SOLUTION MANUAL FOR
Taxation for Decision Makers 2017th Edition by Shirley Dennis-
Escoffier, Karen A. Fortin
Chapter 1-12
Solutions to Chapter 1 Problem Assignments
Check Your Understanding
1. [LO 1.1] What is a tax?
Solution: A tax is a required payment to a governmental unit to support its operations that is
not related to the value of goods or services the person or business receives. A fine
is levied as a result of an unlawful act.
2. [LO 1.1] Constitutional Authority
Solution: The federal income tax system as we know it today did not begin until 1913 when
the 16th Amendment to the U.S. Constitution was ratified. The 16th Amendment
gave Congress the power to lay and collect taxes —on income, from whatever source
derived,‖ without the previous requirement that all direct taxes be imposed based
on population.
3. [LO 1.1] Current Tax Code
Solution: The Tax Reform Act of 1986 was so extensive, the Code was renamed the Internal
Revenue Code of 1986. Any current changes to the tax laws are now amendments
to the Internal Revenue Code of 1986.
4. [LO 1.1] Tax Expenditures
Solution: Tax expenditures can take the form of special exclusions, deductions, credits or
preferential rates for specific activities. These tax expenditures result in a reduction
in the revenue that would be collected under a more comprehensive income tax.
5. [LO 1.1] SALT
Solution: The practice of state and local taxation is commonly referred to as a SALT practice.
6. [LO 1.1] Nexus
Solution: Nexus is the necessary type and degree of connection between a business and the
state in which it is located for the state to impose a tax on its sales or activities
7. [LO 1.1] State Income Tax
Solution: Without physical presence within Arizona, the state cannot assess state income tax
on Suntan Corporation’s sales made to persons or businesses located within Arizona.
,2
8. [LO 1.1] Franchise Tax
Solution: A franchise tax is an excise tax based on the right to do business or own property in
a state. It is usually determined based on corporate income, however, so would, in
effect, simply be another name for an income tax.
9. [LO 1.1] State Income Allocation
Solution: The three-factor allocation formula uses a percentage of corporate sales, payroll
costs, and tangible property allocated to the state.
10. [LO 1.1] Employment Taxes
Solution: An employee pays the Social Security and Medicare (FICA) tax; the employer also
pays an equivalent Social Security and Medicare (FICA) tax, but the employer also
may have to pay an unemployment tax.
11. [LO 1.1] Wealth Taxes
Solution: The most common wealth tax is the real property tax based on the fair market value
of property owned by an individual or a business.
12. [LO 1.1] Intangible Tax
Solution: The intangible tax is levied on intangible property such as receivables, stocks,
bonds, and other forms of investment instruments owned by businesses and
individuals.
13. [LO 1.1] Estate and Gift Tax
Solution: Property that is given away during a lifetime that exceeds an annual allowance per
donee is subject to a gift tax; however, the lifetime exemption prevents most gifts
from being subject to this tax. Once, however, taxable gifts exceed the lifetime
exemption, gifts are subject to the gift tax. When the person passes away, the
remaining property owned at death (not previously given away) is now subject to
the estate tax. Any gift tax exemption not used previously by the decedent is then
available as an exemption from the estate tax. Thus, a decedent’s estate escapes
taxation unless his or her total lifetime taxable gifts plus taxable transfers at death
exceed the lifetime exemption.
14. [LO 1.1] Consumption vs Income Tax
Solution: A consumption tax is levied on purchases of goods or services that are going to be
used or consumed. The most common consumption tax is the sales tax, but the
value-added tax is another form used in many countries outside the United States.
The income tax is based on the value of money or goods that are received, whether
it is spent or saved. An income tax will tax money that is going to be saved rather
than spent while the consumption tax only taxes money that is spent. The
consumption tax is thought to encourage savings.
15. [LO 1.1] Wealth Taxes
Solution: A wealth tax is based on the value of wealth that a person has at a particular point
, Chapter 1: An Introduction to Taxation 3
in time. The real or personal property taxes are wealth taxes. The wealth transfer
tax is based on the value of money or property that is passed on to another person.
The estate, gift, and inheritance taxes are wealth transfer taxes.
16. [LO 1.1] Use Taxes
Solution: A use tax is a companion tax to a sales tax that is imposed on property to be used
in one state but which was purchased in another state to which no sales tax was
paid on the purchase.
17. [LO 1.1] Income Taxes
Solution: Two single persons with taxable income of $76,550 each will pay the same total tax
as a married couple with taxable income of $153,100. Above $153,100 the married
couple’s rate increases to 28% but each of the single persons does not reach that
rate until taxable income is over $91,900.
