Instructor Guide: Young, Persellin, Nellen, Cuccia, Cripe, Lassar, Maloney, Comprehensive Volume 2027, 9798214057934; Chapter 1:
An Introduction to Taxation and the Tax Environment
Instructor Guide
YOUNG, PERSELLIN , NELLEN, CUCCIA, CRIPE, LASSAR, MALONEY, COMPREHENSIVE VOLUME 2027,
9798214057934; C HAPTER 1: AN INTRODUCTION TO TAXATION AND THE TAX ENVIRONMENT
TABLE OF CONTENTS
Chapter Objectives........................................................................................................1
Chapter Outline.............................................................................................................1
Discussion Questions..................................................................................................17
Video Information......................................................................................................18
Related Cengage Video Content.............................................................................................................. 18
CHAPTER OBJECTIVES
The following objectives are addressed in this chapter:
1.1 Explain the importance of taxation and apply approaches for studying this topic.
1.2 Explain the factors that impact the Federal tax law and identify examples of their effect.
1.3 Explain the role played by the courts in the evolution of the Federal tax system.
1.4 Describe some of the history and trends of the Federal income tax.
1.5 Apply principles of good tax policy relevant to the design of a tax system.
1.6 Identify the different taxes imposed in the United States at the Federal, state, and local levels.
1.7 Explain the administration of the tax law, including the audit process utilized by the IRS.
1.8 Evaluate some of the ethical guidelines involved in tax practice.
[return to top]
CHAPTER OUTLINE
In the outline below, each element includes references (in parentheses) to related content. “CO CH.##”
refers to the chapter objective; “PPT Slide #” refers to the slide number in the PowerPoint deck for this
chapter (provided in the PowerPoints section of the Instructor Resource Center); and, as applicable for
each discipline, accreditation or certification standards (“BL 1.3.3”). Introduce the chapter and use the
Ice Breaker in the PPT if desired, and if one is provided for this chapter. Review learning objectives for
Chapter 1 (PPT Slides 2–5).
I. Approaching the Study of Taxation (1.1, PPT Slides 12–18)
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 1
website, in whole or in part.
,Instructor Guide: Young, Persellin, Nellen, Cuccia, Cripe, Lassar, Maloney, Comprehensive Volume 2027, 9798214057934; Chapter 1:
An Introduction to Taxation and the Tax Environment
a. What Is Taxation?
i. “Taxes are what we pay for civilized society.” – Oliver Wendell Holmes, Jr.
ii. The primary purpose of taxation—to raise revenue for government operations.
iii. Taxation is often used as a tool to influence the behavior of individuals and
businesses.
1. An income tax credit may be designed to encourage people to purchase a fuel-
efficient car.
2. A tobacco excise tax may discourage individuals from smoking.
b. Taxation in Our Lives
i. Individuals are affected most directly by taxes when they need to pay them.
1. A direct tax is one paid by the taxpayer directly to the government imposing it
(i.e., personal income tax and property taxes).
2. Taxes can be paid indirectly when they are embedded in the prices charged by
a seller of goods or services. For example, a renter indirectly pays property
taxes assessed on the landlord who will consider that cost when determining
how much rent to charge.
ii. Ultimately, all taxes are paid by individuals.
iii. Federal, state, and local elections often include initiatives that deal with taxation,
such as whether state income taxes should be raised (or lowered), whether a new
tax should be imposed on plastic grocery bags, or whether the sales tax rate should
be changed.
c. The Relevance of Taxation to Accounting and Finance Professionals
i. Accounting and finance professionals must understand the various types of
business taxes to assist effectively with compliance; planning; financial reporting;
Environmental, Social, and Governance (ESG) reporting; controversy; cash
management; data analysis; and tax advocacy.
ii. The level and depth of tax knowledge needed for any accounting or tax
professional depends on the specific job.
