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Table of contents
Ch. 1 Taxes and Taxing Jurisdictions
Ch. 2 Policy Standards for a Good Tax
Ch. 3 Taxes as Transaction Costs
Ch. 4 Maxims of Income Tax Planning
Ch. J Tax Research
Ch. 6 Taxable Income from Business Operations
Ch. Ž Property Acquisitions and Cost Recovery Deductions
Ch. 8 Property Dispositions
Ch. 9 Nontaxable Exchanges
Ch. 1 0 Sole Proprietorships, Partnerships, LLCs, and S Corporations
Ch. 1 1 The Corporate Taxpayer
Ch. 1 2 The Choice of Business Entity
Ch. 1 3 Jurisdictional Issues in Business Taxation
Ch. 1 4 The Individual Tax Formula
Ch. 1 J Compensation and Retirement Planning
Ch. 1 6 Investment and Personal Financial Planning
Ch. 1 Ž Tax Consequences of Personal Activities
Ch. 1 8 The Tax Compliance Process
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Cńapfer f 7axes and 7axing Jurisdicfions
Questïons and Problems for Dïscussïon
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 ¡urisdiction 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 ad¡oining properties or makes the neighborhood less attractive, the owners of the ad¡oining
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, ¡urisdictions 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 ¡urisdictions 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 ¡urisdiction‘s property tax base.
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1 0. 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 sub¡ect
to excise tax.
1 1 . 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 ¡urisdictions with lower tax rates or making more purchases through mail order catalogs or on-line.
1 2. 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.
1 3. The federal income 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.
1 4. 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.
1 5. If the federal government could —piggy backll 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 ¡urisdictional conflict between the federal
government and the states because states don‘t depend on VATs as a source of revenue.
1 6. 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 ¡urisdiction 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
¡urisdiction to tax JK Services. The city of Boston, the state government of Massachusetts, and the U.S.
government have ¡urisdiction to tax JK Realty.
2. a. The United States has ¡urisdiction to tax Mrs. May because she is a permanent resident.
b. The United States has ¡urisdiction to tax Mrs. May only on the U.S. source rental income generated
by the Manhattan real estate.
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Table of contents
Ch. 1 Taxes and Taxing Jurisdictions
Ch. 2 Policy Standards for a Good Tax
Ch. 3 Taxes as Transaction Costs
Ch. 4 Maxims of Income Tax Planning
Ch. J Tax Research
Ch. 6 Taxable Income from Business Operations
Ch. Ž Property Acquisitions and Cost Recovery Deductions
Ch. 8 Property Dispositions
Ch. 9 Nontaxable Exchanges
Ch. 1 0 Sole Proprietorships, Partnerships, LLCs, and S Corporations
Ch. 1 1 The Corporate Taxpayer
Ch. 1 2 The Choice of Business Entity
Ch. 1 3 Jurisdictional Issues in Business Taxation
Ch. 1 4 The Individual Tax Formula
Ch. 1 J Compensation and Retirement Planning
Ch. 1 6 Investment and Personal Financial Planning
Ch. 1 Ž Tax Consequences of Personal Activities
Ch. 1 8 The Tax Compliance Process
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Cńapfer f 7axes and 7axing Jurisdicfions
Questïons and Problems for Dïscussïon
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 ¡urisdiction 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 ad¡oining properties or makes the neighborhood less attractive, the owners of the ad¡oining
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, ¡urisdictions 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 ¡urisdictions 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 ¡urisdiction‘s property tax base.
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1 0. 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 sub¡ect
to excise tax.
1 1 . 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 ¡urisdictions with lower tax rates or making more purchases through mail order catalogs or on-line.
1 2. 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.
1 3. The federal income 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.
1 4. 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.
1 5. If the federal government could —piggy backll 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 ¡urisdictional conflict between the federal
government and the states because states don‘t depend on VATs as a source of revenue.
1 6. 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 ¡urisdiction 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
¡urisdiction to tax JK Services. The city of Boston, the state government of Massachusetts, and the U.S.
government have ¡urisdiction to tax JK Realty.
2. a. The United States has ¡urisdiction to tax Mrs. May because she is a permanent resident.
b. The United States has ¡urisdiction to tax Mrs. May only on the U.S. source rental income generated
by the Manhattan real estate.
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