18. [LO 1.2] Types of Taxes
Solution: The income tax system in the United States is a progressive system; that is, as
income increases, the tax rate increases and the person pays a greater percentage of
income as a tax. A person who has $9,000 of taxable income will pay $900 in taxes
(10%). A person who makes $18,000 will pay $2,233.75 ($932.50 + .15 ($18,000 -
$9,325). $2,233.75/$18,000 = 12.41%. A regressive tax system imposes a lower tax
rate as income increases; that is, a person pays a decreasing percentage of their
income in taxes as income increases. The Social Security portion of the FICA tax is
a regressive tax; as the taxpayer’s income on which the tax is based exceeds a
maximum, the tax is no longer collected and the rate declines. A proportional tax
would collect the same percentage of tax on the tax base, regardless of the size of
the base. The sales tax is a proportional tax as the same percent tax is collected
regardless of the amount spent.
19. [LO 1.2] Income Tax Rates
Solution: Individuals have basic tax rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%
that apply to their ordinary income and their interest income. The basic tax rates for
their dividend income are 0%, 15%, and 20%. Corporations have no tax-favored
incomes so they pay tax on all income at rates of 15%, 25%, 34%, and 35%,
excluding surtaxes on certain portions of income that ultimately produce a flat tax
of 35% on income above $18,333,333.
20. [LO 1.2] Income Tax Rates
Solution: Individual’s short-term capital gains tax rates are the same as the tax rates on
ordinary income. A single individual’s long-term capital gains rates are 0% on
long-term capital gains (LTCG) from 0 to $37,950; 15% on LTCG from $37,951 to
$418,400, and 20% on LTCG exceeding $418,400.
21. [LO 1.3] Canons of Taxation
Solution: The basic idea of equity is that persons with similar incomes will face similar taxes.
Thus, individuals each with $200,000 in taxable income will pay the same amount
, 4
of tax. A tax meets the criterion of economy when the amount of revenue it
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raises is at an optimum level after the costs of administration and compliance
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are considered. The canon of certainty would dictate that a taxpayer know
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with reasonable accuracy the tax consequences of a transaction at the time the
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transaction takes place. The last canon of convenience states that a convenient
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tax is one that would be readily determined and paid with little effort.
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22. [LO 1.3] Equity Concepts
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Solution: Horizontal equity would require persons with equal incomes pay equal amounts
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of taxes. Vertical equity would require persons with higher incomes to pay a
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higher percentage of their income than persons with lower incomes. This is the
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basis of the
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U.S. tax system. K0 K0
23. [LO 1.4] Taxable Persons
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Solution: Only individuals, regular (or C) corporations, and fiduciaries (estates and trusts)
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pay income taxes.
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24. [LO 1.4] Gross Income
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Solution: The term gross income is an all-inclusive term that includes income from all
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sources that are not specifically excluded.
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25. [LO 1.4] Basic Tax Model
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Solution: The basic elements of the tax model are gross income, less deductions, that
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equal taxable income or loss. The applicable tax rate is applied to this to
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
determine the gross tax liability. From this tax credits and prepayments are
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deducted to determine the tax liability owed or the refund due.
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
26. [LO 1.4] Capital Losses
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Solution: An individual may deduct up to $3,000 of capital losses in excess of capital
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gains annually; the excess may be carried forward indefinitely to succeeding
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years. A corporation can only offset capital losses against capital gains; losses
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are not deductible against other income. Instead the corporation first carries the
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losses back to the three previous years and then forward for 5 years.
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27. [LO 1.4] Basic Income Tax Rates
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Solution: Individuals have basic tax rates of 10%, 15%, 25%, 28%, 33%, 35%, and
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39.6% that are applied to their ordinary income. A corporation’s basic tax rates
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are 15%, 25%, 34%, and 35%, excluding surtaxes.
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28. [LO 1.4] Fiduciaries
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Solution: Trusts and estates are two fiduciary entities; a trust is established by a grantor
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
who appoints a trustee to manage the assets for the benefit of the trust’s
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beneficiaries. An estate is an entity that is created on the death of a person
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
that provides management for the assets in the decedent’s estate until they can
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be distributed to the beneficiaries. A grantor is the person who creates the
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trust when assets are placed in the trust for the benefit of the beneficiaries.
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
The trustee is the person
K0 K0 K0 K0 K0
Taxation for Decision Makers 2017th Edition by Shirley Dennis-
Escoffier, Karen A. Fortin
Chapter 1-12
Solutions to Chapter 1 Problem Assignments
Check Your Understanding
1. [LO 1.1] What is a tax?