iii. Much of taxation is transaction-based. The transactions in which a taxpayer
engages, and how those transactions are structured, can meaningfully impact the
taxpayer’s tax liability.
d. How to Study Taxation
i. The goal of studying taxation is to be able to recognize issues (or transactions) that
have tax implications and, when possible, what those implications are.
ii. Taxation is an important and exciting topic due to its relation to the government’s
ever-changing economic, social, and political goals and its significance to the
bottom line of a company and an individual’s finances.
iii. In studying taxation, focus on understanding not only the rules, but the reasons
behind them. Also consider how the rules apply to different types of taxpayers and
to taxpayers of varying levels of income and financial sophistication.
II. Understanding the Federal Tax Law (1.2, PPT Slides 19–24)
i. The Federal tax law is shaped by all three branches of our Federal government.
1. The primary objective of any tax system is to raise the revenue needed to fund
government operations.
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 2
website, in whole or in part.
,Instructor Guide: Young, Persellin, Nellen, Cuccia, Cripe, Lassar, Maloney, Comprehensive Volume 2027, 9798214057934; Chapter 1:
An Introduction to Taxation and the Tax Environment
2. Other considerations (economic, social, equity, and political factors) also play a
significant role.
a. Revenue Needs
i. When enacting tax legislation aimed at non-revenue goals, a deficit-conscious
Congress has often been guided by the concept of revenue neutrality so that the
legislation neither increases nor decreases the net revenues received by the
government.
ii. When tax reductions are involved, the full impact of the legislation can be phased
in over a period of years. Or, as an alternative, the tax reduction can be limited to a
period of years using a sunset provision. When the period expires, the prior law is
automatically reinstated.
b. Economic Considerations
i. Regulating the Economy.
1. Congress has often used the tax depreciation rules as a means of encouraging
investment in business assets.
2. Shorter asset lives and accelerated depreciation methods defer the recognition
of the net income generated by those assets and, therefore, when taxes must be
paid on that income. Deferral of the tax reduces the after-tax net present value
of property and equipment, encouraging additional investment in depreciable
business property.
3. On the other hand, longer asset lives and use of straight-line depreciation
should discourage capital outlays.
ii. Encouragement of Certain Activities.
1. Congress also uses the tax law to encourage certain types of economic activity
or segments of the economy.
2. The Federal government provides a number of tax incentives related to energy
use and production. Those subsidies aim to achieve various policy goals.
3. The tax law encourages savings, such as by giving private retirement plans
preferential treatment.
iii. Encouragement of Certain Industries.
1. Historically, agricultural activities have been favored under Federal tax law.
2. The tax law encourages the development of natural resources by allowing
taxpayers to accelerate the deductibility of certain exploration costs.
3. The railroad and banking industries also receive special tax treatment under
Federal tax law.
iv. Encouragement of Small Business.
1. Small business development is encouraged under the tax law.
2. The shareholders of a small business corporation can make an election that
allows the profits (or losses) of the corporation to be taxed directly to its
shareholders, avoiding the corporate income tax altogether.
3. Another provision allows non-corporate shareholders of certain small
corporations to exclude from income all or a portion of their gain from the sale
of the stock if held over three years.
c. Social Considerations
i. Some provisions of the Federal tax law, particularly those dealing with individuals,
can be explained by social considerations.
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 3
website, in whole or in part.
, Instructor Guide: Young, Persellin, Nellen, Cuccia, Cripe, Lassar, Maloney, Comprehensive Volume 2027, 9798214057934; Chapter 1:
An Introduction to Taxation and the Tax Environment
1.
Accident and health plans financed by employers.
2.
Group term life insurance coverage for employees.
3.
Qualified pension or profit sharing plans for employees.
4.
Deduction for contributions to qualified charities.
5.
The credit for child and disabled dependent care.
6.
The earned income credit provides relief for low-income taxpayers.
7.
