces the value of Mr. Powell’s
apartment complex, he bears the incidence of the increased property tax. To the extent that
the decline reduces the value of adjoining properties or makes the neighborhood less
attractive, the owners of the adjoining properties and the neighborhood residents share the
incidence of the tax increase.
5. People who don’t directly use public schools (such as Mr. and Mrs. Ahern or people who
don’t have children) indirectly benefit from a public education system for the general
population. Arguably, public education contributes to a skilled workforce and improves the
cultural and social environment in which Mr. and Mrs. Ahern live. Based on this argument,
Mr. and Mrs. Ahern should not be exempt from the local property tax.
,6. The consumers who pay the same price for a smaller bar of soap of lesser quality bear the
incidence of the new gross receipts tax.
7. Real property can’t be hidden or moved, and its ownership (legal title) is a matter of public
record. In contrast, personal property is mobile and may be easily concealed. Moreover,
jurisdictions may not have an effective means to discover or trace ownership of personal
property.
8. Arguably, private golf courses beautify the locality and are environmentally more desirable
than other commercial activities. They also may require more acreage than other
businesses and, therefore, would be at a competitive disadvantage without a preferential
real property tax rate.
9. Many jurisdictions that levy property taxes provide an exemption for public institutions, such
as state universities or private colleges. If University K is entitled to such an exemption,
every commercial building or residence acquired by the University reduces the local
jurisdiction’s property tax base.
10. Excise taxes are imposed on a much narrower range of consumer goods and services than
sales taxes. Consequently, people can more readily avoid purchasing the specific good or
service subject to excise tax.
11. The tax increase may have reduced the aggregate demand for consumer goods and,
consequently, municipal residents are buying fewer goods. A second possibility is that
municipal residents are traveling to other jurisdictions with lower tax rates or making more
purchases through mail order catalogs or online.
12. From a political perspective, liquor and cigarettes sales make an excellent tax base
because consumption of the two products is purely discretionary, and any decline in
consumption because of the tax is socially desirable. From an economic perspective, these
sales are a good tax base because the demand for liquor and cigarettes is relatively price
inelastic. In other words, people who drink and smoke on a regular basis buy these
products regardless of a heavy excise tax.
13. The federal income tax has the broader base. The federal payroll tax is imposed on wages,
salaries, and other forms of compensation earned by employees. The federal income tax is
imposed on all types of compensation as well as net business profit, investment income,
and any other income item from whatever source derived.
,14. A property tax is a periodic (usually annual) tax levied on the ownership of property and
based on the value of the property on a particular assessment date. A transfer tax is a
transaction-based tax levied on the transfer of property from one party to another. A
transfer tax is based on the value of the property at date of transfer.
15. If the federal government could “piggyback” a national sales tax on existing state sales tax
collection systems, the federal government could avoid creating a new federal agency for
collecting the tax. In contrast, the federal government would have to create a new collection
system for a national VAT. However, a national VAT would be less likely to cause
jurisdictional conflict between the federal government and the states because states don’t
depend on VATs as a source of revenue.
16. The Internal Revenue Code is federal statutory law, enacted by Congress and signed by
the President. Technically, Treasury regulations only interpret and explain the statute and
aren’t laws in their own right. Thus, regulations are less authoritative than the Code itself.
However, because Congress authorized the Treasury to write regulations, they are the
government’s official interpretation of statutory law. Practically, the regulations carry
considerable authoritative weight.
APPLICATION PROBLEMS
1.
a. The statement of facts identifies three taxpayers: Mr. Josh Kenney, JK Services, and
JK Realty.
b. The government of the locality in which Mr. Kenney resides, the state government of
Vermont, and the U.S. government have jurisdiction to tax Mr. Kenney. The local
governments of the four counties in which JK Services conducts business, the state
government of Vermont, and the U.S. government have jurisdiction to tax JK Services.
The city of Boston, the state government of Massachusetts, and the U.S. government
have jurisdiction to tax JK Realty.
2.
a. The United States has jurisdiction to tax Mrs. Mendez because she is a permanent
resident.
, b. The United States has jurisdiction to tax Mrs. Mendez only on the U.S. source rental
income generated by the Manhattan real estate.
c. The United States does not have jurisdiction to tax Mrs. Mendez.
d. The United States has jurisdiction to tax Mrs. Mendez because she is a U.S. citizen.
3.
a. The United States has jurisdiction to tax Mr. Tompkin because he is a U.S citizen.
b. The United States has jurisdiction to tax Mr. Tompkin only on the U.S. source rental
income generated by the Buffalo real estate.
c. The United States has jurisdiction to tax Mr. Tompkin because he is a permanent
resident.
d. The United States has jurisdiction to tax Mr. Tompkin on his share of the U.S. source
business income generated by Sophic Partnership.
4. State A:
Volume of sales before rate increase $800,000,000
Original tax rate .05
Revenue before rate increase $40,000,000
Volume of sales after rate increase $710,000,000
New tax rate .06
Revenue after rate increase $42,600,000
Additional revenue ($42,600,000 − $40,000,000) $2,600,000
State Z:
Volume of sales added to tax base $50,000,000
Tax rate .05
Additional revenue $2,500,000
PRINCIPLES OF TAXATION FOR BUSINESS AND INVESTMENT
PLANNING
2026 EDITION
CHAPTER 1: TAXES AND TAXING JURISDICTIONS
QUESTIONS AND PROBLEMS FOR DISCUSSION
1. Tax payments differ from government fines and penalties because they aren’t intended to
deter or punish unacceptable behavior. Tax payments differ from fees or user charges
because they don’t entitle the payer to a specific government good or service, such as a
postage stamp or a driver’s license. Tax payments also differ from fees or user charges
because they are compulsory.
