SOLUTION MANUAL FOR b b
Principles of Taxation for Business and Investment Planning 2020 23rd Edition
b b b b b b b b b b
by Sally Jones, Shelley Rhoades Catanach
b b b b b b
Chapter 1 Taxes and Taxing Jurisdictions
b b b b b
Questions and Problems for Discussion
b b b b
1. Tax payments differ from government fines and penalties because they aren‘t intended to
b b b b b b b b b b b b
deter or punish unacceptable behavior. Tax payments differ from fees or user charges
b b b b b b b b b b b b b
because they don‘t entitle the payer to a specific government good or service, such as a
b b b b b b b b b b b b b b b b
postage stamp or a driver‘s license. Tax payments also differ from fees or user charges
b b b b b b b b b b b b b b b
because they are compulsory.
b b b b
2. This payment has characteristics of a tax, a penalty, and a user fee. The compulsory payment
b b b b b b b b b b b b b b b
is not specifically punitive but does apply selectively to those companies most likely
b b b b b b b b b b b b b
responsible for the polluted condition of Green River. However, these same companies may
b b b b b b b b b b b b b
be the entities that benefit most from the environmental clean-up.
b b b b b b b b b b
3. This payment more closely resembles a fee for a government service than a transaction-based
b b b b b b b b b b b b b
tax because the transaction occurs between a private party and the jurisdiction itself, rather
b b b b b b b b b b b b b b
than between private parties engaging in a market transaction. The payment also entitles the
b b b b b b b b b b b b b b
payer to a specific benefit (the right to marry under law).
b b b b b b b b b b b
4. To the extent that the decline in exterior maintenance reduces the value of Mr. Powell‘s
b b b b b b b b b b b b b b
apartment complex, he bears the incidence of the increased property tax. To the extent that
b b b b b b b b b b b b b b b
the decline reduces the value of adjoining properties or makes the neighborhood less
b b b b b b b b b b b b b
attractive, the owners of the adjoining properties and the neighborhood residents share the
b b b b b b b b b b b b b
incidence of the tax increase.
b b b b b
5. People who don‘t directly use public schools (such as Mr. and Mrs. Ahern or people who don‘t
b b b b b b b b b b b b b b b b
have children) indirectly benefit from a public education system for the general population.
b b b b b b b b b b b b b
Arguably, public education contributes to a skilled workforce and improves the cultural and
b b b b b b b b b b b b b
social environment in which Mr. and Mrs. Ahern live. Based on this argument, Mr. and Mrs.
b b b b b b b b b b b b b b b b
Ahern should not be exempt from the local property tax.
b b b b b b b b b b
6. The consumers who pay the same price for a smaller bar of soap of lesser quality bear
b b b b b b b b b b b b b b b b
the incidence of the new gross receipts tax.
b b b b b b b b
7. Real property can‘t be hidden or moved, and its ownership (legal title) is a matter of
b b b b b b b b b b b b b b b
public record. In contrast, personal property is mobile and may be easily concealed.
b b b b b b b b b b b b b
Moreover, jurisdictions may not have an effective means to discover or trace ownership
b b b b b b b b b b b b b
of personal property.
b b b
8. Arguably, private golf courses beautify the locality and are environmentally more desirable
b b b b b b b b b b b
than other commercial activities. They also may require more acreage than other businesses
b b b b b b b b b b b b b
and, therefore, would be at a competitive disadvantage without a preferential real property
b b b b b b b b b b b b b
tax rate.
b b
9. Many jurisdictions that levy property taxes provide an exemption for public institutions, such
b b b b b b b b b b b b
as state universities or private colleges. If University K is entitled to such an exemption,
b b b b b b b b b b b b b b b
every commercial building or residence acquired by the University reduces the local
b b b b b b b b b b b b
jurisdiction‘s property tax base.
b b b b
Copyright b©2020 bMcGraw-Hill bEducation. bAll brights breserved.
No breproduction bor bdistribution bwithout bthe bprior bwritten bconsent bof bMcGraw-Hill
bEducation.