Credits made available to individuals aged 65 and older. Credits allowed to
businesses that incur expenditures to make their facilities more accessible to
the disabled.
8. Various tax credits, deductions, and exclusions to encourage additional
education.
9. The disallowance for certain expenditures that are contrary to public policy.
d. Equity Considerations
i. Though the desire for a fair and equitable tax law is ubiquitous, agreement on what
is “fair” can be anything but.
1. A tax that imposes the same tax rate on all taxpayers regardless of their ability
to pay is a proportional tax.
2. The concept of equity also appears in tax provisions that alleviate the effect of
multiple taxation and postpone the recognition of gain when the taxpayer lacks
the ability or wherewithal to pay the tax.
ii. Alleviating the Effect of Multiple Taxation. In some situations, the same income
may be subject to tax multiple times, raising both equity and economic concerns
(e.g., income earned abroad is potentially subject to both foreign and U.S. income
taxes). Federal law contains multiple provisions to mitigate the double taxation of
the same income.
iii. The Wherewithal to Pay Concept. The wherewithal to pay concept recognizes the
inequity of taxing a transaction when the taxpayer lacks the means with which to
pay the tax. The text illustrates its application with an involuntary conversion
situation.
1. An involuntary conversion occurs when property is destroyed by a casualty or
taken by a public authority through condemnation.
2. If tax were assessed on a gain resulting from the conversion, the taxpayer
would not have the wherewithal to both pay the tax and replace the lost
property.
3. Gains resulting from involuntary conversions may often be deferred if the
property is replaced within a specified period of time.
iv. Mitigating the Effect of the Annual Accounting Period Concept. The accounting
period used to report taxable income and settle any tax liability is one year and is
referred to as the annual accounting period concept.
1. The annual accounting period concept can lead to different tax treatment for
taxpayers who are in the same economic position.
2. Carryback and carryover procedures help mitigate the effect of limiting a loss
or a deduction to the accounting period in which it was realized, allowing a
taxpayer to salvage a loss or deduction that might otherwise be lost.
v. Coping with Inflation.
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 4
website, in whole or in part.
An Introduction to Taxation and the Tax Environment
Instructor Guide
YOUNG, PERSELLIN , NELLEN, CUCCIA, CRIPE, LASSAR, MALONEY, COMPREHENSIVE VOLUME 2027,
9798214057934; C HAPTER 1: AN INTRODUCTION TO TAXATION AND THE TAX ENVIRONMENT
TABLE OF CONTENTS
Chapter Objectives........................................................................................................1
Chapter Outline.............................................................................................................1
Discussion Questions..................................................................................................17
Video Information......................................................................................................18
Related Cengage Video Content.............................................................................................................. 18
CHAPTER OBJECTIVES
The following objectives are addressed in this chapter:
1.1 Explain the importance of taxation and apply approaches for studying this topic.
1.2 Explain the factors that impact the Federal tax law and identify examples of their effect.
1.3 Explain the role played by the courts in the evolution of the Federal tax system.
1.4 Describe some of the history and trends of the Federal income tax.
1.5 Apply principles of good tax policy relevant to the design of a tax system.
1.6 Identify the different taxes imposed in the United States at the Federal, state, and local levels.
1.7 Explain the administration of the tax law, including the audit process utilized by the IRS.
1.8 Evaluate some of the ethical guidelines involved in tax practice.
[return to top]
CHAPTER OUTLINE
In the outline below, each element includes references (in parentheses) to related content. “CO CH.##”
refers to the chapter objective; “PPT Slide #” refers to the slide number in the PowerPoint deck for this
chapter (provided in the PowerPoints section of the Instructor Resource Center); and, as applicable for
each discipline, accreditation or certification standards (“BL 1.3.3”). Introduce the chapter and use the
Ice Breaker in the PPT if desired, and if one is provided for this chapter. Review learning objectives for
Chapter 1 (PPT Slides 2–5).