Solution: A tax is a required payment to a governmental unit to support its operations that is
not related to the value of goods or services the person or business receives. A fine
is levied as a result of an unlawful act.
2. [LO 1.1] Constitutional Authority
Solution: The federal income tax system as we know it today did not begin until 1913 when
the 16th Amendment to the U.S. Constitution was ratified. The 16th Amendment
gave Congress the power to lay and collect taxes —on income, from whatever source
derived,‖ without the previous requirement that all direct taxes be imposed based
on population.
3. [LO 1.1] Current Tax Code
Solution: The Tax Reform Act of 1986 was so extensive, the Code was renamed the Internal
Revenue Code of 1986. Any current changes to the tax laws are now amendments
to the Internal Revenue Code of 1986.
4. [LO 1.1] Tax Expenditures
Solution: Tax expenditures can take the form of special exclusions, deductions, credits or
preferential rates for specific activities. These tax expenditures result in a reduction
in the revenue that would be collected under a more comprehensive income tax.
5. [LO 1.1] SALT
Solution: The practice of state and local taxation is commonly referred to as a SALT practice.
6. [LO 1.1] Nexus
Solution: Nexus is the necessary type and degree of connection between a business and the
state in which it is located for the state to impose a tax on its sales or activities
7. [LO 1.1] State Income Tax
Solution: Without physical presence within Arizona, the state cannot assess state income tax
on Suntan Corporation’s sales made to persons or businesses located within Arizona.
,2
8. [LO 1.1] Franchise Tax
Solution: A franchise tax is an excise tax based on the right to do business or own property in
a state. It is usually determined based on corporate income, however, so would, in
effect, simply be another name for an income tax.
9. [LO 1.1] State Income Allocation
Solution: The three-factor allocation formula uses a percentage of corporate sales, payroll
costs, and tangible property allocated to the state.
10. [LO 1.1] Employment Taxes
Solution: An employee pays the Social Security and Medicare (FICA) tax; the employer also
pays an equivalent Social Security and Medicare (FICA) tax, but the employer also
may have to pay an unemployment tax.
11. [LO 1.1] Wealth Taxes
Solution: The most common wealth tax is the real property tax based on the fair market value
of property owned by an individual or a business.
12. [LO 1.1] Intangible Tax
Solution: The intangible tax is levied on intangible property such as receivables, stocks,
bonds, and other forms of investment instruments owned by businesses and
individuals.
13. [LO 1.1] Estate and Gift Tax
Solution: Property that is given away during a lifetime that exceeds an annual allowance per
donee is subject to a gift tax; however, the lifetime exemption prevents most gifts
from being subject to this tax. Once, however, taxable gifts exceed the lifetime
exemption, gifts are subject to the gift tax. When the person passes away, the
remaining property owned at death (not previously given away) is now subject to
the estate tax. Any gift tax exemption not used previously by the decedent is then
available as an exemption from the estate tax. Thus, a decedent’s estate escapes
taxation unless his or her total lifetime taxable gifts plus taxable transfers at death
exceed the lifetime exemption.
14. [LO 1.1] Consumption vs Income Tax
Solution: A consumption tax is levied on purchases of goods or services that are going to be
used or consumed. The most common consumption tax is the sales tax, but the
value-added tax is another form used in many countries outside the United States.
The income tax is based on the value of money or goods that are received, whether
it is spent or saved. An income tax will tax money that is going to be saved rather
than spent while the consumption tax only taxes money that is spent. The
consumption tax is thought to encourage savings.
15. [LO 1.1] Wealth Taxes
Solution: A wealth tax is based on the value of wealth that a person has at a particular point
, Chapter 1: An Introduction to Taxation 3
in time. The real or personal property taxes are wealth taxes. The wealth transfer
tax is based on the value of money or property that is passed on to another person.
The estate, gift, and inheritance taxes are wealth transfer taxes.
16. [LO 1.1] Use Taxes
Solution: A use tax is a companion tax to a sales tax that is imposed on property to be used
in one state but which was purchased in another state to which no sales tax was
paid on the purchase.
17. [LO 1.1] Income Taxes
Solution: Two single persons with taxable income of $76,550 each will pay the same total tax
as a married couple with taxable income of $153,100. Above $153,100 the married
couple’s rate increases to 28% but each of the single persons does not reach that
rate until taxable income is over $91,900.