1-1
,10. Excise taxes are imposed on a much narrower range of consumer goods and services
b b b b b b b b b b b b b
than sales taxes. Consequently, people can more readily avoid purchasing the specific
b b b b b b b b b b b b
good or service subject to excise tax.
b b b b b b b
11. The tax increase may have reduced the aggregate demand for consumer goods and,
b b b b b b b b b b b b
consequently, municipal residents are buying fewer goods. A second possibility is that
b b b b b b b b b b b b
municipal residents are traveling to other jurisdictions with lower tax rates or making more
b b b b b b b b b b b b b b
purchases through mail order catalogs or on-line.
b b b b b b b
12. From a political perspective, liquor and cigarettes sales make an excellent tax base because
b b b b b b b b b b b b b
consumption of the two products is purely discretionary, and any decline in consumption
b b b b b b b b b b b b b
because of the tax is socially desirable. From an economic perspective, these sales are a
b b b b b b b b b b b b b b b
good tax base because the demand for liquor and cigarettes is relatively price inelastic. In
b b b b b b b b b b b b b b b
other words, people who drink and smoke on a regular basis buy these products regardless
b b b b b b b b b b b b b b b
of a heavy excise tax.
b b b b b
13. The federal income has the broader base. The federal payroll tax is imposed on wages,
b b b b b b b b b b b b b b
salaries, and other forms of compensation earned by employees. The federal income tax is
b b b b b b b b b b b b b b
imposed on all types of compensation as well as net business profit, investment income, and
b b b b b b b b b b b b b b b
any other income item from whatever source derived.
b b b b b b b b
14. A property tax is a periodic (usually annual) tax levied on the ownership of property and
b b b b b b b b b b b b b b b
based on the value of the property on a particular assessment date. A transfer tax is a
b b b b b b b b b b b b b b b b b
transaction- based tax levied on the transfer of property from one party to another. A transfer
b b b b b b b b b b b b b b b b
tax is based on the value of the property at date of transfer.
b b b b b b b b b b b b b
15. If the federal government could ―piggy back‖ a national sales tax on existing state sales tax
b b b b b b b b b b b b b b b
collection systems, the federal government could avoid creating a new federal agency for
b b b b b b b b b b b b b
collecting the tax. In contrast, the federal government would have to create a new collection
b b b b b b b b b b b b b b b
system for a national VAT. However, a national VAT would be less likely to cause
b b b b b b b b b b b b b b b
jurisdictional conflict between the federal government and the states because states don‘t
b b b b b b b b b b b b
depend on VATs as a source of revenue.
b b b b b b b b
16. The Internal Revenue Code is federal statutory law, enacted by Congress and signed by the
b b b b b b b b b b b b b b
President. Technically, Treasury regulations only interpret and explain the statute and aren‘t
b b b b b b b b b b b b
laws in their own right. Thus, regulations are less authoritative than the Code itself. However,
b b b b b b b b b b b b b b b
because Congress authorized the Treasury to write regulations, they are the government‘s
b b b b b b b b b b b b
official interpretation of statutory law. Practically, the regulations carry considerable
b b b b b b b b b b
authoritative weight.
b b
Application Problems b
1. a. b The statement of facts identifies three taxpayers: Mr. Josh Kenney, JK Services, and
b b b b b b b b b b b b
JK Realty.
b b
b. The government of the locality in which Mr. Kenney resides, the state government of
b b b b b b b b b b b b b
Vermont, and the U.S. government have jurisdiction to tax Mr. Kenney. The local
b b b b b b b b b b b b b
governments of the four counties in which JK Services conducts business, the state
b b b b b b b b b b b b b
government of Vermont, and the U.S. government have jurisdiction to tax JK Services.
b b b b b b b b b b b b b
The city of Boston, the state government of Massachusetts, and the U.S. government
b b b b b b b b b b b b b
have jurisdiction to tax JK Realty.
b b b b b b
2. a. b b The United States has jurisdiction to tax Mrs. May because she is a permanent resident.
b b b b b b b b b b b b b b
b. The United States has jurisdiction to tax Mrs. May only on the U.S. source rental
b b b b b b b b b b b b b b
income generated by the Manhattan real estate.
b b b b b b b
Copyright b©2020 bMcGraw-Hill bEducation. bAll brights breserved.
No breproduction bor bdistribution bwithout bthe bprior bwritten bconsent bof bMcGraw-Hill
bEducation.
1-2
, c. The United States does not have jurisdiction to tax Mrs. May.
b b b b b b b b b b
d. The United States has jurisdiction to tax Mrs. May because she is a U.S. citizen.
b b b b b b b b b b b b b b
3. a. The United States has jurisdiction to tax Mr. Tompkin because he is a U.S citizen.
b b b b b b b b b b b b b b b b
b. The United States has jurisdiction to tax Mr. Tompkin only on the U.S. source rental
b b b b b b b b b b b b b b
income generated by the Buffalo real estate.
b b b b b b b
c. The United States has jurisdiction to tax Mr. Tompkin because he is a permanent resident.
b b b b b b b b b b b b b b
d. The United States has jurisdiction to tax Mr. Tompkin on his share of the U.S.