I. Approaching the Study of Taxation (1.1, PPT Slides 12–18)
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 1
website, in whole or in part.
,Instructor Guide: Young, Persellin, Nellen, Cuccia, Cripe, Lassar, Maloney, Comprehensive Volume 2027, 9798214057934; Chapter 1:
An Introduction to Taxation and the Tax Environment
a. What Is Taxation?
i. “Taxes are what we pay for civilized society.” – Oliver Wendell Holmes, Jr.
ii. The primary purpose of taxation—to raise revenue for government operations.
iii. Taxation is often used as a tool to influence the behavior of individuals and
businesses.
1. An income tax credit may be designed to encourage people to purchase a fuel-
efficient car.
2. A tobacco excise tax may discourage individuals from smoking.
b. Taxation in Our Lives
i. Individuals are affected most directly by taxes when they need to pay them.
1. A direct tax is one paid by the taxpayer directly to the government imposing it
(i.e., personal income tax and property taxes).
2. Taxes can be paid indirectly when they are embedded in the prices charged by
a seller of goods or services. For example, a renter indirectly pays property
taxes assessed on the landlord who will consider that cost when determining
how much rent to charge.
ii. Ultimately, all taxes are paid by individuals.
iii. Federal, state, and local elections often include initiatives that deal with taxation,
such as whether state income taxes should be raised (or lowered), whether a new
tax should be imposed on plastic grocery bags, or whether the sales tax rate should
be changed.
c. The Relevance of Taxation to Accounting and Finance Professionals
i. Accounting and finance professionals must understand the various types of
business taxes to assist effectively with compliance; planning; financial reporting;
Environmental, Social, and Governance (ESG) reporting; controversy; cash
management; data analysis; and tax advocacy.
ii. The level and depth of tax knowledge needed for any accounting or tax
professional depends on the specific job.
iii. Much of taxation is transaction-based. The transactions in which a taxpayer
engages, and how those transactions are structured, can meaningfully impact the
taxpayer’s tax liability.
d. How to Study Taxation
i. The goal of studying taxation is to be able to recognize issues (or transactions) that
have tax implications and, when possible, what those implications are.
ii. Taxation is an important and exciting topic due to its relation to the government’s
ever-changing economic, social, and political goals and its significance to the
bottom line of a company and an individual’s finances.
iii. In studying taxation, focus on understanding not only the rules, but the reasons
behind them. Also consider how the rules apply to different types of taxpayers and
to taxpayers of varying levels of income and financial sophistication.
II. Understanding the Federal Tax Law (1.2, PPT Slides 19–24)
i. The Federal tax law is shaped by all three branches of our Federal government.
1. The primary objective of any tax system is to raise the revenue needed to fund
government operations.
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 2
website, in whole or in part.
,Instructor Guide: Young, Persellin, Nellen, Cuccia, Cripe, Lassar, Maloney, Comprehensive Volume 2027, 9798214057934; Chapter 1:
An Introduction to Taxation and the Tax Environment
2. Other considerations (economic, social, equity, and political factors) also play a
significant role.
a. Revenue Needs
i. When enacting tax legislation aimed at non-revenue goals, a deficit-conscious
Congress has often been guided by the concept of revenue neutrality so that the
legislation neither increases nor decreases the net revenues received by the
government.
ii. When tax reductions are involved, the full impact of the legislation can be phased
in over a period of years. Or, as an alternative, the tax reduction can be limited to a
period of years using a sunset provision. When the period expires, the prior law is
automatically reinstated.
b. Economic Considerations
i. Regulating the Economy.
1. Congress has often used the tax depreciation rules as a means of encouraging
investment in business assets.
2. Shorter asset lives and accelerated depreciation methods defer the recognition
of the net income generated by those assets and, therefore, when taxes must be
paid on that income. Deferral of the tax reduces the after-tax net present value
of property and equipment, encouraging additional investment in depreciable
business property.