2. This payment has characteristics of a tax, a penalty, and a user fee. The compulsory
payment is not specifically punitive but does apply selectively to those companies most
likely responsible for the polluted condition of Green River. However, these same
companies may be the entities that benefit most from the environmental clean-up.
3. This payment more closely resembles a fee for a government service than a transaction-
based tax because the transaction occurs between a private party and the jurisdiction itself,
rather than between private parties engaging in a market transaction. The payment also
entitles the payer to a specific benefit (the right to marry under law).
4. To the extent that the decline in exterior maintenance reduces the value of Mr. Powell’s
apartment complex, he bears the incidence of the increased property tax. To the extent that
the decline reduces the value of adjoining properties or makes the neighborhood less
attractive, the owners of the adjoining properties and the neighborhood residents share the
incidence of the tax increase.
5. People who don’t directly use public schools (such as Mr. and Mrs. Ahern or people who
don’t have children) indirectly benefit from a public education system for the general
population. Arguably, public education contributes to a skilled workforce and improves the
cultural and social environment in which Mr. and Mrs. Ahern live. Based on this argument,
Mr. and Mrs. Ahern should not be exempt from the local property tax.
,6. The consumers who pay the same price for a smaller bar of soap of lesser quality bear the
incidence of the new gross receipts tax.
7. Real property can’t be hidden or moved, and its ownership (legal title) is a matter of public
record. In contrast, personal property is mobile and may be easily concealed. Moreover,
jurisdictions may not have an effective means to discover or trace ownership of personal
property.
8. Arguably, private golf courses beautify the locality and are environmentally more desirable
than other commercial activities. They also may require more acreage than other
businesses and, therefore, would be at a competitive disadvantage without a preferential
real property tax rate.
9. Many jurisdictions that levy property taxes provide an exemption for public institutions, such
as state universities or private colleges. If University K is entitled to such an exemption,
every commercial building or residence acquired by the University reduces the local
jurisdiction’s property tax base.
10. Excise taxes are imposed on a much narrower range of consumer goods and services than
sales taxes. Consequently, people can more readily avoid purchasing the specific good or
service subject to excise tax.
11. The tax increase may have reduced the aggregate demand for consumer goods and,
consequently, municipal residents are buying fewer goods. A second possibility is that
municipal residents are traveling to other jurisdictions with lower tax rates or making more
purchases through mail order catalogs or online.
12. From a political perspective, liquor and cigarettes sales make an excellent tax base
because consumption of the two products is purely discretionary, and any decline in
consumption because of the tax is socially desirable. From an economic perspective, these
sales are a good tax base because the demand for liquor and cigarettes is relatively price
inelastic. In other words, people who drink and smoke on a regular basis buy these
products regardless of a heavy excise tax.
13. The federal income tax has the broader base. The federal payroll tax is imposed on wages,
salaries, and other forms of compensation earned by employees. The federal income tax is
imposed on all types of compensation as well as net business profit, investment income,
and any other income item from whatever source derived.
,14. A property tax is a periodic (usually annual) tax levied on the ownership of property and
based on the value of the property on a particular assessment date. A transfer tax is a
transaction-based tax levied on the transfer of property from one party to another. A
transfer tax is based on the value of the property at date of transfer.
15. If the federal government could “piggyback” a national sales tax on existing state sales tax
collection systems, the federal government could avoid creating a new federal agency for
collecting the tax. In contrast, the federal government would have to create a new collection
system for a national VAT. However, a national VAT would be less likely to cause
jurisdictional conflict between the federal government and the states because states don’t
depend on VATs as a source of revenue.
16. The Internal Revenue Code is federal statutory law, enacted by Congress and signed by
the President. Technically, Treasury regulations only interpret and explain the statute and
aren’t laws in their own right. Thus, regulations are less authoritative than the Code itself.
However, because Congress authorized the Treasury to write regulations, they are the
government’s official interpretation of statutory law. Practically, the regulations carry
considerable authoritative weight.
APPLICATION PROBLEMS
1.
a. The statement of facts identifies three taxpayers: Mr. Josh Kenney, JK Services, and
JK Realty.
b. The government of the locality in which Mr. Kenney resides, the state government of
Vermont, and the U.S. government have jurisdiction to tax Mr. Kenney. The local
governments of the four counties in which JK Services conducts business, the state
government of Vermont, and the U.S. government have jurisdiction to tax JK Services.
The city of Boston, the state government of Massachusetts, and the U.S. government
have jurisdiction to tax JK Realty.
2.
a. The United States has jurisdiction to tax Mrs. Mendez because she is a permanent
resident.
, b. The United States has jurisdiction to tax Mrs. Mendez only on the U.S. source rental
income generated by the Manhattan real estate.
c. The United States does not have jurisdiction to tax Mrs. Mendez.
d. The United States has jurisdiction to tax Mrs. Mendez because she is a U.S. citizen.
3.
a. The United States has jurisdiction to tax Mr. Tompkin because he is a U.S citizen.
b. The United States has jurisdiction to tax Mr. Tompkin only on the U.S. source rental
income generated by the Buffalo real estate.
c. The United States has jurisdiction to tax Mr. Tompkin because he is a permanent
resident.
d. The United States has jurisdiction to tax Mr. Tompkin on his share of the U.S. source
business income generated by Sophic Partnership.
4. State A:
Volume of sales before rate increase $800,000,000
Original tax rate .05
Revenue before rate increase $40,000,000
Volume of sales after rate increase $710,000,000
New tax rate .06
Revenue after rate increase $42,600,000
Additional revenue ($42,600,000 − $40,000,000) $2,600,000
State Z:
Volume of sales added to tax base $50,000,000
Tax rate .05
Additional revenue $2,500,000