18. [LO 1.2] Types of Taxes
Solution: The income tax system in the United States is a progressive system; that is, as
income increases, the tax rate increases and the person pays a greater percentage of
income as a tax. A person who has $9,000 of taxable income will pay $900 in taxes
(10%). A person who makes $18,000 will pay $2,233.75 ($932.50 + .15 ($18,000 -
$9,325). $2,233.75/$18,000 = 12.41%. A regressive tax system imposes a lower tax
rate as income increases; that is, a person pays a decreasing percentage of their
income in taxes as income increases. The Social Security portion of the FICA tax is
a regressive tax; as the taxpayer’s income on which the tax is based exceeds a
maximum, the tax is no longer collected and the rate declines. A proportional tax
would collect the same percentage of tax on the tax base, regardless of the size of
the base. The sales tax is a proportional tax as the same percent tax is collected
regardless of the amount spent.
19. [LO 1.2] Income Tax Rates
Solution: Individuals have basic tax rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%
that apply to their ordinary income and their interest income. The basic tax rates for
their dividend income are 0%, 15%, and 20%. Corporations have no tax-favored
incomes so they pay tax on all income at rates of 15%, 25%, 34%, and 35%,
excluding surtaxes on certain portions of income that ultimately produce a flat tax
of 35% on income above $18,333,333.
20. [LO 1.2] Income Tax Rates
Solution: Individual’s short-term capital gains tax rates are the same as the tax rates on
ordinary income. A single individual’s long-term capital gains rates are 0% on
long-term capital gains (LTCG) from 0 to $37,950; 15% on LTCG from $37,951 to
$418,400, and 20% on LTCG exceeding $418,400.
21. [LO 1.3] Canons of Taxation
Solution: The basic idea of equity is that persons with similar incomes will face similar taxes.
Thus, individuals each with $200,000 in taxable income will pay the same amount
, 4
of tax. A tax meets the criterion of economy when the amount of revenue it
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
raises is at an optimum level after the costs of administration and compliance
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
are considered. The canon of certainty would dictate that a taxpayer know
K0 K 0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
with reasonable accuracy the tax consequences of a transaction at the time the
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
transaction takes place. The last canon of convenience states that a convenient
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
tax is one that would be readily determined and paid with little effort.
K0 K 0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
22. [LO 1.3] Equity Concepts
K0 K0 K0
Solution: Horizontal equity would require persons with equal incomes pay equal amounts
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
of taxes. Vertical equity would require persons with higher incomes to pay a
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
higher percentage of their income than persons with lower incomes. This is the
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
basis of the
K0 K0 K0
U.S. tax system. K0 K0
23. [LO 1.4] Taxable Persons
K0 K0 K0
Solution: Only individuals, regular (or C) corporations, and fiduciaries (estates and trusts)
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
pay income taxes.
K0 K0 K0
24. [LO 1.4] Gross Income
K0 K0 K0
Solution: The term gross income is an all-inclusive term that includes income from all
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
sources that are not specifically excluded.
K0 K0 K0 K0 K0 K0
25. [LO 1.4] Basic Tax Model
K0 K0 K0 K0
Solution: The basic elements of the tax model are gross income, less deductions, that
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
equal taxable income or loss. The applicable tax rate is applied to this to
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
determine the gross tax liability. From this tax credits and prepayments are
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
deducted to determine the tax liability owed or the refund due.
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
26. [LO 1.4] Capital Losses
K0 K0 K0
Solution: An individual may deduct up to $3,000 of capital losses in excess of capital
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
gains annually; the excess may be carried forward indefinitely to succeeding
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
years. A corporation can only offset capital losses against capital gains; losses
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
are not deductible against other income. Instead the corporation first carries the
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
losses back to the three previous years and then forward for 5 years.
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
27. [LO 1.4] Basic Income Tax Rates
K0 K0 K0 K0 K0
Solution: Individuals have basic tax rates of 10%, 15%, 25%, 28%, 33%, 35%, and
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
39.6% that are applied to their ordinary income. A corporation’s basic tax rates
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
are 15%, 25%, 34%, and 35%, excluding surtaxes.
K0 K0 K0 K0 K0 K0 K0 K0
28. [LO 1.4] Fiduciaries
K0 K0
Solution: Trusts and estates are two fiduciary entities; a trust is established by a grantor
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
who appoints a trustee to manage the assets for the benefit of the trust’s
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
beneficiaries. An estate is an entity that is created on the death of a person
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
that provides management for the assets in the decedent’s estate until they can
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
be distributed to the beneficiaries. A grantor is the person who creates the
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
trust when assets are placed in the trust for the benefit of the beneficiaries.
K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0 K0
The trustee is the person
K0 K0 K0 K0 K0