b b b b b b b b b b b b b b
source business income generated by Sophic Partnership.
b b b b b b b
4. State A: b
Volume of sales before rate increaseb b b b b $800,000,000
Original tax rate b b .05
Revenue before rate increase b b b $40,000,000
Volume of sales after rate increase b b b b b $710,000,000
New tax rate b b .06
Revenue after rate increase b b b $42,600,000
Additional revenue ($42,600,000 − $40,000,000) b b b b $2,600,000
State Z: b
Volume of sales added to tax base b b b b b b $50,000,000
Tax rate b .05
Additional revenue b $2,500,000
5. a. b b The property tax is $8,300 ($415,000 2%).
b b b b b b b
b. The property tax is $19,000 ([$500,000 2%] + [$225,000 4%]).
b b b b b b b b b b b
6. a. b b The property tax is $39,000 ($1.3 million 3%).
b b b b b b b b
b. The property tax is $85,000 ([$2 million 3%] + [$2.5 million 1%]).
b b b b b b b b b b b b b
7. Increase in County G‘s aggregate assessed property tax value
b b b b b b b b $23,000,000
bAssessed value of Lexon‘s new facility
b b b b b (20,000,000)
Net increase in County G‘s tax base
b b b b b b $3,000,000
bTax rate b
b .04
Net effect on County G‘s current year revenue
b b b b b b b $120,000
8. a. b Value of property purchased in State K
b b b b b b $600,000
Use tax rate in State H
b b b b b b
b.06
Pre credit use tax
b b b $36,000
Sales tax paid to State K
b b b b b (18,000)
Use tax owed to State H
b b b b b $18,000
b. Value of property purchased in State L
b b b b b b $750,000
Use tax rate in State H
b b b b b b
.06 b
Copyright b©2020 bMcGraw-Hill bEducation. bAll brights breserved.
No breproduction bor bdistribution bwithout bthe bprior bwritten bconsent bof bMcGraw-Hill
bEducation.
1-3
, Pre credit use tax
b b b $45,000
Sales tax paid to State L
b b b b b (48,750)
Use tax owed to State H
b b b b b -0-
Copyright b©2020 bMcGraw-Hill bEducation. bAll brights breserved.
No breproduction bor bdistribution bwithout bthe bprior bwritten bconsent bof bMcGraw-Hill
bEducation.
1-4
Principles of Taxation for Business and Investment Planning 2020 23rd Edition
b b b b b b b b b b
by Sally Jones, Shelley Rhoades Catanach
b b b b b b
Chapter 1 Taxes and Taxing Jurisdictions
b b b b b
Questions and Problems for Discussion
b b b b
1. Tax payments differ from government fines and penalties because they aren‘t intended to
b b b b b b b b b b b b
deter or punish unacceptable behavior. Tax payments differ from fees or user charges
b b b b b b b b b b b b b
because they don‘t entitle the payer to a specific government good or service, such as a
b b b b b b b b b b b b b b b b
postage stamp or a driver‘s license. Tax payments also differ from fees or user charges
b b b b b b b b b b b b b b b
because they are compulsory.
b b b b
2. This payment has characteristics of a tax, a penalty, and a user fee. The compulsory payment
b b b b b b b b b b b b b b b
is not specifically punitive but does apply selectively to those companies most likely
b b b b b b b b b b b b b
responsible for the polluted condition of Green River. However, these same companies may
b b b b b b b b b b b b b
be the entities that benefit most from the environmental clean-up.
b b b b b b b b b b
3. This payment more closely resembles a fee for a government service than a transaction-based
b b b b b b b b b b b b b
tax because the transaction occurs between a private party and the jurisdiction itself, rather
b b b b b b b b b b b b b b
than between private parties engaging in a market transaction. The payment also entitles the
b b b b b b b b b b b b b b
payer to a specific benefit (the right to marry under law).
b b b b b b b b b b b
4. To the extent that the decline in exterior maintenance reduces the value of Mr. Powell‘s
b b b b b b b b b b b b b b
apartment complex, he bears the incidence of the increased property tax. To the extent that
b b b b b b b b b b b b b b b
the decline reduces the value of adjoining properties or makes the neighborhood less
b b b b b b b b b b b b b
attractive, the owners of the adjoining properties and the neighborhood residents share the
b b b b b b b b b b b b b
incidence of the tax increase.
b b b b b
5. People who don‘t directly use public schools (such as Mr. and Mrs. Ahern or people who don‘t
b b b b b b b b b b b b b b b b
have children) indirectly benefit from a public education system for the general population.