3. On the other hand, longer asset lives and use of straight-line depreciation
should discourage capital outlays.
ii. Encouragement of Certain Activities.
1. Congress also uses the tax law to encourage certain types of economic activity
or segments of the economy.
2. The Federal government provides a number of tax incentives related to energy
use and production. Those subsidies aim to achieve various policy goals.
3. The tax law encourages savings, such as by giving private retirement plans
preferential treatment.
iii. Encouragement of Certain Industries.
1. Historically, agricultural activities have been favored under Federal tax law.
2. The tax law encourages the development of natural resources by allowing
taxpayers to accelerate the deductibility of certain exploration costs.
3. The railroad and banking industries also receive special tax treatment under
Federal tax law.
iv. Encouragement of Small Business.
1. Small business development is encouraged under the tax law.
2. The shareholders of a small business corporation can make an election that
allows the profits (or losses) of the corporation to be taxed directly to its
shareholders, avoiding the corporate income tax altogether.
3. Another provision allows non-corporate shareholders of certain small
corporations to exclude from income all or a portion of their gain from the sale
of the stock if held over three years.
c. Social Considerations
i. Some provisions of the Federal tax law, particularly those dealing with individuals,
can be explained by social considerations.
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 3
website, in whole or in part.
, Instructor Guide: Young, Persellin, Nellen, Cuccia, Cripe, Lassar, Maloney, Comprehensive Volume 2027, 9798214057934; Chapter 1:
An Introduction to Taxation and the Tax Environment
1.
Accident and health plans financed by employers.
2.
Group term life insurance coverage for employees.
3.
Qualified pension or profit sharing plans for employees.
4.
Deduction for contributions to qualified charities.
5.
The credit for child and disabled dependent care.
6.
The earned income credit provides relief for low-income taxpayers.
7.
Credits made available to individuals aged 65 and older. Credits allowed to
businesses that incur expenditures to make their facilities more accessible to
the disabled.
8. Various tax credits, deductions, and exclusions to encourage additional
education.
9. The disallowance for certain expenditures that are contrary to public policy.
d. Equity Considerations
i. Though the desire for a fair and equitable tax law is ubiquitous, agreement on what
is “fair” can be anything but.
1. A tax that imposes the same tax rate on all taxpayers regardless of their ability
to pay is a proportional tax.
2. The concept of equity also appears in tax provisions that alleviate the effect of
multiple taxation and postpone the recognition of gain when the taxpayer lacks
the ability or wherewithal to pay the tax.
ii. Alleviating the Effect of Multiple Taxation. In some situations, the same income
may be subject to tax multiple times, raising both equity and economic concerns
(e.g., income earned abroad is potentially subject to both foreign and U.S. income
taxes). Federal law contains multiple provisions to mitigate the double taxation of
the same income.
iii. The Wherewithal to Pay Concept. The wherewithal to pay concept recognizes the
inequity of taxing a transaction when the taxpayer lacks the means with which to
pay the tax. The text illustrates its application with an involuntary conversion
situation.
1. An involuntary conversion occurs when property is destroyed by a casualty or
taken by a public authority through condemnation.
2. If tax were assessed on a gain resulting from the conversion, the taxpayer
would not have the wherewithal to both pay the tax and replace the lost
property.
3. Gains resulting from involuntary conversions may often be deferred if the
property is replaced within a specified period of time.
iv. Mitigating the Effect of the Annual Accounting Period Concept. The accounting
period used to report taxable income and settle any tax liability is one year and is
referred to as the annual accounting period concept.
1. The annual accounting period concept can lead to different tax treatment for
taxpayers who are in the same economic position.
2. Carryback and carryover procedures help mitigate the effect of limiting a loss
or a deduction to the accounting period in which it was realized, allowing a
taxpayer to salvage a loss or deduction that might otherwise be lost.
v. Coping with Inflation.
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 4
website, in whole or in part.