b b b b b b b b b b b b b
Arguably, public education contributes to a skilled workforce and improves the cultural and
b b b b b b b b b b b b b
social environment in which Mr. and Mrs. Ahern live. Based on this argument, Mr. and Mrs.
b b b b b b b b b b b b b b b b
Ahern should not be exempt from the local property tax.
b b b b b b b b b b
6. The consumers who pay the same price for a smaller bar of soap of lesser quality bear
b b b b b b b b b b b b b b b b
the incidence of the new gross receipts tax.
b b b b b b b b
7. Real property can‘t be hidden or moved, and its ownership (legal title) is a matter of
b b b b b b b b b b b b b b b
public record. In contrast, personal property is mobile and may be easily concealed.
b b b b b b b b b b b b b
Moreover, jurisdictions may not have an effective means to discover or trace ownership
b b b b b b b b b b b b b
of personal property.
b b b
8. Arguably, private golf courses beautify the locality and are environmentally more desirable
b b b b b b b b b b b
than other commercial activities. They also may require more acreage than other businesses
b b b b b b b b b b b b b
and, therefore, would be at a competitive disadvantage without a preferential real property
b b b b b b b b b b b b b
tax rate.
b b
9. Many jurisdictions that levy property taxes provide an exemption for public institutions, such
b b b b b b b b b b b b
as state universities or private colleges. If University K is entitled to such an exemption,
b b b b b b b b b b b b b b b
every commercial building or residence acquired by the University reduces the local
b b b b b b b b b b b b
jurisdiction‘s property tax base.
b b b b
Copyright b©2020 bMcGraw-Hill bEducation. bAll brights breserved.
No breproduction bor bdistribution bwithout bthe bprior bwritten bconsent bof bMcGraw-Hill
bEducation.
1-1
,10. Excise taxes are imposed on a much narrower range of consumer goods and services
b b b b b b b b b b b b b
than sales taxes. Consequently, people can more readily avoid purchasing the specific
b b b b b b b b b b b b
good or service subject to excise tax.
b b b b b b b
11. The tax increase may have reduced the aggregate demand for consumer goods and,
b b b b b b b b b b b b
consequently, municipal residents are buying fewer goods. A second possibility is that
b b b b b b b b b b b b
municipal residents are traveling to other jurisdictions with lower tax rates or making more
b b b b b b b b b b b b b b
purchases through mail order catalogs or on-line.
b b b b b b b
12. From a political perspective, liquor and cigarettes sales make an excellent tax base because
b b b b b b b b b b b b b
consumption of the two products is purely discretionary, and any decline in consumption
b b b b b b b b b b b b b
because of the tax is socially desirable. From an economic perspective, these sales are a
b b b b b b b b b b b b b b b
good tax base because the demand for liquor and cigarettes is relatively price inelastic. In
b b b b b b b b b b b b b b b
other words, people who drink and smoke on a regular basis buy these products regardless
b b b b b b b b b b b b b b b
of a heavy excise tax.
b b b b b
13. The federal income has the broader base. The federal payroll tax is imposed on wages,
b b b b b b b b b b b b b b
salaries, and other forms of compensation earned by employees. The federal income tax is
b b b b b b b b b b b b b b
imposed on all types of compensation as well as net business profit, investment income, and
b b b b b b b b b b b b b b b
any other income item from whatever source derived.
b b b b b b b b
14. A property tax is a periodic (usually annual) tax levied on the ownership of property and
b b b b b b b b b b b b b b b
based on the value of the property on a particular assessment date. A transfer tax is a
b b b b b b b b b b b b b b b b b
transaction- based tax levied on the transfer of property from one party to another. A transfer
b b b b b b b b b b b b b b b b
tax is based on the value of the property at date of transfer.
b b b b b b b b b b b b b
15. If the federal government could ―piggy back‖ a national sales tax on existing state sales tax
b b b b b b b b b b b b b b b
collection systems, the federal government could avoid creating a new federal agency for
b b b b b b b b b b b b b
collecting the tax. In contrast, the federal government would have to create a new collection
b b b b b b b b b b b b b b b
system for a national VAT. However, a national VAT would be less likely to cause
b b b b b b b b b b b b b b b
jurisdictional conflict between the federal government and the states because states don‘t
b b b b b b b b b b b b
depend on VATs as a source of revenue.
b b b b b b b b
16. The Internal Revenue Code is federal statutory law, enacted by Congress and signed by the
b b b b b b b b b b b b b b
President. Technically, Treasury regulations only interpret and explain the statute and aren‘t
b b b b b b b b b b b b
laws in their own right. Thus, regulations are less authoritative than the Code itself. However,
b b b b b b b b b b b b b b b
because Congress authorized the Treasury to write regulations, they are the government‘s
b b b b b b b b b b b b
official interpretation of statutory law. Practically, the regulations carry considerable
b b b b b b b b b b
authoritative weight.
b b
Application Problems b
1. a. b The statement of facts identifies three taxpayers: Mr. Josh Kenney, JK Services, and
b b b b b b b b b b b b
JK Realty.
b b
b. The government of the locality in which Mr. Kenney resides, the state government of
b b b b b b b b b b b b b
Vermont, and the U.S. government have jurisdiction to tax Mr. Kenney. The local
b b b b b b b b b b b b b
governments of the four counties in which JK Services conducts business, the state
b b b b b b b b b b b b b
government of Vermont, and the U.S. government have jurisdiction to tax JK Services.
b b b b b b b b b b b b b
The city of Boston, the state government of Massachusetts, and the U.S. government
b b b b b b b b b b b b b
have jurisdiction to tax JK Realty.
b b b b b b
2. a. b b The United States has jurisdiction to tax Mrs. May because she is a permanent resident.
b b b b b b b b b b b b b b
b. The United States has jurisdiction to tax Mrs. May only on the U.S. source rental
b b b b b b b b b b b b b b
income generated by the Manhattan real estate.
b b b b b b b
Copyright b©2020 bMcGraw-Hill bEducation. bAll brights breserved.
No breproduction bor bdistribution bwithout bthe bprior bwritten bconsent bof bMcGraw-Hill
bEducation.
1-2
, c. The United States does not have jurisdiction to tax Mrs. May.
b b b b b b b b b b
d. The United States has jurisdiction to tax Mrs. May because she is a U.S. citizen.
b b b b b b b b b b b b b b
3. a. The United States has jurisdiction to tax Mr. Tompkin because he is a U.S citizen.
b b b b b b b b b b b b b b b b
b. The United States has jurisdiction to tax Mr. Tompkin only on the U.S. source rental
b b b b b b b b b b b b b b
income generated by the Buffalo real estate.
b b b b b b b
c. The United States has jurisdiction to tax Mr. Tompkin because he is a permanent resident.
b b b b b b b b b b b b b b
d. The United States has jurisdiction to tax Mr. Tompkin on his share of the U.S.
b b b b b b b b b b b b b b
source business income generated by Sophic Partnership.
b b b b b b b
4. State A: b
Volume of sales before rate increaseb b b b b $800,000,000
Original tax rate b b .05
Revenue before rate increase b b b $40,000,000
Volume of sales after rate increase b b b b b $710,000,000
New tax rate b b .06
Revenue after rate increase b b b $42,600,000
Additional revenue ($42,600,000 − $40,000,000) b b b b $2,600,000
State Z: b
Volume of sales added to tax base b b b b b b $50,000,000
Tax rate b .05
Additional revenue b $2,500,000
5. a. b b The property tax is $8,300 ($415,000 2%).
b b b b b b b
b. The property tax is $19,000 ([$500,000 2%] + [$225,000 4%]).
b b b b b b b b b b b
6. a. b b The property tax is $39,000 ($1.3 million 3%).
b b b b b b b b
b. The property tax is $85,000 ([$2 million 3%] + [$2.5 million 1%]).
b b b b b b b b b b b b b
7. Increase in County G‘s aggregate assessed property tax value
b b b b b b b b $23,000,000
bAssessed value of Lexon‘s new facility
b b b b b (20,000,000)
Net increase in County G‘s tax base
b b b b b b $3,000,000
bTax rate b
b .04
Net effect on County G‘s current year revenue
b b b b b b b $120,000
8. a. b Value of property purchased in State K
b b b b b b $600,000
Use tax rate in State H
b b b b b b
b.06
Pre credit use tax
b b b $36,000
Sales tax paid to State K
b b b b b (18,000)
Use tax owed to State H
b b b b b $18,000
b. Value of property purchased in State L
b b b b b b $750,000
Use tax rate in State H
b b b b b b
.06 b
Copyright b©2020 bMcGraw-Hill bEducation. bAll brights breserved.
No breproduction bor bdistribution bwithout bthe bprior bwritten bconsent bof bMcGraw-Hill
bEducation.
1-3
, Pre credit use tax
b b b $45,000
Sales tax paid to State L
b b b b b (48,750)
Use tax owed to State H
b b b b b -0-
Copyright b©2020 bMcGraw-Hill bEducation. bAll brights breserved.
No breproduction bor bdistribution bwithout bthe bprior bwritten bconsent bof bMcGraw-Hill
bEducation.
1-4
